Group 1 - TSS, Inc. (NASDAQ: TSSI) has formed a partnership with a major technology company to meet the high demand for data center rack assembly [1] - The business of data center rack assembly is characterized by low added value [1]

Group 1: Elite Pharmaceuticals Inc. (ELTP) - ELTP is a manufacturer of generic drugs, focusing on controlled-release products which require higher manufacturing skills and vertical integration, differentiating itself in a price-sensitive market [2] - The company holds strong positions in the mixed Amphetamine Immediate Release (IR) and Extended Release (ER) markets, with significant growth driven by the ADHD market [3][6] - According to IQVIA data, ELTP commands approximately 20% of the $400 million generic Adderall IR market and 16% of the $800 million Adderall ER market [4] - In Q4 fiscal 2025, total revenues reached approximately $31.9 million, a 78.3% increase from $17.9 million in the previous year, with operating income rising to roughly $11.2 million from $3.7 million [5] - ELTP entered the lisdexamfetamine (Vyvanse generic) market in early 2025, capturing an estimated 8-10% market share despite competition [6] - The company experienced a pull-back in stock price post-earnings due to a $7.2 million warrant charge affecting EPS and increased competition in the ADHD generic space [7][8] Group 2: TSS, Inc. (TSSI) - TSSI's core business includes systems integration, facilities management, and IT procurement services, with a focus on AI-enabled computer racks [12][13] - The company reported a sales growth of 262% to $44 million in recent Q2, raising its 2025 adjusted EBITDA growth guidance from at least 50% to at least 75% [13] - Despite strong growth, TSSI's stock has pulled back nearly 30%, attributed to investor expectations for better leverage and elevated depreciation expenses from facility build-out [14] - TSSI began production at a new 213,000-square-foot facility in Georgetown, TX, optimized for high-volume AI rack integration, with management expecting profitability within a two-year payback period [15] - The stock is currently trading at a trailing EV/Sales multiple of 1.84x, which is reasonable for a business with multi-year sales visibility and proven growth [16][18]

["SAFE HARBOR" STATEMENT](index=2&type=section&id=SAFE%20HARBOR%22%20STATEMENT) This statement clarifies that the report contains forward-looking statements subject to risks and disclaims obligation to update them - The report contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995, which are based on management's current plans and expectations and are subject to risks and uncertainties[11](index=11&type=chunk)[12](index=12&type=chunk) - The company expressly disclaims any obligation to publicly release updates or changes to its forward-looking statements[13](index=13&type=chunk) [PART I – FINANCIAL INFORMATION](index=2&type=section&id=PART%20I%E2%80%93FINANCIAL%20INFORMATION) This part presents TSS, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis [Item 1. Condensed Consolidated Financial Statements](index=2&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) This section presents TSS, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, segment performance, and other financial details for the periods ended June 30, 2025, and December 31, 2024 [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of TSS, Inc.'s financial position, detailing assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :----------------------------------- | :------------------------ | :------------------ | | Cash and cash equivalents | $36,836 | $23,222 | | Total current assets | $70,895 | $58,197 | | Property and equipment, net | $35,288 | $8,591 | | Total assets | $139,470 | $96,568 | | Accounts payable and accrued expenses | $82,020 | $53,340 | | Total current liabilities | $87,244 | $56,919 | | Long-term debt, non-current | $19,541 | $8,200 | | Total liabilities | $129,932 | $89,430 | | Total stockholders' equity | $9,538 | $7,138 | [Unaudited Consolidated Statements of Operations](index=3&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Operations) This section outlines TSS, Inc.'s revenues, costs, and profitability over specific reporting periods, including earnings per share Consolidated Statements of Operations Highlights (in thousands, except per-share amounts) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $43,970 | $12,159 | $142,929 | $28,052 | | Cost of revenue | $36,155 | $7,623 | $125,904 | $20,802 | | Gross profit | $7,815 | $4,536 | $17,025 | $7,250 | | Income from operations | $2,236 | $1,700 | $6,349 | $1,954 | | Net income | $1,483 | $1,402 | $4,462 | $1,417 | | Earnings per common share - Basic | $0.06 | $0.06 | $0.19 | $0.06 | | Earnings per common share - Diluted | $0.06 | $0.06 | $0.17 | $0.06 | [Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity](index=4&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) This section details the changes in TSS, Inc.'s equity components, including common stock, additional paid-in capital, and accumulated deficit Changes in Stockholders' Equity (in thousands) | Metric | Balance January 1, 2025 | Balance June 30, 2025 | | :-------------------------- | :---------------------- | :-------------------- | | Common Stock (Shares) | 25,250 | 25,975 | | Common Stock (Amount) | $3 | $3 | | Additional Paid-in Capital | $74,200 | $76,058 | | Treasury Stock (Shares) | (1,849) | (1,975) | | Treasury Stock (Amount) | $(6,730) | $(10,650) | | Accumulated Deficit | $(60,335) | $(55,873) | | Total Stockholders' Equity | $7,138 | $9,538 | - Net income contributed **$2,979 thousand** and **$1,483 thousand** to stockholders' equity for the three months ended March 31, 2025, and June 30, 2025, respectively[19](index=19&type=chunk) - Treasury shares repurchased amounted to **$(1,654) thousand** and **$(2,266) thousand** for the three months ended March 31, 2025, and June 30, 2025, respectively[19](index=19&type=chunk) [Unaudited Condensed Consolidated Statements of Cash Flows](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents TSS, Inc.'s cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Metric | 2025 | 2024 | | :------------------------------------------ | :------- | :------- | | Net cash provided by (used in) operating activities | $36,973 | $(1,682) | | Net cash used in investing activities | $(25,779) | $(1,721) | | Net cash provided