TSS, Inc. (TSSI) shifts from procurement to AI integration as Q1 2026 revenue drops
TSS, Inc. reported Q1 2026 revenue of $55.3 million, down from $99.0 million a year earlier, mainly because prior-year procurement activity was unusually high. Systems integration revenue nearly doubled to $14.1 million, driven by AI-enabled rack integration under a long-term agreement with its largest OEM customer.
Net income was $2.3 million versus $3.0 million last year, as lower procurement volume and higher operating costs more than offset AI integration growth. Cash, cash equivalents and restricted cash totaled $67.8 million at March 31, 2026, down from $85.5 million at year-end, mainly due to working capital swings and debt repayment.
The company remains highly concentrated: one U.S.-based IT OEM generated 99% of Q1 2026 revenue and 88% of receivables. TSS is investing heavily in its Georgetown, Texas integration facility, supported by a $20.0 million term loan and a long-term AI rack integration agreement that includes minimum payments and extended term.
Positive
- None.
Negative
- Revenue concentration and volatility: Q1 2026 revenue fell 44% to $55.3 million and 99% of revenue came from a single U.S.-based IT OEM, highlighting both volume lumpiness and significant customer concentration risk.
Insights
Sharp revenue drop reflects procurement lumpiness while AI integration scales.
TSS, Inc. generated $55.3M in Q1 2026 revenue, down 44% from $99.0M a year earlier, primarily because prior-period procurement activity was unusually high. Procurement revenue fell 56%, while systems integration revenue nearly doubled to $14.1M as AI rack work ramped.
Despite mix shifts, gross profit held near prior-year levels at $8.8M, and net income was $2.3M versus $3.0M. Cash and restricted cash declined to $67.8M as the company reduced payables and deferred revenues and paid down debt. A single U.S.-based IT OEM contributed 99% of revenue, underscoring customer concentration risk.
A long-term agreement for AI-enabled rack integration, extended in December 2025, includes minimum monthly fees expected to cover facility and debt costs, alongside volume-based payments. Future performance will depend on sustaining AI integration volumes and maintaining compliance with leverage and coverage covenants under the $20.0M term loan.
Key Figures
Key Terms
non-recourse factoring financial
deferred revenue financial
right-of-use asset financial
incremental borrowing rate financial
valuation allowance financial
long-term agreement financial
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from____to____
Commission file number:
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(Address of principal executive offices) |
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | |
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| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Number of shares of common stock outstanding as of May 1, 2026:
TSS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2026
“SAFE HARBOR” STATEMENT |
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PART I–FINANCIAL INFORMATION |
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Item 1. Condensed Consolidated Financial Statements |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. Controls and Procedures |
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PART II–OTHER INFORMATION |
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Item 1. Legal Proceedings |
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Item 1a. Risk Factors |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. Defaults Upon Senior Securities |
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Item 4. Mine Safety Disclosures |
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Item 5. Other Information |
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Item 6. Exhibits |
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SIGNATURES |
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| Table of Contents |
“SAFE HARBOR” STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, we make oral and written statements that may constitute “forward-looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements made in this Quarterly Report on Form 10-Q (the “Quarterly Report”), as well as those made in other filings with the SEC.
Forward-looking statements can be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “forecast,” “foresee” or other similar words. Such forward-looking statements are based on management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward-looking statements. Important factors that could cause actual results to differ materially from those anticipated in our forward-looking statements include, but are not limited to, those described under "Risk Factors” set forth in Item 1A of this Form 10-Q and Annual Report on Form 10-K for the fiscal year ended December 31, 2025.
We expressly disclaim any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.
As used herein, except as otherwise indicated by the context, the terms “TSS”, “Company”, “we”, “our” and “us” are used to refer to TSS, Inc. and its subsidiaries.
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
TSS, Inc.
Condensed Consolidated Balance Sheets
(in thousands except par values)
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Current Assets: |
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Cash and cash equivalents |
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Contract and other receivables, net of allowance of $ |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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Inventories, net |
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Restricted cash |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Lease right-of-use asset |
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Goodwill |
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Deferred tax asset, net |
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Other assets |
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Total assets |
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Current Liabilities: |
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Accounts payable |
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Accrued expenses and other current liabilities |
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Deferred revenues, current |
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Long-term debt, current |
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Lease liabilities, current |
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Total current liabilities |
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Non-current Liabilities: |
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Long-term debt, net, non-current |
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Lease liabilities, non-current |
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Deferred revenues, non-current |
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Other non-current liabilities |
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Total non-current liabilities |
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Total liabilities |
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Commitments and Contingencies (Note 6) |
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Stockholders’ Equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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See accompanying notes to the condensed consolidated financial statements.
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| Table of Contents |
TSS, Inc.
Unaudited Consolidated Statements of Operations
(in thousands, except per-share amounts)
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Revenues: |
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Procurement |
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Facilities management |
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System integration |
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Total revenues |
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Cost of revenues: |
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Cost of revenues |
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Cost of revenues – depreciation and amortization |
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Total cost of revenues |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Depreciation and amortization |
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Bank factoring fees |
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Total operating expenses |
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Income from operations |
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Interest expense |
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Interest income |
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Other expense (income) |
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Pre-tax income |
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Income tax expense |
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Net income |
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Earnings per common share - Basic |
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Earnings per common share - Diluted |
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See accompanying notes to the condensed consolidated financial statements.
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| Table of Contents |
TSS, Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
(in thousands)
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Balance December 31, 2024 |
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Restricted stock vested |
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Stock options exercised |
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Treasury shares repurchased |
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Stock-based compensation |
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Net income |
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Balance at March 31, 2025 |
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Balance December 31, 2025 |
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Restricted stock vested |
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Stock options exercised |
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Shares Repurchased |
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Stock-based compensation |
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Net income |
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Balance at March 31, 2026 |
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| Table of Contents |
TSS, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
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Cash Flows from Operating Activities: |
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Net income |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Stock-based compensation |
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Provision for inventory reserve |
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Amortization of debt issuance costs |
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Non-cash lease expense |
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Changes in operating assets and liabilities: |
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Contract and other receivables |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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Inventories |
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Prepaid expenses and other assets |
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Deferred tax assets |
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Accounts payable and accrued expenses |
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Deferred revenues |
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Operating lease liabilities |
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Other non-current liabilities |
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Net cash provided by (used in) operating activities |
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Cash Flows from Investing Activities: |
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Capital expenditures |
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Net cash used in investing activities |
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Cash Flows from Financing Activities: |
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Repayments of long-term debt |
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Proceeds from exercise of stock options |
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Stock repurchases |
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Net cash used in financing activities |
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Net increase (decrease) in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period |
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Supplemental disclosures of cash flow information: |
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Cash paid for interest, net of amounts capitalized |
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Cash paid for factoring fees |
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Cash paid for taxes |
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Cash and cash equivalents, beginning of period |
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Restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash and cash equivalents, end of period |
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Restricted cash, end of period |
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Cash, cash equivalents and restricted cash, end of period |
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Supplemental non-cash investing activities: |
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Additions to capital expenditures financed with accounts payable |
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| Table of Contents |
TSS, Inc.
Notes to Condensed Consolidated Statements
(unaudited)
Note 1 – Significant Accounting Policies
Description of Business
TSS, Inc. ("TSS”, the "Company”, "we”, "us” or "our”) provides a comprehensive suite of services for the integration of complex Artificial Intelligence (AI) technologies, planning, design, deployment, maintenance and refresh of end-user and enterprise systems, including the mission-critical facilities in which they are housed. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT procurement services. Beginning in 2024, our systems integration services have been enhanced to include integration of AI enabled data center server racks. TSS was incorporated in Delaware in December 2004. In the second quarter of 2025, we relocated our corporate offices and primary integration facility from Round Rock, Texas to Georgetown, Texas and continued to operate a secondary integration facility in our Round Rock facility for approximately one additional quarter before all operations were migrated to our new facility in Georgetown in May 2025.
Basis of Presentation
The preparation of the condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("U. S. GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates are reasonable and that the actual results will not vary significantly from the estimated amounts.
The accompanying condensed consolidated balance sheet as of December 31, 2025, derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting and include the accounts of the Company and its consolidated subsidiaries. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations, changes in stockholders’ equity and cash flows. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025. The Company’s business is not subject to significant seasonal fluctuations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current presentation. The reclassifications are:
| (i) | On our statements of operations, we now present interest expense and bank factoring fees separately, and have reclassified and relabeled bank factoring fees to be included in income from operations and interest expense to be exclusive of bank factoring fees, whereas we presented a single amount “interest expense” in the prior year presentation |
| a. | As previously disclosed in the notes to our financial statements, prior year amounts presented as interest expense represented only bank factoring fees |
| b. | As we had bank debt outstanding throughout the period ended March 31, 2026, we reclassified and relabeled bank factoring fees onto a separate line item in our income statement and present interest expense separately from bank factoring fees. |
| (ii) | In the supplemental disclosures to our statements of cash flows, we now present cash paid for bank factoring fees separately from cash paid for interest whereas these were combined in a single line item of cash paid for interest in the prior year presentation |
| (iii) | Accrued expenses which were previously included within the line item “accounts payable and accrued expenses” are now presented separately, and |
| (iv) | On the statement of cash flows, we now present non-cash lease expense separately from the change in lease right-of-use asset. |
These reclassifications had no net effect on our reported results of operations, financial position or cash flows.
| 5 |
| Table of Contents |
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary VTC, L.L.C. dba Total Site Solutions. All intercompany accounts and transactions have been eliminated in consolidation.
Financial Instruments
The Company’s financial instruments primarily consist of cash and cash equivalents including money market accounts, accounts receivable, accounts payable and debt.
Based primarily on the short-term nature of cash and cash equivalents, we estimate that their carrying amount approximates their fair value at March 31, 2026 and December 31, 2025. We consider the fair value of our cash and cash equivalents, including money market accounts, to be measured using Level 1 inputs.
