ONE STOP SYSTEMS, INC. - Quarter Report: 2023 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 September 30, 2023


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

For the transition period from __________ to ________________

Commission File Number: 001-38371

One Stop Systems, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

33-0885351

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2235 Enterprise Street #110

Escondido, California 92029

(Address of principal executive offices, including Zip Code)

(760) 745-9883

(Registrant’s telephone number, including area code)

(Former name, former address, and former fiscal year, if changed since last report)

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


Title of each class	Trading symbol	Name of exchange on which registered
Common Stock, $0.0001 par value per share	OSS	The Nasdaq Capital Market

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 preceding 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 the 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, 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.

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 31, 2023, the registrant had 20,604,050 shares of common stock (par value $0.0001) outstanding.

Table of Contents

PART_1_FINANCIAL_INFORMATION


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets	4
	Unaudited Consolidated Statements of Operations	5
	Unaudited Consolidated Statements of Comprehensive (Loss) Income	6
	Unaudited Consolidated Statements of Stockholders’ Equity	7
	Unaudited Consolidated Statements of Cash Flows	9
	Notes to Unaudited Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	46
Item 1A	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
	Signatures	50

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

In our opinion the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented. We have presented financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these unaudited consolidated financial statements, management has evaluated events and transactions for potential recognition or disclosure through the date the unaudited consolidated financial statements were issued by filing with the SEC.

This Quarterly Report on Form 10-Q for the three and nine month periods ended September 30, 2023 (this "Quarterly Report"), should be read in conjunction with our audited financial statements for the year ended December 31, 2022, included in our Annual Report on Form 10-K, filed with the SEC on March 23, 2023.

The results of operations for the three and nine month periods ended September 30, 2023, are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023.

ONE STOP SYSTEMS, INC. (OSS)

CONSOLIDATED BALANCE SHEETS


	Unaudited			Audited
	September 30,			December 31,
	2023			2022
ASSETS
Current assets
Cash and cash equivalents	$	3,735,005		$	3,112,196
Short-term investments (Note 3)		9,439,296			10,123,535
Accounts receivable, net (Note 4)		8,978,454			11,327,244
Inventories, net (Note 5)		22,225,210			20,775,366
Prepaid expenses and other current assets		668,665			502,156
Total current assets		45,046,630			45,840,497
Property and equipment, net		2,261,233			2,570,124
Operating lease right-of use assets		1,947,750			731,043
Deposits and other		48,093			60,243
Deferred tax assets, net		720,894			-
Goodwill		1,489,722			7,120,510
Intangible assets, net (Note 6)		-			42,154
Total Assets	$	51,514,322		$	56,364,571

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	3,228,134		$	4,592,713
Accrued expenses and other liabilities (Note 7)		4,778,548			3,013,869
Current portion of operating lease obligation (Note 10)		365,629			536,588
Current portion of notes payable (Note 8)		2,259,687			2,952,447
Total current liabilities		10,631,998			11,095,617
Long-term debt, net of current portion (Note 8)		-			409,294
Deferred tax liability, net		-			138,662
Operating lease obligation, net of current portion (Note 10)		1,729,433			397,249
Total liabilities		12,361,431			12,040,822
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock, $0.0001 par value; 50,000,000 shares authorized; 20,604,050 and 20,084,528 shares issued and outstanding, respectively		2,059			2,008
Additional paid-in capital		46,905,058			45,513,807
Accumulated other comprehensive income		386,941			510,485
Accumulated deficit		(8,141,167	)		(1,702,551	)
Total stockholders’ equity		39,152,891			44,323,749
Total Liabilities and Stockholders' Equity	$	51,514,322		$	56,364,571

See accompanying notes to unaudited consolidated financial statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022
Revenue	$	13,748,163		$	18,815,844		$	47,741,589		$	54,171,864
Cost of revenue		10,096,812			13,737,976			34,221,538			38,753,023
Gross profit		3,651,351			5,077,868			13,520,051			15,418,841
Operating expenses:
General and administrative		1,935,720			1,890,036			7,293,701			5,486,169
Impairment of goodwill		2,930,788			-			5,630,788			-
Marketing and selling		1,713,105			1,864,588			4,983,751			5,061,221
Research and development		1,053,852			1,159,868			3,203,830			3,656,020
Total operating expenses		7,633,465			4,914,492			21,112,070			14,203,410
(Loss) income from operations		(3,982,114	)		163,376			(7,592,019	)		1,215,431
Other income (expense), net:
Interest income		170,420			46,407			385,471			152,919
Interest expense		(31,468	)		(30,044	)		(88,112	)		(133,710	)
Employee retention credit (ERC) (Note 2)		418,486			-			1,716,727			-
Other income (expense), net		13,035			(11,050	)		24,649			86,903
Total other income, net		570,473			5,313			2,038,735			106,112
(Loss) income before income taxes		(3,411,641	)		168,689			(5,553,284	)		1,321,543
Provision for income taxes		226,967			36,156			885,332			286,954
Net (loss) income	$	(3,638,608	)	$	132,533		$	(6,438,616	)	$	1,034,589

Net (loss) income per share:
Basic	$	(0.18	)	$	0.01		$	(0.32	)	$	0.05
Diluted	$	(0.18	)	$	0.01		$	(0.32	)	$	0.05

Weighted average common shares outstanding:
Basic		20,569,111			20,019,625			20,407,284			19,619,971
Diluted		20,569,111			21,138,957			20,407,284			20,582,116

See accompanying notes to unaudited consolidated financial statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022
Net (loss) income	$	(3,638,608	)	$	132,533		$	(6,438,616	)	$	1,034,589
Other comprehensive income (loss):
Net unrealized (loss) income on short-term investments		(12,240	)		12,088			(11,373	)		10,669
Currency translation adjustment		(839,903	)		(216,191	)		(112,171	)		(434,941	)
Total other comprehensive loss		(852,143	)		(204,103	)		(123,544	)		(424,272	)
Comprehensive (loss) income	$	(4,490,751	)	$	(71,570	)	$	(6,562,160	)	$	610,317

See accompanying notes to unaudited consolidated financial statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 2023


	Common Stock							Accumulated Other			Accumulated			Total
	Shares		Amount		Additional Paid-in-Capital			Comprehensive income			(Deficit) Earnings			Stockholders' Equity
Balance, January 1, 2023		20,084,528	$	2,008	$	45,513,807		$	510,485		$	(1,702,551	)		44,323,749
Stock-based compensation		-		-		1,372,217			-			-			1,372,217
Exercise of stock options, RSUs and warrants		458,496		45		51,004			-			-			51,049
Taxes paid on net issuance of employee stock options		-		-		(532,600	)		-			-			(532,600	)
Currency translation adjustment		-		-					727,732			-			727,732
Net unrealized gain on short-term investments		-		-		-			867			-			867
Net loss		-		-		-			-			(2,800,008	)		(2,800,008	)
Balance, June 30, 2023		20,543,024	$	2,053	$	46,404,428		$	1,239,084		$	(4,502,559	)	$	43,143,006
Stock-based compensation		-		-		518,680			-			-			518,680
Exercise of stock options, RSUs and warrants		61,026		6		11,367			-			-			11,373
Taxes paid on net issuance of employee stock options		-		-		(29,417	)		-			-			(29,417	)
Currency translation adjustment		-		-		-			(839,903	)		-			(839,903	)
Net unrealized loss on short-term investments		-		-		-			(12,240	)		-			(12,240	)
Net loss		-		-		-			-			(3,638,608	)		(3,638,608	)
Balance, September 30, 2023		20,604,050	$	2,059	$	46,905,058		$	386,941		$	(8,141,167	)	$	39,152,891

See accompanying notes to unaudited consolidated financial statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 2022


	Common Stock							Accumulated Other						Total
	Shares		Amount		Additional Paid-in-Capital			Comprehensive Income			Accumulated Earnings / (Deficit)			Stockholders' Equity
Balance, January 1, 2022		18,772,214	$	1,877	$	41,232,441		$	153,361		$	571,037		$	41,958,716
Adjustment to beginning retained for adoption of lease account (ASC 842)		-		-		-			-			(44,533	)		(44,533	)
Adjusted beginning balance, January 1, 2022		18,772,214	$	1,877	$	41,232,441		$	153,361		$	526,504		$	41,914,183
Stock-based compensation		-		-		915,464			-			-			915,464
Exercise of stock options, RSUs and warrants		200,306		20		32,208			-			-			32,228
Taxes paid on net issuance of employee stock options		-		-		(152,162	)		-			-			(152,162	)
Conversion of senior secured convertible debt to equity		1,036,365		104		2,590,805			-			-			2,590,909
Currency translation adjustment		-		-		-			(218,750	)		-			(218,750	)
Net unrealized gains (losses) on short-term investments		-		-		-			(1,419	)		-			(1,419	)
Net income		-		-		-			-			902,056			902,056
Balance, June 30, 2022		20,008,885	$	2,001	$	44,618,756		$	(66,808	)	$	1,428,560		$	45,982,509
Stock-based compensation		-		-		542,166			-			-			542,166
Exercise of stock options, RSUs and warrants		15,201		1		9,933			-			-			9,934
Taxes paid on net issuance of employee stock options		-		-		(117,433	)		-			-			(117,433	)
Currency translation adjustment		-		-		-			(216,191	)		-			(216,191	)
Net unrealized gains on short-term investments		-		-		-			12,088			-			12,088
Net income		-		-		-			-			132,533			132,533
Balance, September 30, 2022		20,024,086	$	2,002	$	45,053,422		$	(270,911	)	$	1,561,093		$	46,345,606

See accompanying notes to unaudited consolidated financial statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Nine Months Ended September 30,
	2023			2022
Cash flows from operating activities:
Net (loss) income	$	(6,438,616	)	$	1,034,589
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Deferred benefit for income taxes		-			(151,495	)
(Gain) loss on disposal of property and equipment		(92,147	)		28,047
Provision for bad debt		30,488			5,125
Impairment of goodwill		5,630,788			-
Warranty reserves		(18,216	)		12,470
Amortization of intangibles		42,154			47,424
Depreciation		771,619			737,623
Inventory reserves		1,026,501			144,387
Amortization of debt discount		-			1,224
Stock-based compensation expense		1,890,897			1,457,630
Employee retention credit (ERC)		(1,716,727	)		-
Changes in operating assets and liabilities:
Accounts receivable		2,639,125			(6,578,327	)
Inventories		(2,614,194	)		(9,066,931	)
Prepaid expenses and other current assets		(1,018,286	)		(463,582	)
Accounts payable		(1,309,295	)		3,256,015
Accrued expenses and other liabilities		1,401,378			860,907
Net cash provided by (used in) operating activities		225,469			(8,674,894	)

Cash flows from investing activities:
Redemption of short-term investment grade securities		672,865			4,878,419
Proceeds from sale of intangible assets		-			125,000
Purchases of property and equipment, including capitalization of labor costs for test equipment and ERP		(374,464	)		(285,499	)
Net cash provided by investing activities		298,401			4,717,920

Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		62,422			42,162
Payment of payroll taxes on net issuance of employee stock options		(562,017	)		(269,595	)
Proceeds on borrowing of notes payable		-			2,692,531
Repayments on notes payable		(1,081,729	)		(225,252	)
Proceeds on employee retention credit benefit		1,716,727			-
Net cash provided by financing activities		135,403			2,239,846

Net change in cash and cash equivalents		659,273			(1,717,128	)
Effect of exchange rates on cash		(36,464	)		(203,871	)
Cash and cash equivalents, beginning of period		3,112,196			5,101,174
Cash and cash equivalents, end of period	$	3,735,005		$	3,180,175

See accompanying notes to unaudited consolidated financial statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED


	For the Nine Months Ended September 30,
	2023		2022
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	91,822	$	33,994
Cash paid during the period for income taxes	$	217,705	$	88,355

Supplemental disclosure of non-cash flow transactions:
Right of use assets recorded upon adoption of ASC 842	$	-	$	1,203,580
Lease liabilities recorded upon adoption of ASC 842	$	-	$	1,477,419
Conversion of senior secured convertible debt to common stock	$	-	$	2,590,909

See accompanying notes to unaudited consolidated financial statements.

ONE STOP SYSTEMS, INC. (OSS)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Month Periods Ended September 30, 2023 and 2022

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Nature of Operations

One Stop Systems, Inc. (“we,” “our,” “OSS,” or the “Company”) was originally incorporated as a California corporation in 1999, after initially being formed as a California limited liability company in 1998. On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with its initial public offering. The Company designs, manufactures, and markets specialized high-performance compute and storage hardware, software, and systems, which are designed to target edge artificial intelligence (“AI”) Transportable deployments. The Company markets its products to manufacturers of automated equipment used for autonomous vehicle, medical, industrial, and military applications, with special focus on platforms that move, such as trucks, planes, and mobile datacenters.

