One Stop Systems 10Q 2022 Q2 Quarterly report

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 June 30, 2022

☐	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.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 July 31, 2022, the registrant had 20,024,086 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
	Unaudited Consolidated Balance Sheets	4
	Unaudited Consolidated Statements of Income	5
	Unaudited Consolidated Statements of Comprehensive Income	6
	Unaudited Consolidated Statement 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	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	44
Item 1A	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
	Signatures	47

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, the Company 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 six month periods ended June 30, 2022, should be read in conjunction with our audited financial statements for the year ended December 31, 2021, included in our Annual Report on Form 10-K, filed with the SEC on March 24, 2022.

The results of operations for the three and six month periods ended June 30, 2022, are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED BALANCE SHEETS

	Unaudited			Audited
	June 30,			December 31,
	2022			2021
ASSETS
Current assets
Cash and cash equivalents	$	2,874,831		$	5,101,174
Short-term investments (Note 3)		11,514,047			14,535,750
Accounts receivable, net (Note 4)		10,014,336			5,089,804
Inventories, net (Note 5)		20,466,855			12,277,873
Prepaid expenses and other current assets		1,090,682			580,651
Total current assets		45,960,751			37,585,252
Property and equipment, net		2,687,391			3,091,415
Operating lease right-of-use assets		950,124			-
Deposits and other		38,092			46,845
Deferred tax assets, net		3,635,187			3,641,032
Goodwill		7,120,510			7,120,510
Intangible assets, net (Note 6)		73,769			105,385
Total Assets	$	60,465,824		$	51,590,439

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	6,332,547		$	2,059,059
Accrued expenses and other liabilities (Note 7)		3,297,460			3,846,488
Current portion of operating lease obligation (Note 10)		549,856			-
Current portion of notes payable (Note 8)		2,866,875			1,137,651
Current portion of senior secured convertible note, net of debt discounts of $0 and $2,384, respectively (Note 8)		-			2,588,525
Total current liabilities		13,046,738			9,631,723
Long-term debt, net of current portion (Note10)		796,134			-
Operating lease obligation, net of current portion (Note 8)		640,443			-
Total liabilities		14,483,315			9,631,723
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock, $0.0001 par value; 50,000,000 shares authorized; 20,008,885 and 18,772,214 shares issued and outstanding, respectively		2,001			1,877
Additional paid-in capital		44,618,756			41,232,441
Accumulated other comprehensive (loss) income		(66,808	)		153,361
Accumulated earnings		1,428,560			571,037
Total stockholders’ equity		45,982,509			41,958,716
Total Liabilities and Stockholders' Equity	$	60,465,824		$	51,590,439

See accompanying notes to unaudited consolidated financial statements

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2022			2021			2022			2021
Revenue	$	18,303,343		$	14,905,009		$	35,356,020		$	28,220,761
Cost of revenue		13,103,025			10,252,265			25,015,047			19,135,233
Gross profit		5,200,318			4,652,744			10,340,973			9,085,528
Operating expenses:
General and administrative		1,821,445			1,648,785			3,596,133			3,806,404
Marketing and selling		1,724,913			1,479,292			3,196,633			2,647,193
Research and development		1,252,037			1,008,017			2,496,152			1,840,250
Total operating expenses		4,798,395			4,136,094			9,288,918			8,293,847
Income from operations		401,923			516,650			1,052,055			791,681
Other income (expense), net:
Interest income		55,507			61,798			106,512			67,098
Interest expense		(44,949	)		(169,031	)		(103,665	)		(319,013	)
Other income (expense), net		(4,169	)		1,522,998			97,952			1,494,369
Total other income (expense), net		6,389			1,415,765			100,799			1,242,454
Income before income taxes		408,312			1,932,415			1,152,854			2,034,135
Provision for income taxes		85,490			235,293			250,798			295,815
Net income	$	322,822		$	1,697,122		$	902,056		$	1,738,320
Net income per share:
Basic	$	0.02		$	0.09		$	0.05		$	0.10
Diluted	$	0.02		$	0.09		$	0.04		$	0.09

Weighted average common shares outstanding:
Basic		19,940,902			18,513,620			19,416,832			17,934,022
Diluted		21,180,490			19,735,383			20,346,917			19,305,842

See accompanying notes to unaudited consolidated financial statements

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2022			2021		2022			2021
Net income	$	322,822		$	1,697,122	$	902,056		$	1,738,320
Other comprehensive income (loss):
Net unrealized income (losses) on short-term investments		4,577			601		(1,419	)		601
Currency translation adjustment		(168,384	)		107,302		(218,750	)		(143,086	)
Total other comprehensive income (loss)		(163,807	)		107,903		(220,169	)		(142,485	)
Comprehensive income	$	159,015		$	1,805,025	$	681,887		$	1,595,835