As it does not have a quoted market price and its term extends beyond a year, requiring more judgment, we consider our debt balance to be measured using Level 2 inputs. As the debt bears a floating interest rate that is adjusted frequently in line with movements in prevailing interest rates that would be used to discount any future cash flows, we estimate that its carrying value approximates its fair value. See Note 7 – Fair Value Measurements.
Accounting for Business Combinations
We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, is recorded as goodwill.
We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets such as customer contracts, leases, and any other significant assets or liabilities and contingent consideration. Preliminary purchase price allocation is adjusted, as necessary, up to one year after the acquisition closing date if management obtains more information regarding asset valuations and liabilities assumed.
Revenue Recognition
We recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative stand-alone selling prices or cost-plus markup as appropriate, depending on the nature of each transaction.
Maintenance services
We generate maintenance services revenues by providing our customers with as-needed maintenance and repair services on modular data centers (MDCs) during the contract term. Our contract terms are typically one year in duration, are billed annually in advance, and are non-cancelable. As a result, we record deferred revenue (a contract liability) and recognize revenue from these services using a time-based input method, ratably over the contract term, because the performance obligation represents a stand-ready service and the customer receives and consumes the benefit of having access to maintenance support evenly throughout the contract period. We can mitigate our exposure to credit losses by discontinuing services in the event of non-payment. However, our history of non-payments and bad debt expenses has been insignificant.
Integration services
We generate integration services revenues by providing our customers with customized systems and rack-level integration services. We recognize revenue upon shipment to the customer of the completed systems as this is when we have completed our services and when the customer obtains control of the promised goods.
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Pursuant to a long-term agreement signed in 2024 and subsequently amended in 2025, we also recognize revenue monthly at contractually based amounts for certain billable fixed and facility costs and trained staffing levels to support a specified weekly quantity of AI-enabled racks, with staffing fees reduced for any under-staffing, as the performance obligation represents a stand-ready ability for us to support the weekly outputs. The fee for staffing is based on defined services as transferred to the customer and is variable consideration based on the customer’s weekly demand. However, the revenue recognized is not contingent on the occurrence of any future events or subject to any estimation.
We typically extend credit terms to our integration customers based on their creditworthiness and generally do not receive advance payments. As such, we record accounts receivable at the time of shipment, when our right to consideration becomes unconditional. Accounts receivable from our integration customers are typically due within 30-105 days of invoicing. An allowance for credit losses is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ credit worthiness. As of March 31, 2026 and December 31, 2025, we had no allowance for credit losses.
Equipment and Material sales
We generate revenues under fixed price contracts from the sale of data center and related ancillary equipment or materials to customers in the United States. We recognize revenue when the product is shipped to the customer as that is when the customer obtains control of the promised goods and when we have completed our contractual obligations. Typically, we do not receive advance payments for equipment or material sales; however, when we do, we record the advance payment as deferred revenues. Normally we record accounts receivable at the time of shipment, when our right to the consideration has become unconditional. Accounts receivable from our equipment and material sales are typically due within 30-45 days of invoicing.
Deployment and Other services
We generate revenues from fees we charge our customers for other services, including repairs or other services not covered under maintenance contracts; installation and servicing of equipment, including MDCs; and other fixed-price services including repair, design and project management services. In some cases, we arrange for a third party to perform “break-fix” and servicing of equipment upon customer request, and in these instances, we recognize revenue as the amount of any fees or commissions to which we expect to be entitled. Other services are typically invoiced upon completion of services or completion of milestones. We record accounts receivable at the time of completion when our right to consideration becomes unconditional.
Procurement services
We generate revenues from fees we charge our customers to procure third-party hardware, software and professional services on their behalf, some of which are then used in our integration services as we integrate these components to deliver a completed system to our customer. We recognize our procurement services revenues upon completion of the procurement activity or delivery of the completed product. For any procurement activities in which we transform the product, the revenues recognized on these transactions are the gross sales amount of the transaction, and we recognize offsetting costs of revenues for any costs we incur to procure the related goods (“gross deals”). In some cases, we arrange for the purchase of third-party hardware, software or professional services that are to be provided directly to our customers by another party, we have no control of the goods before they are transferred to the customer, and we do not transform the product in any way. In these instances, we are acting as an agent in the transaction and recognize revenue on a net basis, recording only the amount of any fee or commissions to which we expect to be entitled after paying the other party for the goods or services provided to the customer (“net deals”). Accounts receivable from our procurement activities are typically due within 80 days of invoicing. The majority of the procurement activities involve us transforming the product, and as such most of these transactions are recorded on a gross basis. To accelerate the time in which we receive payment, we generally factor the procurement services receivables utilizing a program that we estimate has an effective annualized interest rate below the rate at which we could borrow funds. Regardless of whether the transaction is recorded as a gross deal or a net deal, the factoring fees we pay are based on the gross value of each transaction.
The following table presents our revenues disaggregated by reportable segment and by product or service type (in ’000’s):
|
| Three Months Ended March 31, |
| |||||
|
| 2026 |
|
| 2025 |
| ||
Facilities Management: |
|
|
|
|
|
| ||
Maintenance revenues |
| $ |
|
| $ |
| ||
Equipment sales, deployment and other services |
|
|
|
|
|
| ||
Total Facilities Management revenues |
|
|
|
|
|
| ||
Systems integration services |
|
|
|
|
|
| ||
Procurement services |
|
|
|
|
|
| ||
TOTAL REVENUES |
| $ |
|
| $ |
| ||
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The following table presents our revenues disaggregated by timing of revenue recognition (in ’000’s):
|
| Three Months Ended March 31, |
| |||||
|
| 2026 |
|
| 2025 |
| ||
Revenues recognized at a point in time |
| $ |
|
| $ |
| ||
Revenues recognized over time |
|
|
|
|
|
| ||
TOTAL REVENUES |
| $ |
|
| $ |
| ||
The following table presents our revenues disaggregated by contract type (in ’000’s):
|
| Three Months Ended March 31, |
| |||||
|
| 2026 |
|
| 2025 |
| ||
Revenues recognized on time and materials contracts |
| $ |
|
| $ |
| ||
Revenues recognized on fixed-price contracts |
|
|
|
|
|
| ||
TOTAL REVENUES |
| $ |
|
| $ |
| ||
Judgments
We consider several factors in determining that control transfers to the customer upon shipment of equipment or upon completion of our services. These factors include that legal title transfers to the customer, we have a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment or completion of the services.
Sales taxes
Sales (and similar) taxes that are imposed on our sales and collected from customers are excluded from revenues.
Shipping and handling costs
Costs for shipping and handling activities are recorded as cost of sales and are expensed as incurred. We accrue costs for shipping and handling activities that occur after control of the promised good or service has been transferred to the customer.
Deferred Revenue
Remaining performance obligations include deferred revenue and amounts we expect to receive for goods and services that have not yet been delivered or provided under existing, non-cancellable contracts. For contracts that have an original duration of one year or less, we have elected the practical expedient applicable to such contracts and we do not disclose the transaction price for remaining performance obligations at the end of each reporting period and when we expect to recognize this revenue. As of March 31, 2026, total remaining performance obligations and deferred revenue were $
| · | $ |
| · | $ |
| · | $ |
Contract liabilities consisting of deferred revenues were $
Concentration of Credit Risk
We are economically dependent upon our relationship with a large US-based IT OEM (Original Equipment Manufacturer). If this relationship is unsuccessful or discontinues, our business and revenue will suffer. The loss of or a significant reduction in orders from this customer or the failure to provide adequate products or services to it would significantly reduce our revenue.
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The following customer accounted for a significant percentage of our revenues for the periods shown:
|
| Three Months Ended March 31, |
| |||||
|
| 2026 |
|
| 2025 |
| ||
US-based IT OEM |
|
| % |
|
| % | ||
No other customer represented more than
Non-recourse factoring
We have entered into a factoring agreement with a financial institution to sell certain of our accounts receivable from a US-based IT OEM customer under a non-recourse agreement. Due to the extended payment terms from that customer, we use this factoring arrangement because the effective interest rate implicit in this arrangement is less than the rate at which we could borrow the funds to carry those receivables through their due date. Under the arrangement, we sell certain trade receivables on a non-recourse basis and account for the transaction as a sale of the receivable. The financial institution assumes the full risk of collection, without recourse to the Company in the event of a loss. Debtors are directed to send payments directly to the financial institution. The applicable receivables are removed from our condensed consolidated balance sheet when we receive the cash proceeds. We do not service any factored accounts after the factoring has occurred. We utilize this factoring arrangement as part of our financing for working capital. The table below presents information relevant to this factoring program (in $’000’s):
|
| Three Months Ended March 31, |
| |||||
|
| 2026 |
|
| 2025 |
| ||
Aggregate gross amount factored |
| $ |
|
| $ |
| ||
Financing fees paid |
| $ |
|
| $ |
| ||
Financing fees were recorded as bank factoring fees in our condensed consolidated statements of operations or in deferred costs if it is related to projects for which revenue has not yet been recognized at the time the expense was recognized, as such there may be differences in the total amount of cash paid in the period. The total amounts factored exceed our total recorded revenues, as the factoring fees apply to the gross value of receivables collected through the program, while we record only our agent fee on procurement contracts as revenue for any procurement activity that is shipped directly from third parties to the end customer.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, net of estimated forfeitures. For awards with performance-based vesting criteria, we recognize expense once it is deemed probable that the performance criteria will be met. We award shares of restricted stock and stock options to employees, managers, executive officers, and directors for both incentive and retention purposes.
During the three months ended March 31, 2026 and 2025, we incurred approximately $
Cash, cash equivalents, and restricted cash
Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of three months or less, primarily consisting of bank time deposits. We had unrestricted cash of $
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Contract and Other Receivables
Accounts receivables are recorded at the invoiced amount and may bear interest in the event of late payment under certain contracts.
Allowance for Credit Losses
We recognize an allowance for credit losses in an amount equal to the current expected credit loss, which is based on historical loss experience, factors related to the specific credit risk of each customer, current receivable aging, and management’s expectation and reasonable and supportable forecast of future conditions. Historically our credit losses have been minimal. We perform credit evaluations of new customers and may require prepayments or the use of bank instruments such as trade letters of credit to mitigate credit risk. We monitor outstanding amounts to limit our credit exposure to individual accounts. We continue to pursue collection even if we have fully provided for an account balance.