During the year ended December 31, 2015, the Company formed a wholly owned subsidiary in Germany, One Stop Systems, GmbH (“OSS GmbH”). In July 2016, the Company acquired Mission Technologies Group, Inc. (“Magma”) and its operations that complemented OSS' manufacture of custom high-performance compute servers.

On August 31, 2018, the Company acquired Concept Development Inc. (“CDI”) located in Irvine, California. CDI specialized in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment, flight safety equipment, and networking systems. CDI’s business was fully integrated into the core operations of the Company as of June 1, 2020.

On October 31, 2018, OSS GmbH acquired 100% of the outstanding equity of Bressner Technology GmbH, a limited liability company registered under the laws of Germany and located near Munich, Germany (“Bressner”). Bressner designs and manufactures standard and customized servers, panel PCs, and PCIe accelerator systems. Although, currently, Bressner primarily serves as a value-added reseller for the Company in Europe, we are also focused on growing the AI Transportable portion of our business through Bressner and leveraging its existing relationships. Bressner also provides manufacturing, test, sales, and marketing services for customers throughout Europe, the Middle East and Africa.

The Company has completed and fulfilled substantially all of its orders associated with its long-term media and entertainment customer and does not anticipate significant business from this customer in the future. This resulted from an acceleration in such customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry. This is particularly true of their virtual products, which do not require the same level of ruggedization, as this system is not typically operated in harsh environments and for which software is being developed to provide a real-time cloud solution. This customer’s transition to cloud solutions had a negative impact on the Company’s results of operations for the three and nine months ended September 30, 2023.

As previously disclosed, in 2021, the Company shifted its primary focus to the development and sale of AI Transportables. Since 2022, we have significantly increased our efforts to penetrate the military and defense sectors in particular. With the formation of a strategic advisory board in second quarter 2022, and the recent hiring of Michael Knowles and Robert Kalebaugh, each of whom has extensive experience in contracting in the defense industry, as our new president and chief executive officer and Vice President of Sales, respectively, we have further increased our emphasis and focus on the pursuit of revenue opportunities with major defense contractors and the military.

The lingering negative impacts of the COVID-19 pandemic and the impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the ongoing military conflict between Russia and Ukraine and the escalating war in Israel, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic uncertainty, which has negatively affected our operations. Additionally, the general consensus among economists continues to suggest that an elevated risk of recession will continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations.

We are continuing to experience increased pricing, longer lead-times, unavailability of certain product and limited supplies, protracted delivery dates, changes in minimum order quantities to secure product, and/or shortages of certain parts and supplies that are necessary components for the products and services we offer to our customers. As a result, the Company is continuing to carry increased inventory balances to ensure availability of necessary products and to secure pricing.

These global issues and concerns regarding general economic decline or recession are impacting our business as well as some of our customers, who are experiencing downturns or uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts. During the three and nine months ended September 30, 2023, the Company experienced delays and postponements of committed purchases and orders due to certain customers’ funding or program delays. We have also experienced cancellations of orders due to disruptions in our customers’ businesses or changes in their business plans. Such delays, postponements and cancellations negatively impacted the Company’s results of operations for the three and nine months ended September 30, 2023. If such decreases in orders, postponements or cancellations continue in the future, our operating results will be further impacted, and our revenues may decline in future periods.

These global issues and events may also have the effect of heightening many risks associated with our customers and supply chain. We may take further actions that alter our operations from time to time, or which we determine are in our best interests. In addition, we may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business.

In March 2023, Silicon Valley Bank and Signature Bank, and on May 1, 2023, First Republic Bank, were closed and taken over by the FDIC, which created significant market disruption and uncertainty for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system in the United States, and in particular with respect to regional banks. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened and such events could have a material adverse effect on our business and financial condition.

As a result of these global issues, as well as other factors discussed in this Quarterly Report, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long-term impacts of the economic and geopolitical issues, inflation, the Federal Reserve interest rate increases and the potential for a recession. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause our stock price to decline.

Management’s plans with respect to the above are to continue their efforts towards responding to the changing economic landscape, to continue to control costs, conserve cash, strengthen margins through the introduction of new product lines focusing on AI compute capabilities for military and industrial applications, autonomous truck diving and improve company-wide execution.

Basis of Presentation

The accompanying consolidated financial statements have been prepared on an accrual basis of accounting in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”), as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).

The unaudited consolidated financial statements herein have been prepared by the Company pursuant to the rules and regulations of the SEC. The accompanying interim unaudited consolidated financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the latest year ended December 31, 2022. Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, 2022 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying consolidated financial statements. Operating results for the three and nine month periods ended September 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2023.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of OSS, which include the operating results of its wholly owned subsidiary, OSS GmbH, and its wholly owned subsidiary Bressner. Intercompany balances and transactions have been eliminated in consolidation.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

There have been no changes to our accounting policies disclosed in our audited consolidated financial statements and the related notes for the year ended December 31, 2022, except for the adoption of ASU 2016-13, ("Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” as follows:

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, which sets out the principles for the recognition of measurement of credit losses on financial instruments. This standard provides guidance on the impairment of financial instruments that is based on expected losses rather than probable or incurred losses. Under this new guidance, the Company will recognize, as an allowance, our estimate of expected credit losses based upon historical and current information, and reasonable and supportable forecasts of future events and circumstances, as well as estimates of prepayments. Under this model, we are required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset.

Accounts receivable have been reduced by an allowance for doubtful accounts. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable after considering current market conditions and supportable forecasts when appropriate. This estimate is a result of management's evaluation of collectability, customer creditworthiness, historical levels of credit losses, and future expectations.

The Company shall recognize an allowance for credit losses rather than a reduction to the carrying value of the asset for debt securities. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee.

Upon adoption of this standard on January 1, 2023, there was no immediate material impact to the Company's consolidated financial position, results of operations or cash flows. On an ongoing basis, the Company will contemplate forward-looking economic conditions in recording lifetime expected credit losses for the Company’s financial assets measured at cost, such as the Company’s trade receivables and certain short-term investments.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions.

On an ongoing basis, our management evaluates these estimates and assumptions, including those related to determination of standalone selling prices of our products and services, allowance for doubtful account and sales reserves, income tax valuations, stock-based compensation, goodwill, intangible assets and inventory valuations and recoverability. We base our estimates on historical data and experience, as well as various other factors that our management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities.

Goodwill

Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event has occurred. The Company reviews the impairment of goodwill for impairment annually at year-end. The Company completed its annual assessment for goodwill impairment and determined that goodwill was not impaired as of December 31, 2022, and no adjustment was required.

In June and September of 2023, the Company performed an interim impairment test of goodwill, as a result of the overall financial performance of OSS as compared to plan, the transition of and focus on our product strategy of AI Transportables and the defense industry, along with the deferment of certain orders. As a result of these interim evaluations, the Company recorded an adjustment of $2,700,000 in June 2023, and an additional impairment loss to goodwill of $2,930,788, which was charged to operating expenses in the current period. Total goodwill impairment loss for the nine month period ended September 30, 2023, was $5,630,788.

Due to the lingering effects of the COVID-19 pandemic, Ukraine war, the escalating war in Israel, inflationary pressures, other macroeconomic factors, the loss of our media and entertainment customer (which has historically been one of our largest customers), there has been uncertainty and disruption in the global economy, financial markets and our ongoing operations. We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions or a revision of the carrying value of our assets or liabilities as of the date of this Quarterly Report. These estimates and assumptions may change as new events occur and additional information is obtained. As a result, actual results could differ materially from these estimates and assumptions.

Recent Accounting Pronouncements

Management has evaluated recent accounting pronouncements through the date of these consolidated financial statements and believes that the are no recent accounting pronouncements that will have a material impact on the Company's financial statements.

Employee Retention Credit

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit (“ERC”) The ERC was designed to encourage businesses to keep employees on the payroll during the COVID-19 pandemic. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, we accounted for the ERC funding consistent with our accounting treatment and reporting of the forgiveness of our Paycheck Protection Program ("PPP") Loan.

The credit is based upon the number of employees in specific quarters in years 2020 and 2021. For the year 2020, the maximum credit is based upon the lesser of 50% of eligible wages or $5,000 for the year. For the first three quarters only of the year 2021, the maximum quarterly credit is based upon the lesser of 70% of eligible wages or $7,000 per quarter. The total maximum program credit per employee is $26,000.

The Company applied for the ERC program and as of September 30, 2023, has received a total of $2,004,382 in credits, including interest, and paid commissions of $287,656 to a vendor who assisted with the calculations and filing of the application. The net proceeds of $1,716,727 have been reported as other income in the accompanying consolidated statements of operations. Income is recognized when reasonably assured of receipt based upon notice.

NOTE 3 - SHORT-TERM INVESTMENTS

The Company’s short-term investments by significant investment category as of September 30, 2023, were as follows:


Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	2,282,709	$	10,269	$	-		$	-	$	2,292,978
Certificates of deposit		7,070,000		-		(6,687	)		83,005		7,146,318
	$	9,352,709	$	10,269	$	(6,687	)	$	83,005	$	9,439,296

(1)

Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.

The Company’s short-term investments by significant investment category as of December 31, 2022, were as follows:


Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	5,139,940	$	22,646	$	-		$	3,506	$	5,166,092
Certificates of deposit		4,950,527		-		(7,691	)		14,607		4,957,443
	$	10,090,467	$	22,646	$	(7,691	)	$	18,113	$	10,123,535

(1)

Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.

Cash alternatives represents cash balances in savings accounts and U.S. Treasury Bills that are temporarily on-hand that are immediately available for investments in accordance with the Company’s investment policy.

The Company typically invests in highly rated securities and its investment policy limits the amount of credit exposure to any one issuer. The policy requires investments in fixed income instruments denominated and payable in U.S. dollars only and requires investments to be investment grade, with a primary objective of minimizing the potential risk of principal loss.

NOTE 4 -ACCOUNTS RECEIVABLE

Accounts receivable, net consisted of the following:


	September 30,			December 31,
	2023			2022
Accounts receivable	$	9,053,791		$	11,372,598
Less: allowance for doubtful accounts		(75,337	)		(45,354	)
	$	8,978,454		$	11,327,244

Provision (recovery) for bad debt expense related to accounts receivable was $(8,165) and $9,918 for the three month periods ended September 30, 2023 and 2022, respectively, and $30,488 and $5,125 for the nine month periods ended September 30, 2023 and 2022, respectively.

NOTE 5 – INVENTORIES

Inventories, net consisted of the following:


	September 30,			December 31,
	2023			2022
Raw materials	$	12,304,989		$	9,370,162
Sub-assemblies		497,760			892,123
Work-in-process		731,541			1,343,239
Finished goods		10,699,037			10,357,452
		24,233,327			21,962,976
Less: allowances for obsolete and slow-moving inventories		(2,008,117	)		(1,187,610	)
	$	22,225,210		$	20,775,366

NOTE 6 – LONG LIVED INTANGIBLE ASSETS

Definite lived intangible assets related to acquisition were as follows, as of September 30, 2023:


	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	0 months	$	2,084,515	$	(2,084,515	)	$	-
Drawings and technology	36 months	0 months		760,207		(760,207	)		-
Trade name, trademarks & other	24 to 36 months	0 months		447,274		(447,274	)		-
Non-compete	36 months	0 months		246,797		(246,797	)		-
			$	3,538,793	$	(3,538,793	)	$	-

Definite lived intangibles assets related to acquisitions were as follows, as of December 31, 2022:


	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	8 months	$	2,084,515	$	(2,042,361	)	$	42,154
Drawings and technology	36 months	0 months		760,207		(760,207	)		-
Trade name, trademarks & other	24 to 36 months	0 months		447,274		(447,274	)		-
Non-compete	36 months	0 months		246,797		(246,797	)		-
			$	3,538,793	$	(3,496,639	)	$	42,154

Amortization expense recognized during the three month periods ended September 30, 2023 and 2022, was $10,538 and $15,808, respectively, and $42,154 and $47,424 for the nine month periods ended September 30, 2023 and 2022, respectively.

NOTE 7 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consisted of the following:


	September 30,		December 31,
	2023		2022
Accrued compensation and related liabilities	$	1,417,467	$	989,478
Deferred revenue		257,193		378,952
Customer deposits		58,076		61,696
Warranty reserve		560,880		584,268
Trade and other taxes		1,281,870		225,743
Other accrued expenses		1,203,062		773,732
	$	4,778,548	$	3,013,869

NOTE 8 – DEBT

Bank Lines of Credit

In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 with Torrey Pines Bank which was renewed in April 2023, and renews on an annual basis at the current prime rate. To access this line of credit, the Company must maintain cash and investments balances at a minimum of $4,000,000. No balance was outstanding on September 30, 2023 and December 31, 2022, respectively.

