tssi_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2025

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-33627

TSS, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-2027651
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

110 E. Old Settlers Blvd Round Rock, Texas		78664
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (512)-310-1000

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class		Ticker Symbol		Name of Each Exchange on Which Registered
Common Stock, $.0001 par value		TSSI		Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Exchange Act: None

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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	☒
		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 ☐ No ☒

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 13, 2025: 25,020,498

TSS, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended March 31, 2025

“SAFE HARBOR” STATEMENT		ii
PART I–FINANCIAL INFORMATION		1
Item 1.	Consolidated Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II–OTHER INFORMATION		26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6.	Exhibits	27
SIGNATURES		28

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"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 Annual Report on Form 10-K (the “Annual 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 Annual Report.

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. Consolidated Financial Statements

TSS, Inc.

Consolidated Balance Sheets

(in thousands except par values)

	March 31, 2025			December 31, 2024
	(unaudited)

Current Assets:
Cash and cash equivalents	$	27,339		$	23,222
Contract and other receivables, net		11,061			16,203
Costs and estimated earnings in excess of billings on uncompleted contracts		1,778			851
Inventories, net		20,396			17,673
Prepaid expenses and other current assets		508			248
Total current assets		61,082			58,197
Property and equipment, net		23,276			8,591
Lease right-of-use asset		23,667			24,213
Goodwill		780			780
Other assets		4,734			4,787
Total assets	$	113,539		$	96,568

Current Liabilities:
Accounts payable and accrued expenses	$	66,214		$	53,340
Deferred revenues, current		4,337			2,613
Lease liabilities, current		1,654			966
Total current liabilities		72,205			56,919
Non-current Liabilities:
Long-term debt, non-current		8,200			8,200
Lease liabilities, non-current		23,062			23,540
Deferred revenues, non-current		681			771
Total non-current liabilities		31,943			32,511
Total liabilities		104,148			89,430

Commitments and Contingencies

Stockholders’ Equity:
Preferred stock, $0.0001 par value; 1,000 shares authorized; none issued		-			-
Common stock, $0.0001 par value; 49,000 shares authorized; 25,793 and 25,250 issued; 23,476 and 23,107 outstanding at March 31, 2025 and December 31, 2024, respectively		3			3
Additional paid-in capital		75,128			74,200
Treasury stock, at cost; 1,973 and 1,849 shares at March 31, 2025 and December 31, 2024		(8,384	)		(6,730	)
Accumulated deficit		(57,356	)		(60,335	)
Total stockholders’ equity		9,391			7,138
Total liabilities and stockholders’ equity	$	113,539		$	96,568

See accompanying notes to the consolidated financial statements.

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TSS, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except per-share amounts)

	Three Months Ended March 31,
	2025			2024

Revenues:
Procurement	$	90,177		$	11,623
Facilities management		1,298			2,146
System integration		7,484			2,123
Total revenues		98,959			15,892
Cost of revenue		89,749			13,178
Gross profit		9,210			2,714

Operating expenses:
Selling, general and administrative		4,887			2,389
Depreciation and amortization		210			72
Total operating expenses		5,097			2,461
Income from operations		4,113			253

Interest expense		1,468			328
Interest income		(383	)		(100	)
Other expense		-			-
Pre-tax income		3,028			25
Income taxes		49			10
Net income	$	2,979		$	15

Earnings per common share – Basic	$	0.13		$	-
Earnings per common share – Diluted	$	0.12		$	-

See accompanying notes to the consolidated financial statements.

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TSS, Inc.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

					Additional											Total
	Common Stock				Paid-in		Treasury Stock						Accumulated			Stockholders’
	Shares		Amount		Capital		Shares			Amount			Deficit			Equity
Balance January 1, 2024		23,533	$	2	$	72,103		(1,762	)	$	(2,245	)	$	(66,311	)	$	3,549
Restricted stock vested		376		-		-		-			-			-			-
Stock options exercised		-		-		-		-			-			-			-
Treasury shares repurchased		-		-		-		(120	)		(55	)		-			(55	)
Stock-based compensation		-		-		150		-			-			-			150
Net income		-		-		-		-			-			15			15
Balance at March 31, 2024		23,909	$	2	$	72,253		(1,882	)	$	(2,300	)	$	(66,296	)	$	3,659

					Additional											Total
	Common Stock				Paid-in		Treasury Stock						Accumulated			Stockholders’
	Shares		Amount		Capital		Shares			Amount			Deficit			Equity
Balance January 1, 2025		25,250	$	3	$	74,200		(1,849	)	$	(6,730	)	$	(60,335	)	$	7,138
Restricted stock vested		473		-		-		-			-			-			-
Stock options exercised		70		-		7		-			-			-			7
Treasury shares repurchased		-		-		-		(124	)		(1,654	)		-			(1,654	)
Stock-based compensation		-		-		921		-			-			-			921
Net income		-		-		-		-			-			2,979			2,979
Balance at March 31, 2025		25,793	$	3	$	75,128		(1,973	)	$	(8,384	)	$	(57,356	)	$	9,391

See accompanying notes to the consolidated financial statements.