by (used in) financing activities | $7,420 | $(117) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $18,614 | $(3,520) | | Cash, cash equivalents and restricted cash, end of period | $41,836 | $8,311 | - Cash paid for interest, net of capitalized amounts, was **$2,327 thousand** in 2025, up from **$537 thousand** in 2024[21](index=21&type=chunk) - Capital expenditures financed with accounts payable amounted to **$1,881 thousand** in 2025[21](index=21&type=chunk) [Notes to Condensed Consolidated Statements](index=5&type=section&id=Notes%20to%20Condensed%20Consolidated%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies and segment data [Note 1 – Significant Accounting Policies](index=6&type=section&id=Note%201%20%E2%80%93%20Significant%20Accounting%20Policies) This note details TSS, Inc.'s business operations, revenue recognition methods, and key accounting principles applied in financial reporting - TSS, Inc. provides comprehensive services for planning, design, deployment, maintenance, and refresh of end-user and enterprise systems, including AI-enabled data center server racks, and recently relocated its corporate offices to Georgetown, Texas[23](index=23&type=chunk) - The company recognizes revenue when control of goods or services is transferred to customers, with specific policies for maintenance, integration, equipment sales, deployment, and procurement services[33](index=33&type=chunk) Revenues Disaggregated by Segment and Service Type (Three Months Ended June 30, in thousands) | Segment/Service Type | 2025 | 2024 | | :--------------------------------- | :------- | :------- | | Facilities Management | $1,482 | $2,285 | | Systems Integration | $9,486 | $4,960 | | Procurement | $33,002 | $4,914 | | **Total Revenues** | **$43,970** | **$12,159** | Revenues Disaggregated by Segment and Service Type (Six Months Ended June 30, in thousands) | Segment/Service Type | 2025 | 2024 | | :--------------------------------- | :------- | :------- | | Facilities Management | $2,780 | $4,431 | | Systems Integration | $16,970 | $7,083 | | Procurement | $123,179 | $16,538 | | **Total Revenues** | **$142,929** | **$28,052** | - The company is economically dependent on a large US-based IT OEM, which accounted for **98% of revenues** in Q2 2025 and **99% year-to-date 2025**, and **98% of accounts receivable** at June 30, 2025[47](index=47&type=chunk)[48](index=48&type=chunk) Non-Recourse Factoring Program (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Aggregate gross amount factored | $72,391 | $28,835 | $193,484 | $50,978 | | Financing fees paid | $882 | $427 | $2,425 | $742 | - Non-cash stock-based compensation expense was approximately **$0.9 million** for Q2 2025 and **$1.9 million** for the six months ended June 30, 2025, significantly higher than prior year periods[53](index=53&type=chunk) - Cash and cash equivalents, including restricted cash, totaled **$41.8 million** at June 30, 2025, with **$5.0 million** restricted as collateral for bank debt[54](index=54&type=chunk) Allowance for Credit Losses (in thousands) | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------- | :----------------------------- | :----------------------------- | | Balance at beginning of period | $7 | $7 | | Additions charged to expense | $14 | $- | | Balance at end of period | $21 | $7 | - Goodwill carrying value remained at **$0.8 million** at June 30, 2025, with no impairment identified[65](index=65&type=chunk) - The company adopted ASU 2023-07 (Segment Reporting) effective December 31, 2024, resulting in three reportable segments and retrospective reclassification of prior period results[71](index=71&type=chunk) [Note 2 – Supplemental Balance Sheet Information](index=12&type=section&id=Note%202%20%E2%80%93%20Supplemental%20Balance%20Sheet%20Information) This note provides detailed breakdowns of specific balance sheet accounts, including receivables, inventories, and long-term debt Contract and Other Receivables, Net (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :------------------------------ | :------------------------ | :------------------ | | Contract and other receivables | $14,018 | $16,210 | | Allowance for credit losses | $(21) | $(7) | | **Contracts and other receivables, net** | **$13,997** | **$16,203** | Inventories, Net (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :---------------- | :------------------------ | :------------------ | | Raw Materials | $78 | $201 | | Work in Process | $155 | $120 | | Finished Goods | $14,377 | $17,373 | | Reserve | $(21) | $(21) | | **Inventories, net** | **$14,589** | **$17,673** | Goodwill and Intangible Assets (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :--------------------------------- | :------------------------ | :------------------ | | Goodwill | $780 | $780 | | Customer relationships (Gross Carrying Amount) | $906 | $906 | | Customer relationships (Accumulated Amortization) | $(906) | $(906) | | Acquired software (Gross Carrying Amount) | $234 | $234 | | Acquired software (Accumulated Amortization) | $(234) | $(234) | Property and Equipment, Net (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :-------------------------- | :------------------------ | :------------------ | | Trade equipment | $5,680 | $763 | | Leasehold improvements | $29,909 | $2,328 | | Construction in Process | $1,469 | $6,701 | | Less accumulated depreciation | $(2,601) | $(3,704) | | **Property and equipment, net** | **$35,288** | **$8,591** | Accounts Payable and Accrued Expenses (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :--------------------------------- | :------------------------ | :------------------ | | Accounts payable | $69,281 | $33,491 | | Accrued expenses | $9,674 | $17,802 | | **Total accounts payable and accrued expenses** | **$82,020** | **$53,340** | Long-Term Debt, Non-Current (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :-------------------------- | :------------------------ | :------------------ | | Borrowed funds (bank loan) | $20,000 | $8,667 | | Deferred debt issuance costs | $(459) | $(467) | | **Long-term debt, non-current** | **$19,541** | **$8,200** | [Note 3 – Long-Term Debt](index=14&type=section&id=Note%203%20%E2%80%93%20Long-Term%20Debt) This note describes TSS, Inc.'s new credit agreement, term loan details, interest rates, and compliance with financial covenants - On December 31, 2024, TSS entered a