Bressner has three revolving lines of credit with German institutions, including Uni Credit Bank AG, Commerzbank AG, and VR Bank, with total availability of up to €2,700,000 (US$2,858,393) as of September 30, 2023. Borrowings under the lines of credit bear interest at a variable rate of Euribor plus a stated rate. The rates as of September 30, 2023, for the lines of credit ranged from 3.1% to 5.622%, with the balances remaining open indefinitely or until occurrence of a defined change of control event. There were no outstanding lines of credit balances as of September 30, 2023 and December 31, 2022, respectively.

Foreign Debt Obligations

Bressner had four term loans outstanding as of September 30, 2023, with an aggregate balance outstanding of €2,134,470 (US$2,259,687) as follows:

•

On February 1, 2022, Bressner converted €500,000 of its line of credit from VR Bank into a note payable. On August 1, 2022, this note was extended through February 1, 2023, with accrued interest having been paid current as of the original maturity date. On February 1, 2023, this note was further extended through July 31, 2023, and the interest rate was increased to 4.76%, with accrued interest having been paid current as of February 1, 2023. The balance has been paid in full and there is no outstanding balance as of September 30, 2023. As of December 31, 2022, the balance was €500,000 (US$536,616);

•

On February 16, 2022, Bressner converted €500,000 of its line of credit from UniCredit Bank into a note payable. On August 16, 2022, this note was extended through February 16, 2023, with accrued interest having been paid current as of the original maturity date. On February 16, 2023, this note was further extended through August 16, 2023, and on August 16, 2023, this note was further extended through February 16, 2024, and the interest rate was increased to 5.63%, with accrued interest having been paid current as of August 16, 2023. The outstanding balance as of September 30, 2023 and December 31, 2022, was €500,000 (US$529,332) and €500,000 (US$536,616), respectively;

•

On June 18, 2021, Bressner converted €500,000 of its line of credit from UniCredit Bank into a note payable. The note was originally due December 17, 2021, and subsequently extended through June 17, 2022. On June 17, 2022, this note was further extended through December 19, 2022, with accrued interest having been paid current as of the revised maturity date. On December 19, 2022, this note was extended through June 19, 2023. However, on June 19, 2023, this note was further extended through December 19, 2023, and the interest rate was increased to 5.80%, with accrued interest having been paid current as of June 19, 2023. The balance outstanding on the new note as of September 30, 2023 and December 31, 2022, was €500,000 (US$529,332) and €500,000 (US$536,616) respectively;

•

On April 9, 2021, Bressner converted €500,000 of its line of credit from Commerzbank AG into a note payable. The note was due on September 30, 2021, with a payment of principal and interest due upon maturity. This loan was paid in full on September 30, 2021, with proceeds from a new note with similar terms. This new note had an original maturity date of June 30, 2022; however, on September 30, 2022, this note was further extended through March 31, 2023, with accrued interest having been paid current as of the revised maturity date. On March 30, 2023, this note was further extended through September 29, 2023, and the interest rate was increased to 4.60%, with accrued interest having been paid current as of March 30, 2023. On September 29, 2023, this note was further extended through March 28, 2024, and the interest rate was increased to 5.75%, with accrued interest having been paid current as of September 19, 2023. The balance outstanding on the new note as of September 30, 2023 and December 31, 2022, was €500,000 (US$529,332), and €500,000 (US$536,616), respectively; and

•

On June 30, 2022, Bressner borrowed €1,500,000 (US$1,468,173) from Commerzbank AG, which bears interest at 2.55%, is due in June 2024, and is repayable in twenty-four monthly installments, with payments beginning July 31, 2022. The balance outstanding as of September 30, 2023 and December 31, 2022, was €634,470 (US$671,691) and €1,132,356 (US$1,215,279), respectively. This loan is collateralized by accounts receivable attributable to a specific customer.

Senior Secured Convertible Note

On April 20, 2020, the Company entered into a Securities Purchase Agreement with an institutional investor, providing for the issuance by the Company of Senior Secured Convertible Promissory Notes with a principal face value of up to $6,000,000. The notes were, subject to certain conditions, convertible into shares of the Company’s common stock, par value $0.0001 per share, at an initial conversion price per share of $2.50. Notes issued under the Securities Purchase Agreement had a 10% original issue discount.

At the initial closing of the offering, the Company issued notes in the principal amount of $3,000,000 with a 10% original issue discount, resulting in an aggregate purchase price of $2,700,000 at the initial closing. The notes bore no interest rate (except upon event of default) and, unless earlier converted or redeemed, were scheduled to mature on April 1, 2022.

Commencing July 1, 2020, the Company made monthly amortization payments equal to 1/22nd of the initial principal, any accrued and unpaid interest, and late charges and any deferred or accelerated amount, of such note, which could be satisfied in cash at a redemption price equal to 105% of such installment amount (110% of such installment amount on notes issued at additional closings). The remaining balance of the notes of $2,590,909 was converted into Company common stock on March 30, 2022; accordingly, the outstanding balance of the notes as of September 30, 2023 and 2022, was $0, respectively.

The original issue discount of 10% on the note was recorded as a debt discount, decreasing the note payable. This debt discount is amortized to interest expense using the effective interest rate method over the term of the loan. For the three month periods ended September 30, 2023 and 2022, total debt discount amortization was $0, respectively, and for the nine month periods ended September 30, 2023 and 2022, total debt discount amortization was $0 and $1,161, respectively. Such amounts are included in interest expense in the accompanying consolidated statements of operations.

Debt issuance costs in the amount of $316,274 related to this indebtedness were deducted from the face value of the note. Such costs are amortized to interest expense using the effective interest rate method over the term of the loan. Total debt issuance costs amortized during the three month periods ended September 30, 2023 and 2022, was $0, respectively, and for the nine month periods ended September 30, 2023 and 2022 was $0 and $1,223,

respectively. Such amounts are included in interest expense in the accompanying consolidated statements of operations.

A summary of outstanding debt obligations as of September 30, 2023, were as follows:


Loan Description	Current Interest Rate	Maturity Date	Balance (Euro)		Balance ($)		Current Portion		Long-term Portion
Foreign:
Commerzbank AG	2.550%	June-24	€	634,470	$	671,691	$	671,691	$	-
Commerzbank AG	5.750%	March-24		500,000		529,332		529,332		-
Uni Credit Bank AG	5.630%	February-24		500,000		529,332		529,332		-
Uni Credit Bank AG	5.800%	December-23		500,000		529,332		529,332		-
			€	2,134,470	$	2,259,687	$	2,259,687	$	-

NOTE 9 – STOCKHOLDERS’ EQUITY

The Company’s amended and restated certificate of incorporation, filed on December 14, 2017, authorizes the Company to issue 10,000,000 shares of preferred stock and 50,000,000 shares of common stock.

2017 Equity Incentive Plan Amendments

On October 10, 2017, the Company’s board of directors approved and adopted the Company's 2017 Equity Incentive Plan (as amended to date, the “2017 Plan”), subject to stockholder approval thereof. On December 18, 2017, the Company’s stockholders approved the 2017 Plan. The 2017 Plan allows for the grant of a variety of equity vehicles to provide flexibility in the grant and issuance of equity awards, including stock options, unrestricted stock grants, restricted stock units, stock bonuses and performance-based awards. An aggregate of 1,500,000 shares of common stock were initially reserved for issuance under the Plan.

On June 24, 2020, the Company amended the 2017 Plan to increase the maximum limitation of the number of shares of common stock with respect to one or more Stock Awards (as defined in the 2017 Plan) that may be granted to any one participant under the 2017 Plan during any calendar year from 500,000 shares to 1,000,000 shares. The amendment did not increase the total number of shares of common stock reserved under the 2017 Plan and did not require stockholder approval.

On May 19, 2021, the Company’s stockholders approved the Company’s proposal to increase the number of shares authorized for issuance under the 2017 Plan from 1,500,000 shares to 3,000,000 shares of common stock of the Company pursuant to the terms and conditions of the 2017 Plan. The amendment took effect upon receipt of stockholder approval.

Executive Employment Agreements

As contemplated by the A&R Raun Agreement, in connection with the termination of Mr. Raun’s role as chief executive officer and president of the Company, all of those unvested restricted stock units ("RSUs") held by Mr. Raun that were scheduled to vest within twelve months from his termination date (June 5, 2023) became vested as of such date, with the remaining unvested RSUs being forfeited. As a result, the vesting of 150,556 RSUs was accelerated and 52,132 RSUs were forfeited.

On June 5, 2023, in connection with, and as a material inducement to, the appointment of Mr. Knowles as the Company’s new chief executive officer and president, Mr. Knowles was granted (i) non-qualified stock options to purchase 400,000 shares of Company common stock (the “Inducement Options”), which Inducement Options have an exercise price equal to $2.95 per share and will expire ten years from the date of the grant; and (ii) 400,000 restricted stock units (together with the Inducement Options, the “Inducement Grants”).

Both of the Inducement Grants shall vest over a four-year period as follows: 25% on the one-year anniversary of the date of the grant, and the remaining 75% will vest in six equal installments, commencing six months after the one-year anniversary of the date of grant and every six months thereafter until fully vested, subject to Mr. Knowles’ continued employment by the Company.

On July 17, 2023, the Company appointed Robert Kalebaugh as Vice President of Sales and granted him 35,715 RSUs as an inducement grant, which RSUs vest over a period of three years as follows: 33% on the one-year anniversary of the date of grant, and the remaining 67% will vest in four equal installments, commencing six months after the one-year anniversary of the date of grant and every six months thereafter until fully vested, subject to Mr. Kalebaugh's continued employment by the Company.

The inducement grants were each granted outside of the Company’s 2017 Plan and any other equity incentive plans, and in reliance on the employment inducement exemption provided under the Nasdaq Listing Rule 5635(c)(4).

Stock Options

A summary of stock option activity during the nine month period ended September 30, 2023, was as follows:


	Stock Options Outstanding
	Number of Underlying Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding on January 1, 2023		970,680		$	2.07		5.61	$	147,475
Granted		400,000		$	2.95		-		-
Forfeited / Canceled		(1,250	)	$	2.10		-		-
Exercised		(38,670	)	$	0.63		-	$	48,361
Outstanding on September 30, 2023		1,330,760		$	2.37		4.29	$	99,115
Exercisable as of September 30, 2023		930,760		$	2.13		1.97	$	99,115
Vested and expected to vest as of September 30, 2023		930,760		$	2.13		1.97	$	99,115

The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stock options granted by the Company. There were no options granted either under the Company's 2017 Plan or outside of the 2017 Plan during the nine month period ended September 30, 2022. The following table presents the grant date fair value of options vested and the intrinsic value of options exercised.


	For the Nine Months Ended September 30,
	2023			2022
Expected term (in years)		6.16			-
Expected volatility		72.73	%		0.00	%
Risk-free interest rate		3.79	%		0.00	%
Weighted average grant date fair value per share	$	2.95		$	-
Grant date fair value of options vested	$	927,447		$	2,006,480
Intrinsic value of options exercised	$	48,361		$	130,059

As of September 30, 2023, the amount of unearned stock-based compensation estimated to be expensed from 2023 through 2027 related to unvested stock options was $732,384, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 2.11years.

If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase, or cancel any remaining unearned stock-based compensation expense or calculate

and record additional expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional common stock options or other stock-based awards.

Restricted Stock Units

RSUs may be granted at the discretion of the compensation committee of the Company's board of directors under, or outside of, the Company’s 2017 Plan in connection with the hiring and retention of personnel and are subject to certain conditions. RSUs vest quarterly or semi-annually over a period of one to four years and are typically forfeited if employment is terminated before the RSUs vest. The compensation expense related to the RSUs is calculated as the fair value of the common stock on the grant date and is amortized to expense over the vesting period and is adjusted for estimated forfeitures.

The Company’s RSU activity for the nine months ended September 30, 2023, was as follows:


	Restricted Stock Units
	Number of Underlying Shares			Weighted Average Grant Date Fair Value
Unvested on January 1, 2023		907,507		$	4.04
Granted		925,243		$	2.80
Vested		(573,016	)	$	3.80
Canceled		(99,733	)	$	4.31
Unvested on September 30, 2023		1,160,001		$	3.14

As of September 30, 2023, there was $3,752,214 of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.64 years.