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TSS, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

	Three Months Ended March 31,
	2025			2024
Cash Flows from Operating Activities:
Net income	$	2,979		$	15
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		210			72
Stock-based compensation		921			150
Changes in operating assets and liabilities:
Contracts and other receivables		5,142			(1,043	)
Costs and estimated earnings in excess of billings on uncompleted contracts		(927	)		823
Inventories, net		(2,723	)		1,495
Prepaid expenses and other assets		(229	)		(36	)
Right-of-use assets		546			89
Accounts payable and accrued expenses		12,874			1,928
Deferred revenues		1,634			(765	)
Operating lease liabilities		210			(82	)
Net cash provided by (used in) operating activities		20,637			2,646
Cash Flows from Investing Activities:
Capital expenditures		(14,873	)		(39	)
Net cash used in investing activities		(14,873	)		(39	)
Cash Flows from Financing Activities:
Proceeds from exercise of stock options		7			-
Purchase of treasury stock		(1,654	)		(55	)
Repayment of long-term borrowings		-			-
Net cash provided by (used in) financing activities		(1,647	)		(55	)
Net increase (decrease) in cash and cash equivalents		4,117			2,552
Cash and cash equivalents, beginning of period		23,222			11,831
Cash and cash equivalents, end of period	$	27,339		$	14,383
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,543		$	316
Cash paid for taxes		-			-

See accompanying notes to the consolidated financial statements.

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TSS, Inc.

Notes to 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 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. Our systems integration services have recently been enhanced to include integration of Artificial Intelligence (AI) enabled data center server racks. TSS was incorporated in Delaware in December 2004. Our corporate offices and our integration facility are located in Round Rock, Texas.

The preparation of the 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.

Basis of Presentation

The accompanying consolidated balance sheet as of December 31, 2024, which has been derived from audited consolidated financial statements, and the unaudited interim 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 SEC for interim reporting and include the accounts of the Company and its consolidated subsidiaries. In the opinion of management, the accompanying unaudited 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 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, 2024.

Certain prior year amounts have been reclassified to conform to the current period presentation. The reclassifications (i) on our income statement, we now present revenues from each individual segment whereas the prior year revenues were all presented on a single line item; (ii) on our income statement, we now present interest expense and interest income separately whereas we presented a single amount “interest expense, net” in the prior year presentation and (iii) we recast the segment disclosures to present our procurement services as a separate segment consistent the current year presentation whereas those results were aggregated into the systems integration segment in the prior year presentation. These reclassifications had no net effect on our reported results of operations, financial position or cash flows.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. 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. The carrying amounts of the other financial instruments approximate their fair value on March 31, 2025 and December 31, 2024, due to the short-term nature of these items.

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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 we expect to be entitled to 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 standalone selling prices.

In the quarter ended June 30, 2024, we received from one of our clients a reimbursement of certain capital expenditures and other start-up costs in support of our AI rack integration services. These capital investments and related reimbursement are both being amortized over the same 36-month period representing the estimated useful life of the assets, over which period we expect to use that equipment to meet the client’s future needs for AI-enabled rack integration. Similarly, the reimbursement of other start-up costs representing items that are expected to be used within the coming year are being amortized over twelve months, which is the same period over which we are amortizing the associated recorded asset.

Maintenance services

We generate maintenance services revenues from fees that provide our customers with as-needed maintenance and repair services on modular data centers during the contract term. Our contract terms typically are one year in duration, are billed annually in advance, and are non-cancellable. As a result, we record deferred revenue (a contract liability) and recognize revenue from these services on a ratable basis over the contract term. 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.