new Credit Agreement for a **$20.0 million** term loan facility to fund improvements at its new Georgetown, Texas facility[87](index=87&type=chunk) - The company borrowed **$8.7 million** initially and the remaining **$11.3 million** by June 30, 2025, bringing the total to **$20.0 million**[87](index=87&type=chunk) - The loan converted to a fully amortizing term loan on July 5, 2025, with monthly payments of approximately **$437,000** starting August 5, 2025, and a final due date of January 5, 2030[88](index=88&type=chunk) - The loan bears a floating interest rate (1-month SOFR plus 3.0%, with a 4.5% floor) and is secured by a **$5.0 million** cash deposit and certain equipment[88](index=88&type=chunk) - TSS was in compliance with all financial covenants (leverage ratio, debt service coverage ratio) at June 30, 2025[89](index=89&type=chunk) [Note 4 – Leasing Arrangements](index=15&type=section&id=Note%204%20%E2%80%93%20Leasing%20Arrangements) This note outlines TSS, Inc.'s operating lease commitments for facilities and equipment, including associated costs and future payment schedules - TSS has operating leases for its office and integration facilities in Round Rock and Georgetown, Texas, and for certain equipment, with remaining lease terms of 9 to 119 months[91](index=91&type=chunk) Operating Lease Costs (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $973 | $236 | $1,964 | $457 | | Variable lease cost | $202 | $114 | $324 | $227 | | **Total operating lease cost** | **$1,175** | **$350** | **$2,288** | **$684** | | Cash paid for operating leases | $420 | $136 | $656 | $265 | Future Minimum Lease Payments (as of June 30, 2025, in thousands) | Fiscal Year | Amount | | :---------- | :------- | | 2025 | $1,813 | | 2026 | $3,662 | | 2027 | $3,777 | | 2028 | $3,905 | | 2029 | $3,265 | | 2030 | $1,538 | | Thereafter | $16,678 | | **Total minimum future lease payments** | **$34,638** | | Less imputed interest | $(10,099) | | **Total** | **$24,539** | [Note 5 – Earnings Per-Share](index=16&type=section&id=Note%205%20%E2%80%93%20Earnings%20Per-Share) This note reconciles the calculation of basic and diluted earnings per share, detailing the components of the numerator and denominator Earnings Per Share Reconciliation (in thousands except per share amounts) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (Numerator) | $1,483 | $1,402 | $4,462 | $1,417 | | Weighted-average shares of common stock outstanding (Basic Denominator) | 23,581 | 22,077 | 23,871 | 21,988 | | **Basic Earnings per share** | **$0.06** | **$0.06** | **$0.19** | **$0.06** | | Dilutive options and warrants outstanding | 2,226 | 2,623 | 2,368 | 1,546 | | Number of shares used in diluted per-share computation | 25,807 | 24,700 | 26,239 | 23,534 | | **Diluted Earnings per share** | **$0.06** | **$0.06** | **$0.17** | **$0.06** | - 50,000 restricted shares and options were excluded from diluted EPS calculation for the three and six months ended June 30, 2025, due to their anti-dilutive effect[96](index=96&type=chunk) [Note 6 – Segment Reporting](index=16&type=section&id=Note%206%20%E2%80%93%20Segment%20Reporting) This note details TSS, Inc.'s three reportable segments, presenting their revenues, gross profits, and capital expenditures - TSS now operates with three reportable segments: Procurement, Systems Integration, and Facilities Management, a change from two segments prior to Q4 2024[97](index=97&type=chunk)[103](index=103&type=chunk) Segment Performance (Three Months Ended June 30, 2025, in thousands) | Metric | Procurement | Systems Integration | Facilities Management | Total Segments | | :------------------------------------------ | :---------- | :------------------ | :-------------------- | :------------- | | Total revenue | $33,002 | $9,486 | $1,482 | $43,970 | | Cost of revenue | $30,463 | $5,311 | $381 | $36,155 | | Segment gross profit | $2,539 | $4,175 | $1,101 | $7,815 | | Segment pre-tax income | $1,783 | $2,178 | $910 | $4,871 | | Capital expenditures | $- | $12,705 | $- | $12,705 | Segment Performance (Six Months Ended June 30, 2025, in thousands) | Metric | Procurement | Systems Integration | Facilities Management | Total Segments | | :------------------------------------------ | :---------- | :------------------ | :-------------------- | :------------- | | Total revenue | $123,179 | $16,970 | $2,780 | $142,929 | | Cost of revenue | $113,612 | $11,144 | $1,148 | $125,904 | | Segment gross profit | $9,567 | $5,826 | $1,632 | $17,025 | | Segment pre-tax income | $7,445 | $2,437 | $1,276 | $11,158 | | Capital expenditures | $- | $27,574 | $- | $27,574 | Reconciliation of Total Segment Pre-Tax Income to Consolidated Pre-Tax Income (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total segment pre-tax income (loss) | $4,871 | $3,112 | $11,158 | $4,691 | | Less: Unallocated SG&A, depreciation and other operating expenses | $3,494 | $1,790 | $7,136 | $3,443 | | Plus: Unallocated interest income, net | $175 | $106 | $558 | $205 | | **Consolidated pre-tax income** | **$1,552** | **$1,428** | **$4,580** | **$1,453** | Segment Total Assets (in thousands) | Segment | June 30, 2025 | December 31, 2024 | | :------------------ | :------------ | :---------------- | | Procurement | $28,452 | $19,319 | | Systems Integration | $38,789 | $25,855 | | Facilities Management | $2,773 | $932 | | **Total Segment Assets** | **$70,014** | **$46,106** | [Note 7 – Subsequent Events](index=18&type=section&id=Note%207%20%E2%80%93%20Subsequent%20Events) This note discloses significant events occurring after the balance sheet date, specifically the conversion of the construction loan to a term loan - On July 5, 2025, the **$20.0 million** principal balance on the Credit Agreement converted to a fully amortizing term loan, with monthly payments of approximately **$437,000** beginning August 5, 2025, and a final due date of January 5, 2030[107](index=107&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on TSS, Inc.'s financial performance and condition for the three and six months ended June 30, 2025. It highlights significant revenue growth driven by AI-enabled systems integration and procurement services, discusses changes in profitability, and outlines the company's liquidity and capital resources, including investments in a new facility [Overview](index=19&type=section&id=Overview) This overview describes TSS, Inc.'s core services, strategic