See accompanying notes to unaudited consolidated financial statements

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2022

	Common Stock							Accumulated Other						Total
	Shares		Amount		Additional Paid-in-Capital			Comprehensive Income			Accumulated Earnings			Stockholders' Equity
Balance, January 1, 2022		18,772,214	$	1,877	$	41,232,441		$	153,361		$	571,037		$	41,958,716
Adjustment to beginning accumulated earnings for adoption of lease accounting (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		-		-		382,828			-			-			382,828
Exercise of stock options, RSUs and warrants		105,969		10		29,660			-			-			29,670
Taxes paid on net issuance of employee stock options		-		-		(20,478	)		-			-			(20,478	)
Conversion of senior secured convertible debt to equity		1,036,365		104		2,590,805			-			-			2,590,909
Currency translation adjustment		-		-		-			(50,366	)		-			(50,366	)
Net unrealized gains (losses) on short-term investments		-		-		-			(5,996	)		-			(5,996	)
Net income		-		-		-			-			579,234			579,234
Balance, March 31, 2022		19,914,548	$	1,991	$	44,215,256		$	96,999		$	1,105,738		$	45,419,984
Stock-based compensation		-		-		532,636			-			-			532,636
Exercise of stock options, RSUs and warrants		94,337		10		2,548			-			-			2,558
Taxes paid on net issuance of employee stock options		-		-		(131,684	)		-			-			(131,684	)
Currency translation adjustment		-		-		-			(168,384	)		-			(168,384	)
Net unrealized gains on short-term investments		-		-		-			4,577			-			4,577
Net income		-		-		-			-			322,822			322,822
Balance, June 30, 2022		20,008,885	$	2,001	$	44,618,756		$	(66,808	)	$	1,428,560		$	45,982,509

See accompanying notes to unaudited consolidated financial statements

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2021

	Common Stock							Accumulated Other						Total
	Shares		Amount		Additional Paid-in-Capital			Comprehensive Income			Accumulated (Deficit)			Stockholders' Equity
Balance, January 1, 2021		16,684,424	$	1,668	$	30,758,354		$	287,547		$	(1,761,736	)	$	29,285,833
Stock-based compensation		-		-		438,394			-			-			438,394
Exercise of stock options, RSU's and warrants		321,472		32		278,936			-			-			278,968
Proceeds from issuance of stock, net of issuance costs of $778,810		1,497,006		150		9,221,040			-			-			9,221,190
Taxes paid on net issuance of employee stock options		-		-		(44,252	)		-			-			(44,252	)
Currency translation adjustment		-		-		-			(250,388	)		-			(250,388	)
Net Income		-		-		-			-			41,198			41,198
Balance, March 31, 2021		18,502,902	$	1,850	$	40,652,472		$	37,159		$	(1,720,538	)	$	38,970,943
Stock-based compensation		-		-		465,336			-			-			465,336
Exercise of stock options, RSU's and warrants		35,787		4		22,548			-			-			22,552
Additional stock issuance costs related to registered direct offering		-		-		(32,517	)		-			-			(32,517	)
Taxes paid on net issuance of employee stock options		-		-		(69,891	)		-			-			(69,891	)
Currency translation adjustment		-		-		-			107,302			-			107,302
Net unrealized gains on short-term investments		-		-		-			601			-			601
Net Income		-		-		-			-			1,697,122			1,697,122
Balance, June 30, 2021		18,538,689	$	1,854	$	41,037,948		$	145,062		$	(23,416	)	$	41,161,448

See accompanying notes to unaudited consolidated financial statements

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net income	$	902,056		$	1,738,320
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Deferred benefit for income taxes		(1,648	)		94,155
Gain on disposal of property and equipment		36,064			-
Recovery for bad debt		(5,524	)		(4,902	)
Warranty reserves		(35,465	)		53,944
Amortization of intangibles		31,616			327,801
Depreciation		492,604			447,771
Inventory reserves		158,697			343,136
Amortization of debt discount		1,224			109,305
Stock-based compensation expense		915,464			903,730
Gain on forgiveness of PPP loan and interest		-			(1,514,354	)
Changes in operating assets and liabilities:
Accounts receivable		(5,041,981	)		902,572
Inventories		(8,962,525	)		(3,271,942	)
Prepaid expenses and other current assets		(508,546	)		(219,308	)
Accounts payable		4,429,156			3,219,960
Accrued expenses and other liabilities		12,453			(341,825	)
Net cash (used in) provided by operating activities		(7,576,355	)		2,788,363

Cash flows from investing activities:
Investment in short-term investment grade securities		-			(14,523,647	)
Redemption of short-term investment grade securities		2,895,285			-
Proceeds from sale of intangible assets		125,000			-
Purchases of property and equipment, including capitalization of labor costs for test equipment and ERP		(141,685	)		(199,799	)
Net cash provided by (used in) investing activities		2,878,600			(14,723,446	)

Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		32,228			301,520
Payment of payroll taxes on net issuance of employee stock options		(152,162	)		(114,143	)
Proceeds from issuance of stock		-			10,000,000
Stock issuance costs		-			(811,327	)
Proceed on borrowing of notes payable		3,663,009			1,807,818
Repayments on notes payable		(928,612	)		(1,348,481	)
Repayments on related-party notes payable		-			(206,669	)
Net cash provided by financing activities		2,614,463			9,628,718