The following table summarizes the changes in our allowance for credit losses (in ’000):
|
| Three Months Ended March 31, |
| |||||
|
| 2026 |
|
| 2025 |
| ||
Balance at beginning of period |
| $ |
|
| $ |
| ||
Additions charged to expense |
|
|
|
|
|
| ||
Recovery of amounts previously reserved |
|
|
|
|
|
| ||
Amounts written off |
|
|
|
|
|
| ||
Balance at end of period |
| $ |
|
| $ |
| ||
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for purchased inventories other than inventory bearing serial numbers which are tracked using specific identification. We write down obsolete inventory or inventory quantities more than our estimated usage to its estimated realizable value less costs to sell, if less than its cost. Inherent in our estimates of net realizable value in determining inventory valuation are estimates related to future demand and technological obsolescence of our products. Any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventories and our results of operations and financial position could be materially affected.
Property and Equipment
Property and equipment are recorded at cost, including interest incurred during the construction phase of assets financed at least partly with debt. We provide for depreciation using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the lease term. Additions and major replacements or improvements are capitalized, while minor replacements and maintenance costs are charged to expense as incurred. Depreciation expense directly related to our revenue producing activities is recorded as a component of cost of revenues in our condensed consolidated statements of operations; the remainder is classified in operating expenses. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction or the date of determination that the assets have been impaired.
Goodwill and Intangible Assets
We have recorded goodwill and intangible assets with definite lives, including customer relationships and acquired software, in conjunction with the acquisition of various businesses. These intangible assets are amortized based on their estimated economic lives. Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets acquired and liabilities assumed, and it is not amortized. The recorded goodwill is allocated to the reporting unit to which the underlying transaction relates.
U. S. GAAP requires us to perform an impairment test of goodwill on an annual basis or whenever events or circumstances make it more likely than not that impairment of goodwill may have occurred. As part of the annual impairment test, we review for indicators of impairment as “Step Zero” of the annual impairment test and if any exist, we compare the fair value of the reporting unit with its carrying amount. If that fair value exceeds the carrying amount, no impairment charge is required to be recorded. If the carrying value exceeds the reporting unit’s fair value, we would recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. If necessary, the fair value of a reporting unit will be determined using a discounted cash flow analysis, which requires the use of estimates and assumptions. Significant assumptions that may be required include forecasted operating results, and the determination of an appropriate discount rate. Actual results may differ from forecasted results, which may have a material impact on the conclusions reached.
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We have elected to use December 31 as our annual assessment date. As circumstances change that could affect the recoverability of the carrying amount of goodwill during an interim period, we will evaluate our goodwill for impairment. The Company performed a qualitative analysis of our goodwill at December 31, 2025 and concluded no impairment existed at that date. In the quarter ended March 31, 2026, we considered relevant matters including macroeconomic and other conditions on our operations and noted no triggering events or circumstances that occurred during that period that would indicate the carrying value of our goodwill or other long-lived intangible assets were impaired. On March 31, 2026, and December 31, 2025, the carrying value of goodwill was $0.8 million.
In any period with a reported value of intangible assets with definite lives, our policy is to review those intangible assets for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset. Our recorded intangible assets with definite lives were fully amortized at March 31, 2026 and December 31, 2025; accordingly, no such impairment review was necessary during the three-months ended March 31, 2026 or for the year ended December 31, 2025.
Income Taxes
Deferred income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The U.S. net operating losses generated prior to 2018 and not utilized can be carried forward for 20 years to offset future taxable income. As we now have a history of continued net income and income from operations for the last two years, and anticipate being able to continue generating taxable income, we determined it was more likely than not that we will be able to utilize the majority of our deferred tax assets. As a result, in the fourth quarter of 2025, we released most of the valuation allowance we had previously recorded, keeping in place the valuation allowance related to state income taxes in states in which we no longer generate revenue or taxable income. As a percentage of our pre-tax earnings, the income tax expense presented on our statements of operations is substantially less than one might normally expect to see. In the three months ended March 31, 2026, this is due primarily to discrete items, such as tax benefits attributed to stock compensation realized in the period, and in the prior year period ended March 31, 2025, this was due to the partial release of the valuation allowance, which was sufficient to absorb such taxes in that period. We recognize any interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the condensed consolidated statements of operations.
Earnings Per-Common Share
Basic and diluted earnings per share are based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for the purposes of determining diluted earnings per share, includes the effects of dilutive unvested restricted stock and options to purchase common stock. The effect of such potentially dilutive common stock is computed using the treasury stock method.
Common Stock Repurchases
We account for common stock repurchases using the cost method. Purchases of shares of common stock are recorded at cost and result in a reduction of stockholders’ equity. In December 2025, the Company’s Board of Directors authorized the retirement of all treasury shares previously held and future retirement of any shares repurchased as a result of employees’ decisions to net-share settle to fulfill any tax withholding requirements or amounts due to exercise options. Accordingly, we reduced the recorded par value and additional paid-in capital, as the Company has an accumulated deficit, by an amount equal to what was previously recorded for treasury stock.
Commitments and Contingencies
In the ordinary course of business, the Company may be subject to claims, lawsuits, and proceedings. Management evaluates such matters based on available information and, when necessary, records an accrual for estimated losses. The Company also enters into purchase commitments, subcontractor arrangements, and other contractual obligations in the normal course of operations. Although many of these commitments do not meet the criteria for recognition as liabilities under U.S. GAAP, the Company may provide disclosure of material non‑cancelable or otherwise significant commitments to provide users of the financial statements with additional information about future cash flow requirements.
As of March 31, 2026, management determined that no legal matters required accrual or disclosure, and any additional commitments disclosed elsewhere in the notes represent contractual obligations rather than contingencies.
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Defined Contribution Plan
The Company sponsors a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code covering eligible employees. The 401(k) plan allows each participant to contribute up to an amount not to exceed an annual statutory maximum. Although the employer match is voluntary according to the terms of the plan, the Company has contributed in each period presented a matching contribution of 50% of each participant’s employee contributions of up to 6% of eligible wages during the period. During the three-months ended March 31, 2026 and 2025, the Company recognized expense of $
Recently Adopted Accounting Guidance
In July 2025, FASB issued ASU 2025-05, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, which provides public companies with a practical expedient in developing reasonable and supportable forecasts as part of estimating expected credit losses. All entities may elect a practical expedient that assumes that current conditions as of the balance sheet date do not change for the remaining life of the asset. Early adoption is permitted. The amendment is effective for annual periods beginning after December 15, 2025, and interim periods within those annual reporting periods. We adopted this guidance during the three-month period ended March 31, 2026, and elected to apply the practical expedient. It did not have a material impact on our financial results of operations or financial position.
Recently Issued Accounting Pronouncements
In November 2024, FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40) (“ASU 2024-03”), which will require that entities provide more granular footnote disclosures of the details contained in certain captions on the company’s income statement, such as “Selling, General and Administrative” expenses. This new guidance is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. We have not yet determined all the effects that adoption of this new guidance will have on our statement of operations and related footnote disclosures. We do not expect its adoption to affect our net operating results or financial position.
In September 2025, the FASB issued ASU 2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which updates the guidance for determining when capitalization of internal-use software costs should begin. The amendments are effective for annual reporting periods beginning after December 15, 2027. Early adoption is permitted. The amendments may be applied prospectively to software costs incurred after adoption or through a modified prospective approach based on the status of software development projects at the date of adoption. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
In December 2025, the FASB issued ASU No. 2025-10, Government Grants (Topic 832): Accounting for Government Grants Received by Business Entities. The ASU establishes authoritative guidance in GAAP about accounting for government grants received by business entities, clarifies the appropriate accounting, in an effort to reduce diversity in practice and increase consistency of application across business entities. The ASU is effective for annual reporting periods beginning after December 15, 2028, and interim reporting periods within those annual reporting periods. Adoption of this ASU can be applied a modified prospective approach, a modified retrospective approach, or a retrospective approach. Early adoption is permitted. We are currently evaluating the provisions of this ASU and do not expect this ASU to have a material impact on our consolidated financial statements.
In December 2025, the FASB issued ASU No. 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements. The ASU clarifies interim disclosure requirements and the applicability of Topic 270. The objective of the amendments is to provide further clarity about the current interim disclosure requirements. The ASU will first apply to us in the fiscal quarter ending March 31, 2028. Adoption of this ASU can be applied using either a prospective or a retrospective approach. Early adoption is permitted. We are currently evaluating the provisions of this ASU and do not expect this ASU to have a material impact on our consolidated financial statements.
In December 2025, the FASB issued ASU No. 2025-12, Codification Improvements. The ASU addresses thirty-three items, representing the changes to the Codification that (1) clarify, (2) correct errors, or (3) make minor improvements. Generally, the amendments in this Update are not intended to result in significant changes for most entities. The ASU is effective for interim reporting periods within annual reporting periods beginning after December 15, 2026. The adoption method of this ASU may vary, on an issue-by-issue basis. Early adoption is permitted. We are currently evaluating the provisions of this ASU and do not expect this ASU to have a material impact on our consolidated financial statements.