investments in a new facility, and key customer agreements driving growth - TSS provides comprehensive services for data centers and mission-critical facilities, with systems integration services enhanced to include AI-enabled data center server racks since 2024[109](index=109&type=chunk) - The company has invested approximately **$31.6 million** in a new 213,000 square foot facility in Georgetown, Texas, to support increased production of AI-enabled computer racks, funded by a **$20 million** construction loan and cash on hand[113](index=113&type=chunk)[114](index=114&type=chunk)[158](index=158&type=chunk) - A multi-year agreement with its largest customer for AI-enabled rack integration provides expected minimum monthly volumes and payments to cover facility and debt service costs[113](index=113&type=chunk)[114](index=114&type=chunk) [Results of Operations - Three Months Ended June 30, 2025](index=20&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20June%2030%2C%202025) This section analyzes TSS, Inc.'s financial performance for the second quarter of 2025, detailing revenue, cost, and income changes [Revenues](index=20&type=section&id=Revenues_Q2) This subsection details the significant increase in Q2 2025 revenues, primarily driven by procurement and systems integration services - Total revenues increased by **262% to $44.0 million** in Q2 2025, driven by significant growth in procurement (**572% increase**) and systems integration (**91% increase**), partially offset by a **35% decrease** in facilities management revenue[122](index=122&type=chunk) - The increase in systems integration revenues was primarily due to continued growth in AI-enabled computer rack integration, supported by a multi-year agreement with minimum volume commitments[123](index=123&type=chunk) Procurement Activities - Three Months Ended June 30 (in thousands, except percentages) | Metric | 2025 | 2024 | Increase | Percentage Increase | | :------------------------------------------ | :------- | :------- | :------- | :------------------ | | Recognized value of all procurement deals (GAAP) | $33,002 | $4,914 | $28,088 | 572% | | Gross profit (GAAP) | $2,539 | $713 | $1,826 | 256% | | Gross margin based on recognized value (GAAP) | 7.7% | 14.5% | | | | Gross value of all procurement deals (Non-GAAP) | $65,731 | $20,988 | $44,743 | 213% | | Gross margin based on gross value (Non-GAAP) | 3.9% | 3.4% | | | [Cost of Revenue and Gross Margins](index=22&type=section&id=Cost%20of%20Revenue%20and%20Gross%20Margins_Q2) This subsection analyzes the changes in cost of revenue and gross margins across segments for Q2 2025, highlighting the impact of procurement growth - Consolidated gross margin decreased to **18%** in Q2 2025 from **37%** in Q2 2024, primarily due to the outsized increase in the lower-margin procurement business[131](index=131&type=chunk) Segment Gross Margins (Three Months Ended June 30) | Segment | 2025 | 2024 | | :------------------ | :----- | :----- | | Procurement | 8% | 15% | | Systems Integration | 44% | 43% | | Facilities Management | 74% | 74% | - Systems integration gross profit increased by **95% to $4.2 million**, despite including **$0.3 million** of rent expense for the new Georgetown facility and uncapitalizable costs related to readying the facility[131](index=131&type=chunk) [Selling, General and Administrative (SG&A) Expenses](index=23&type=section&id=Selling%2C%20General%20and%20Administrative%20%28SG%26A%29%20Expenses_Q2) This subsection details the increase in SG&A expenses for Q2 2025, attributed to higher headcount and compensation costs - SG&A expenses increased by **$2.0 million** in Q2 2025, primarily due to higher headcount, compensation costs, and increased accruals for incentive compensation[135](index=135&type=chunk) - Non-cash equity-based compensation included in SG&A was **$0.9 million** in Q2 2025, compared to **$0.2 million** in Q2 2024[135](index=135&type=chunk) [Depreciation and Amortization](index=23&type=section&id=Depreciation%20and%20Amortization_Q2) This subsection explains the increase in depreciation and amortization for Q2 2025, primarily due to the new factory - Depreciation and amortization increased from **$0.1 million** in Q2 2024 to **$0.8 million** in Q2 2025, due to two full months of depreciation on the new factory put into service in May 2025[136](index=136&type=chunk) [Operating Income](index=23&type=section&id=Operating%20Income_Q2) This subsection reports the growth in operating income for Q2 2025, reflecting improved operational efficiency despite increased expenses - Operating income increased by **32% to $2.2 million** in Q2 2025, up from **$1.7 million** in Q2 2024, despite a **97% increase** in operating expenses[137](index=137&type=chunk) [Interest Expense and Interest Income](index=23&type=section&id=Interest%20Expense%20and%20Interest%20Income_Q2) This subsection details the changes in interest expense and income for Q2 2025, influenced by increased debt and cash balances - Interest expense increased to **$0.9 million** in Q2 2025 from **$0.4 million** in Q2 2024, due to increased procurement transactions and interest on the **$20.0 million** construction loan[138](index=138&type=chunk)[139](index=139&type=chunk) - Interest income increased to **$0.2 million** in Q2 2025 from **$0.1 million** in Q2 2024, due to a higher average cash balance[140](index=140&type=chunk) [Net Income](index=24&type=section&id=Net%20Income_Q2) This subsection presents the net income and diluted earnings per share for Q2 2025, showing a modest increase Net Income and EPS (Three Months Ended June 30) | Metric | 2025 | 2024 | | :--------- | :------- | :------- | | Net income | $1,483 | $1,402 | | Diluted EPS | $0.06 | $0.06 | [Results of Operations - Six Months Ended June 30, 2025](index=24&type=section&id=Results%20of%20Operations%20-%20Six%20Months%20Ended%20June%2030%2C%202025) This section analyzes TSS, Inc.'s financial performance for the first half of 2025, detailing revenue, cost, and income changes [Revenues](index=24&type=section&id=Revenues_YTD) This subsection details the substantial increase in year-to-date revenues, driven by procurement and AI-enabled systems integration - Total revenues increased by **410% to $142.9 million** for the six months ended June 30, 2025, driven by procurement (**645% increase**) and systems integration (**140% increase**), partially