Net change in cash and cash equivalents		(2,083,292	)		(2,306,365	)
Effect of exchange rates on cash		(143,051	)		(35,487	)
Cash and cash equivalents, beginning of period		5,101,174			6,316,921
Cash and cash equivalents, end of period	$	2,874,831		$	3,975,069

See accompanying notes to unaudited consolidated financial statements

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

	For the Six Months Ended June 30,
	2022		2021
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	13,373	$	83,392
Cash paid during the period for income taxes	$	30,821	$	80,629

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	$	-
Forgiveness of PPP loan and interest	$	-	$	1,514,354
Reclassification of inventories to property and equipment	$	-	$	24,076

See accompanying notes to unaudited consolidated financial statements

ONE STOP SYSTEMS, INC. (OSS)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Month Periods Ended June 30, 2022 and 2021

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 computing modules and systems, which are designed to target edge computing deployments. The Company markets its products to manufacturers of automated equipment used for media and entertainment, medical, industrial, and military applications.

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.

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

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

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

The negative impact 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, 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, during the second quarter, the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year, which could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.

Currently, we are experiencing increased pricing, longer lead-times, unavailability of 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 carrying increased inventory balances to ensure availability of necessary products and to secure pricing. Additionally, products that are in the “work-in-process” stage have increased due to the timing and availability of certain componentry necessary to complete our products.

These global issues and concerns regarding general economic decline or recession are also impacting 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.

As a result of these global issues, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long term impact of the pandemic, 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.

Furthermore, a decrease in orders in a given period could negatively affect our revenues 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 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 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, 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, 2021. Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, 2021, audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements. The Company’s management has evaluated all subsequent events and transactions through the date of filing this report.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. Operating results for the three and six month periods ended June 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2022.

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, 2021, except for the addition of a definition of, and description of our policy for accounting for leases in accordance with the adoption of ASU No. 2016-02, Leases (“ASU 2016-02”) as follows:

Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. A lease must be classified as a finance lease if any of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the

present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.

Right-of-use assets and liabilities are initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right of use assets are reviewed for impairment. The lease liability is initially measured at the present value of future minimum lease payments over the expected lease term at the commencement date of each lease. The Company measures and records a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs.

In these cases where the discount rate implicit in the lease is not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to the Company's incremental borrowing rate it pays on current debt instruments or would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The Company and its subsidiary have no leases classified as finance leases. The Company and its subsidiary currently lease plant, office facilities and equipment under operating leases expiring through August 2024. As of June 30, 2022, the weighted average remaining lease term for our operating leases was 25.8 months. The weighted average discount rate for our operating leases was 12.8%.

The Company’s lease agreements may include options to extend the lease following the initial term. On a case-by-case basis, the Company’s management determines if it is reasonably certain to exercise the renewal option; such renewal options were included in determining the initial lease term.

We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2022, and therefore did not reassess (i) whether any expired or existing contracts are, or contain, leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases. We elected to use hindsight for transition when considering judgments and estimates such as assessments of lease options to extend, or terminate, a lease, or to purchase the underlying asset. As result of the adoption of ASC 842, the Company recognized an accumulative adjustment to beginning retained earnings for the 2022 fiscal year of $44,533.

For all asset classes, we elected to (i) not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less and (ii) not separate non-lease components from lease components, and we have accounted for combined lease and non-lease components as a single lease component. Variable lease payments associated with the Company’s leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on which those payments are assessed. For those leases that are subsequently modified for terms, such changes may require a remeasurement of the lease liability.

Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense.

Use of Estimates

The preparation of condensed 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 condensed 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.

As of June 30, 2022, we had $3,635,187 in net deferred tax assets (“DTAs”). These DTAs include approximately $7,100,000 related to net operating loss carryforwards that can be used to offset taxable income in future periods and reduce our income taxes payable in those future periods. At this time, we consider it more likely than not, that we will have sufficient taxable income in the future that will allow us to realize these DTAs. However, it is possible that certain economic conditions may decrease the likelihood that we will have sufficient taxable income in the future. Therefore, unless we are able to generate sufficient taxable income from our operations, a substantial valuation allowance to reduce our U.S. DTAs may be required, which would materially increase our expenses in the period the allowance is recognized and may have a material adverse effect on our results of operations and statement of financial condition.

On March 11, 2021, Congress passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which includes certain business tax provisions. At this point, we do not believe that these changes will have a material impact on our income tax provision for 2022. We will continue to evaluate the impact of new legislation on our financial position, results of operations, and cash flows.

The U.S. Tax Cuts and Jobs Act (“TCJA”) was signed into law on December 22, 2017. Guidance continues to be issued clarifying the application of this legislation and recent proposed legislation known as Build Back Better is under consideration within both houses of U.S. Congress. Significant business and international provisions have been proposed in various versions of the framework of the bill that could increase our total tax expense. We cannot predict the overall impact that the additional guidance and proposed changes may have on our business. Some jurisdictions have raised tax rates and it is reasonable to expect that other global taxing authorities will be reviewing current legislation for potential modifications in reaction to the implementation of U.S. tax legislation, current economic conditions, and COVID-19 response costs.