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Note 2 – Supplemental Balance Sheet Information
Receivables
Contract and other receivables consisted of the following (in ‘000’s):
|
| March 31, 2026 (Unaudited) |
|
| December 31, 2025 |
| ||
Contract and other receivables |
| $ |
|
| $ |
| ||
Allowance for credit losses |
|
|
|
|
|
| ||
Contracts and other receivables, net |
| $ |
|
| $ |
| ||
Contract and other receivables, net were $
Inventories
We state inventories at the lower of cost or net realizable value (in ‘000’s) as follows:
|
| March 31, 2026 (Unaudited) |
|
| December 31, 2025 |
| ||
Raw Materials |
| $ |
|
| $ |
| ||
Work in Process |
|
|
|
|
|
| ||
Finished Goods |
|
|
|
|
|
| ||
Reserve |
|
| ( | ) |
|
| ( | ) |
Inventories, net |
| $ |
|
| $ |
| ||
Property and Equipment
Property and equipment consisted of the following (in ’000’s):
|
| Estimated Useful Lives |
|
| March 31, 2026 (Unaudited) |
|
| December 31, 2025 |
| |||
|
| (years) |
|
|
|
|
|
|
| |||
Trade equipment |
|
|
| $ |
|
|
|
| ||||
Leasehold improvements |
|
|
|
|
|
|
|
| ||||
Furniture and fixtures |
|
|
|
|
|
|
|
| ||||
Computer equipment and software |
|
|
|
|
|
|
|
|
| |||
Construction in Process |
|
| N/A |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Less accumulated depreciation |
|
|
|
|
|
| ( | ) |
|
| ( | ) |
Property and equipment, net |
|
|
|
|
| $ |
|
| $ |
| ||
Depreciation of property and equipment and amortization of leasehold improvements and software totaled $
The following table presents interest capitalized as property and equipment, as the related debt was used to finance the build-out of a portion of the capital expenditures (in $000’s):
|
| Three Months Ended March 31, |
| |||||
|
| (Unaudited) |
| |||||
|
| 2026 |
|
| 2025 |
| ||
Capitalized interest |
| $ |
|
| $ |
| ||
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Goodwill and Intangible Assets
Goodwill and Intangible Assets consisted of the following (in ‘000’s):
|
| March 31, 2026 (Unaudited) |
|
| December 31, 2025 |
| ||||||||||
|
| Gross |
|
|
|
| Gross |
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| ||||||
|
| Carrying |
|
| Accumulated |
|
| Carrying |
|
| Accumulated |
| ||||
|
| Amount |
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| Amortization |
|
| Amount |
|
| Amortization |
| ||||
Intangible assets not subject to amortization: |
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|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill |
| $ |
|
|
|
|
| $ |
|
|
|
| ||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
Acquired software |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
Goodwill is attributable to the following reportable segments (in ‘000’s):
|
| March 31, 2026 (Unaudited) |
|
| December 31, 2025 |
| ||
Facilities Management |
| $ |
|
| $ |
| ||
Systems Integration |
|
|
|
|
|
| ||
Total goodwill |
| $ |
|
| $ |
| ||
We recognized no amortization expense related to intangible assets in the three-month periods ended March 31, 2026 or in the comparable period of 2025 as all long-lived intangible assets subject to amortization were fully amortized.
Other Assets
Other assets, non-current is comprised of the following amounts (in $000’s):
|
| March 31, 2026 (Unaudited) |
|
| December 31, 2025 |
| ||
Deposits |
| $ |
|
| $ |
| ||
Other non-current assets, net |
|
|
|
|
|
| ||
Total other assets |
| $ |
|
| $ |
| ||
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in ’000’s):
|
| March 31, 2026 (Unaudited) |
|
| December 31, 2025 |
| ||
Accrued expenses |
| $ |
|
| $ |
| ||
Compensation, benefits and related taxes |
|
|
|
|
|
| ||
Other accrued expenses |
|
|
|
|
|
| ||
Total accrued expenses and other current liabilities |
| $ |
|
| $ |
| ||
Long-Term Debt
Long-term debt, non-current consisted of the following (in ’000’s):
|
| March 31, 2026 (Unaudited) |
|
| December 31, 2025 |
| ||
Borrowed funds (bank loan; see Note 3) |
| $ |
|
| $ |
| ||
Less deferred debt issuance costs |
|
| ( | ) |
|
| ( | ) |
Less long-term debt, current portion |
|
| ( | ) |
|
| ( | ) |
Long-term debt, non-current |
| $ |
|
| $ |
| ||
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Amortization of deferred debt issuance costs began in the quarter ended June 30, 2025, once construction of the Georgetown facility was substantially complete. We amortized $
Note 3 - Long-Term Debt
On December 31, 2024, we entered into a new Credit Agreement (the “Credit Agreement”) with Susser Bank to fund improvements at the Georgetown, Texas location we leased on December 2, 2024 to which we have now moved our headquarters and operations. The Credit Agreement provided for a $
The Credit Agreement includes customary affirmative covenants for secured transactions of this type, including maintaining adequate books and records, periodic financial reporting, compliance with laws, maintenance of insurance, maintenance of assets, timely payment of taxes, and notices of adverse events. It also includes customary negative covenants including incurrence of other indebtedness, mergers, consolidations and transfers of assets and liens on our assets. The Loan Agreement and ancillary documents also include customary events of default, including payment defaults, failure to perform or observe terms, covenants or agreements included in the Loan Agreement and ancillary documents, insolvency and bankruptcy defaults, judgment defaults, material adverse change defaults, and change of ownership defaults.
As of March 31, 2026, all available funds under the Credit Agreement have been drawn.
The following table presents the aggregate future maturities of the Company’s debt as of March 31, 2026 (unaudited, in $000’s):
Fiscal Year |
| |||
Remainder of 2026 |
| $ |
| |
2027 |
|
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| |
2028 |
|
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| |
2029 |
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| |
2030 |
|
|
| |
Total maturities, principal amount |
| $ |
| |
Note 4- Leasing Arrangements
We have operating leases for our office and integration facilities in both Round Rock, Texas and Georgetown, Texas as well as for certain equipment. Our leases have remaining lease terms of
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We determine if an arrangement is a lease at its inception. Operating leases are included in the lease right-of-use assets, current lease liabilities and lease liabilities, non-current, on our condensed consolidated balance sheets. We have elected an accounting policy to not recognize short-term leases (one year or less) on the balance sheet. We also selected a package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, we did not need to reassess whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases. Additionally, as an ongoing accounting policy election, we elected the practical expedient to not separate lease components from non‑lease components for our facility and equipment lease asset classes. As a result, each lease component and its related non‑lease components are accounted for together as a single lease component.
Right-of-use assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term, with variable lease expense recognized in the period in which the costs are incurred. Variable lease expense is comprised of common area maintenance (CAM), property taxes and property insurance. Components of lease expense and other information is as follows (in $000’s ):
|
| Three Months Ended March 31, |
| |||||
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| (Unaudited) |
| |||||
|
| 2026 |
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| 2025 |
| ||
Operating lease cost: |
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| ||
Operating lease cost |
| $ |
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| $ |
| ||
Variable lease cost |
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Total operating lease cost |
| $ |
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| $ |
| ||
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Cash paid for operating leases |
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| ||
New right-of-use assets – operating leases |
|
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|
| ||
The following presents information regarding the Company's operating leases as of March 31 (unaudited):
|
| 2026 |
|
| 2025 |
| ||
Weighted average remaining lease term – operating leases (months) |
|
|
|
|
|
| ||
Weighted average discount rate – operating leases |
|
| % |
|
| % | ||
Future minimum lease payments under non-cancellable leases as of March 31, 2026 were as follows (unaudited, in ‘000’s):
Fiscal Year |
|
|
| |
2026 |
| $ |
| |
2027 |
|
|
| |
2028 |
|
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| |
2029 |
|
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| |
2030 |
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| |
Thereafter |
|
|
| |
Total minimum future lease payments |
|
|
| |
Less imputed interest |
|
| ( | ) |
Total |
| $ |
| |
|
|
|
|
|
Reported as of March 31, 2026 (in ‘000’s): |
|
|
|
|
Current portion of lease liability |
| $ |
| |
Non-current portion of lease liability |
|
|
| |
|
| $ |
| |
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Note 5 – Income Taxes
For the three-month period ended March 31, 2026, the Company recorded an income tax expense of $
For the three-month period ended March 31, 2025, the Company recorded an income tax expense of $
The Company’s total unrecognized tax benefits, excluding interest, were $
Note 6 – Commitments and Contingencies
In the normal course of business, we issue binding purchase orders to subcontractors and equipment suppliers. At March 31, 2026, these open purchase order commitments amount to approximately $
We are not a party to any material litigation in any court, and we are not aware of any contemplated proceeding by any governmental authority against us. From time to time, we are involved in various legal matters and proceedings concerning matters arising in the ordinary course of business such as employment-related matters. We believe that any potential liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.
Note 7– Fair Value Measurements
U. S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U. S. GAAP also established a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As of March 31, 2026, we did not have any assets measured at fair value on a recurring basis that would require disclosure based on the fair value hierarchy of valuation techniques. In addition, certain non-financial assets and liabilities are to be initially measured at fair value on a non-recurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities, including goodwill and property and equipment, are measured at fair value using Level 3 inputs, which result in management’s best estimate of fair value from the perspective of a market participant, when there is an indication of impairment and are recorded at fair value only when impairment is recognized.
Note 8–Share-Based Payments
Stock‑based compensation expense was $
There were no material changes to the Company’s share‑based payment plans, valuation methodologies, or significant award terms during the quarter.
Note 9–Common Stock Repurchases
During the three months ended March 31, 2026 and 2025, we repurchased
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Note 10 – Related Party Transactions
During the three months ended March 31, 2026, the Company entered into transactions with a related party, Neovia Logistics Services, LLC (“Neovia”). Neovia is considered a related party, as its Chief Executive Officer is an independent director on the Company’s board of directors. The transactions consisted of consulting services related to the Company’s inventory and warehouse management processes. For the three months ended March 31, 2026, expenses recognized related to these transactions totaled approximately $
Note 11 – Earnings Per-Share
Basic and diluted income per share is based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for the purpose of determining diluted income per share, includes the effects of dilutive unvested restricted stock, options to purchase common stock and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.