offset by a **37% decrease** in facilities management[143](index=143&type=chunk) - The increase in systems integration revenues was primarily due to continued growth in AI-enabled computer rack integration[144](index=144&type=chunk) Procurement Activities - Six Months Ended June 30 (in thousands, except percentages) | Metric | 2025 | 2024 | Increase | Percentage Increase | | :------------------------------------------ | :------- | :------- | :------- | :------------------ | | Recognized value of all procurement deals (GAAP) | $123,179 | $16,538 | $106,641 | 645% | | Gross profit (GAAP) | $9,567 | $1,622 | $7,945 | 490% | | Gross margin based on recognized value (GAAP) | 7.8% | 9.8% | | | | Gross value of all procurement deals (Non-GAAP) | $171,712 | $40,944 | $130,768 | 319% | | Gross margin based on gross value (Non-GAAP) | 5.6% | 4.0% | | | [Cost of Revenue and Gross Margins](index=25&type=section&id=Cost%20of%20Revenue%20and%20Gross%20Margins_YTD) This subsection analyzes the changes in cost of revenue and gross margins for the first half of 2025, impacted by the growth of lower-margin procurement - Consolidated gross margin decreased to **12%** for the six months ended June 30, 2025, from **26%** in the prior year, primarily due to the increased proportion of lower-margin procurement business[149](index=149&type=chunk) Segment Gross Margins (Six Months Ended June 30) | Segment | 2025 | 2024 | | :------------------ | :----- | :----- | | Procurement | 8% | 10% | | Systems Integration | 34% | 39% | | Facilities Management | 59% | 65% | - Systems integration gross profit increased by **113% to $5.8 million**, despite approximately **$1.0 million** of non-cash rent expense for the new Georgetown facility prior to operations[149](index=149&type=chunk) [Selling, General and Administrative (SG&A) Expenses](index=26&type=section&id=Selling%2C%20General%20and%20Administrative%20%28SG%26A%29%20Expenses_YTD) This subsection details the increase in SG&A expenses for the first half of 2025, driven by higher headcount and compensation - SG&A expenses increased by **$4.5 million (88%)** for the six months ended June 30, 2025, due to higher headcount, compensation, and incentive compensation accruals[151](index=151&type=chunk) - Non-cash equity-based compensation included in SG&A was **$1.8 million** for the six months ended June 30, 2025, compared to **$0.3 million** in the prior year[151](index=151&type=chunk) [Depreciation and Amortization](index=26&type=section&id=Depreciation%20and%20Amortization_YTD) This subsection explains the increase in depreciation and amortization for the first half of 2025, due to the new factory - Depreciation and amortization increased from **$0.2 million** in the prior year to **$1.1 million** for the six months ended June 30, 2025, due to the new factory being put into service[152](index=152&type=chunk) [Operating Income](index=26&type=section&id=Operating%20Income_YTD) This subsection reports the significant growth in operating income for the first half of 2025, indicating improved operational leverage - Operating income grew by **225% to $6.3 million** for the six months ended June 30, 2025, compared to **$2.0 million** in the prior year, reflecting effective leveraging of the expense structure[153](index=153&type=chunk) [Interest Expense and Interest Income](index=26&type=section&id=Interest%20Expense%20and%20Interest%20Income_YTD) This subsection details the changes in interest expense and income for the first half of 2025, influenced by debt and cash balances - Interest expense increased to **$2.3 million** for the six months ended June 30, 2025, from **$0.7 million** in the prior year, due to increased procurement transactions and the construction loan[154](index=154&type=chunk) - Interest income increased to **$0.6 million** for the six months ended June 30, 2025, from **$0.2 million** in the prior year, due to higher average cash balances[155](index=155&type=chunk) [Net Income](index=26&type=section&id=Net%20Income_YTD) This subsection presents the net income and diluted earnings per share for the first half of 2025, showing substantial growth Net Income and EPS (Six Months Ended June 30) | Metric | 2025 | 2024 | | :--------- | :------- | :------- | | Net income | $4,462 | $1,417 | | Diluted EPS | $0.17 | $0.06 | [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses TSS, Inc.'s sources and uses of cash, including operating cash flow, investments in facilities, and financing activities - Primary liquidity sources include cash and cash equivalents (**$41.8 million** at June 30, 2025), vendor trade-credit, projected cash flows from operations, and **$6.8 million** in tenant improvement funds[157](index=157&type=chunk)[161](index=161&type=chunk) - Cash provided by operating activities was **$37.0 million** for the six months ended June 30, 2025, a significant increase from a **$1.7 million** use in the prior year, driven by AI-rack integration and procurement services[162](index=162&type=chunk) - Investing activities used **$25.8 million** in cash for the six months ended June 30, 2025, primarily for the buildout of the new integration facility[164](index=164&type=chunk) - Financing activities provided **$7.4 million** in cash, mainly from **$11.3 million** in construction loan proceeds, partially offset by **$3.9 million** used to repurchase treasury stock[165](index=165&type=chunk) - The company uses a non-recourse factoring agreement for receivables from its largest customer to accelerate cash receipts, which is considered efficient due to a lower effective interest rate than borrowing funds[160](index=160&type=chunk) [Off-Balance Sheet Arrangements](index=28&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms that TSS, Inc. had no off-balance sheet arrangements as of the reporting dates - As of June 30, 2025, and December 31, 2024, the company had no off-balance sheet arrangements[168](index=168&type=chunk) [Critical Accounting Policies and Pronouncements](index=28&type=section&id=Critical%20Accounting%20Policies%20and%20Pronouncements) This section states that there have been no material changes to TSS, Inc.'s critical accounting policies since the last annual report - There have been no material changes to the company's critical accounting policies and estimates as set forth in the 2024 Annual Report on Form 10-K[169](index=169&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details TSS, Inc.'s exposure to market risks, primarily focusing on interest rate risk associated with its variable-rate debt and the costs incurred from its accounts receivable factoring program - The company's **$20.0 million** outstanding debt bears a variable interest rate tied to 1-month SOFR, exposing it to interest rate fluctuations[171](index=171&type=chunk) - A hypothetical **25 basis point** increase or decrease in annual SOFR rates would increase or decrease annual interest expense by approximately **$50,000** on the outstanding debt[171](index=171&type=chunk) - Factoring costs for accounts receivable are also based on prevailing SOFR; a hypothetical **25 basis point** change could alter annual interest expense by approximately **$107,000**, assuming **$200 million** in factored receivables[172](index=172&type=chunk) [Item 4. Controls and Procedures](index=28&type=section&id=Item%204.