Due to the COVID-19 pandemic, economic uncertainty, inflation, increases in interest rates, capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine, and supply chain issues, our business, financial condition and results of operations could be materially adversely affected by any negative impact from these events. 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 on Form 10-Q. 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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. In November 2019, ASU 2016-13 was amended by ASU 2019-10 that changed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, with early

adoption permitted. Further, the ASU clarifies that operating lease receivables are not within the scope of ASC Subtopic 326-20 and should instead be accounted for under the new leasing standard, ASC 842. Management is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements and related disclosures.

NOTE 3 - SHORT-TERM INVESTMENTS

The Company’s short-term investments by significant investment category as of June 30, 2022, are as follows:

Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	6,317,741	$	-	$	(8,426	)	$	-	$	6,309,315
Certificates of deposit		1,662,005		856					1,172		1,664,033
Corporate bonds and notes		1,472,373		-		(3,596	)		11,570		1,480,347
Municipal Securities		2,039,301		-		(1,313	)		22,364		2,060,352
	$	11,491,420	$	856	$	(13,335	)	$	35,106	$	11,514,047

The Company’s short-term investments by significant investment category as of December 31, 2021, are as follows:

Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	2,172,853	$	-	$	-		$	-	$	2,172,853
Certificates of deposit		591,968		-		(3,294	)		1,222		589,896
Corporate bonds and notes		4,293,722		-		(5,432	)		46,820		4,335,110
Municipal Securities		7,411,043		-		(2,334	)		29,182		7,437,891
	$	14,469,586	$	-	$	(11,060	)	$	77,224	$	14,535,750

(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 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 1 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 consists of the following:

	June 30,			December 31,
	2022			2021
Accounts receivable	$	10,024,347		$	5,105,426
Unbilled receivables		-			-
		10,024,347			5,105,426
Less: allowance for doubtful accounts		(10,011	)		(15,622	)
	$	10,014,336		$	5,089,804

Unbilled receivables include amounts associated with percentage of completion and milestone billing accounting, which includes cost and gross profit earned in excess of billing, not currently billable due to contractual provisions. (Recovery) provision for bad debt expense related to accounts receivable was $0 and $11,688 for the three month periods ended June 30, 2022 and 2021, respectively, and $0 and ($4,902) for the six month periods ended June 30, 2022 and 2021, respectively.

NOTE 5 – INVENTORIES

Inventories, net consist of the following:

	June 30,			December 31,
	2022			2021
Raw materials	$	10,319,583		$	5,603,868
Sub-assemblies		614,540			495,320
Work-in-process		558,650			518,838
Finished goods		9,583,112			6,228,892
		21,075,885			12,846,918
Less: reserves for obsolete and slow-moving inventories		(609,030	)		(569,045	)
	$	20,466,855		$	12,277,873

NOTE 6 – LONG LIVED INTANGIBLE ASSETS

Definite lived intangible assets related to acquisition are as follows, as of June 30, 2022:

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	0 to 14 months	$	2,084,515	$	(2,010,746	)	$	73,769
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	$	(3,465,024	)	$	73,769

Definite lived intangibles assets related to acquisitions are as follows, as of December 31, 2021:

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	0 to 20 months	$	2,084,515	$	(1,979,130	)	$	105,385
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	$	(3,433,408	)	$	105,385

As of June 30, 2022, amortization expense of the definite lived intangible assets for the years remaining is as follows:

2022				2023				Total
$	31,615			$	42,154			$	73,769

Amortization expense recognized during the three month periods ended June 30, 2022 and 2021, was $15,807 and $163,901, respectively, and $31,616 and $327,801 for the six month periods ended June 30, 2022 and 2021, respectively.

NOTE 7 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following:

	June 30,		December 31,
	2022		2021
Accrued compensation and related liabilities	$	855,643	$	1,372,342
Deferred revenue and customer deposits		853,591		844,081
Warranty reserve		505,666		571,903
Other accrued expenses		1,082,560		545,951
Deferred rent		-		512,211
	$	3,297,460	$	3,846,488

NOTE 8 – DEBT

Bank Lines of Credit

The Company has recently obtained a domestic revolving line of credit of $2 million, which 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 million. NaN balance is outstanding on June 30, 2022.

Bressner has 3 revolving lines of credit with German institutions, including UniCredit Bank and VR Bank with total availability of up to €2,200,000 (US$2,302,246) as of June 30, 2022. Borrowings under the lines of credit bear interest at a variable rate of Euribor plus a stated rate. The current rates as of June 30, 2022, for the lines of credit range from 3.10% to 4.0%, with the balances remaining open indefinitely or until occurrence of a defined change of control event. There were 0 outstanding lines of credit balances as of June 30, 2022 and December 31, 2021.

Bressner has 5 term loans outstanding as of June 30, 2022, with an aggregate balance outstanding of €3,500,000 (US$3,663,009) as follows:

•

On June 1, 2022, Bressner borrowed €1,500,000 (US$1,526,358) from Commerzbank AG, which bears interest at 2.55% due June 2024, repayable in twenty-four monthly installments, with payments beginning July 31, 2022. The balance outstanding as of June 30, 2022, is €1,500,000 (US$1,569,861). This loan is collateralized by accounts receivable attributable to a specific customer.