Stock-based compensation expense for the three and nine month periods ended September 30, 2023 and 2022, was comprised of the following:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Stock-based compensation classified as:	2023		2022		2023		2022
General and administrative	$	268,245	$	309,631	$	1,213,531	$	812,072
Production		82,851		70,967		236,820		197,382
Marketing and selling		92,980		104,543		239,484		291,087
Research and development		74,604		57,025		201,062		157,089
	$	518,680	$	542,166	$	1,890,897	$	1,457,630

Warrants

The following table summarizes the Company’s warrant activity during the nine months ended September 30, 2023:


	Number of Warrants			Weighted Average Exercise Price
Warrants outstanding – January 1, 2023		451,112		$	5.37
Warrants granted		-		$	-
Warrants expired		(380,000	)	$	6.00
Warrants exercised		(28,090	)	$	1.78
Warrants outstanding – September 30, 2023		43,022		$	2.15

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Legal

We are subject to litigation, claims, investigations, and audits arising from time to time in the ordinary course of our business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of any such matters as of September 30, 2023 and December 31, 2022, are not expect to have a materially adverse effect on the consolidated financial position or results of operations of the Company.

Guarantees and Indemnities

The Company has made certain indemnities, under which it may be required to make payments to an indemnified party, in relation to certain transactions. The Company indemnifies its directors, officers, employees, and agents to the maximum extent permitted under the laws of the State of Delaware. In connection with its facility lease, the Company has indemnified its lessor for certain claims arising from the use of the facilities. The duration of the indemnities varies, and in many cases is indefinite. These indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities in the accompanying consolidated balance sheets.

Leases

The Company leases its offices, manufacturing, and warehouse facility in San Diego County under a non-cancelable operating lease. Our corporate headquarters are in a leased space comprising of approximately 29,342 square feet in Escondido. On September 1, 2023, the Company entered into an agreement to extend the term of the lease from August 2024 to August 30, 2030.

The Company also leases a 3,208 square foot facility in Salt Lake City, Utah that houses our Ion software development team that was scheduled to expire in June 2023 pursuant to its terms and was extended through June 2025. The Company is the lessee of 1,632 square feet located in Anaheim, California, which was scheduled to expire in June 2023 pursuant to its terms and was extended through June 2025. Bressner leases space comprised of 11,836 square feet on a month-to-month basis.

Other information related to leases as of the three and nine month periods ended September 30, 2023 and 2022, was as follows:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Operating lease expense	$	184,310	$	158,696	$	518,417	$	485,391
Total lease expense	$	184,310	$	158,696	$	518,417	$	485,391

Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows from operating leases	$	163,512	$	158,696	$	406,697	$	485,391

Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,513,950		-	$	1,513,950		-
Operating lease obligation for new operating leases	$	1,370,247		-	$	1,370,247		-

Weighted-average remaining lease term - operating leases					75.2 months		23.0 months
Weighted-average discount rate - operating leases					12.0%		12.8%

The following table presents a maturity of the Company’s operating lease liabilities as of September 30, 2023:


Year	Operating Leases
Remaining payments in 2023	$	69,035
2024		579,984
2025		439,032
2026		390,616
Thereafter		1,559,221
Total lease payments	$	3,037,888
Less: Amount representing interest		(942,826	)
Present value of lease payment		2,095,062
Less: current portion of operating lease obligation		(365,629	)
Operating lease obligation, net of current portion	$	1,729,433

Purchase Commitments

In the normal course of business, the Company may enter into purchase commitments for inventory components to be delivered based upon non-cancellable, pre-established, delivery schedules that are over a period that may exceed one year. Total non-cancellable purchase orders as of September 30, 2023, were $6,904,605.

Customer Concentration

During the three month period ended September 30, 2023, the Company had no customers that represented more than 10% of revenue, and during the three month period ended September 30, 2022, the Company had one customer that accounted for approximately 23% of revenue.

During the nine month period ended September 30, 2023, the Company had two customers that accounted for (in the aggregate) approximately 25% of revenue, and during the nine month period ended September 30, 2022, the Company had two customers that accounted for approximately 28% of revenue, for which each of such customers represented greater than 10% of our consolidated quarterly revenue.

As of September 30, 2023 and December 31, 2022, the Company had one customers that accounted for (in the aggregate) approximately 12% and two customers that comprised 47% of trade accounts receivables, respectively, for which each of such customer’s balances represented greater than 10% of our consolidated trade accounts receivable balance.

During the three month periods ended September 30, 2023 and 2022, the Company had two vendors that approximated 36% and 23% of purchases, respectively, from vendors for which each of such vendors represents greater than 10% of our consolidated purchases.

During the nine month periods ended September 30, 2023 and 2022, the Company had two vendors that approximated 36% and one vendor that comprised 11% of purchases, respectively, from vendors/suppliers for which each represents greater than 10% of our consolidated purchases.

NOTE 11 – NET (LOSS) INCOME PER SHARE

Basic and diluted net (loss) income per share were calculated as follows for the three and nine periods ended September 30, 2023 and 2022:


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2023			2022		2023			2022
Basic and diluted net (loss) income per share:
Numerator:
Net (loss) income	$	(3,638,608	)	$	132,533	$	(6,438,616	)	$	1,034,589
Denominator:
Weighted average common shares outstanding - basic		20,569,111			20,019,625		20,407,284			19,619,971
Effect of dilutive securities		-			1,119,332		-			962,145
Weighted average common shares outstanding - diluted		20,569,111			21,138,957		20,407,284			20,582,116
Net (loss) income per share:
Basic	$	(0.18	)	$	0.01	$	(0.32	)	$	0.05
Diluted	$	(0.18	)	$	0.01	$	(0.32	)	$	0.05

NOTE 12 – REVENUE, SEGMENT AND GEOGRAPHIC INFORMATION

Segment details for the three and nine month periods ended September 30, 2023 and 2022, were as follows:


	For the Three Months Ended September 30, 2023									For the Three Months Ended September 30, 2022
	OSS			Bressner			Total			OSS			Bressner			Total
Revenues	$	5,500,159		$	8,248,004		$	13,748,163		$	10,669,245		$	8,146,599		$	18,815,844
Cost of revenues		(3,716,476	)		(6,380,336	)		(10,096,812	)		(7,397,458	)		(6,340,518	)		(13,737,976	)
Gross profit		1,783,683			1,867,668			3,651,351			3,271,787			1,806,081			5,077,868
Gross margin %	32.4%			22.6%			26.6%			30.7%			22.2%			27.0%
Total operating expenses		(6,601,090	)		(1,032,375	)		(7,633,465	)		(4,044,866	)		(869,626	)		(4,914,492	)
(Loss) income from operations	$	(4,817,407	)	$	835,293		$	(3,982,114	)	$	(773,079	)	$	936,455		$	163,376

	For the Nine Months Ended September 30, 2023									For the Nine Months Ended September 30, 2022
	OSS			Bressner			Total			OSS			Bressner			Total
Revenues	$	22,408,841		$	25,332,748		$	47,741,589		$	31,966,648		$	22,205,216		$	54,171,864
Cost of revenues		(15,082,160	)		(19,139,378	)		(34,221,538	)		(21,379,512	)		(17,373,511	)		(38,753,023	)
Gross profit		7,326,681			6,193,370			13,520,051			10,587,136			4,831,705			15,418,841
Gross profit %	32.7%			24.4%			28.3%			33.1%			21.8%			28.5%
Total operating expenses		(18,078,167	)		(3,033,903	)		(21,112,070	)		(11,549,509	)		(2,653,901	)		(14,203,410	)
(Loss) income from operations	$	(10,751,486	)	$	3,159,467		$	(7,592,019	)	$	(962,373	)	$	2,177,804		$	1,215,431

Revenue from customers with non-U.S. billing addresses represented approximately 65% and 69% of the Company’s revenue during the three month periods ended September 30, 2023 and 2022, respectively, and 67% and 72% of the Company’s revenue during the nine month periods ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, substantially all the Company’s long-lived assets are located in the United States of America, with the exception of assets of $246,788 located in Germany.

NOTE 13 – SUBSEQUENT EVENTS

The Company’s management has evaluated subsequent events after the consolidated balance sheet dated as of September 30, 2023, through the date of filing of this Quarterly Report. Based upon the evaluation, management has determined that, other than as disclosed in the accompanying notes, no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto.

On November 6, 2023, the Company’s board of directors adopted a resolution to temporarily increase the size of the board from seven members to eight members, effective November 10, 2023, and to subsequently decrease the size of the board back down to seven members, effective as of the Company’s 2024 annual meeting of stockholders (the “2024 Annual Meeting”).

Additionally, on November 6, 2023, the Company’s board of directors appointed Joseph Manko as a director of the Company, effective November 10, 2023, to fill the newly created directorship.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and operating results together with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report"). This discussion and analysis contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Quarterly Report. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 23, 2023. Readers are cautioned not to place undue reliance on these forward-looking statements.

Overview

One Stop Systems, Inc. (“OSS”) designs, manufactures, and markets specialized high-performance compute and storage hardware, software, and systems, which are designed to target edge artificial intelligence ("AI") Transportable deployments. These specialized modules and systems consist of computers and storage products that incorporate the latest state-of-the art components with our embedded proprietary software. Such modules and systems allow our customers to offer high-end computing capabilities (often integrated within their equipment) to their target markets and applications. Edge computing is a form of computing that is done on site, near a particular data source or the user (rather than in the cloud), minimizing the need for data to be processed in a remote data center. The global increase in load on the cloud infrastructure and increase in AI applications are the primary factors driving the growth of the edge computing market. We market our products to manufacturers of automated equipment used for medical, industrial, and military applications. Our customer applications often require connection to a wide array of data sources and sensors, ultra-fast processing power, and the ability to quickly access and store large and ever-growing data sets at their physical location (rather than in the cloud). This equipment requires datacenter class performance optimized for deployment at the edge in challenging environments. Many of these edge applications have unique requirements, including special and compact form factors ruggedized for harsh conditions, which cannot be accommodated by traditional controlled air-conditioned data centers. We believe that we are uniquely positioned as a specialized provider to address the needs of this market, providing custom servers, data acquisition platforms, compute accelerators, solid-state storage arrays, system I/O expansion systems, as well as edge optimized industrial and panel PCs, tablets, and handheld compute devices. Our systems also offer industry leading capabilities that occupy less physical space and require less power consumption. We deliver this high-end technology to our customers through the sale of equipment and embedded software.

One Stop Systems, Inc. was originally incorporated as a California corporation in 1999, after initially being formed as a California limited liability company in 1998. On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with its initial public offering.

During the year ended December 31, 2015, the Company formed a wholly owned subsidiary in Germany, OSS GmbH. Then, in July 2016, the Company acquired Magma and its operations that complemented OSS' manufacture of custom high-performance compute servers.

On August 31, 2018, the Company acquired Concept Development, Inc. ("CDI"), which was located in Irvine, California. CDI specialized in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment, flight safety equipment, and networking systems. CDI’s business was fully integrated into the core operations of OSS as of June 1, 2020.

On October 31, 2018, OSS GmbH acquired 100% of the outstanding equity of Bressner Technology GmbH, a Germany limited liability company located near Munich, Germany ("Bressner"). Bressner designs and manufactures standard and customized servers, panel PCs, and PCIe expansion systems. Bressner also provides manufacturing, test, sales, and marketing services for customers throughout Europe, the Middle East and Africa.

Recent Developments

In the second quarter of 2022, we formed a new strategic advisory board to aid in the acceleration of our pursuit of the AI Transportables market, and the military sector in particular. The advisory board is comprised of retired high-ranking military officials and corporate executives with decades of experience in technology, high performance computing and M&A for the defense, oil & gas, AI and autonomous vehicle industry verticals. Members of the advisory board provide input on product and market strategy, as well as help us navigate government bureaucracy and identify/introduce us to key decision makers, all with the goal of accelerating our success through their contacts, knowledge and experience.

Furthermore, in the first quarter of 2023, we implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate, our strategy to focus on the AI Transportables industry and our military business. In furtherance of this strategy and our goals, we have taken various steps to strengthen our management team with individuals who have deep experience and high-level contacts in the defense sector. In connection with this transition, on June 5, 2023, Michael Knowles was appointed as the Company’s president and chief executive officer and David Raun stepped down from such roles. Additionally, we initiated a search for a vice president of sales with significant military experience, which position we filled effective as of July 17, 2023.

Effective September 30, 2023, Jack Harrison and Sita Lowman tendered their resignations from our board of directors and the relevant committees thereof, and Michael Knowles, our chief executive officer and president, and retired Vice Admiral Michael Dumont, a former member of our advisory board, were appointed as directors of the Company, to fill the two vacant board seats created by the resignations. These changes were part of the first phase of our previously announced plans to reprofile our board of directors to further align with our focus on AI Transportables and our military business. Consistent with previous disclosures, we intend to make additional changes to the composition of our board over the coming year.