Pursuant to a multi-year agreement signed in 2024, we also recognize revenue monthly at contractually based amounts for certain billable fixed and facility costs and trained staffing levels to support the weekly quantity of AI-enabled racks, with staffing fees reduced for any under-staffing. The fee for staffing is based on defined services as transferred to the customer and are not variable consideration because the customer’s usage is known weekly and 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 the consideration becomes unconditional. Accounts receivable from our integration customers are typically due within 30-105 days of invoicing. An allowance for doubtful accounts 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’ creditworthiness. Our allowance for doubtful accounts was $21,000 on March 31, 2025 and $7,000 on December 31, 2024.

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, if 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 modular data centers; and other fixed-price services including repair, design and project management services, or the moving of equipment to a different location. In some cases, we arrange for a third party to perform warranty and servicing of equipment, and in these instances, we recognize revenue as the amount of any fees or commissions that we expect to be entitled to. 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.

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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. For any procurement activities in which we somehow transform the product, the revenues recognized on these transactions are the gross sales amount of the transaction, and we recognize offsetting costs of sales 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 and we have no control of the goods before they are transferred to the customer and 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 that we expect to be entitled to 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 generally involve us transforming the product, and as such the majority of these transactions are recorded gross. In order to accelerate the time period 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 transaction or a net transaction, the interest we are charged through the factoring program is based on the gross value of the transaction.

The following table presents our revenues disaggregated by reportable segment and by product or service type (unaudited, in ’000’s):

	Three Months Ended March 31,
	2025		2024
FACILITIES MANAGEMENT:
Maintenance revenues	$	873	$	1,305
Equipment sales		425		691
Deployment and other services		-		150
Total Facilities Management revenues	$	1,298	$	2,146

SYSTEMS INTEGRATION:
Integration services	$	7,484	$	2,123
Total Systems Integration revenues	$	7,484	$	2,123

PROCUREMENT:
Procurement services	$	90,177	$	11,623
Total Procurement revenues		90,177		11,623
TOTAL REVENUES	$	98,959	$	15,892

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, including those activities that occur subsequent to transfer of control to the customer, 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.

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Remaining Performance Obligations

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, 2025, deferred revenue of $5,018,000 includes:

	·	$1,493,000 of our remaining performance obligations for our maintenance contracts, all of which are expected to be recognized within one year, and
	·	$3,525,000 relates to procurement and integration services where we have yet to complete our services for our customers. Of the $3,525,000 deferred revenues related to procurement and integration services,

	o	$2,844,000 is expected to be recognized within one year, and
	o	$681,000 is expected to be recognized beyond one year.

Contract liabilities consisting of deferred revenues were $3,384,000 on December 31, 2024, and $3,370,000 on December 31, 2023.

Concentration of Credit Risk

We are currently economically dependent upon our relationship with a large US-based IT OEM. 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.

The following customer accounted for a significant percentage of our revenues for the periods shown (unaudited):

Three Months Ended

March 31,

2025

2024

US-based IT OEM

100

No other customers represented more than 10% of our revenues for any periods presented. Our US-based IT OEM customer represented 99% and 98% of our trade accounts receivable at March 31, 2025 and December 31, 2024, respectively. No other customer represented more than 10% of our accounts receivable at either of those dates.

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 as 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 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 aggregate gross amount factored under this arrangement was approximately $121.1 million and $22.1 million for the three-month periods ended March 31, 2025 and 2024, respectively. We paid financing fees under this arrangement of approximately $1.5 million and $316,000 for the three-month periods ended March 31, 2025 and 2024, respectively, which was recorded as interest expense in our consolidated statements of operations or in deferred costs if the interest related to projects where revenue has not yet been recognized. The 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 only 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-month periods ended March 31, 2025 and 2024, we incurred approximately $0.9 million and $0.6 million, respectively, in non-cash compensation expense which was included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations.

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Cash and cash equivalents

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 $27.3 million and $18.2 million more than FDIC insured limits on March 31, 2025 and December 31, 2024, respectively. In both periods, cash and cash equivalents includes a $5.0 million deposit in a money market account securing our outstanding bank debt. Under the terms of the loan agreement, we can at any point request that the bank apply the deposit as a reduction of loan principal.

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 Doubtful Accounts

We estimate an allowance for doubtful accounts based on estimated credit losses, based on factors related to the specific credit risk of each customer. 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 doubtful accounts (in ’000):

	Three Months Ended March 31,
	2025		2024
Balance at beginning of period	$	7	$	7
Additions charged to expense		14		-
Recovery of amounts previously reserved		-		-
Amounts written off		-		-
Balance at end of period	$	21	$	7

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all purchased inventories. We write down obsolete inventory or inventory more than our estimated usage to its estimated realizable value less cost 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. Additions and major replacements or improvements are capitalized, while minor replacements and maintenance costs are charged to expense as incurred. Depreciation expense is included in operating expenses in the consolidated statements of operations. 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.