•

On February 1, 2022, Bressner converted €500,000 of its line of credit from VR Bank into a note payable, which bears interest at 1.95% with interest only payments to be paid on a quarterly basis. The note is due on August 1, 2022. The balance outstanding as of June 30, 2022, is €500,000 (US$523,287);

•

On February 16, 2022, Bressner converted €500,000 of its line of credit from UniCredit Bank into a note payable, which bears interest at 1.580% with interest only payments to be paid on a quarterly basis. The note is due on August 16, 2022. The outstanding balance as of June 30, 2022, is €500,000 (US$523,287);

•

On June 18, 2021, Bressner converted €500,000 of its line of credit from UniCredit Bank into a note payable, which bore interest at 1.487% with interest only payments to be paid on a quarterly basis. The note was due December 17, 2021, and subsequently extended through June 17, 2022. On June 17, 2022, this note was further extended through December 19, 2022, and the interest rate was increased to 2.45% with accrued interest having been paid current as of the original maturity date. Payment of the principal and all unpaid interest will be due upon maturity in December 2022. The outstanding balance as of June 30, 2022, is €500,000 (US$523,287);

•

On June 4, 2021, Bressner converted €500,000 of its line of credit from UniCredit Bank into a note payable, which bore interest at 1.55% with interest only payments to be paid on a quarterly basis. The note matured on November 30, 2021, with a payment of principal and unpaid interest due upon maturity. The note was paid in full as of December 31, 2021; and

•

On April 9, 2021, Bressner converted €500,000 of its line of credit from UniCredit Bank into a note payable, which bore interest at 1.60% with interest only payments to be paid on a quarterly basis. 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 that bears interest at 1.685% with similar terms. This new note had an original maturity date of June 30, 2022; however, this note was renewed and extended to September 30, 2022. The balance outstanding on the new note as of June 30, 2022 was €500,000 (US$523,287), and as of December 31, 2021 was €500,000 (US$568,825);

Notes Payable

In April 2019, the Company borrowed an aggregate of $350,000 from 3 individuals for a two-year period at an interest rate of 9.5%, which required the Company to make monthly principal and interest payments of $16,100 per month. These loans were secured by the assets of the Company. In connection with these loans, the Company issued to the noteholders warrants to purchase shares of the Company’s common stock in an amount equal to 10% of the original principal at a price per share equal to $2.15. Accordingly, the Company issued to the noteholders warrants to purchase an aggregate of 16,276 shares of the Company’s common stock at an exercise price of $2.15 per share. The relative fair value of each warrant was $0.90. The relative fair value of warrants was estimated using Black-Scholes with the following weighted-average assumptions: fair value of the Company’s common stock at issuance of $2.15 per share; five year contractual term; 44.60% volatility; 0.0% dividend rate; and a risk-free interest rate of 2.307%. The total relative fair value of the warrants issued is $14,037. These loans have matured, and all balances have been paid in full. As such, the balances outstanding as of June 30, 2022 and December 31, 2021, were $0.

Notes Payable – Related Parties

In April 2019, the Company borrowed an aggregate of $1,150,000 from 3 individuals who serve on the Company’s board of directors for a two-year period at an interest rate of 9.5%, which required the Company to make monthly principal and interest payments of $52,900 per month. These loans were secured by the assets of the Company. In connection with these loans, the Company issued to the noteholders warrants to purchase shares of the Company’s common stock in an amount equal to 10% of the original principal at a price per share equal to $2.15. Accordingly, the Company issued to the noteholders warrants to purchase an aggregate 53,490 shares of the Company’s common stock at an exercise price of $2.15 per share. The relative fair value of each warrant was $0.90. The relative fair value of warrants was estimated using Black-Scholes with the following weighted-average assumptions: fair value of the Company’s common stock at issuance of $2.15 per share; five year contractual term; 42.60% volatility; 0.0% dividend rate; and a risk-free interest rate of 2.3067%. The relative fair value of warrants issued is $46,121. These loans have matured, and all balances have been paid in full. As such, the balances outstanding as of June 30, 2022 and December 31, 2021 were $0.

Debt Discount

The relative fair value of warrants issued in connection with the notes payable described above were recorded as debt discount, decreasing notes payable and related-party notes payable and increasing additional paid-in-capital on the accompanying consolidated balance sheets. The debt discounts were amortized to interest expense over the term of the corresponding notes payable using the straight-line method, which approximated the effective interest method.

Amortization of debt discounts of $0 and $1,254 were recognized as interest expense for the three month periods ended June 30, 2022 and 2021, respectively, and $0 and $8,773 for the six month periods ended June 30, 2022 and 2021, respectively.

Paycheck Protection Program Loan

On April 28, 2020, the Company received authorization pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) as administered by the U.S. Small Business Administration (the “SBA”) for a “PPP” loan. On May 11, 2020, the loan was funded, and the Company received proceeds in the amount of $1,499,360 (the “PPP Loan”).