Consistent with previous disclosures, we have taken further action to reprofile our board of directors. On November 6, 2023, our board of directors unanimously adopted a resolution to temporarily increase the size of the board from seven members to eight members, effective November 10, 2023, and to subsequently decrease the size of the board back down to seven members, effective as of the Company’s 2024 annual meeting of stockholders (the “2024 Annual Meeting”). The board also appointed Joseph Manko as a director of the Company, effective November 10, 2023, to fill the vacancy created by the board expansion. Mr. Manko serves as a managing member and senior principal at Horton Capital Management, LLC, a significant shareholder of the Company, and has significant public company board and governance experience.

Our board of directors intends to further temporarily increase the size of the board to no more than nine members and to appoint one additional director with relevant defense market experience during the fourth quarter of 2023. Notwithstanding these temporary increases in the size of the board, the size of the board will be decreased back down to seven members in connection with our 2024 Annual Meeting. The seven person slate to be presented to our shareholders for election at the 2024 Annual Meeting will be determined by the full board prior to filing our proxy statement for the 2024 Annual Meeting with the SEC.

On April 3, 2023, in connection with the anticipated management transition, the Company and Mr. Raun entered into an Amended and Restated Employment Agreement (the “A&R Raun Agreement”), which superseded that certain Employment Agreement between the Company and Mr. Raun, dated June 24, 2020, as amended by that Amendment to Employment Agreement, dated July 15, 2020 (collectively, the “Prior Agreement”). The term of the A&R Raun Agreement commenced on April 3, 2023, and the A&R Raun Agreement automatically terminated pursuant to its terms on June 5, 2023, which is the date on which Mr. Knowles was appointed as chief executive officer and president of the Company.

The terms and conditions of the A&R Raun Agreement were substantially similar to those included in the Prior Agreement, with the exception of the following material changes: (i) in addition to his base salary, which remained unchanged, Mr. Raun was entitled to receive a retention bonus that was equivalent to 50% of his base salary, which was prorated on a daily basis through his termination date; (ii) Mr. Raun was eligible to receive, at the sole discretion of the Company’s board of directors, a performance-based grant of 201,000 RSUs pursuant to the

Company’s 2017 Equity Incentive Plan, as amended (the “2017 Plan”), which RSUs ultimately were not granted to Mr. Raun; (iii) in addition to those severance payments payable to Mr. Raun in the event that his employment is terminated for a reason other than “good cause,” as set forth in Section 12(b) of the Prior Agreement and A&R Raun Agreement, all other RSUs held by Mr. Raun that were scheduled to vest within twelve months from his termination date were to be accelerated to vest as of the date of termination, provided, that with respect to that tranche of unvested RSUs held by Mr. Raun that was scheduled to vest on August 3, 2024, the Company further agreed to prorate and accelerate the vesting of that portion of such tranche that would have otherwise vested within twelve months of the termination date if vesting of the RSUs in such tranche were to vest on a daily basis (as opposed to a nine month basis) (collectively, the “Severance Benefits”); (iv) Mr. Raun was also entitled to receive the Severance Benefits in the event that the A&R Raun Agreement expired pursuant to its terms, subject to execution of a release and waiver by Mr. Raun; and (v) the Board agreed to nominate Mr. Raun for election to the Company’s board of directors at the Company’s 2023 Annual Meeting of Stockholders.

As discussed above, the A&R Raun Agreement automatically terminated pursuant to its terms on June 5, 2023. In connection therewith, Mr. Raun received the Severance Benefits, which included, amongst other compensation, the accelerated vesting of 150,556 RSUs that were scheduled to vest within twelve months from June 5, 2023, and the forfeiture of 52,132 unvested RSUs.

On May 16, 2023, the Company entered into an employment agreement with Mr. Knowles, effective June 5, 2023, to begin serving as chief executive officer and president of the Company. The initial term of the agreement is three years from the effective date, after which it will automatically renew on an annual basis, subject to earlier termination in accordance with the terms of the agreement. Mr. Knowles will be entitled to receive an annual base salary of $460,000 per annum (subject to annual review and adjustment); an annual bonus (paid out annually if targets are met), with a target amount equivalent to seventy-five percent of his then-current annual base salary if certain applicable bonus criteria are met, subject to approval by the Company’s board of directors; a prorated bonus in 2023; and eligibility to participate in a number of Company-sponsored benefits.

In addition to the foregoing compensation, as an inducement material to his entering into his employment with the Company, as of June 5, 2023, Mr. Knowles was granted (i) non-qualified stock options to purchase 400,000 shares of Company common stock, which options have an exercise price of $2.95 and will expire ten years from the date of the grant; and (ii) 400,000 RSUs. Both of such equity grants were granted outside of the Company’s 2017 Plan, and in reliance on the employment inducement exemption provided under the Nasdaq Listing Rule 5635(c)(4).

Both the options and the RSUs shall vest over a four-year period as follows: 25% on the one-year anniversary of the date of the grant, and the remaining 75% will vest in nine equal installments, commencing nine months after the one-year anniversary of the date of grant and every nine months thereafter until fully vested, subject to Mr. Knowles’ continued employment by the Company.

Furthermore, pursuant to agreement, in the event that Mr. Knowles is terminated for a reason other than “good cause” or for “good reason,” Mr. Knowles, upon signing and returning an effective waiver and release of claims, shall be entitled to receive: (i) separation payments in an aggregate amount of twelve months of his then-current base salary; (ii) continuation of group health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”) at the Company’s expense for a period of twelve months following the termination date; and (iii) unvested RSUs held by Mr. Knowles shall accelerate so that an additional twelve months of RSUs shall vest from the termination date.

On July 17, 2023, The Company appointed Robert Kalebaugh as Vice President of Sales and granted 35,715 RSUs as an inducement grant which vest over a period of three years as follows: 33% on the one-year anniversary of the date of grant, and the remaining 67% will vest in four equal installments, commencing six months after the one-year anniversary of the date of grant and every six months thereafter until fully vested, subject to Mr. Kalebaugh's continued employment by the Company.

Additionally, on April 7, 2023, we amended our Amended and Restated Bylaws (the “Bylaws”) to (i) revise Article II, Section 2.5 of the Bylaws to incorporate those requirements set forth in Rule 14a-19 of the Securities Exchange Act of 1934, as amended, as recently implemented by the SEC; and (ii) revise Article II, Section 2.8 of the Bylaws to decrease the quorum threshold necessary to conduct business at shareholder meetings of the Company

to one-third of the voting power of the Company’s capital stock issued and outstanding as of the relevant record date. Pursuant to Article X of the Bylaws, stockholder approval was not required to amend the Bylaws.

The Company has completed and fulfilled its orders associated with its long-term media and entertainment customer (shipments have now ceased) and does not anticipate significant business from this former customer in the future. This resulted from an acceleration in such customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry. This is particularly true of their virtual products, which do not require the same level of ruggedization, as this system is not typically operated in harsh environments and for which software is being developed to provide a real-time cloud solution. This customer’s transition to cloud solutions had a negative impact on the Company’s results of operations for the three and nine months ended September 30, 2023.

As previously disclosed, in 2021, we shifted our primary focus to the development and sale of AI Transportables. Since 2022, we have significantly increased our efforts to penetrate the military and defense sectors in particular. With the formation of a strategic advisory board in second quarter 2022 and the recent hiring of a new president and chief executive officer and new vice president of sales, both with extensive experience in contracting in the defense industry, we have further increased our emphasis and focus on the pursuit of revenue opportunities with major defense contractors and the military. Additionally, effective September 30, 2023, Jack Harrison and Sita Lowman each resigned as members of our board of directors, and our board appointed Mr. Knowles and Vice Admiral Michael Dumont, each of whom has significant prior military experience, as directors to fill the two vacant board seats. As noted above, the board of directors currently intends to appoint another individual with significant defense market experience to the board prior to the end of 2023.

The lingering negative impacts of the COVID-19 pandemic and the impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the ongoing military conflict between Russia and Ukraine, and the escalating war in Israel, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic uncertainty, which has negatively affected our operations. Additionally, the general consensus among economists continues to suggest that an elevated risk of recession will continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations.

We are continuing to experience increased pricing, longer lead-times, unavailability of certain products and limited supplies, protracted delivery dates, changes in minimum order quantities to secure product, and/or shortages of certain parts and supplies that are necessary components for the products and services we offer to our customers. As a result, the Company is continuing to carry increased inventory balances to ensure availability of necessary products and to secure pricing.

These global issues and events may also have the effect of heightening many risks associated with our customers and supply chain. We may take further actions that alter our operations as may be required by federal, state, or local authorities from time to time, or which we determine are in our best interests. In addition, we may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business.

Management’s plans with respect to the above are to continue their efforts towards responding to the changing economic landscape, to continue to control costs, conserve cash, and focus on AI compute capabilities for military and industrial applications, autonomous applications and improve company-wide execution.

Components of Results of Operations

Revenue

The Company recognizes revenue under accounting standard ASC 606. Revenue is primarily generated from the sale of computer hardware and engineering services, and, to a minimal extent, revenue is also generated from the sale of software and sales of software maintenance and support contracts. The Company’s performance obligations are satisfied over time as work is performed or at a point in time. The majority of the Company’s revenue is recognized at a point in time when products ship and control is deemed to be transferred to the customer. The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied.

Cost of revenue

Cost of revenue primarily consists of costs of materials, costs paid to third-party contract manufacturers (which may include the costs of components), and personnel costs associated with manufacturing and support operations. Personnel costs consist of wages, bonuses, benefits, and stock-based compensation expenses. Cost of revenue also includes freight, allocated overhead costs and inventory write-offs and changes to our inventory and warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect cost of revenue to increase in absolute dollars with product revenue increases.

Operating expenses

Our operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs.

General and Administrative - General and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, and fees for third-party professional services, as well as allocated overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in growing the business.

Impairment of goodwill - Impairment of goodwill consists of the amount of write down of value attributable to acquisitions of the amount paid that was in excess of the book value of the assets acquired.

Marketing and Selling – Marketing and selling expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel, and entertainment expenses as well as allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications, and brand-building activities. We expect marketing and selling expenses to increase in absolute dollars as we expand our sales force, increase marketing resources, and further develop sales channels.

Research and Development - Research and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for research and development, third-party engineering, and contractor support costs, as well as allocated overhead. We expect our research and development expenses to increase in absolute dollars as we continue to invest in new and existing products.

Other Income (Expense), net

Other income and expense consists of miscellaneous income and expense from activities outside of our core business and is inclusive of interest income from investing activities and interest expense incurred by financing activities.

Employee Retention Credit is a one-time U.S. government benefit enacted under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic. The CARES Act includes a provision for an Employee Retention Credit (“ERC”). The ERC was designed to encourage businesses to keep employees on the payroll during the COVID-19 pandemic.

Provision for Income Taxes

Provision for income taxes consists of estimated income taxes due to the United States and German governments as well as state tax authorities in jurisdictions in which we conduct business, along with the change in our deferred income tax assets and liabilities.

Results of Operations

The following tables set forth our results of operations for the three and nine month periods ended September 30, 2023 and 2022, presented in dollars and as a percentage of revenue, respectively.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022
Revenue	$	13,748,163		$	18,815,844		$	47,741,589		$	54,171,864
Cost of revenue		10,096,812			13,737,976			34,221,538			38,753,023
Gross profit		3,651,351			5,077,868			13,520,051			15,418,841
Operating expenses:
General and administrative		1,935,720			1,890,036			7,293,701			5,486,169
Impairment of goodwill		2,930,788			-			5,630,788			-
Marketing and selling		1,713,105			1,864,588			4,983,751			5,061,221
Research and development		1,053,852			1,159,868			3,203,830			3,656,020
Total operating expenses		7,633,465			4,914,492			21,112,070			14,203,410
(Loss) income from operations		(3,982,114	)		163,376			(7,592,019	)		1,215,431
Other income (expense), net:
Interest income		170,420			46,407			385,471			152,919
Interest expense		(31,468	)		(30,044	)		(88,112	)		(133,710	)
Employee retention credit (ERC)		418,486			-			1,716,727			-
Other income (expense), net		13,035			(11,050	)		24,649			86,903
Total other income (expense), net		570,473			5,313			2,038,735			106,112
(Loss) income before income taxes		(3,411,641	)		168,689			(5,553,284	)		1,321,543
Provision for income taxes		226,967			36,156			885,332			286,954
Net (loss) income	$	(3,638,608	)	$	132,533		$	(6,438,616	)	$	1,034,589


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2023	2022	2023	2022
Revenue	100.0%	100.0%	100.0%	100.0%
Cost of revenue	73.4%	73.0%	71.7%	71.5%
Gross profit	26.6%	27.0%	28.3%	28.5%
Operating expenses:
General and administrative	14.1%	10.0%	15.3%	10.1%
Impairment of goodwill	21.3%	0.0%	11.8%	0.0%
Marketing and selling	12.5%	9.9%	10.4%	9.3%
Research and development	7.7%	6.2%	6.7%	6.7%
Total operating expenses	55.5%	26.1%	44.2%	26.2%
(Loss) income from operations	-29.0%	0.9%	-15.9%	2.4%
Other income (expense), net:
Interest income	1.2%	0.2%	0.8%	0.3%
Interest expense	-0.2%	-0.2%	-0.2%	-0.2%
Employee retention credit (ERC)	3.0%	0.0%	3.6%	0.0%
Other (expense) income, net	0.1%	-0.1%	0.1%	0.1%
Total other income (expense), net	4.1%	0.0%	4.3%	0.1%
(Loss) income before income taxes	-24.8%	0.9%	-11.6%	2.5%
Provision for income taxes	1.7%	0.2%	1.9%	0.5%
Net (loss) income	-26.5%	0.7%	-13.5%	2.0%

Comparison of the three and nine month periods ended September 30, 2023 and 2022:

The Company operates in two reportable segments: (i) the design and manufacture of high-performance customized computers and flash arrays, in-flight entertainment and connectivity, which we refer to as “OSS,” and (ii) our subsidiary, Bressner, which operates fundamentally as a value-added reseller with minimal product customization with the growing potential to sell OSS type products in their geography. The following tables set forth revenue, cost of revenue and gross profit per reportable segment for the three and nine month periods ended September 30, 2023 and 2022, respectively.