%20Controls%20and%20Procedures) This section reports on the effectiveness of TSS, Inc.'s disclosure controls and procedures, concluding they were ineffective as of June 30, 2025, due to an un-remediated material weakness in internal control over financial reporting identified in 2024 - Management concluded that disclosure controls and procedures were ineffective as of June 30, 2025, due to an un-remediated material weakness in internal control over financial reporting[175](index=175&type=chunk) - The material weakness, identified during the 2024 annual audit, relates to ineffective design of certain management review controls, leading to potential material adjustments to financial statements[176](index=176&type=chunk) - Root causes include manual processes, challenges in segregating duties, and a need for additional controls; remediation efforts are ongoing, including engaging external experts and enhancing documentation[176](index=176&type=chunk)[177](index=177&type=chunk) - Despite the material weakness, management believes the condensed consolidated financial statements for the periods ended June 30, 2025, fairly present the company's financial position, results of operations, and cash flows in conformity with GAAP[179](index=179&type=chunk) [PART II – OTHER INFORMATION](index=30&type=section&id=PART%20II%E2%80%93OTHER%20INFORMATION) This part includes information on unregistered sales of equity securities and a list of exhibits filed with the report [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=30&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section provides details on the company's purchases of its common stock during the quarter ended June 30, 2025, which were primarily for tax withholding requirements related to employee stock plans Purchases of Common Stock (Quarter Ended June 30, 2025) | Monthly Period | Total Shares Purchased | Average Price paid per Share | | :-------------------------------- | :--------------------- | :--------------------------- | | April 1, 2025 – April 30, 2025 | 5,930 | $6.55 | | May 1, 2025 – May 31, 2025 | 23,766 | $14.44 | | June 1, 2025 – June 30, 2025 | 69,407 | $27.14 | | **Total** | **99,103** | **$22.86** | - All shares were acquired from associates to satisfy tax withholding requirements upon restricted stock vesting or as exercise price for stock options; none were open market trades[182](index=182&type=chunk) [Item 6. Exhibits](index=31&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the Form 10-Q, including various certifications and XBRL documents - Exhibits include certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as well as Inline XBRL documents[183](index=183&type=chunk) [SIGNATURES](index=30&type=section&id=SIGNATURES) This section provides the official signature and date of the report's filing by the principal financial officer - The report was signed on August 11, 2025, by Daniel M. Chism, Chief Financial Officer (Principal Financial Officer) of TSS, INC[185](index=185&type=chunk)[186](index=186&type=chunk)[187](index=187&type=chunk)

Core Insights - TSS, Inc. (TSSI) shares have decreased by 23.7% since the second quarter of 2025 results, contrasting with a 0.7% rise in the S&P 500 index during the same period [1] - The company reported a significant revenue increase of 262% year over year, reaching $44 million, while diluted EPS remained flat at 6 cents per share [2] - Adjusted EBITDA surged 103% year over year to $4 million, indicating strong operational performance despite margin pressures [2][11] Revenue Breakdown - Revenue growth was primarily driven by Procurement, which saw a 572% increase to $33 million, and Systems Integration, which grew by 91% to $9.5 million [3] - Facilities Management revenue declined by 35% to $1.5 million, although there was a sequential increase of $0.2 million compared to the first quarter [3] Profitability Metrics - The gross margin for the consolidated business was 17.8%, down from 37.3% a year ago but improved from 9.3% in the first quarter [3] - Systems Integration margin increased to 44%, while Facilities Management maintained a margin of 74% [4] Management Commentary - The CEO highlighted strong demand for AI-enabled infrastructure and the strategic importance of the new Georgetown facility, which became fully operational late in the quarter [5] - First-half revenues exceeded second-half 2024 levels, indicating confidence in achieving a record year [5] Guidance and Outlook - Management raised the 2025 adjusted EBITDA growth outlook to at least 75% compared to 2024, up from a previous estimate of at least 50% [7] - The new target is viewed as a floor, reflecting confidence from first-half performance and a strengthening pipeline in AI integration [7] Operational Developments - The company has completed its move to the Georgetown headquarters and is investing in power and cooling capacity to support high-density rack requirements [8] - TSS converted its construction facility into a fully amortizing loan and expects to receive $6.8 million in tenant-improvement reimbursements in the third quarter [9][10] Financial Position - Cash and restricted cash totaled approximately $41.8 million at quarter-end, supported by $37 million of operating cash flow in the first half [10] - Net working capital turned negative due to capital expenditures, but the company is exploring a sublease of its legacy facility to potentially improve operating income [10]