The PPP Loan, which took the form of a two-year promissory note (the “PPP Note”), was scheduled to mature on April 28, 2022 and bore interest at a rate of 1.0% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), was initially to commence on October 28, 2020. The Company did not provide any collateral or guarantees for the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The PPP Note provided for customary events of default, including, among others, those relating to failure to make payment, breaches of any term, obligation, covenant, or condition contained in the PPP Note and payment of unauthorized expenses or use of proceeds contrary to CARES Act rules.

The Company submitted an application with the lender to forgive the PPP Loan, in accordance with SBA Procedural Notice, Control No. 5000-20057, effective as of October 2, 2020. On May 3, 2021, the Company received notification from the SBA that its PPP Loan of $1,499,360, plus accrued interest of $14,994, had been fully forgiven and such amount has been recognized as other income in the consolidated statement of income.

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 are, 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 this 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 0 interest rate (except upon event of default) and, unless earlier converted or redeemed, were scheduled to mature on April 1, 2022.

Pursuant to the Securities Purchase Agreement, the Company had the right to consummate additional closings of up to an additional $3,000,000, subject to the prior satisfaction of certain closing conditions. This right expired effective April 20, 2021, and the Company may no longer consummate additional closings under the Securities Purchase Agreement.

The notes were convertible at any time, in whole or in part, at the option of the investors, into shares of Company common stock at the initial conversion price of $2.50 per share. The conversion price was subject to adjustment for the issuances of securities at a price below the conversion price then in effect and for stock splits, combinations or similar events. If immediately following the close of business on the nine month anniversary of the issuance date of each note, the conversion price then in effect exceeded 135% of the volume weighted average price VWAP (the “Market Price”), the initial conversion price under any such note would be automatically lowered to the Market Price.

Subject to the satisfaction of certain equity conditions set forth in the notes, installment amounts could be satisfied in shares of our common stock, with such installment conversion at a conversion price equal to the lower of (i) the conversion price then in effect; and (ii) the greater of (x) the floor price of $1.00 (80% of the Nasdaq market price at date of purchase agreement) and (y) the lower of (I) 82.5% the volume weighted average price of our common stock on the trading day immediately before the applicable installment date and (II) 82.5% of the quotient of (A) the sum of the volume weighted average price of our common stock for each of the three (3) trading days with the lowest volume weighted average price of our common stock during the twenty (20) consecutive trading day period ending and including the trading day immediately prior to the applicable installment date, divided by (B) three (3). Shares of our common stock to be issued with respect to any such installment would be pre-delivered on the second trading day after the applicable installment notice date (as defined in the notes) with a true-up on the applicable installment date. The market value of any installment amount below the floor price would be cash settled on the applicable installment date.

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 June 30, 2022 was $0.

Management evaluated the embedded conversion feature to determine whether bifurcation was required as a separate derivative liability. Management first determined that the conversion feature was not within the scope of ASC 480. It then determined that the embedded derivative should be separated from the host instrument and accounted for as a derivative instrument because it met the criteria of ASC 815-15-25-1, primarily because the contract provides for delivery of an asset that puts the recipient in substantially the same position as net settlement. However, due in part to the Company’s adoption of ASC 2017-11 on April 1, 2020, which allowed management to disregard the down round provisions of the conversion feature, management determined that a scope exception to derivative accounting existed by satisfying the additional conditions necessary for equity classification specified by ASC 815-10-15-74 and ASC 815-40-25. As a result of management’s analysis, the conversion feature was not accounted for separately from the debt instrument and the Company will recognize the contingent beneficial conversion feature when, or if, such is triggered.

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 June 30, 2022 and 2021, total debt discount amortization was $0 and $44,431, respectively. For the six month periods ended June 30, 2022 and 2021, total debt discount amortization was $1,161 and $95,359, respectively. Such amounts are included in interest expense in the accompanying consolidated statements of income.

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 June 30, 2022 and 2021, was $0 and $46,842, respectively. Debt issuance costs amortized during the six month periods ended June 30, 2022 and 2021, was $1,223 and $100,532, respectively. Such amounts are included in interest expense in the accompanying consolidated statements of income.

A summary of outstanding debt obligations as of June 30, 2022, is as follows:

Loan Description	Current Interest Rate	Maturity Date	Balance (Euro)		Balance ($)		Current Portion		Long-term Portion
Foreign:
Commerzbank AG	2.55%	June-24	€	1,500,000	$	1,569,861	$	773,727	$	796,134
Uni Credit Bank AG	2.45%	December-22		500,000		523,287		523,287		-
Uni Credit Bank AG	1.58%	August-22		500,000		523,287		523,287		-
Uni Credit Bank AG	1.69%	September-22		500,000		523,287		523,287		-
VR Bank	1.95%	August-22		500,000		523,287		523,287		-
			€	3,500,000	$	3,663,009	$	2,866,875	$	796,134

Outstanding debt obligations as of June 30, 2022, consist of the following:

Period Ended June 30, 2022	Foreign		Total
Current portion:
Principal	$	2,866,875	$	2,866,875
Less discount		-		-
Less loan origination costs		-		-
Net liability	$	2,866,875	$	2,866,875

Long-term portion:
Principal	$	796,134	$	796,134
Less discount		-		-
Less loan origination costs		-		-
Net liability	$	796,134	$	796,134

Total:
Principal	$	3,663,009	$	3,663,009
Less discount		-		-
Less loan origination costs		-		-
Net liability	$	3,663,009	$	3,663,009

Total future principal payments under notes payable and related party notes payable as of June 30, 2022, are as follows:

Period Ending June 30,	Foreign			Total
2023	$	2,866,875		$	2,866,875
2024		796,134			796,134
Total minimum payments		3,663,009			3,663,009
Current portion of notes payable		(2,866,875	)		(2,866,875	)
Notes payable, net of current portion	$	796,134		$	796,134

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.