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 as defined by U.S. GAAP 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 also review intangible assets with definite lives 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.

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 the assets during an interim period, we will evaluate our indefinite lived intangible assets for impairment. At our most recent annual assessment date of December 31, 2024, we identified no such indicators of impairment and determined there was no impairment at that date. In the quarter ended March 31, 2025, we considered relevant matters including macroeconomic and other conditions on our operations and noted no material triggering events or circumstances that occurred during that period that would indicate the carrying value of our goodwill or other long-lived intangible assets was impaired. On March 31, 2025 and December 31, 2024, the carrying value of goodwill was $0.8 million.

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. A full valuation allowance has been recorded against our net deferred tax assets, because we have concluded that under relevant accounting standards it is more likely than not that deferred tax assets will not be realizable. We re-evaluate this assessment quarterly and if we determine, after weighing all positive and all negative evidence available at that time, that it is more likely than not that the deferred tax asset will be realizable, we will remove the valuation allowance at that point in time. We recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the 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, options to purchase common stock and convertible securities, if any. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.

Treasury Stock

We account for treasury shares using the cost method. Purchases of shares of common stock are recorded at cost and result in a reduction of stockholders’ equity. We hold repurchased shares in treasury for general corporate purposes, including issuances under various employee compensation plans and from time to time may retire all or a portion of the treasury shares, reducing the issued and treasury share counts. When treasury shares are issued, we use a weighted average cost method. Purchase costs in excess of reissue price are treated as a reduction of retained earnings. Reissue price more than purchase costs is treated as additional paid-in-capital.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

In November 2023, FASB issued Accounting Standards Update ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ("ASU 2023-07”). ASU 2023-07 improves reportable segment disclosure requirements for public business entities primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision-maker and included within each reported measure of segment profit (referred to as the "significant expense principle”). We adopted this guidance effective for the annual period ended December 31, 2024. It did not have a material impact on our financial results of operations or financial position, other than the enhanced disclosures. At the same time as adopting this guidance, we also re-assessed our segmentation and determined we now have three reportable segments whereas we have historically had three reportable segments. In interim periods after December 31, 2024, the new guidance is now applied retrospectively for all prior periods presented in the financial statements, and prior period segment results are recast to conform to the current year presentation.

Recently Issued Accounting Pronouncements

In December 2023, FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Further, this ASU requires certain disclosures of state versus federal income tax expense and taxes paid. This ASU is effective for our Annual Report on Form 10-K for the year ending December 31, 2025, with early adoption permitted. We do not expect the adoption of ASU 2023-09 to have a material impact on our financial statements.

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, which 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.

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Note 2 – Supplemental Balance Sheet Information

Receivables

Contract and other receivables consisted of the following (in ‘000’s):

	March 31, 2025 (unaudited)			December 31, 2024
Contract and other receivables	$	11,082		$	16,210
Allowance for doubtful accounts		(21	)		(7	)
Contracts and other receivables, net	$	11,061		$	16,203

Contract assets consisting of accounts receivable and costs in excess of billings were $3,527,000 as of December 31, 2023.

Inventories

We state inventories at the lower of cost or net realizable value, using the first-in-first-out-method (in ‘000’s) as follows:

	March 31, 2025 (unaudited)			December 31, 2024
Materials and component parts	$	572		$	201
Procurement inventories		19,845			17,493
Reserve		(21	)		(21	)
Inventories, net	$	20,396		$	17,673

Goodwill and Intangible Assets

Goodwill and Intangible Assets consisted of the following (in ‘000’s):

	March 31, 2025 (unaudited)					December 31, 2024
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Intangible assets not subject to amortization:
Goodwill	$	780		-		$	780		-
Intangible assets subject to amortization:
Customer relationships	$	906	$	(906	)	$	906	$	(906	)
Acquired software	$	234	$	(234	)	$	234	$	(234	)

Goodwill attributable to reporting units (in ‘000’s):

	March 31, 2025 (unaudited)		December 31, 2024
Facilities Management unit	$	643	$	643
Systems Integration unit		137		137
Total	$	780	$	780

We recognized amortization expense related to intangibles of approximately $0 and $0 for the three-month periods ended March 31, 2025 and 2024, respectively.