Revenue, cost of revenue and gross profit:


	For the Three Months Ended September 30, 2023										For the Three Months Ended September 30, 2022
Entity:	Revenue		Cost of Revenue			Gross Profit		Gross Margin %			Revenue		Cost of Revenue			Gross Profit		Gross Margin %
OSS	$	5,500,159	$	(3,716,476	)	$	1,783,683		32.4	%	$	10,669,245	$	(7,397,458	)	$	3,271,787		30.7	%
Bressner		8,248,004		(6,380,336	)		1,867,668		22.6	%		8,146,599		(6,340,518	)		1,806,081		22.2	%
	$	13,748,163	$	(10,096,812	)	$	3,651,351		26.6	%	$	18,815,844	$	(13,737,976	)	$	5,077,868		27.0	%

	For the Nine Months Ended September 30, 2023										For the Nine Months Ended September 30, 2022
Entity:	Revenue		Cost of Revenue			Gross Margin		Gross Margin %			Revenue		Cost of Revenue			Gross Margin		Gross Margin %
OSS	$	22,408,841	$	(15,082,160	)	$	7,326,681		32.7	%	$	31,966,648	$	(21,379,512	)	$	10,587,136		33.1	%
Bressner		25,332,748		(19,139,378	)		6,193,370		24.4	%		22,205,216		(17,373,511	)		4,831,705		21.8	%
	$	47,741,589	$	(34,221,538	)	$	13,520,051		28.3	%	$	54,171,864	$	(38,753,023	)	$	15,418,841		28.5	%

Revenue

For the three months ended September 30, 2023, our total revenue decreased $5,067,681, or 26.9%, as compared to the same period in 2022. OSS saw a decrease in revenue of $5,169,086, or 48.5%, as compared to the same period in 2022. The majority of this decrease is primarily attributable to decreases in shipments to our former media customer, for which shipments have now ceased, bankruptcy of an autonomous trucking customer and delays in the receipt of certain military orders for our data storage units. Bressner experienced an increase of $101,405, or 1.2%, as compared to the same period in 2022 as a result of additional project based related business, increases in the number of smaller accounts and having available inventory.

For the nine months ended September 30, 2023, our total revenue decreased $6,430,275, or 11.9%, as compared to the same period in 2022. OSS saw a decrease in revenue of $9,557,807, or 29.9%, as compared to the same period in 2022. The majority of this decrease is primarily attributable to decreases in shipments to our former media customer, for which shipments have now ceased, bankruptcy of an autonomous trucking customer and delay in the receipt of certain military orders for our data storage units. Bressner experienced an increase of $3,127,532, or 14.1%, as compared to the same period in 2022 as a result of additional project based related business, increases in the number of smaller accounts and having available inventory.

Cost of revenue and gross profit

Cost of revenue decreased $3,641,164, or 26.5%, for the three month period ended September 30, 2023, as compared to the same period in 2022. OSS saw a decrease in cost of revenue of $3,680,982, or 49.8%, as compared to the same period in 2022. This decrease in cost of revenue is mainly attributable to a decrease in sales to our former media customer and sales of AI Transportable products. Bressner’s cost of revenue increased $39,818, or 0.63%, as compared to the same period in 2022, due to additional sales attributable to project based related business, increases in the number of smaller accounts and having available inventory.

The overall gross margin percentage was 26.6% for the 2023 period as compared to 27.0% in the same period in 2022. OSS’ gross margin percentage for the three months ended September 30, 2023, was 32.4%, an improvement of 1.7 percentage points as compared to the prior year period in 2022 of 30.7%, due to the absences of lower margin sales to our former media customer and higher mix of our AI Transportable type products. Though OSS has experienced an improvement in gross margin percentage due to a change in product mix, the Company is

experiencing pressure on margins as a result of under utilization to manufacturing capacity due to reduced volume. Bressner contributed gross margin at a rate of 22.6%, as compared to the same period in 2022 of 22.2%, an increase of 0.4 percentage points.

Cost of revenue decreased $4,531,485, or 11.7%, for the nine months ended September 30, 2023, as compared to the same period in 2022. OSS saw a decrease in cost of revenue of $6,297,352, or 29.5%, as compared to the same period in 2022. This decrease in cost of revenue is mainly attributable to a decrease in our sales to our former media customer and sales of AI transportable products. Bressner’s cost of revenue increased $1,765,867, or 10.2%, as compared to the same period in 2022, due to additional sales attributable to project based related business, increases in the number of smaller accounts and having available inventory.

The overall gross margin percentage was 28.3% for the 2023 period as compared to 28.5% in the same period in 2022. OSS’s gross margin percentage for the nine months ended September 30, 2023, was 32.7%, a decrease of 0.2% percentage points as compared to the prior year period in 2022 of 33.1%, due to the decline in lower margin sales to our previous media custom, offset set by under utilization of production resources, due to overall lower revenue. Though OSS has experienced an improvement in gross margin percentage due to a change in product mix, the Company is experiencing pressure on margins as a result of under utilization to manufacturing capacity due to reduced volume. Bressner contributed gross margin at a rate of 24.4%, as compared to the same period in 2022 of 21.8%, an increase of 2.6 percentage points, resulting from strategic management of inventory and of having sought-after products sold at a premium, product mix and increased sales of OSS classic type products.

Operating expenses

General and administrative expense

General and administrative expense increased $45,684, or 2.4%, for the three months ended September 30, 2023, as compared to the same period in 2022. OSS experienced a decrease of $12,095, or 0.8%. Of this increase, general and administrative expense increased, approximately $200,000 attributable to increased costs associated with our organizational restructuring and contract labor costs which was offset by reductions in bonus accruals, rent, board and employee stock compensation and public company related expenses. Bressner had an increase of $57,779, or 13.7% resulting from increased employee costs attributable to new employees and expenditures for additional computer storage. Overall, total general and administrative expense increased as a percentage of revenue to 14.1% for the three months ended September 30, 2023, as compared to 10.0% during the same period in 2022.

General and administrative expense increased $1,807,532, or 33.0%, for the nine months ended September 30, 2023, as compared to the same period in 2022. OSS experienced an increase of $1,675,241, or 39.9%. Of this increase in general and administrative expense, approximately $1,529,000 is attributable to increased non-recurring costs associated with our organizational restructuring and outside professional services. Such costs included additional equity compensation, wages, legal fees, search firm fees, and additional board compensation attributable to the strategic transition committee. Bressner had an increase of $132,291, or 10.3%, resulting from increased employee wages and new employees and expenditures for additional computer storage. Overall, total general and administrative expense increased as a percentage of revenue to 15.3% for the nine months ended September 30, 2023, as compared to 10.1% during the same period in 2022.

Impairment of goodwill

During September 2023, the Company took an additional write-down of $2,930,788 as a result of the overall financial performance of OSS as compared to plan, the transition of and focus on our product strategy on AI Transportables and the defense industry deferment of certain orders. Total goodwill impairment loss for the nine month period ended September 30, 2023 was $5,630,788. There was no such impairment charge in 2022.

Marketing and selling expense

Marketing and selling expense decreased $151,483, or 8.1%, for the three months ended September 30, 2023, as compared to the same period in 2022. OSS had a decrease of $225,685, or 14.8%, which was mainly attributable to having the Company participating in fewer tradeshows in the quarter as compared to the prior year and a reduction in employee costs resulting from our organizational restructuring. Bressner had an increase of $74,202, or

21.6%, primarily resulting from the addition of new marketing personnel and sales collateral material. Overall, total marketing and selling expense increased as a percentage of revenue to 12.5% during the three months ended September 30, 2023, as compared to 9.9% during the same period in 2022.

Marketing and selling expense decreased $77,470, or 1.5%, for the nine months ended September 30, 2023, as compared to the same period in 2022. OSS had a decrease of $270,916, or 6.8%, which was mainly attributable to a reduction in employee costs resulting from our organizational restructuring. Bressner had an increase of $193,446, or 18.4%, primarily resulting from the addition of new marketing personnel and sales collateral material. Overall, total marketing and selling expense increased as a percentage of revenue to 10.4% during the nine months ended September 30, 2023, as compared to 9.3% during the same period in 2022.

Research and development expense

Research and development expense decreased $106,016, or 9.1%, for the three months ended September 30, 2023, as compared to the same period in 2022. OSS saw a decrease of $136,784, or 13.0%. The decrease was largely driven by engineering resources being deployed on chargeable projects, which costs are reclassified as a component of costs of sales. Bressner experienced an increase of $30,768, or 29.4%. This increase was attributable to increased testing of product to support the increase in revenue. Overall, total research and development expense as a percentage of revenue increased as a percentage of revenue to 7.7% during the three months ended September 30, 2023, as compared to 6.2% during the same period in 2022.

Research and development expense decreased $452,190, or 12.4%, for the nine months ended September 30, 2023, as compared to the same period in 2022. OSS saw a decrease of $506,454, or 15.2%. The decrease was largely driven by engineering resources being deployed on chargeable projects, which costs are reclassified as a component of costs of sales. Bressner experienced an increase of $54,264, or 17.1%. This increase was attributable to increased testing of product to support the increase in revenue. Overall, total research and development expense as a percentage of revenue was consistent as a percentage of revenue of 6.7% during the nine months ended September 30, 2023, as compared to the same period in 2022.

Interest income

Interest income increased $124,013 for the three months ended September 30, 2023, as compared to the same period in 2022. The increase is attributable to higher interest rates on qualified short-term investments that meet Company requirements.

Interest income increased $232,552 for the nine months ended September 30, 2023, as compared to the same period in 2022. The increase is attributable to higher interest rates on qualified short-term investments that meet Company requirements.

Interest expense

Interest expense increased $1,424 for the three months ended September 30, 2023, as compared to the same period in 2022, as a result of higher interest on short-term debt.

Interest expense decreased $45,598 for the nine months ended September 30, 2023, as compared to the same period in 2022, as a result of the paydown of approximately $1,000,000 in debt outstanding.

Employee Retention Credit

For the three and nine month periods ended September 30, 2023, the Company received a government provided Employee Retention Credit ("ERC") for the retention of employees during the COVID-19 pandemic

during the years of 2020 and 2021, in the amount of $488,348 less commissions of $69,862 and $2,004,382 less commission of $287,655, respectively.

Other income (expense), net

Other income (expense), for the three months ended September 30, 2023, resulted in net other income of $13,035, as compared to net other expense of $11,050, in the same period in 2022, for an improvement of $24,085 attributable to currency translation gain, net.

Other income (expense), for the nine months ended September 30, 2023, resulted in net other income of $24,649, as compared to net other income of $86,903, in the same period in 2022, for a net decrease of $62,254. The most significant contributions to the year-over-year change include the sale of a URL for Magma.com in 2022 for $125,000 and translation gain, net.