The following table presents a reconciliation of the numerators and denominators of the computations of basic and diluted income per share from continuing operations. In the table below, net income represents the numerator, and shares represent the denominator (in thousands except per share amounts):
|
| Three Months Ended March 31, |
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|
| (Unaudited) |
| |||||
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| 2026 |
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| 2025 |
| ||
Basic Earnings per share: |
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Numerator: |
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Net income |
| $ |
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| $ |
| ||
Denominator: |
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Weighted-average shares of common stock outstanding |
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Basic Earnings per share |
| $ |
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| $ |
| ||
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Diluted Earnings per share: |
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Numerator: |
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Net income |
| $ |
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| $ |
| ||
Denominator: |
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Weighted-average shares of common stock outstanding |
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Dilutive options outstanding |
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Number of shares used in diluted per-share computation |
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| ||
Diluted Earnings per share |
| $ |
|
| $ |
| ||
For the three-month periods ended March 31, 2026 and 2025, respectively,
Note 12 - Segment Reporting
Segment information reported in the tables below represents the operating segments of the Company organized in a manner consistent with which separate information is available and for which segment results are evaluated regularly by our President and CEO, who is our chief operating decision-maker (CODM), in assessing performance, allocating resources and awarding incentive compensation. Our CODM evaluates our operations and allocates resources on the basis of three segments, which are our reportable segments as noted below. Our revenues are substantially all derived from the U.S. market, and all revenues presented are from external customers; we have no intercompany revenues.
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The Company’s reportable segments are as follows:
| · | Procurement: Assists our customers in procuring third-party hardware, software, and professional services on their behalf that are used in our integration services as we integrate these components to deliver a completed system to our customers. Although this activity drives some of the work done in the systems integration business, its activities and financial results are reviewed separately from the systems integration segment results. |
| · | Systems Integration: Integrates IT equipment for OEM vendors and customers to be used inside data center environments, including MDCs. This includes AI-enabled computer technology as well as more traditional data center equipment. This segment also provides other computer equipment configuration services for our customers. |
| · | Facilities Management: Involved in the design, project management and maintenance of data centers and mission-critical business operations. |
The CODM evaluates the performance of the segments based on segment revenue, gross profit and pre-tax income, by comparing actual results to historic results and previously forecast financial information. Segment results are exclusive of certain corporate activities and expenses that are not allocated to specific segments, and which are reconciled below to our consolidated pre-tax income.
Other consolidated assets not specifically attributable to or allocated to business segments are principally cash and cash equivalents, prepaids and deposits, certain fixed assets, and operating lease right-of use assets. Other operating expenses (income) in the following tables generally represent property taxes, rent and related costs, travel and entertainment, professional fees, office supplies and other similar items utilized by the specific reportable segments but not separately identified in the tables below as none of the costs are individually significant.
Information regarding our reportable segments is presented below (unaudited, in thousands):
|
| Procurement |
|
| Systems Integration |
|
| Facilities Management |
|
| Total Segments |
| ||||
Three Months Ended March 31, 2026: |
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Total revenue |
| $ |
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| $ |
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| $ |
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| $ |
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Cost of revenues |
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Cost of revenues – depreciation |
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Segment gross profit |
| $ |
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| $ |
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| $ |
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| $ |
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Payroll and benefits excluded from cost of revenues |
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Depreciation and amortization expense |
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Bank factoring fees |
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Other operating expenses |
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Interest expense |
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Interest income |
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Other expense (income) |
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Segment pre-tax income |
| $ |
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| $ |
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| $ |
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| $ |
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Capital expenditures |
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| $ |
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| $ |
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|
| Procurement |
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| Systems Integration |
|
| Facilities Management |
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| Total Segments |
| ||||
Three Months Ended March 31, 2025: |
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Total revenue |
| $ |
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| $ |
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| $ |
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| $ |
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Cost of revenues |
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Cost of revenues – depreciation |
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Segment gross profit |
| $ |
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| $ |
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| $ |
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| $ |
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Payroll and benefits excluded from cost of revenues |
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Depreciation and amortization expense |
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Bank factoring fees |
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Other operating expenses |
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Interest expense |
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Interest income |
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Other expense (income) |
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Segment pre-tax income |
| $ |
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| $ |
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| $ |
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| $ |
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Capital expenditures |
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| $ |
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| $ |
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The table below reconciles total segment pre-tax income for each period presented above to consolidated pre-tax income (in thousands):
|
| Three Months Ended March 31, |
| |||||
|
| (Unaudited) |
| |||||
|
| 2026 |
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| 2025 |
| ||
Total segment pre-tax income |
| $ |
|
| $ |
| ||
Less: Unallocated SG&A and depreciation |
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Plus: Unallocated interest income, net |
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Less other expense (plus other income) |
|
| ( | ) |
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| |
Consolidated pre-tax income |
| $ |
|
| $ |
| ||
The table below presents segment total assets for March 31, 2026 and December 31, 2025 (unaudited, in thousands):
|
| Procurement |
|
| Systems Integration |
|
| Facilities Management |
|
| Total Segments |
| ||||
Total Segment Assets at March 31, 2026 |
| $ |
|
| $ |
|
| $ |
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| $ |
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Total Segment Assets at December 31, 2025 |
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The table below reconciles combined segment total assets for each period presented above to consolidated total assets (in thousands):
|
| March 31, 2026 (Unaudited) |
|
| December 31, 2025 |
| ||
Combined total assets included in segments |
| $ |
|
| $ |
| ||
Plus items not allocated to segments: |
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Cash and cash equivalents |
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Other receivables |
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Restricted cash |
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Prepaid expenses and other current assets |
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Property and equipment, net |
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Lease right-of-use asset |
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Deferred tax asset, net |
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Other assets |
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Consolidated total assets |
| $ |
|
| $ |
| ||
Note 13 – Subsequent Events
In April 2026, the Company entered an agreement with its largest customer to use its previously idle Round Rock, Texas facility to provide warehousing, fulfillment and transportation services, primarily for inventory parts related to AI rack integration services it provides to that same customer. The agreement calls for the Company to provide such services, including transportation of parts from that facility to the Company’s Georgetown, Texas integration facility as needed, beginning May 1, 2026. The term of the agreement runs through the expiration of the lease at that facility on March 31, 2029, and includes the potential of extensions beyond that date if both parties agree.
On May 1, 2026, the Company entered into an agreement with Neovia, a related party described in more detail under Note 10 – Related Parties, whereby Neovia will provide the warehouse, operations, inventory and transportation management services from the Company’s Round Rock, Texas facility.
| 20 |
| Table of Contents |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Result of Operations is intended to inform the reader about matters affecting the financial condition and results of operations of TSS, Inc. and its subsidiaries (collectively “we”, “us”, “our”, “TSS” or the “Company”). The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the condensed consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2025 included in our 2025 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words “believe,” “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the “Risk Factors” in Part 1, Item 1A of our 2025 Annual Report on Form 10-K for a discussion of items that may affect our future results.
Overview
We provide a comprehensive suite of services for the integration of complex Artificial Intelligence (AI) technologies, planning, design, deployment, maintenance and refresh of end-user and enterprise systems, including the mission-critical facilities in which they are housed. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT procurement services. Beginning in 2024, our systems integration services have been enhanced to include integration of AI enabled data center server racks. TSS was incorporated in Delaware in December 2004.
We deliver complex solutions to a broad range of enterprise customers who utilize our services to deploy solutions in their own data centers, in modular data centers (MDCs), in colocation facilities or at the edge of the network. This market remains highly competitive and is subject to constant evolution as new computing technologies or applications drive continued demand for more advanced computing and storage capacity. In recent years, these enterprises have shifted their investment priorities towards AI and accelerated computing infrastructure initiatives. Enterprise and data center operators are facing immense pressure to rapidly integrate and deploy the latest generative, inferencing and agentic AI equipment and GPUs (Graphics Processing Units) and will need to adapt these next-generation servers and custom rack-scale architectures to quickly and successfully compete in the market. Ensuring adequate power and thermal management systems are implemented to support these new technologies while meeting increasingly stringent sustainability requirements is critical to a successful deployment. TSS exists to assist these operators in achieving these benefits over the life cycle of their IT investments.
Over the last ten years, we have optimized our business by providing world-class integration services to our customer base. As computing technologies evolve and as we see new power and cooling technologies emerge, including direct liquid-cooled IT solutions and the rapid adoption of AI computing solutions, we will continue to adapt our systems integration business and capabilities to support these new products. We will also continue to offer expanded services to enable the integration, deployment, support, and maintenance of these new IT solutions. We compete in expanding market segments, often against larger competitors who have extensive resources. We rely on several large relationships and one US-based OEM (original equipment manufacturer) strategic customer to win contracts and to provide business to us under a Master Relationship Agreement. A material decline in volume from, or loss of this OEM customer, would have a material effect on our results. Our operational focus is to ensure this does not occur.
Most of the components used in our systems integration business are consigned to us by our largest OEM customer or its end-user customers. Thus, most of our systems integration revenues reflect only the services we provide, and the consigned components are not reflected in our statement of operations or on our balance sheet. We also offer procurement services whereby we procure third-party hardware, software and services on their behalf. Our configuration and integration services businesses often integrate these components to deliver a complete system to our customers.
In October 2024, we signed a long-term agreement with our largest customer to provide systems integration services for AI-enabled computer racks at an expected minimum monthly volume. To support this level of production, and to be able to provide increased volumes over our prior facility, we moved our headquarters and production facility to a new location in May 2025. Through March 31, 2026, we have invested approximately $40 million in improvements to that leased facility, primarily to significantly increase the available electrical power and related cooling capabilities for both air-cooled and direct liquid cooled computer racks. We are financially responsible for all fixed and variable costs related to this activity, including debt service requirements related to the capital expenditures, direct and indirect labor related to this activity, and all facility and related costs. In December 2025, we signed an amendment to the long-term agreement whereby both parties agreed to extend the term of the agreement for an additional two years beyond its original multi-year term, with automatic one-year renewals if not earlier terminated, and to provide pricing updates to account for increased power consumption and capital expenditures beyond the original expectations. While there may be some variability in the number of racks built in any given period, we believe the structure of the agreement with our customer provides reasonable assurance to us that absent our material breach of the agreement or our termination of the agreement, the revenues we earn from this arrangement will be sufficient to cover the aforementioned costs we expect to incur in fulfilling our obligations. Our customer could terminate the agreement if we were to materially breach the agreement, leaving us with the financial obligations of the lease and debt service regardless of whether we had revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to the other party’s material breach of the agreement, the other party would be relieved of any further obligation. Funding sources for the build-out costs at the new facility include approximately $6.8 million contributed by our landlord, $25 million from two related bank term loans, and cash on hand. In December 2025, we repaid the second $5 million bank loan, and our current loan balance reflects the remaining balance on only the original $20 million loan.