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Property and Equipment

Property and equipment consisted of the following (in ’000’s):

	Estimated Useful Lives		March 31, 2025 (unaudited)			December 31, 2024
	(years)
Trade equipment		5	$	763			763
Leasehold improvements		2–5		2,328			2,328
Furniture and fixtures		7		143			140
Computer equipment and software		3		2,408			2,363
Construction in Process		N/A		21,526			6,701
				27,168			12,295
Less accumulated depreciation				(3,892	)		(3,704	)
Property and equipment, net			$	23,276		$	8,591

Depreciation of property and equipment and amortization of leasehold improvements and software totaled $159,000 and $72,000 for the three-month periods ended March 31, 2025 and 2024, respectively.

Other Assets

Other assets, non-current is comprised of the following amounts (in $000’s):

	March 31, 2025 (unaudited)		December 31, 2024
Deposits	$	2,109	$	2,109
Other non-current assets, net		2,625		2,678
Balance at end of year	$	4,734	$	4,787

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following (in ’000’s):

	March 31, 2025 (unaudited)		December 31, 2024
Accounts payable	$	51,324	$	33,491
Accrued expenses		12,497		17,802
Compensation, benefits and related taxes		2,095		1,774
Other accrued expenses		298		273
Total accounts payable and accrued expenses	$	66,214	$	53,340

Long-Term Debt

Long-term debt consisted of the following (in ’000’s):

	March 31, 2025 (unaudited)			December 31, 2024
Borrowed funds (bank loan; see Note 3)	$	8,667		$	8,667
Deferred debt issuance costs		(4,667	)		(4,667	)
Long-term debt, non-current	$	8,200		$	8,200

Amortization of deferred debt issuance costs has not yet begun, as the funds borrowed are related to construction still in progress at the end of both periods presented.

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Note 3 - Long-Term Debt

In May 2024, we renewed our revolving line of credit (the “revolving line of credit”) with Susser Bank, National Association (“Lender”) pursuant to a Business Loan Agreement (Asset Based) effective May 5, 2024. The obligations under the revolving line of credit were secured by substantially all of our accounts receivable. Our wholly owned subsidiaries jointly and severally guaranteed our obligations under the revolving line of credit. We terminated the revolving line of credit on December 31, 2024 when we entered a new credit agreement with Susser Bank described below. There were no borrowings outstanding on the revolving credit facility at any point during the periods presented.

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 plan to move the majority of our operations and our headquarters. Loan proceeds may also be used for ordinary working capital purposes and loan closing costs. The Credit Agreement provides for a $20.0 million term loan facility, and the option for additional incremental term loans of up to $5.0 million (the “accordion feature”), pending Lender approval. During the construction period, not to extend beyond July 5, 2025, we may make periodic draw-downs to fund or reimburse us for costs of the buildout of the new facility. During the construction period, required payments are interest only and any outstanding borrowings convert to a term loan upon the earlier of July 5, 2025 or completion of construction. Regardless of the actual construction completion date, the total loan term including the interest-only period, is designed to be approximately five years, with a final due date of January 5, 2025. Upon closing on December 31, 2024, we borrowed $8.7 million, with $5.0 million of that amount deposited in a required interest-bearing cash collateral account, $3.4 million reimbursed to us for capital expenditures previously funded with our operating cash, and $0.3 million funding loan closing costs. In the three month period ended March 31, 2025, we made no additional draw-downs and the principal balance on the loan remains $8.7 million. To date, we have monthly made interest only payments in accordance with the terms of the loan. The loan is secured by substantially all of our assets.

Interest accrues at a rate per annum equal to 1-month SOFR plus 3.0%, subject to a 4.5% floor. Upon an event of default, interest would accrue at a rate equal to the normal rate plus 2.0%. Payments are interest only during the construction period. Once converted to a term loan, which occurs at the earlier of (i) completion of construction or (ii) July 5, 2025, the loan converts to a fully amortizing term loan and payments of principal and interest under the term loan are due and payable monthly.

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 chance defaults, and change of ownership defaults. Financial covenants require us to maintain a leverage ratio, as defined in the agreement, of no more than 3.75x through September 30, 2025; 2.75x from then to September 30, 2026; and 2.00x after that, and a debt service coverage ratio, as defined in the agreement, of at least 1.25x. On March 31, 2025, we received a waiver and 30-day extension of time to provide to the bank our annual report on Form 10-K for the year ended December 31, 2024 and our officer’s certificate of compliance, due to the delayed filing of our annual report as publicly disclosed. We subsequently have provided the Lender with the required annual report and officer’s certification noting compliance with all covenants, and we remain in compliance with all covenants at March 31, 2025.