Provision for income taxes

We have recorded an income tax provision of $226,967 and $36,156, respectively, for the three months ended September 30, 2023 and 2022, and $885,332 and $286,954, respectively, for the nine months ended September 30, 2023 and 2022. The effective tax rate for the nine months ended September 30, 2023 and 2022, differed from the statutory rate mainly due to permanent non-deductible goodwill amortization for Bressner and impairment of goodwill attributable to OSS, change in valuation allowance, deductions related to expenses of OSS stock options, research and development credits, and changes in reserves for uncertain tax positions, as well as projecting foreign and state tax liabilities for the year. Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization requirement increases our deferred tax assets and the related valuation allowance and may have an impact on payment of tax liabilities. The effective tax rate for the nine months ended September 30, 2023, was 28.5%, as compared to 20.9% in the prior period in 2022.

Liquidity and Capital Resources

Historically, our primary sources of liquidity have been provided by public and private offerings of our securities and revenues generated from our business operations. As of September 30, 2023, we had total cash and cash equivalents of $3,735,005, with short-term investments of $9,439,296, and total working capital of $34,414,632. Cash and cash equivalents held by Bressner totaled US$1,726,242 on September 30, 2023. Bressner’s debt covenants do not permit the use of those funds by its parent company.

During the year ended December 31, 2022, we had income from operations of $1,568,328, with cash used by operating activities of $7,806,025.

Our sources of liquidity and cash flows are used to fund ongoing operations, fund research and development projects for new products technologies and provide ongoing support services for our customers. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, successfully integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all.

As discussed elsewhere in this Quarterly Report, during the nine month period of 2023, the general consensus among economists continued to suggest that an elevated risk of recession will continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations. We intend to continue to monitor the effects of inflation, global supply chain shortages and the economic conditions, and, if appropriate, we may alter our plans to address such concerns as they may arise.

Management’s plans are to focus on acquiring new customer orders to replace lost revenue attributable to our previous media customer, to continue our efforts towards responding to the changing economic landscape, including inflation, foreign currency exchange rates, a potential recession, increases in the Federal Reserve interest rate, the current instability of the banking system in the United States, supply chain constraints and international conflicts, by continuing to control hiring and operating costs, conserve cash, and continual focus on improving margin.

While management expects these actions and continued diligence towards limiting cost growth and expense containment, will result in slowing the rate of growth in costs as compared to revenue growth, our results of operations for the nine months ended September 30, 2023, and the year ended December 31, 2022, partially benefited from such actions particularly those resulting from a reduction in force in April 2023. Management is also committed to conserving cash and securing debt and/or equity financing, as required, for liquidity to meet our cash requirements through at least a period of the next twelve months.

In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 from its bank, which was renewed in April 2023 and renews on an annual basis at the current prime rate. To access this line of credit the Company must maintain cash and investments balances at a minimum of $4,000,000. Although the Company has not drawn down on the line of credit to date, it may choose to do so in the future.

Additionally, in August 2023, we filed a new registration statement on Form S-3 (Registration No. 333-274073) with the SEC, which became effective on August 25, 2023, and allows us to offer and sell up to an aggregate of $100,000,000 of our common stock, preferred stock, debt securities, warrants to purchase our common stock, preferred stock or debt securities, subscription rights to purchase our common stock, preferred stock or debt securities and/or units consisting of some or all of these securities, in any combination, together or separately, in one or more offerings, in amounts, at prices and on the terms that we will determine at the time of the offering and which will be set forth in a prospectus supplement and any related free writing prospectus. In the event that we need additional financing, we may choose to consummate an offering of our securities under the registration statement on S-3 in order to raise capital.

As a result of management’s implementation of our cost reduction plans, our potential sources of liquidity and management’s most recent cash flow forecasts, management believes that we have sufficient liquidity to satisfy our anticipated working capital requirements for our ongoing operations and obligations for at least the next twelve months. However, there can be no assurance that management’s cost reduction efforts will be effective or the forecasted cash flows will be achieved. Furthermore, we will continue to evaluate our capital expenditure needs based upon various factors, including but not limited to, our sales from operations, growth rate, the timing and extent of spending to support development efforts, the expansion of our sales and marketing efforts, the timing of new product introductions, and the continuing market acceptance of our products and services.

If cash generated from operations is insufficient to satisfy our capital requirements, we may borrow up to $2,000,000 from our revolving line of credit with our bank (subject to satisfaction of certain borrowing conditions), may have to sell additional equity or debt securities, or may obtain expanded credit facilities to fund our operating expenses, pay our obligations, diversify our geographical reach, and grow the Company. In the event such financing is needed in the future, there can be no assurance that such financing will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional financing were obtained, then management would consider restructuring the Company in a way to preserve its business while maintaining expenses within operating cash flows.

The following table summarizes our cash flows for the three month periods ended September 30, 2023 and 2022:


	For the Nine Months Ended September 30,
Cash flows:	2023		2022
Net cash provided by (used in) operating activities	$	225,469	$	(8,674,894	)
Net cash provided by investing activities	$	298,401	$	4,717,920
Net cash provided by financing activities	$	135,403	$	2,239,846

Operating Activities

During the nine month period ended September 30, 2023, we provided $255,469 in cash for operating activities, a difference of $8,900,363 when compared to the cash used in operating activities of $8,674,894 during the same period in 2022.

The change in cash provided by operating activities during the nine month period ended September 30, 2023, as compared to cash used in operating activities in the same period in 2022, is primarily a result a net increase in the sources of operating cash flow for working capital items of $11,090,646. This increase was offset by a reduction in profitability from net income in 2022 of $1,034,589, to a net loss of $6,303,616 in the current year, a reduction of $7,338,205.

Additionally, there were net favorable adjustments in the current period for non-cash items of $5,147,922, which were comprised of $7,022,023 of favorable non-cash items, inclusive of the write-down for the impairment of goodwill, offset by $1,874,101 of negative non-cash items that did not affect operating cash flow and exclusion of $1,716,727 for the employee retention credit.

Net working capital uses for the nine month period ended September 30, 2023, were $901,272, as compared to the prior year period uses of working capital of $11,991,918, a reduction in the use of working capital of $11,090,646. The sources of working capital of $16,210,660 were attributable to changes in accounts receivables, inventory levels, and accrued expenses and other liabilities for the comparable period. These sources were offset by uses of working capital of $5,120,014 being applied to changes in prepaid expenses and other current assets and accounts payable.

Our ability to generate cash from operations in future periods will depend in large part on our profitability, the rate and timing of collections of our accounts receivable, our inventory turns and our ability to manage other areas of working capital, including accounts payable and accrued expenses.

Investing Activities

During the nine month period ended September 30, 2023, the Company generated cash of $298,401 in investing activities, as compared to $4,717,920 provided by investing activities during the prior year period in 2022, a net decrease of $4,419,519. The source of investing funds was attributable to the redemption of short-term investments in both years and the sale of the Magma.com URL in the prior year. Additionally, the Company continues to enhance the capabilities of its ERP system, and purchase test equipment for the engineering department. We do not anticipate any significant investments not normally anticipated in the original course of business in the near term.

Financing Activities

Given the current economic, financial, and geopolitical instability, the Company believes it is imperative to maintain opportunities for additional financial resources to ensure financial stability during trying economic times. During the nine month period ended September 30, 2023, the Company generated $135,403 resulting from funds received in conjunction with the ERC program offset by debt service payments on Bressner borrowings and payment of tax on the net exercise of vested RSUs. During the same period in 2022, the Company generated cash through proceeds for new borrowings for inventory at Bressner.

Known Trends or Uncertainties

Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.

We are experiencing delays in funding for customer projects, delays in delivery schedules based upon customer requirements and an extended sales cycle. Additionally, certain of our customers are experiencing downturns or uncertainty in their own business operations and revenue, and as a result there is an increased risk that these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts. During the three and nine months ended September 30, 2023, the Company experienced delays and postponements of committed purchases and orders due to certain customers’ funding or program delays. We have also experienced cancellations of orders due to disruptions in our customers’ businesses or changes in their business plans. Such delays, postponements and cancellations negatively impacted the Company’s results of operations for the three and nine months ended September 30, 2023. If such decreases in orders, postponements or cancellations continue in the future, our operating results will be further impacted, and our revenues may decline in future periods.

As discussed in this Quarterly Report, the world has been affected due to the lingering effects of the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine, and the escalating war in Israel, and economic uncertainty, amongst other things. Inflation has risen, Federal Reserve interest rates have increased recently, there is still some concern regarding instability of the banking systems in the United States and the general consensus among economists continues to suggest that we should continue to expect an elevated risk of recession will continue for the foreseeable future. These factors, amongst other things, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.

As of September 30, 2023, the Company has completed and fulfilled all of its orders associated with its former long-term media and entertainment customer (shipments have now ceased) and does not anticipate any significant business from this customer in the future. This resulted from an acceleration in such customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry. This is particularly true of their virtual products, which do not require the same level of ruggedization as this system is not typically operated in harsh environments and for which software is being developed to provide a real-time cloud solution. This customer’s transition to cloud solutions had a negative impact on the Company’s results of operations for the three and nine months ended September 30, 2023.

As previously disclosed, in 2021, we shifted our primary focus to the development and sale of AI Transportables. Since 2022, we have significantly increased our efforts to penetrate the military and defense sectors in particular, which typically have protracted sales cycles, significant contracting requirements, and multi-year deliverables. With the formation of a strategic advisory board in second quarter 2022 and the recent hiring of a new president and chief executive officer and new vice president of sales, each of whom has extensive experience in contracting in the defense industry, we have further increased our emphasis and focus on the pursuit of revenue opportunities with major defense contractors and the military. As discussed elsewhere in this Quarterly Report, we have also added relevant defense market experience to our board of directors through the appointment of Mr. Knowles and Vice Admiral Dumont as directors effective September 30, 2023, and we currently intend to appoint another director with relevant experience to the board prior to the end of the year.

Additionally, in March 2023, Silicon Valley Bank and Signature Bank, and on May 1, 2023, First Republic Bank, were closed and taken over by the FDIC, which created significant market disruption for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system in the United States, and in particular with respect to regional banks. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened and such events could have a material adverse effect on our business and financial condition.

We believe that the need for improved productivity in the research and development activities directed toward developing new products and/or software will continue to result in increasing adoption of high-performance computers and interconnect technologies such as those we produce. New product and/or software developments in the specialized compute-business segment could result in increased revenues and earnings if they are accepted by our markets; however, there can be no assurances that new products and/or software will result in significant improvements to revenues or earnings. For competitive reasons, we do not disclose all of our new product development activities.

Additionally, the potential for growth in new markets is uncertain. We will continue to explore these opportunities until such time as we either generate sales or determine that resources would be more efficiently used elsewhere.

In the first and second quarters of 2023, we implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate our strategy to focus on, the AI Transportables industry and our military business. In furtherance of this strategy and our goals, on June 5, 2023, David Raun, then the Company’s chief executive officer, stepped down from such roles and Michael Knowles was appointed to serve in such roles. Mr. Raun currently continues to serve as a member of the Company’s board of directors. Additionally, on July 17, 2023, we hired a new vice president of sales with significant relevant experience. Furthermore, effective September 30, 2023, Jack Harrison and Sita Lowman each resigned as members of our board of directors, and our board appointed Mr. Knowles and Vice Admiral Michael Dumont, each of whom has significant prior military experience, as directors to fill the two vacant board seats. These changes were part of the first phase of our previously announced plans to reprofile our board of directors to further align with our focus on AI Transportables and our military business.

Consistent with previously disclosed commitments, we have taken further action to reprofile our board of directors. On November 6, 2023, our board of directors unanimously adopted a resolution to temporarily increase the size of the board from seven members to eight members, effective November 10, 2023, and to subsequently decrease the size of the board back down to seven members, effective as of the Company’s 2024 annual meeting of stockholders (the “2024 Annual Meeting”). The board also appointed Joseph Manko as a director of the Company, effective November 10, 2023, to fill the vacancy created by the board expansion. Mr. Manko serves as a managing member and senior principal at Horton Capital Management, LLC, a significant shareholder of the Company, and has significant public company board and governance experience.

In the first and second quarters of 2023, we implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate our strategy to focus on, the AI Transportables industry and our military business. In furtherance of this strategy and our goals, on June 5, 2023, David Raun, then the Company’s chief executive officer, stepped down from such roles and Michael Knowles was appointed to serve in such roles. Mr. Raun currently continues to serve as a member of the Company’s board of directors. Additionally, on July 17, 2023, we hired a new vice president of sales with significant relevant experience. Furthermore, effective September 30, 2023, Jack Harrison and Sita Lowman each resigned as members of our board of directors, and our board appointed Mr. Knowles and Vice Admiral Michael Dumont, who has significant prior military experience, as directors to fill the two vacant board seats. These changes were part of the first phase of our previously announced plans to reprofile our board of directors to further align with our focus on AI Transportables and our military business. Consistent with previous disclosures, we intend to make additional changes to the composition of our board over the coming year.