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| Table of Contents |
Customers continue to value our ability to procure disparate hardware, software and services and provide a single-source solution for their IT needs. In some cases, we merely act as agents in these transactions, and so the reported procurement services revenues will reflect only our fees earned in the transaction (“net deals”). If the procurement activities include integration services or other value-add work beyond just the procurement activity, the transaction is recorded at its gross value (“gross deals”), and revenue and costs are allocated to the procurement and systems integration segments based on the value created in each and the effort involved to fulfill the contracts.
Revenues consist of fees earned from the planning, design and project management for mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services for these facilities. We also earn revenues from providing system configuration and integration services, as well as procurement services, to IT equipment vendors. We began integration services on AI racks in June 2024 and have continued that activity to date. Currently we derive substantially all our revenue from the U.S. market.
We contract with our customers with various contract types: service and maintenance, time and material, and guaranteed maximum price contracts, all of which are fixed-price exclusive of time and material contracts. Guaranteed maximum price contracts are typically lower risk arrangements and thus yield lower profit margins than time-and-materials arrangements which generally generate higher profit margins, relative to their higher risk. Certain of our service and maintenance contracts provide comprehensive coverage of all the customers’ equipment (excluding IT equipment) at a facility during the contract period.
Most of our revenue is generated based on services provided either by our employees or subcontractors. To a lesser degree, the revenue we earn includes reimbursable travel and other costs to support the project. Since we earn higher profits from the labor services that our employees provide compared with use of subcontracted labor and other reimbursable costs, we seek to optimize our labor content on the contracts we are awarded to maximize our profitability. Occasionally, our revenues will reflect certain reimbursements received from customers for expanding our capacity, typically through capital expenditures, or for adding headcount to support specific customer requests. In 2024, we invested approximately $1.7 million in our Round Rock facility to expand our capacity to integrate generative AI-enabled server racks, including both air-cooled and direct-liquid cooled systems. One of our customers reimbursed us for the majority of those investments. Prior to December 2025, we were amortizing that reimbursement into service integration revenues over the expected useful life of three years; the same period over which we were depreciating the related fixed assets. As the production of AI racks has now fully moved to our Georgetown facility and we no longer expect to utilize the assets installed in our Round Rock facility to support AI rack integration, we accelerated the revenue recognition and depreciation of those assets in the fourth quarter of 2025.
Our maintenance and integration services traditionally earn higher margins and maintenance contracts typically renew annually, providing consistency and predictability of revenues. We focus our design and project management services on smaller jobs typically connected with addition or retrofit activities to obtain better margins and a more predictable pattern of earnings than are typically seen when such efforts are concentrated in fewer high-value contracts for the construction of new data centers, which would otherwise require greater levels of working capital and tend to yield lower margins. We have also focused on providing maintenance services for MDC applications as this market has expanded. We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize our assets in that business, and through adding revenue streams such as procurement services to help drive volume through the integration facility.
In April 2026, we signed an agreement with our largest customer to use our idle Round Rock, Texas facility to provide warehousing, fulfillment and transportation services, primarily for inventory parts that are integral to the AI rack integration services we provide to that same customer. The agreement calls for us to provide such services, including transportation of parts from that facility to our Georgetown, Texas integration facility as needed, beginning May 1, 2026. The term of the agreement runs through the expiration of our lease at that facility on March 31, 2029, and includes the potential of extensions beyond that date if both parties agree. The agreement calls for both fixed and variable revenues which we expect to contribute to the Company’s overall income beginning in the second quarter of 2026.
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| Table of Contents |
RESULTS OF OPERATIONS
Three Months Ended March 31, 2026
Unless otherwise noted, all comparisons in this section are between the three-month period ended March 31, 2026 (the “current quarter” or “this quarter”) and the three-month period ended March 31, 2025 (the “prior year quarter” or “this quarter last year”).
Revenues
Total revenues in the current quarter decreased 44% to $55.3 million. Procurement revenues decreased by $50.2 million (56%) in comparison to an unusually large volume of procurement activity in the prior year quarter and facilities management revenues decreased by $0.1 million (1%). These decreases were somewhat offset by an increase in systems integration revenues of $6.6 million (88%). Deferred revenues decreased $11.5 million compared to the balance at December 31, 2025, for contracts and projects that were completed in the period ended March 31, 2026, including one unusually large order that was in process at December 31, 2025.
The $6.6 million (88%) increase in systems integration revenues was due primarily to the continued growth in integration of AI-enabled computer racks, which began with significant volume in June 2024, and an increase in certain fixed monthly fees as we amended our long-term agreement with our main customer in December 2025. This agreement calls for certain minimum monthly payments to us, which we believe will be sufficient to cover the majority of the costs for our facility and debt service payments tied to our financing of the build-out of Georgetown, Texas facility which was completed in 2025. While those payments are required under the terms of this agreement, our customer could terminate the agreement if we were to materially breach it, leaving us with the financial obligations of the facility and debt service regardless of whether we have revenue sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to our customer’s material breach of the agreement, they would be relieved of any further obligation. If the customer were to terminate the agreement for convenience, they would continue to be obligated to pay us for the monthly fixed charge, but would no longer have any minimum volume commitments, as discussed below.
In addition to the fixed monthly fees to which we are entitled under our long-term agreement, we also receive payments that scale depending on the volume of AI racks integrated and for which we are prepared to integrate. To mitigate the impact of demand fluctuations and supply-chain issues on our growing AI-enabled rack integration business, our primary customer has committed to pay us for maintaining staffing levels to support an agreed minimum weekly quantity of racks. To the extent we do not meet the minimum weekly volume due to our production downtime or labor shortages compared to agreed-upon levels, we will reduce the fee, billing only for the quantity of racks we actually configured or could have configured given the actual staffing levels. We contractually agreed to use commercially reasonable efforts to mitigate our customer’s costs for under-utilized staff, including during periods of extended lulls in demand or supply chain issues experienced by our customer. While any reduction in available staff reduces the revenues to which we are entitled under this agreement, we believe our long-term partnership with our customer is strengthened as we help them mitigate a portion of the costs for which they are responsible. The periodic reduction of revenues has a muted impact on our overall results, as we also reduce our labor costs in line with the reduced revenues.
Our non-AI rack integration services, without such minimum commitments, may be impacted by periodic supply chain issues for certain components and lulls in demand. These supply chain disruptions periodically cause delays in the timing of systems integration revenue for us as we await delivery of required components, and our vendors and partners expect these supply-chain issues to continue for at least the next several quarters.
The prior year quarter included an unusually high level of sales to our largest customer for both governmental and private enterprise end users. As much of our procurement business is ultimately related to federal government buying, we believe this can contribute to some variability of these revenues from quarter to quarter. We do not rely on a predictable flow of business, but we promote the importance of a procurement services solution alongside our customer using our sales personnel.
Due to the lighter effort required to execute procurement transactions, the gross margins are less robust in that line of business. As a result, increases and decreases in that business have a smaller impact on our overall margins and profitability compared to increases in the facilities management or systems integration lines of business.
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| Table of Contents |
Non-GAAP Revenue, Gross Profit and Gross Margins
The following table presents the results of our procurement activities, in terms of the gross value of the transactions, regardless of whether they were recorded as gross deals or net deals, along with the recorded values, to aid the analysis of the underlying economics (unaudited, in thousands, except percentages):
|
| Three Months Ended March 31, 2026 |
|
| Three Months Ended March 31, 2025 |
|
| Decrease |
|
| Percentage Decrease |
| ||||
Recognized Values (GAAP): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Recognized value of all procurement deals |
| $ | 39,980 |
|
| $ | 90,177 |
|
| $ | (50,197 | ) |
|
| (56 | )% |
Recognized cost of revenues |
|
| 37,283 |
|
|
| 83,149 |
|
|
| (45,866 | ) |
|
| (55 | )% |
Gross profit |
|
| 2,697 |
|
|
| 7,028 |
|
|
| (4,331 | ) |
|
| (62 | )% |
Gross margin based on recognized value of transactions |
|
| 6.7 | % |
|
| 7.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Values (Non-GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross value of all procurement deals |
| $ | 49,378 |
|
| $ | 105,982 |
|
| $ | (56,604 | ) |
|
| (53 | )% |
Cost of revenues |
|
| 46,681 |
|
|
| 98,954 |
|
|
| (52,273 | ) |
|
| (53 | )% |
Gross profit |
|
| 2,697 |
|
|
| 7,028 |
|
|
| (4,331 | ) |
|
| (62 | )% |
Gross margin based on gross value of transactions |
|
| 5.5 | % |
|
| 6.6 | % |
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the non-GAAP figures presented above to the most closely related GAAP figures presented. We review these non-GAAP figures not as a substitute for the GAAP figures, but to help our internal analysis of the underlying economics of each transaction as we do not believe the GAAP figures are as useful for that purpose as are the non-GAAP measures. We believe presentation of the gross value of procurement revenues is also helpful in forecasting and analyzing bank factoring costs of the related receivables, as the factoring fee is calculated based on the gross value of the transactions (unaudited, in thousands):
|
| Three Months Ended March 31, 2026 |
|
| Three Months Ended March 31, 2025 |
| ||
|
|
|
|
|
|
| ||
Recognized revenue of all procurement deals - GAAP |
| $ | 39,980 |
|
| $ | 90,177 |
|
Materials costs incurred but excluded from both recorded revenues and costs (also known as “netting”) |
|
| 9,398 |
|
|
| 15,805 |
|
Gross value of revenues including netting (non-GAAP) |
| $ | 49,378 |
|
| $ | 105,982 |
|
|
|
|
|
|
|
|
|
|
Recognized cost of goods for all procurement deals - GAAP |
| $ | 37,283 |
|
| $ | 83,149 |
|
Materials costs incurred but excluded from both recorded revenues and costs (also known as “netting”) |
|
| 9,398 |
|
|
| 15,805 |
|
Gross value of costs of goods including netting (non-GAAP) |
| $ | 46,681 |
|
| $ | 98,954 |
|
The gross value of all procurement transactions decreased 53% from the prior year quarter, from $106.0 million to $49.4 million in the current quarter. Gross profit recognized on all procurement transactions decreased 62% from $7.0 million to $2.7 million before interest charges. The prior year quarter included an elevated level of sales to the federal government, as well as one individually large transaction to an enterprise client, with a larger than normal margin in the prior year quarter.