Financial Data and Key Metrics Changes - Consolidated total revenue increased by 262% in 2025 to $44 million, up from $12.2 million in 2024 [13] - Adjusted EBITDA increased more than 100% to $4 million in 2025 [8][23] - Net income for 2025 was $1.5 million, up 6% from $1.4 million in the same quarter last year [22] - Diluted earnings per share remained at $0.06 in each period [22] Business Line Data and Key Metrics Changes - Revenue from procurement services grew more than 572% year over year to $33 million, driven by increased infrastructure investments for AI workloads [9][13] - Systems Integration revenue increased to $9.5 million, up 91% compared to $5 million in 2024, fueled by demand for AI-enabled infrastructure [16] - Facilities Management revenue declined 35% to $1.5 million, representing approximately 3% of total revenue [11][14] Market Data and Key Metrics Changes - The company reported record year-over-year revenue growth of 262%, highlighting strong market demand for its solutions [8] - The gross value of all procurement transactions increased 213% from the prior year quarter to $65.7 million [14] Company Strategy and Development Direction - The company is focused on scaling operations and capturing a meaningful share of the rapidly growing AI infrastructure market [12] - The new Georgetown facility is viewed as a strategic asset, enabling the company to support larger and more complex customer deployments [6][30] - The company is exploring organic growth and strategic alternatives to expand beyond existing relationships, particularly with Dell [37][40] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, expecting continued strong performance and raising the full year 2025 adjusted EBITDA outlook from at least 50% growth to at least 75% growth compared to 2024 [32] - The company is witnessing accelerating demand for complex high-performance computing systems, particularly for AI applications [5] Other Important Information - The company generated positive cash flow from operations for the first six months of the year, totaling $37 million, compared to cash used in operations in the prior year [28] - The company is transitioning to an accelerated filer status due to growth in market capitalization and revenues, leading to higher audit and accounting costs [19] Q&A Session Summary Question: What is TSS's priority order for Dell for rack integration projects? - Management aims to be the top priority for Dell and is working hard to achieve that [35][36] Question: Can you elaborate on organic growth and expanding beyond Dell? - Management is focused on organic growth and exploring opportunities for on-site rack integration and channel partnerships [38][40][41] Question: Can you provide guidance on procurement revenue fluctuations? - Management noted that procurement revenue can vary and is optimistic about future performance, particularly aligned with the federal buying cycle [42][44] Question: Is there potential for upside beyond the 75% EBITDA growth guidance? - Management views the 75% growth as a floor and expects to exceed that based on current performance [53][56] Question: What is the status of the Georgetown facility? - The Georgetown facility is now fully operational and at capacity [63] Question: What are the plans for the Round Rock facility? - The Round Rock facility is available for subleasing and could be used to expand configuration services [74]

EX-99.1 2 tssi_ex991.htm PRESS RELEASE "The outlook for our industry remains exceptionally strong, and demand across our core markets—particularly in data center infrastructure and AI rack integration—continues to accelerate, reinforcing our belief that we are in a significant and sustained growth cycle. With the strategic groundwork in place, we are positioned to scale capacity and address complexity to capitalize on opportunities before us and meet the growing demand for advanced, AI-driven systems." Seco ...

Core Viewpoint - TSS, Inc. (TSSI) has experienced significant stock price appreciation and robust financial performance driven by increasing demand for AI infrastructure, with a notable 523% revenue growth in Q1 2025 compared to the previous year [1][2]. Financial Performance - For Q1 2025, TSS reported revenues of $99 million, a 523% increase from $15.9 million in Q1 2024, and net income rose to $3 million from $15,000 [2]. - Diluted earnings per share reached 12 cents, up from breakeven, and adjusted EBITDA increased over tenfold to $5.2 million from $475,000 [2]. Segment Performance - Procurement services generated $90.2 million in revenues, a 676% increase from $11.6 million in Q1 2024, accounting for 77% of total procurement revenues for 2024 [3]. - Systems Integration revenues surged 253% to $7.5 million, with gross margins improving to 32% when excluding non-cash rent costs [4]. - Facilities Management revenues declined 40% year over year to $1.3 million, but the company sees potential for recovery in this segment [5]. Management Insights - CEO Darryll Dewan described the quarter as "extraordinary" and a pivotal moment for the company, emphasizing strong execution in AI infrastructure [6]. - CFO Daniel Chism noted the low consolidated gross margin of 9.3% was due to the procurement mix, with expectations for improvement in future quarters as production ramps up [7]. Growth Drivers - Revenue growth was primarily driven by increased AI investments from enterprise clients and infrastructure spending from OEM partners [8]. - The complexity of AI rack integration, including demands for direct liquid cooling and power testing, is enhancing TSS's value proposition as a strategic integrator [9]. Future Guidance - TSS expects first-half 2025 revenues to surpass those of the second half of 2024 and anticipates adjusted EBITDA for 2025 to be at least 50% higher than in 2024 [10][11]. Operational Developments - In May 2025, TSS commenced production at a new 213,000-square-foot facility in Georgetown, TX, designed for high-volume AI rack integration [12]. - The company invested $14.9 million in the quarter as part of a planned $25-$30 million capital build-out, expecting profitability within a two-year payback period [13]. Strategic Positioning - TSS's Q1 results reflect its transformation into a key infrastructure enabler for the AI era, with aggressive capacity expansion and long-term contracts supporting sustained growth despite some margin pressures [14].