The remaining available funds for construction at March 31, 2025 are $11.3 million, or $16.3 million if the accordion feature were utilized. See Note 7, “Subsequent Events” regarding the draw-down of these remaining funds in May 2025, after the period covered by this quarterly report.

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 and vehicles. Our leases have remaining lease terms of 10 to 120 months. As of March 31, 2025, we have not entered into any lease arrangement classified as a finance lease.

We determine if an arrangement is a lease at inception. Operating leases are included in the lease right-of-use assets, current lease liabilities and lease liabilities, non-current, on our 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 elected the 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.

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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. Components of lease expense and other information is as follows (unaudited, in ‘000’s):

	Three Months Ended March 31,
	2025			2024
Lease expense
Operating lease cost	$	991		$	222

Operating Lease – operating cash flows	$	(236	)	$	(129	)
New right-of-use assets – operating leases		-			40

The following presents information regarding the Company's operating leases as of March 31:

	2025			2024
Weighted average remaining lease term – operating leases (months)		110			59
Weighted average discount rate – operating leases		7	%		5	%

Future minimum lease payments under non-cancellable leases as of March 31, 2025, were as follows (in ‘000’s):

Fiscal Year
2025	$	2,494
2026		3,672
2027		3,787
2028		3,915
2029		3,276
2030		763
Thereafter		16,941
Total minimum future lease payments		34,848
Less imputed interest		(10,132	)
Total	$	24,716

Reported as of December 31, 2024:
Current portion of lease liability	$	1,654
Non-current portion of lease liability		23,062
	$	24,716

Note 5 – Net Income 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.

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The following table presents a reconciliation of the numerators and denominators of the basic and diluted income per share computations for income from continuing operations. In the table below, income represents the numerator, and shares represent the denominator (unaudited, in thousands except per share amounts):

	Three Months Ended
	March 31,
	2025		2024
Basic net income per share:
Numerator:
Net income	$	2,979	$	15
Denominator:
Weighted-average shares of common stock outstanding		23,397		21,899

Basic net income per share	$	0.13	$	0.00

Diluted net income per share:
Numerator:
Net income	$	2,979	$	15
Denominator:
Weighted-average shares of common stock outstanding		23,397		21,899
Dilutive options and warrants outstanding		2,506		469
Number of shares used in diluted per-share computation		25,903		22,368

Diluted net income per share	$	0.12	$	0.00

For the three-month periods ended March 31, 2025 and 2024, respectively, zero and 3,377,000 restricted shares and options were excluded from the calculation of dilutive shares because their effect would have been anti-dilutive.

Note 6 - 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. Prior to the fourth quarter of 2024, our activities were organized and managed in two reportable segments: facilities management and systems integration, with our procurement operating segment aggregated into the systems integration reportable segment. In the fourth quarter of 2024, we reorganized our structure such that our CODM now evaluates our operations and allocates resources on the basis of three segments. Accordingly, we have determined that we now have three reportable segments as noted below. Comparable prior period amounts presented have been recast to conform with the current period presentation, including the costs allocated to each reportable segment as provided to our CODM. Our revenues are substantially all derived from the U.S. market, and all revenues presented are from external customers; we have no intercompany revenues.

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 modular data centers. 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, including the significant expenses presented separately in the table below. Segment results are exclusive of certain activities and expenses that are not allocated to specific segments, and which are reconciled below to our consolidated pre-tax income.

When present, certain expenses within cost of revenue such as amortization of purchased intangibles and unusual and nonrecurring items are not allocated to specific segments. Therefore, these amounts are excluded from segment results and included in 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.

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Unaudited Information regarding our reportable segments is presented below (in thousands):

	Procurement		Systems Integration		Facilities Management		Total Segments
Three Months Ended March 31, 2025:
Total revenue	$	90,177	$	7,484	$	1,298	$	98,959
Cost of revenue		83,149		5,833		767		89,749
Gross profit		7,028		1,651		531		9,210
Payroll and benefits excluded from cost of revenues		-		831		139		970
Depreciation and amortization expense		-		179		3		182
Other operating expenses		14		280		9		303
Total operating expenses		14		1,290		151		1,455
Operating income		7,014		361		380		7,755
Interest expense		1,352		102		14		1,468
Interest income		-		-		-		-
Other expense		-		-		-		-
Pre-tax income		5,662		259		366		6,287
Capital expenditures	$	-	$	14,869	$	-	$	14,869