Inflation

We experienced some affects due to inflation during the most recent period, including increased product pricing of semiconductor products, increased transportation costs due to increases in the cost of energy and general price increases due to inflation in the economy. Although the Company attempts to pass on increases in raw material, labor, energy and fuel-related costs to our customers, the Company’s ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Company’s products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be fully recovered. These increasing costs are being aggressively managed by the Company and actions are being taken to minimize the impact to the Company, particularly in the purchase of inventories to minimizing price increases. Inflation affects the Company’s manufacturing costs, distribution costs and operating expenses.

Off balance sheet arrangements

We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity.

We do not have any majority-owned subsidiaries that are not consolidated in the financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose entities.

Stockholder transactions

See Note 9 to the accompanying consolidated financial statements for a discussion regarding our stockholder transactions for the relevant periods.

Critical accounting policies and estimates

In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and our historical experience.

Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2022.

We periodically re-evaluate and adjust our critical accounting policies as circumstances change. There were no significant changes to our critical accounting policies during the three month period ended September 30, 2023.

Recently implemented accounting pronouncements

Effective January 1, 2023, the Company implemented ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”). See Note 2 "Significant Accounting Policies" in the accompanying consolidated financial statements.

Interest rate risk

Our exposure to interest rate risk is primarily associated with borrowing on revolving lines of credit denominated in both U.S. dollars and Euros. We are exposed to the impact of interest rate changes primarily through our borrowing activities for our variable rate borrowings. The Federal Reserve interest rates have increased recently and may increase further in the near term.

Concentration of credit risk

At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation (“SIPC”), of which both provide basic deposit coverage with limits up to $250,000 per owner. As of September 30, 2023, the Company had $250,000 of cash in our accounts that exceeded the insurance limits. The Company has not experienced any losses in these accounts and believes that the financial institutions at which such amounts are held are stable; however, no assurances can be provided. In Germany, the deposit insurance is €100,000 per bank, per customer. Bressner has funds on deposit in both Euro and U.S. dollar denominations of €813,922 (US$861,670) with banks in excess of the insurance limits.

We provide credit to our customers in the normal course of business. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary.

Foreign currency risk

We operate primarily in the United States. Foreign sales of products and services are primarily denominated in U.S. dollars. We also conduct business outside the United States through Bressner our foreign subsidiary in Germany, where business is largely transacted in non-U.S. dollar currencies, particularly the Euro, which is subject to fluctuations due to changes in foreign currency exchange rates. Accordingly, we are subject to exposure from changes in the exchange rates of local currencies. Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations.

OSS GmbH operates as an extension of OSS’ domestic operations and acquired Bressner in October 2018. The functional currency of OSS GmbH is the Euro. Transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, monetary assets and liabilities are translated using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Consequently, changes in the exchange rates of the currencies may impact the translation of the foreign subsidiaries’ statements of operations into U.S. dollars, which may in turn affect our consolidated statement of operations. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income in the consolidated statement of comprehensive income.

Derivative Financial Instruments

We employ derivatives on a periodic basis to manage certain market risks using foreign exchange forward contracts. We do not use derivatives for trading or speculative purposes. Our derivatives are designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we may enter into foreign exchange contracts to provide currency at a fixed rate.

Non-GAAP Financial Measures

Adjusted EBITDA

We believe that the use of adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, is helpful for an investor to assess the performance of the Company. The Company defines adjusted EBITDA as income (loss) before interest, taxes, depreciation, amortization, acquisition expenses, impairment of long-lived assets, financing costs, fair value adjustments from purchase accounting, stock-based compensation expense, employee retention credits and expenses related to discontinued operations.

Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles in the United States, or GAAP. Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company’s non-cash operating expenses, we believe that providing a non-GAAP financial measure that excludes non-cash and non-recurring expenses allows for meaningful comparisons between our core business operating results and those of other companies, as well as

providing us with an important tool for financial and operational decision making and for evaluating our own core business operating results over different periods of time.

Our adjusted EBITDA measure may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. Our adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to operating income or as an indication of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider adjusted EBITDA to be a substitute for, or superior to, the information provided by GAAP financial results.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022
Net (loss) income	$	(3,638,608	)	$	132,533		$	(6,438,616	)	$	1,034,589
Depreciation and amortization		271,245			260,827			813,773			785,047
Stock-based compensation expense		518,680			542,166			1,890,897			1,457,630
Interest expense		31,468			30,044			88,112			133,710
Interest income		(170,420	)		(46,407	)		(385,471	)		(152,919	)
Impairment of goodwill		2,930,788			-			5,630,788			-
Employee retention credit (ERC)		(418,486	)		-			(1,716,727	)		-
Provision for income taxes		226,967			36,156			885,332			286,954
Adjusted EBITDA	$	(248,366	)	$	955,319		$	768,088		$	3,545,011

Adjusted EPS

Adjusted EPS excludes the impact of certain items, and therefore, has not been calculated in accordance with GAAP. We believe that exclusion of certain selected items assists in providing a more complete understanding of our underlying results and trends and allows for comparability with our peer company index and industry. We use this measure along with the corresponding GAAP financial measures to manage our business and to evaluate our performance compared to prior periods and the marketplace. The Company defines non-GAAP income (loss) as income or (loss) before amortization, stock-based compensation, employee retention credits and expenses related to discontinued operations, impairment of long-lived assets and non-recurring acquisition costs. Adjusted EPS expresses adjusted income (loss) on a per share basis using weighted average diluted shares outstanding.

Adjusted EPS is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses similar to the adjusted income from continuing operations and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring.

The following table reconciles non-GAAP net income and basic and diluted earnings per share:


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2023			2022		2023			2022
Net (loss) income	$	(3,638,608	)	$	132,533	$	(6,438,616	)	$	1,034,589
Amortization of intangibles		10,538			15,808		42,154			47,424
Impairment of goodwill		2,930,788			-		5,630,788			-
Employee retention credit (ERC)		(418,486	)		-		(1,716,727	)		-
Stock-based compensation expense		518,680			542,166		1,890,897			1,457,630
Non-GAAP net (loss) income	$	(597,088	)	$	690,507	$	(591,504	)	$	2,539,643
Non-GAAP net (loss) income per share:
Basic	$	(0.03	)	$	0.03	$	(0.03	)	$	0.13
Diluted	$	(0.03	)	$	0.03	$	(0.03	)	$	0.12
Weighted average common shares outstanding:
Basic		20,569,111			20,019,625		20,407,284			19,619,971
Diluted		20,569,111			21,138,957		20,407,284			20,582,116

Free Cash Flow

Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by or used in operating activities, less capital expenditures for property and equipment, which includes capitalized software development costs for the implementation of the Company’s ERP system. We believe free cash flow provides investors with an important perspective on cash available for investments and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. We believe that trends in our free cash flow can be valuable indicators of our operating performance and liquidity.

Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies.

We expect to continue to incur expenditures similar to the free cash flow adjustments described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash. The following table reconciles cash provided by or used in operating activities, the most directly comparable GAAP financial measure, to free cash flow:


	For the Nine Months Ended September 30,
Cash flow:	2023			2022
Net cash provided by (used in) operating activities	$	225,469		$	(8,674,894	)
Capital expenditures		(374,464	)		(285,499	)
Free cash flow	$	(148,995	)	$	(8,960,393	)

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and that such information is accumulated

and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Limitation on Effectiveness of Controls

The design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals. The inherent limitations in any control system include the realities that judgments related to decision-making can be faulty, and that reduced effectiveness in controls can occur because of simple errors or mistakes. Due to the inherent limitations in a cost-effective control system, misstatements due to error may occur and may not be detected.

Evaluation of Disclosure Controls and Procedures

Management is required to evaluate our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures are controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at a reasonable assurance level as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of our material pending legal proceeding, please see Note 10, Commitments and Contingencies, to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

Item 1A. Risk Factors.

Please carefully consider the information set forth in this Quarterly Report and the risk factors discussed in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”), which could materially affect our business, financial condition, or future results. In evaluating our business, you should carefully consider the risk factors discussed in our Annual Report, as updated by our subsequent filings under the Exchange Act. The occurrence of any of the risks discussed in such filings, or other events that we do not currently anticipate or that we currently deem immaterial, could harm our business, prospects, financial condition and results of operations. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Except as set forth below, there have been no material updates or changes to the risk factors previously disclosed in our Annual Report; provided, however, additional risks not currently known or currently material to us may also harm our business.

Cybersecurity risks and cyber incidents, as well as other significant disruptions of our information technology networks and related systems and resources, could adversely affect our business, disrupt operations and expose us to liabilities to employees, customers, governmental regulators, and other third parties.

We use information technology and other computer resources to carry out important operational activities and to maintain our business records. As part of our normal business activities, we permit certain employees to perform some or all of their business activities remotely, we collect and store certain personal identifying and/or confidential information relating to our employees, customers, vendors and suppliers, and we maintain operational and financial information related to our business. Furthermore, we rely on products and services provided by third-party suppliers to operate certain critical business systems, including without limitation, cloud-based infrastructure, encryption and authentication technology, email, and other functions, which exposes us to supply-chain attacks or other business disruptions.

We face risks associated with security breaches through cyber-attacks or cyber-intrusions, malware, computer viruses and malicious codes, ransomware, attachments to e-mail, unauthorized access attempts, denial of service attacks, phishing, social engineering, persons with access to systems inside our organization, and other significant disruptions of our information technology networks and related systems. The risk of a security breach has generally increased as the frequency, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques, tools and tactics used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed to not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers, disaster recovery or other preventative or corrective measures, and thus it is impossible for us to entirely counteract this risk or fully mitigate the harms after such an attack.

We have implemented certain systems and processes intended to address ongoing and evolving cybersecurity risks, secure our information technology, applications and computer systems, and prevent unauthorized access to or loss of sensitive, confidential and personal data. Although we and our service providers employ what we believe are adequate security, disaster recovery and other preventative and corrective measures, our security measures, taken as a whole, may not be sufficient for all possible situations and may be vulnerable to, among other things, fraud, hacking, employee error, system error, and faulty password management.

Our ability to conduct our business may be impaired if our or our services providers’ information technology networks, systems or resources, including our and their websites or e-mail systems, are compromised, degraded,

damaged or fail, whether due to a virus or other harmful circumstance, fraud, intentional penetration or disruption of our or their information technology resources by:

•

a third party,

•

natural disaster,

•

a failure of hardware or software due to a design or programmatic flaw,

•

a failure of hardware or software security controls,

•

telecommunications system failure,

•

service provider error or failure,

•

fraudulent transactions,

•

intentional or unintentional personnel actions,

•

lost connectivity to our networked resources, or

•

a failure of disaster recovery system.

A significant and extended disruption could damage our business or reputation and cause, amongst other things, loss of revenues or customer relationships, unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying and confidential information, and us to incur significant expenses to address and remediate or otherwise resolve these kinds of issues.

The release of confidential information may also lead to litigation or other proceedings against us by affected individuals, business partners and/or regulators, and the outcome of such proceedings, which could include losses, penalties, fines, injunctions, expenses and charges recorded against our earnings and cause us reputational harm and/or could have a material and adverse effect on our business, financial position or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None

Item 6. Exhibits.

Exhibit Index


Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
2.1	Agreement and Plan of Merger and Reorganization, dated August 22, 2018, with Concept Development Inc.	8-K	001-38371	2.1	September 6, 2018

2.2	Share Purchase Agreement, dated October 31, 2018, with Bressner Technology GmbH.	8-K	001-38371	2.1	November 6, 2018

3.1	Amended and Restated Certificate of Incorporation (currently in effect).	8-K/A	001-38371	3.1	March 21, 2018

3.2	Bylaws, as amended (currently in effect).	8-K	001-38371	3.2	February 6, 2018

3.3	Certificate of Amendment to the Amended and Restated Bylaws of the Company, dated April 7, 2023.	8-K	001-38371	3.1	April 7, 2023

4.1	Second Amended and Restated Investors’ Rights Agreement, dated January 2007.	S-1	333-222121	4.2	December 18, 2017

4.2	Common Shareholder Piggyback Registration Rights Agreement, dated July 15, 2016.	S-1	333-222121	4.3	December 18, 2017

31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X

31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X

32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					*

32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C.					*

Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 INS

Inline XBRL Instance Document

101 SCH

Inline XBRL Taxonomy Extension Schema Document

101 CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101 LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101 PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101 DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 attachments)

* Furnished herewith

** The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	One Stop Systems, Inc.

Date: November 9, 2023	By:	/s/ Michael Knowles
		Michael Knowles
		President and Chief Executive Officer (Principal Executive Officer)

Date: November 9, 2023	By:	/s/ John W. Morrison Jr.
		John W. Morrison Jr.
		Chief Financial Officer (Principal Financial and Accounting Officer)