Although the margins are thin, efforts required to support the business are minimal, so any incremental activity remains additive to our net income and can lead to additional cross-sales of higher yielding integration services, so we continue to view this business as a growth vehicle. The procurement business can fluctuate widely from quarter to quarter, and the recorded revenues can fluctuate even more widely if there is a substantial shift between gross and net deals, even if the underlying economics between the two are relatively similar.
Cost of Revenue and Gross Margins
Cost of revenue includes the cost of component parts for our products, labor costs expended in the production and delivery of our services, subcontractor and third-party expenses, equipment and other costs associated with our test and integration facilities, depreciation of our manufacturing equipment, shipping costs, and the costs of support functions such as purchasing, logistics and quality assurance, and depreciation of fixed assets directly related to our revenue-producing operations. Our consolidated gross margin significantly improved, increasing from 9.3% in the prior year quarter to 15.9% in the current quarter. Gross margins for the current quarter were 6.7% for the procurement business, 37.5% for the systems integration business, and 64.7% for the facilities management business. In the prior year quarter, gross margins were 7.8% for the procurement business, 22.1% for the systems integration business and 40.9% for the facilities management business.
| · | Procurement Segment: Calculated using the non-GAAP gross value of all transactions, procurement gross margins declined from 6.6% in the prior year quarter to 5.5% in the current quarter, reflecting the absence of the singularly large transactions with wider margins in the prior year quarter. |
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| · | Systems Integration Segment: The overall gross margin for systems integration improved from 22.1% in the prior year quarter to 37.5% in the current quarter. The overall improvement was expected due to the increased monthly fees which we began charging at the end of the fourth quarter to compensate for the additional power charges we are incurring to meet our customer’s demand and additional capital investments, combined with an elevated volume of AI racks in the current quarter. The increase in flat monthly fees enables us to meet the majority of our fixed costs and leverage the increased volumes we experienced into the overall gross margin increase. We have continued to see more elevated levels of AI rack integration, and expect to continue seeing elevated levels of activity for at least the next several quarters. We expect to realize further increases in systems integration revenues in future periods, pursuant to the recent execution of an agreement to use our Round Rock, Texas facility to provide warehousing, fulfillment and logistics support to our largest customer in relation to the AI rack integration business. Those services began May 1, 2026. |
| · | Facilities Management Segment: Gross margins in the facilities management segment remained robust and increased to 64.7% in the current quarter, up from 40.9% in the prior-year quarter. The increase in gross margin is due to the shift in projects towards more maintenance agreements which require less costs and lead to higher margins. |
Since we earn higher profits when using our own labor, we expect gross margins to improve when our labor mix increases relative to the use of subcontracted labor or third-party labor. Our direct labor costs are relatively fixed in the short-term, and the utilization of direct labor is critical to maximizing our profitability. As we continue to bid and win contracts that require specialized skills that we do not possess, we would expect to have more third-party subcontracted labor to help us fulfill those contracts. In addition, we can face hiring challenges in internally staffing larger contracts. While these factors could lead to a higher ratio of cost of services to revenue, the ability to outsource these activities without carrying a higher level of fixed overhead improves our overall profitability by increasing income, broadening our revenue base and generating a favorable return on invested capital. In periods when we increase the level of IT procurement services, we anticipate that our overall blended gross margin percentages will be lower in those periods, even as our gross profits increase, as the normal margins on procurement activities are lower than the margins from our traditional facilities and systems integration services.
A large portion of our revenue is derived from fixed price contracts. Under such contracts, we set the price of our services and assume the risk that the costs associated with our performance may be greater than we anticipated. Our profitability is therefore dependent upon our ability to accurately estimate the costs associated with our services. These costs may be affected by a variety of factors such as lower than anticipated productivity, conditions at the work sites differing materially from what was anticipated at the time we bid on the contract and higher than expected costs of materials and labor. Certain agreements or projects could have lower margins than anticipated or losses if actual costs for contracts exceed our estimates, which could reduce our profitability and liquidity.
In prior years, our depreciation related to equipment and other fixed assets used in revenue-generating activities was minimal. Following the significant capital investments recently made in our new Georgetown, Texas integration facility, we began in 2025 reporting as a component of cost of revenues the depreciation related to revenue-generating activities. That depreciation classified as cost of revenue amounted to $0.9 million in the three-month period ended March 31, 2026, with zero reported in the prior year quarter.
Selling, General and Administrative (SG&A) Expenses
Selling, general and administrative expenses consist primarily of compensation and related expenses, including sales commissions and other incentive compensation for our executive, administrative and sales and marketing personnel, as well as related travel, selling and marketing expenses, equity-based compensation, professional fees, facility costs, insurance and other corporate costs. As a percentage of gross profit, SG&A expenses increased from 53% in the prior year quarter to 63% in the current quarter. In dollar terms, our SG&A expenses increased by $0.6 million (13%) due to higher non-cash equity based compensation, headcount and related compensation costs to support the growing scale of the organization.
Depreciation and Amortization outside cost of revenues
Depreciation and amortization not allocated to cost of revenues increased from $0.2 million in the prior year quarter to $0.3 million in the current quarter due to the general growth in the business.
Bank Factoring Fees
Bank factoring fees decreased from $1.5 million in the prior year quarter to $0.7 million in the current quarter. This is due to the overall decline in the gross value of deals as the basis on which we are charged factoring fees is the gross billings factored, which includes the amount of procurement revenues “netted” out for GAAP-basis procurement revenues, as presented in the table in the Non-GAAP Revenue, Gross Profit and Gross Margins section above. Also contributing to the decrease in bank factoring fees is a slight decrease in prevailing short-term interest rates, which have a direct impact on the fees we pay.
Operating Income (Loss)
We recognized an operating income of $2.3 million in the current quarter compared to operating income of $2.6 million in the prior year quarter. The majority of this decline is attributable to increased SG&A expenses as described above as the overall decline in total revenues was offset by our improved operational efficiency and gross margins. We expect revenues will continue to ramp at a faster pace than SG&A costs, which will lead to overall expected increases in operating income for the remainder of the year.
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Interest Expense
In the current quarter, we recorded interest expense of $0.3 million compared to no interest expense in the prior year quarter. This increase was due to our long-term debt converting into an interest-bearing note in the third quarter of the prior year. As such, all interest charges in the prior year quarter were capitalized as part of the build-out costs of our new Georgetown facility.
Interest Income
Due primarily to the higher average balance of cash on hand in the current quarter, interest income increased to $0.7 million compared to $0.4 million earned in the prior year quarter. The cash balance increased primarily due to our raising $55.3 million as a result of our stock offering completed in August 2025, combined with continued net cash flows from operations.
Income tax expense
Due to a history of consolidated net operating losses, we had historically recorded a full valuation allowance against our deferred tax asset (“DTA”). The minimal income tax expense recorded in periods prior to the fourth quarter of 2025 represented primarily Texas state franchise tax, with any federal taxes offset by a partial utilization of the DTA and related release of the offsetting valuation allowance. In light of our improved financial performance and expectation of continued generation of taxable income in future periods, we reversed in the quarter ended December 31, 2025 the majority of the valuation allowance we had previously recorded against our DTA.
The income tax expense in the current quarter was $0.4 million, or 14.7% of pre-tax income, compared to $49,000, or 1.6% of pre-tax income in the prior year quarter. The current quarter effective tax rate is comprised of federal and state income taxes of 28.2% of pre-tax income, net of a large discrete tax benefit tied to excess tax benefits on employee stock compensation in the first quarter of 2026. We expect the effective tax rate in the second through fourth quarters of 2026 to be approximately 26.0%, yielding a full-year effective tax rate of approximately 22.7%. This could be affected by large discrete items in future periods.
Net Income
After the $0.4 million charge for income taxes, our net income was $2.3 million, or $0.08 per diluted share in the current quarter, compared to net income of $3.0 million, or $0.12 per diluted share in the prior year quarter. This reflects the net effect of the items discussed above, as well as a greater number of shares outstanding following our August 2025 sale of stock.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity on March 31, 2026 were our cash and cash equivalents on hand and projected cash flows from operating activities. The $17.7 million net decrease in cash and cash equivalents was primarily attributable to a net use of $14.9 million in operating activities, reflecting largely the $2.5 million net income, net of $20.5 million cash used to reduce accounts payable and accrued expenses. Financing activities used $1.0 million for scheduled principal payments on our debt and $1.4 million to repurchase stock upon employees’ vesting in restricted stock. Investing activities were comprised of a $0.5 million use of cash for capital expenditures. In the prior year quarter, we invested $14.9 million in the continued buildout of our headquarters and integration facility in Georgetown, Texas. As of March 31, 2026, the Company was in compliance with all applicable covenants under its debt agreements. To secure the additional electrical capacity required to support increased demand, the utility provider required us to provide a $1.8 million bank letter of credit, which was issued during the current quarter and collateralized by a corresponding amount of restricted cash. In December 2025, we amended the long-term AI rack integration agreement with our OEM customer. This agreement calls for certain minimum monthly payments to us, which we believe will be sufficient to cover the majority of the costs for the facility, including increased power consumption, and debt service payments tied to the build-out of the factory for which we are responsible.
The majority of the Company’s receivables are from a single customer with 80-day payment terms. We generally factor our receivables from that customer through a bank, so that we are paid within 2-3 days of invoicing rather than needing to wait the full term to receive funds. We believe this is an efficient program, as we estimate the effective annualized interest rate to utilize that program is less than the rate at which we could borrow funds. We hold excess funds in interest-bearing accounts so that we can earn some interest income on the funds we receive immediately from the factoring program but do not have to pay our vendors for 30-45 days on typical payment terms.