Amendment to 2017 Plan

On June 24, 2020, the Company amended its 2017 Equity Incentive Plan (as 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, by a majority of votes cast, 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.

S-8 Registration Statement

On June 21, 2021, the Company filed a Form S-8 Registration Statement relating to 3,543,114 shares of the Company’s common stock, par value $0.0001 per share, issuable to the employees, officers, directors, consultants and advisors of the Company under the Company’s 2017 Plan, One Stop Systems, Inc. 2015 Stock Option Plan, and One Stop Systems, Inc. 2011 Stock Option Plan.

Executive Employment Agreement

Effective June 24, 2020, the Company entered into an employment agreement with David Raun to serve as the Company’s president and chief executive officer. Pursuant to the terms of the employment agreement, Mr. Raun is entitled to receive 412,125 restricted stock units (“RSUs”) that shall vest over three years, with one third of the RSUs vesting following the one-year anniversary of the date of grant, and the remaining RSUs vesting in four equal installments, commencing nine months after the one-year anniversary of the date of grant and every nine months thereafter until fully vested; and 412,125 Incentive Stock Options (“ISOs”) pursuant to the Company’s 2017 Plan, whereby the exercise price for the ISOs shall be no less than the fair market value of the Company’s common stock at the date of grant ($2.14).

The ISOs shall vest at the end of each of the second and fourth quarters, the price of the Company’s common stock as of the end of quarter two or quarter four, as applicable, shall be determined using the ten-day trailing volume weighted average price (“VWAP”) after reporting of quarter two and quarter four earnings, as applicable. The date of each such determination shall be referred to as a “Determination Date.” If on any Determination Date the Company’s stock price has increased from the prior Determination Date, then a portion of the ISOs shall become vested. The number of ISOs that shall become vested on a Determination Date is determined as follows: ((Price at Determination Date – Price at prior Determination Date) x 100) * 1,177.52 = Vested ISOs. If on any Determination

Date the Company’s stock price is $5.50 per share, all ISOs shall immediately become vested. Mr. Raun’s ISOs are fully vested, but not exercised, based upon achievement of the specified performance objectives.

In the event that Mr. Raun’s employment agreement is terminated for a reason other than “good cause” or for “good reason,” upon Mr. Raun’s execution of an effective waiver and release of claims, unvested RSUs shall accelerate so that an additional twelve (12) months of RSUs shall vest from the termination date.

Stock Options

A summary of stock option activity under each of the Company’s equity incentive plans during the six month period ended June 30, 2022, is as follows:

	Stock Options Outstanding
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding on January 1, 2022		1,025,499		$	2.01		6.35	$	1,867,324
Granted		-			-		-		-
Forfeited / Canceled		-			-		-		-
Exercised		(38,618	)	$	0.83		-	$	119,927
Outstanding on June 30, 2022		986,881		$	2.05		6.05	$	1,875,167
Exercisable as of June 30, 2022		981,876		$	2.04		6.04	$	1,868,961
Vested and expected to vest as of June 30, 2022		986,881		$	2.05		6.05	$	1,875,167

There were 0 options granted during the six month periods ended June 30, 2022 and 2021. The following table presents the grant date fair value of options vested and the intrinsic value of options exercised:

	For the Six Months Ended June 30,
	2022		2021
Grant date fair value of options vested	$	2,005,285	$	4,182,562
Intrinsic value of options exercised	$	119,927	$	43,473

As of June 30, 2022, the amount of unearned stock-based compensation estimated to be expensed from 2022 through 2025 related to unvested stock options is $4,693, net of estimated forfeitures. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 0.42 years.

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 Board of Directors under the Company’s 2017 Plan in connection with the hiring and retention of personnel and are subject to certain conditions. RSUs generally vest quarterly or semi-annually over a period of one to three 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 six months ended June 30, 2022, is as follows:

	Restricted Stock Units
	Number of Shares			Weighted Average Grant Date Fair Value
Unvested on January 1, 2022		604,800		$	4.30
Granted		683,450		$	3.92
Vested		(226,278	)	$	4.36
Canceled		(938	)	$	4.57
Unvested on June 30, 2022		1,061,034		$	4.04

As of June 30, 2022, there was $3,770,869 of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.30 years.