	Procurement		Systems Integration			Facilities Management		Total Segments
Three Months Ended March 31, 2024:
Total revenue	$	11,623	$	2,123		$	2,146	$	15,892
Cost of revenue		10,715		1,518			945		13,178
Gross profit		908		605			1,201		2,714
Payroll and benefits excluded from cost of revenues		-		430			129		559
Depreciation and amortization expense		-		35			3		38
Other operating expenses		-		185			25		210
Total operating expenses		-		650			157		807
Operating income		908		(45	)		1,044		1,907
Interest expense		284		34			10		328
Interest income		-		-			-		-
Other expense		-		-			-		-
Pre-tax income (loss)		624		(79	)		1,034		1,579
Capital expenditures	$	-	$	39		$	-	$	39

The table below reconciles total segment pre-tax income for each period presented above to consolidated pre-tax income (unaudited, in thousands):

	Three Months Ended March 31,
	2025		2024
Total segment pre-tax income (loss)	$	6,287	$	1,579
Less: Unallocated SG&A, depreciation and other operating expenses		3,642		1,654
Plus: Unallocated interest income, net		383		100
Less other expense (plus other income)		-		-
Consolidated pre-tax income	$	3,028	$	25

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The table below presents segment total assets for March 31, 2025 (unaudited) and December 31, 2024 (in thousands):

	Procurement		Systems Integration		Facilities Management		Total Segments
Total Assets at March 31, 2025	$	24,845	$	33,707	$	739	$	59,291
Total Assets at December 31, 2024		19,319		25,855		932		46,106

The table below reconciles combined segment total assets for each period presented above to consolidated total assets (in thousands):

	March 31, 2025 (unaudited)		December 31, 2024
Combined total assets included in segments	$	59,291	$	46,106
Plus items not allocated to segments:
Cash and cash equivalents		27,339		23,222
Prepaid expenses and other current assets		501		230
Property and equipment, net		26		29
Lease right-of-use asset		23,667		24,213
Other assets		2,715		2,768
Consolidated total assets	$	113,539	$	96,568

Note 7 – Subsequent Events

On May 5, 2025, we drew down the remaining $11.3 million on our construction loan from Susser Bank described in Note 3, “Long-Term Debt”, for costs expended on the build-out of our new facility in Georgetown, Texas. This increased the total amount borrowed to $20.0 million.

We have evaluated subsequent events through May 15, 2025, the date at which the unaudited interim consolidated financial statements were available to be issued. We have identified no such events requiring disclosure.

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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 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, 2024 included in our 2024 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 2024 Annual Report on Form 10-K for a discussion of items that may affect our future results.

Overview

TSS, Inc. ("TSS”, the "Company”, "we”, "us” or "our”) provides a comprehensive suite of services for the planning, design, deployment, maintenance, refresh and take-back of end-user and enterprise systems, including the mission-critical data center 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. Our systems integration services have recently been enhanced to include the integration of Artificial Intelligence (AI) enabled data center server racks and componentry. TSS was incorporated in Delaware in December 2004. Our corporate offices and our integration facility are located in Round Rock, Texas.

We support 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 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 on 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 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, our revenues reflect only the services we provide, and the consigned components are not reflected in our income statement or on our balance sheet. We also offer our customers 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.

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In October 2024, we signed a multi-year 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 existing facility, we are moving our headquarters and production facility to a new location in 2025 and anticipate capital expenditures of approximately $25 million to $30 million for improvements to that facility, primarily to significantly increase the available electrical power and related cooling capabilities for both air-cooled and direct liquid cooled (“DLC”) computer racks. We are financially responsible for all fixed and variable costs related to this activity, including debt service requirements related to the planned capital expenditures, direct and indirect labor related to this activity, and all facility and related costs. 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 consistently 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 to be contributed by our landlord, $20 million from a construction loan from Susser Bank, and cash on hand for the remainder of the costs. The construction loan is expandable up to $25 million with bank approval. We borrowed no additional funds under that loan in the quarter ended March 31, 2025 and the outstanding principal balance remained $8.7 million throughout the three-month period. Subsequent to the quarter ended March 31, 2025, in May 2025 we borrowed the remaining $11.3 million available on the loan, which reimbursed us for capital expenditures we had previously funded using cash on hand.