As of March 31, 2026, we had cash and cash equivalents of $67.8 million, of which $1.8 million was held in a money market account as collateral against our outstanding letter of credit and therefore was not immediately accessible, as describe above.
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| Table of Contents |
Significant sources and uses of cash
Operating activities:
Cash used in operating activities was $14.9 million in the current quarter, compared to $20.6 million of cash provided by operating activities in the prior year quarter. With net income only $0.7 million different between the two periods, the primary difference was due to changes in operating assets and liabilities in each period. Operating cash flow in the current quarter was primarily due to the $2.3 million of net income, more than offset by a $20.1 million net use of cash for the change in operating assets and liabilities, largely to pay down accounts payable and accrued expenses as we paid costs related to projects that were in process at the beginning of the current quarter. In the prior year quarter, the $20.6 million cash provided by operating activities was comprised primarily of $3.0 million of net income combined with a $16.0 million net inflow of cash from the change in operating assets and liabilities, primarily an increase in accounts payable and accrued expenses during that period stemming from a large procurement project.
Despite the improvements in our earnings, financial position and liquidity over the last two years, there can be no assurance as to the Company’s ability to continue to operate profitably or to scale its business operations on terms upon which additional financing might be available.
Investing activities:
We invested $14.9 million of cash in the three months ended March 31, 2025 primarily in the continued buildout of our leased integration facility and headquarters. These costs were largely for enhancements to our electrical and cooling systems to support our growth in AI-enabled rack integration. This compares to only $0.5 million invested in capital assets in the current quarter as the buildout of our new facility and associated capital expenditures were completed in the prior year.
Financing activities:
Net cash used in financing activities were $2.3 million compared to a $1.6 million used in the prior year quarter. This increase in cash outflows is due to repayments made on our current debt outstanding of $1.0 million in the current quarter, which was not required in the comparative period. We used $1.4 million in the current quarter to repurchase stock upon employees’ net settlement on the vesting of restricted stock and option exercises, compared to $1.7 million used for this same purpose in the prior year quarter.
To minimize dilution to our shareholders, we generally allow employees to “net settle” upon the vesting of restricted stock and upon stock option exercises, allowing them to forfeit a portion of the shares sufficient to cover their tax obligation, if applicable, and the option exercise price, and we then use the Company’s cash to pay the employee’s taxes. None of the share repurchases were open-market transactions and there is no approved share buyback program in place other than allowing employees to net settle.
Future uses of cash
Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding future revenues and costs and our ability to secure sources of funding when needed. However, our revenues may not meet our expectations and our costs may exceed our estimates. Further, our estimates may change, and future events or developments may affect our estimates. Any of these factors may change our expectations of cash usage during 2026 and beyond or significantly affect our level of liquidity, which could require us to take other measures to raise funds or reduce our operating costs to continue operating. Any action to reduce operating costs may negatively affect our range of products and services that we offer or our ability to deliver such products and services, which could materially affect our financial results depending on the level of cost reductions taken.
Our primary liquidity and capital requirements are to fund working capital from current operations, to fund the repurchase of shares from employees upon option exercises or vesting of restricted stock to allow them to cover their tax liabilities and to fund the repayments of our outstanding debt. Our largest customer has also recently requested that we further enhance our integration facility, which we expect will require us to invest approximately $17 million in capital expenditures. We expect to recapture these costs, plus the cost of capital and a profit margin through increased fees for integration services over the next several years, tied to our multi-year AI rack integration agreement. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand and funds generated from operations including the funds from our customer financing program. We believe that if future results do not meet expectations, we can implement reductions in selling, general and administrative expenses to better achieve profitability and therefore improve cash flows, or that we could take further steps such as the issuance of new equity or debt. However, the timing and effect of these steps may not completely alleviate a material effect on liquidity. We may also require additional capital if we seek to introduce a new line of business or if we seek to acquire additional businesses or further expand our facility. While we have no immediate plans to do so and there are no assurances that we could issue equity or other securities on terms that are satisfactory to us, we could raise an additional $94.3 million under our currently effective shelf registration statement.
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| Table of Contents |
Off-Balance Sheet Arrangements
During the three months ended March 31, 2026, the Company entered into a letter of credit arrangement with a financial institution in support of utility service requirements associated with its operations. The letter of credit was required by the Company’s utility provider to ensure adequate electrical capacity and reliability.
The letter of credit is fully collateralized by an equivalent amount of restricted cash, which is reflected on the Company’s condensed consolidated balance sheets as of March 31, 2026. Accordingly, the Company’s maximum potential exposure under this arrangement is limited to the amount of restricted cash posted, and the arrangement does not create an obligation for additional future funding beyond amounts already recognized in the financial statements.
The Company does not expect the letter of credit to be drawn under normal circumstances and does not believe this arrangement is reasonably likely to have a material impact on its liquidity, capital resources, or financial condition. The primary effect of the arrangement is the classification of a portion of cash as restricted, which is discussed in the notes to the condensed consolidated financial statements.
Other than the letter of credit described above, the Company has not entered into any material off‑balance sheet arrangements during the three months ended March 31, 2026.
Critical Accounting Policies and Pronouncements
There have been no material changes to our critical accounting policies and estimates as set forth in the Annual Report for the year ended December 31, 2025 on our consolidated financial statements and disclosures. See also Item 1. Financial Statements Note 1–Significant Accounting Policies regarding Recent Accounting Pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes in the Company’s exposure to market risk since the disclosures set forth in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2025. We continue to be exposed to movements in short-term interest rates, as they affect both the factoring fees we pay to factor our receivables, and the interest we pay on our bank debt.
Item 4. Controls and Procedures.
Our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) are designed to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2026, our disclosure controls and procedures were, in design and operation, ineffective due to the material weakness in internal control over financial reporting that continues to exist as of March 31, 2026, as described below.
Material Weakness
During the audit of the Annual Report on Form 10-K for the year ended December 31, 2024, we identified a material weakness in our controls relating to the ineffective design of certain management review controls across the Company’s financial statements, leading to adjustments that were and could have been material to our 2024 consolidated financial statements. Due to the fact that our internal controls over financial reporting did not identify, prevent or detect these risks of material misstatements, we determined this indicated a material weakness in our internal controls over financial reporting at that date. We believe the root causes of the control deficiencies are primarily a number of manual processes in our closing process, combined with challenges in properly segregating duties due to the relatively small size of our accounting department, additional controls needed, and user access for certain information technology systems that support the Company’s financial reporting process.
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| Table of Contents |
To formally remediate controls, companies must not only update or put into place controls such that they are designed and operate effectively, but such effective operation must be evaluated and verified over a period of time before we determine the control deficiencies that led to the material weakness have formally been remediated. In order to remediate the control deficiencies leading to the material weakness, we have made certain improvements to our internal controls and plan to make further enhancements in fiscal year 2026, have enhanced management review of certain areas, have expanded our staffing and have engaged external experts to assist the Company in more formally designing and documenting our controls. We have also committed to more fully documenting the performance of the controls themselves so that they not only operate effectively but so that there is sufficient audit evidence that may be reviewed, so that others may verify the effective operation of the controls.
We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weaknesses are remediated as soon as possible.
Notwithstanding the material weakness described above, management has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three-month period ended March 31, 2026 present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a‑15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2026, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although the Company implemented certain actions intended to remediate the previously identified material weakness, those actions do not yet represent completed or tested control changes and therefore have not been determined to materially affect internal control over financial reporting. As described above, these controls have not yet been fully evaluated to determine whether they have effectively remediated the material weakness.
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| Table of Contents |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material litigation in any court, and we are not aware of any contemplated proceeding by any governmental authority against us. From time to time, we are involved in various legal matters and proceedings concerning matters arising in the ordinary course of business such as employment-related matters. We believe that any potential liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including the factors discussed in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2025, which could adversely affect our business, financial conditions and future results. There have been no material changes from the risk factors discussed in our Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth information about our purchases of outstanding shares of our common stock during the quarter ended March 31, 2026:
Monthly Period During the Quarter Ended March 31, 2026 |
| Total Shares Purchased |
|
| Average Price paid per Share |
|
| Total Shares Purchased as Part of Publicly Announced Plans |
|
| Approximate Dollar Amount of Shares Yet To Be Purchased Under Plans |
| ||||
January 1, 2026 – January 31, 2026 |
|
| 106,268 |
|
| $ | 10.57 |
|
|
| - |
|
|
| - |
|
February 1, 2026 – February 28, 2026 |
|
| 21,089 |
|
| $ | 8.33 |
|
|
|
|
|
|
|
|
|
March 1, 2026 – March 31, 2026 |
|
| 4,876 |
|
| $ | 12.09 |
|
|
| - |
|
|
| - |
|
Total |
|
| 132,233 |
|
| $ | 10.27 |
|
|
|
|
|
|
|
|
|
(a) All of these shares were acquired from associates to satisfy tax withholding requirements upon the vesting of restricted stock or accepted as the exercise price for associates exercising stock options. None were open market trades.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the fiscal quarter ended March 31, 2026, none of our directors or officers (as defined in Rule 16a-1 under the Exchange Act) adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as those are defined in Item 408 of Regulation S-K).
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| Table of Contents |
Item 6. Exhibits.
31.1* |
| Certification of TSS, Inc. Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2* |
| Certification of TSS, Inc. Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1** |
| Certification of TSS, Inc. Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2** |
| Certification of TSS, Inc. Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS * |
| Inline XBRL Instance Document |
101.SCH * |
| Inline XBRL Taxonomy Extension Schema |
101.CAL * |
| Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF * |
| Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB * |
| Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE* |
| Inline XBRL Taxonomy Extension Presentation Linkbase |
104 |
| Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* | Filed herewith. |
** | Furnished herewith. |
| 31 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TSS, INC. |
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Date: May 7, 2026 | By: | /s/ Daniel M. Chism |
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| Daniel M. Chism |
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| Chief Financial Officer |
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| (Principal Financial Officer) |
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| 32 |