Core Viewpoint - The analysis of TSS, Inc. (NASDAQ: TSSI) indicates a bullish sentiment towards the company, with a previous Hold rating reflecting a cautious optimism based on market study and long-term value projection [1]. Company Analysis - The analyst has been closely observing TSS, Inc. and its growth trajectory, emphasizing the importance of understanding how companies deliver value to stakeholders over time [1]. - The analyst's background in capital markets and content creation for a software company supports a comprehensive understanding of investment opportunities within the industry [1].

Financial Data and Key Metrics Changes - Total revenue grew by 523% year over year to $99 million, up from $15.9 million in Q1 2024, driven by significant growth in procurement and systems integration services [19][27] - Diluted earnings per share increased to $0.12, a substantial improvement from just above breakeven a year ago [28] - Net income for Q1 2025 was $3 million, compared to $15,000 in Q1 2024 [27] - Cash flow from operations for the first three months of 2025 was $20.6 million, up from $2.6 million in the same period last year [29] Business Line Data and Key Metrics Changes - Procurement services revenue surged by over 600% to more than $90 million, reflecting strong demand for AI infrastructure investments [8][19] - Systems integration revenue increased by more than 250% to $7.5 million, driven by demand for AI-enabled infrastructure [9][20] - Facilities management revenue declined by 40% to $1.3 million, representing a smaller portion of total revenue [10][20] Market Data and Key Metrics Changes - The gross value of all procurement transactions increased by 431% year over year to $106 million [22] - Procurement gross margins improved from 4.6% in the prior year quarter to 6.6% in the current quarter when viewed on a non-GAAP basis [22][23] - The company anticipates robust growth in modular data centers as medium and large enterprises increasingly adopt them as cost-effective solutions for AI technologies [21] Company Strategy and Development Direction - The company is focused on capturing a significant share of the rapidly growing AI infrastructure market, with plans to scale operations and enhance service offerings [6][11] - A new facility in Georgetown, Texas, is expected to support increased production capacity and is designed specifically for AI rack integration [12][15] - The company is investing between $25 million and $30 million in the new facility, with an anticipated payback period of approximately two years [16] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about continued strong performance in 2025, expecting total revenue in the first half to exceed that of the second half of 2024 [35] - The company is closely monitoring the impact of tariffs on IT hardware costs and supply chain dynamics, which may affect order processing times [33] - The order pipeline from OEM customers remains robust, with expectations for sustained demand in AI infrastructure [34][85] Other Important Information - The company is actively optimizing its facilities management segment to focus on high-growth opportunities [20] - Management highlighted the importance of maintaining strong relationships with key partners to navigate market uncertainties [34] Q&A Session Summary Question: How did the company manage to perform well during the transition to a new facility? - Management acknowledged the team's commitment and focus, emphasizing the complexity of the transition and the successful execution of operational commitments [38][39] Question: Concerns about integration services being obviated by advancements from companies like NVIDIA and Dell? - Management reassured that the complexity of AI integration is increasing, and the company is well-positioned to add value in this area [42][46] Question: What is the outlook for the facilities management segment? - Management remains optimistic about the segment's potential, noting a transition towards alternative computing solutions for AI [78][80] Question: What visibility does the company have regarding demand from AI clients? - Management indicated good visibility into demand, with a fluctuating but generally positive outlook for the rack integration business [109]

Financial Data and Key Metrics Changes - Total revenue grew by 523% year over year to $99 million, up from $15.9 million in Q1 2024 [19][20] - Diluted earnings per share increased to $0.12, a significant improvement from breakeven a year ago [29] - Net income for Q1 2025 was $3 million, compared to $15,000 in Q1 2024 [28] - Consolidated gross margin was 9.3%, down from 17.1% in the prior year quarter [24] Business Line Data and Key Metrics Changes - Procurement services revenue surged by 676% to $90.2 million, representing 77% of total procurement revenues for all of 2024 [22] - Systems integration revenue increased by 253% to $7.5 million, driven by AI-enabled rack integration [20][21] - Facilities management revenue declined by 40% to $1.3 million, representing just over 1% of total revenue [10][21] Market Data and Key Metrics Changes - The demand for AI infrastructure is rapidly growing, with significant capital flowing into high-performance compute environments [17] - The modular data center market is evolving, with expectations for increased adoption of modular solutions for AI [12] Company Strategy and Development Direction - The company is focused on scaling operations to capture a significant share of the AI infrastructure market [6] - A new facility in Georgetown, Texas, is being built to support increased demand for AI rack integration, with a planned investment of $25 million to $30 million [17][30] - The company anticipates a payback period of approximately two years for the new facility, indicating a strong return on investment [17] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about sustained high growth in AI infrastructure as customers ramp up investments [9][36] - The company is closely monitoring the impact of tariffs on IT hardware costs and supply chain dynamics [33] - Management expects total revenue in the first half of 2025 to exceed that of the second half of 2024, reflecting strong customer demand [36] Other Important Information - Cash flow from operations for Q1 2025 was $20.6 million, significantly higher than $2.6 million in Q1 2024 [30] - The company is actively optimizing its facilities management segment to focus on high-growth opportunities [21] Q&A Session Summary Question: How is the company managing the transition to the new facility? - Management acknowledged the complexity of the transition but emphasized successful execution and commitment from the team [39][40] Question: How does the company view competition from NVIDIA and Dell in integration services? - Management believes that the increasing complexity of AI integration will maintain the need for their services, despite advancements from competitors [41][42] Question: What is the outlook for facilities management revenue? - Management remains optimistic about the facilities management segment, which is transitioning to support AI applications [75][76] Question: What visibility does the company have on demand from AI clients? - Management indicated good visibility on demand, with a fluctuating but generally positive outlook for the rack integration business [108]