The volume of our strategic procurement services grew substantially in the quarter ended March 31, 2025 compared to the quarter ended March 31, 2024. Customers value our ability to source 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 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.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2025

Unless otherwise noted, all comparisons in this section are between the three-month period ended March 31, 2025 (the “current quarter” or “this quarter”) and the three-month period ended March 31, 2024 (the “prior year quarter” or “this quarter last year”).

Revenues

Revenues consist of fees earned from 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, and procurement services, to IT equipment vendors. We began integration services on AI racks in June 2024 and have continued with that activity throughout the current quarter. Currently we derive all our revenue from the U.S. market.

We contract with our customers under five primary contract types: fixed-price service and maintenance contracts, time and material contracts, cost-plus-fee, guaranteed maximum price and fixed-price contracts. Cost-plus-fee and guaranteed maximum price contracts are typically lower risk arrangements and thus yield lower profit margins than time-and-materials and fixed-price 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. Where customer requirements are clear, we prefer to enter comprehensive fixed-price arrangements or time-and-materials arrangements rather than cost-plus-fee and guaranteed maximum price contracts.

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 the 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 expenditure 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. We received a reimbursement from one of our customers for the majority of those investments and are amortizing that reimbursement into service integration revenues over the expected useful life of three years. We are also depreciating those assets over the same three-year period.

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 modular data center 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. The expansion into AI-enabled rack integration services which began in June 2024 bolstered both our revenues and our earnings, helping move the systems integration segment from a $0.1 million segment pre-tax loss in the prior year quarter to a $0.3 million segment contribution to pre-tax income in the current quarter, discussed in greater detail below. These amounts exclude certain corporate expenses, such as selling, general and administrative costs as well as facility costs and interest income that are not allocated to segments.

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Total revenues in the current quarter increased 523% to $99.0 million, driven primarily by significant growth in procurement and systems integration activities. Procurement revenues increased by $78.6 million (676%) and systems integration revenues increased by $5.4 million (253%). These increases were somewhat offset by a $0.8 million (40%) decrease in revenue from the facilities management segment.

The $5.4 million (253%) increase in systems integration revenues was due primarily to the growth in integration of AI-enabled computer racks, which began with significant volume in June 2024. With the October signing of a multi-year agreement to continue integrating AI-enabled racks at certain minimum volumes, we expect systems integration revenues to remain significantly above the historical trend for several years. 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 and debt service payments tied to the build-out of that factory for which we are responsible. 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 had revenues 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 that 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 would otherwise be 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, though they appear to be improving in general. It is not yet known the extent to which tariffs currently threatened or imposed by the United States may or may not impact these supply chain issues.

The increase in procurement revenues was driven primarily by an increase in purchases from the federal government and a few large commercial enterprises including several individually large sales, combined with a mix shift with a greater proportion of the revenues coming from gross deals, as opposed to net deals. As much of our procurement business is ultimately related to federal government buying, we believe this can contribute to some seasonality of these revenues. As the federal government budget ends on September 30 each year, we believe this may generally lead to an increase in procurement revenues in the quarter ending September 30 each year and again in the quarter ending December 31 as federal agencies receive their budgets for the new year. However, we cannot accurately predict when other large procurement activity will occur, such as the large purchases from our customers’ enterprise clients in the current quarter.

Due to the lighter effort required to execute procurement transactions, the gross margins are thinner 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. The following table presents the results of our procurement activities, both 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 in an analysis of the underlying economics (unaudited, in thousands, except percentages):

	Three Months Ended March 31, 2025			Three Months Ended March 31, 2024			Increase		Percentage Increase
Recognized Values (GAAP):
Recognized value of all procurement deals	$	90,177		$	11,623		$	78,554		677	%
Recognized cost of revenues		83,149			10,715			72,434		676	%
Gross profit		7,028			908			6,120		674	%
Gross margin based on recognized value of transactions		7.8	%		7.8	%

Gross Values (Non-GAAP):
Gross value of all procurement deals	$	105,982		$	19,956		$	86,026		431	%
Cost of revenues		98,954			19,048			79,906		419	%
Gross profit		7,028			908			6,120		674	%
Gross margin based on gross value of transactions		6.6	%		4.6	%

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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 in 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 considered on a gross basis (unaudited, in thousands):

	Three Months Ended March 31, 2025		Three Months Ended March 31, 2024

Recognized revenue of all procurement deals - GAAP	$	90,177	$	11,623
Materials costs incurred but excluded from both recorded revenues and costs (also known as “netting”)

SEC Form 10-Q filed by TSS Inc.