Stock-based compensation expense for the three and six month periods ended June 30, 2022 and 2021, was comprised of the following:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Stock-based compensation classified as:	2022		2021		2022		2021
General and administrative	$	300,346	$	215,825	$	502,441	$	616,825
Production		70,959		78,657		126,415		93,316
Marketing and selling		104,364		114,319		186,544		129,716
Research and development		56,967		56,535		100,064		63,873
	$	532,636	$	465,336	$	915,464	$	903,730

Warrants

The following table summarizes the Company’s warrant activity during the six months ended June 30, 2022:

	Number of Warrants		Weighted Average Exercise Price
Warrants outstanding – January 1, 2022		451,112	$	5.37
Warrants granted		-	$	-
Warrants exercised		-	$	0
Warrants outstanding – June 30, 2022		451,112	$	5.37

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 June 30, 2022 and December 31, 2021, 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, California under a lease that was modified in February 2019 and expires in August 2024. The Company also leases a 3,208 square foot facility in Salt Lake City, Utah that houses our Ion software development team which expires in June 2023. The Company is the lessee of 1,632 square feet located in Anaheim, California, which expires in June 2023. Bressner leases space comprised of 8,073 square feet on a month-to-month basis. All Company leases are operating leases with a weighted average remaining lease term of 25.8 months with a weighted average discount rate of 12.8%. For the three month periods ended June 30, 2022 and 2021, rent expense was $175,041 and $201,120, respectively. For the six month periods ended June 30, 2022 and 2021, rent expense was $336,576 and $452,250, respectively.

Other information related to leases as of the three and six month periods ended June 30, 2022, are as follows:

Supplement Cash Flow Information:

For the Three

Months Ended

June 30, 2022

For the Six

Months Ended

June 30, 2022

Cash paid for amounts included in the measurement of operating lease liabilities

165,785

326,695

The following table presents a maturity of the Company’s operating lease liabilities as of June 30, 2022:

Year	Operating Leases
Remainder of 2022	$	320,655
2023		604,013
2024		410,803
2025		-
2026		-
Thereafter		-
Total lease payments		1,335,471
Less: Amount representing interest		(145,172	)
Present value of lease payment		1,190,299
Less: current portion of operating lease obligation		(549,856	)
Operating lease obligation, net of current portion	$	640,443

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 June 30, 2022, were approximately $9,718,000.

Customer Concentration

During the three month periods ended June 30, 2022 and 2021, the Company had 1 and 3 customers, respectively, in each period that accounted for (in the aggregate) approximately 35% and 42%, respectively, of revenue for which each represented greater than 10% of our consolidated quarterly revenue.

During the six month periods ended June 30, 2022 and 2021, the Company had 1 and 2 customers, respectively, in each period that accounted for (in the aggregate) approximately 31% and 33%, respectively, of revenue for which each represented greater than 10% of our consolidated quarterly revenue.

As of June 30, 2022 and December 31 2021, the Company had 2 customers and 3 customers, respectively, that accounted for approximately 60% and 64%, respectively, of trade accounts receivables for which each customer’s balances represented greater than 10% of our consolidated trade accounts receivable balance.

During the three month periods ended June 30, 2022 and 2021, the Company had approximately 23% and 23%, respectively, of purchases from vendors/suppliers for which each represents greater than 10% of our consolidated purchases.

During the six month periods ended June 30, 2022 and 2021, the Company had approximately 32% and 23%, respectively, of purchases from vendors/suppliers for which each represents greater than 10% of our consolidated purchases.

NOTE 11 – RELATED PARTY TRANSACTIONS

In April 2019, certain members of the Company’s Board of Directors executed definitive agreements to commit funds of up to $4,000,000 as a credit facility. The Company initially borrowed an aggregate of $1,150,000 from members of the Board of Directors and an aggregated of $350,000 from other shareholders for a two-year period at an interest rate of 9.5%, which required the Company to make monthly principal and interest payment of $69,000 per month. In connection with these loans, the Company issued to these note holders, warrants to purchase shares of the Company’s common stock equal to 10% of the original principal of such notes at a price per share equal to $2.15. Accordingly, the Company issued to these note holders warrants to purchase an aggregate of 69,766 shares of the Company’s common stock. The relative fair value of the warrants issued was $60,158. The remaining unfunded commitments expired as of April 1, 2020, and the Company has 0t received any additional funding commitments from members of the Board of Directors. Interest expense on all related-party notes payable for the three months ended June 30, 2022 and 2021 was $0 and $417, respectively, and for the six months ended June 30, 2022 and 2021 was $0 and $4,095, respectively. These loans have matured, and all balances have been paid in full. As such, the balances outstanding as of June 30, 2022 and December 31, 2021 were $0.

NOTE 12 – NET INCOME PER SHARE

Basic and diluted net income per share were calculated as follows for the three and six month periods ended June 30, 2022 and 2021:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Basic and diluted net income per share:
Numerator:
Net income	$	322,822	$	1,697,122	$	902,056	$	1,738,320
Denominator:
Weighted average common shares outstanding - basic		19,940,902		18,513,620		19,416,832		17,934,022
Effect of dilutive securities		1,239,588		1,221,763		930,085		1,371,820
Weighted average common shares outstanding - diluted		21,180,490		19,735,383		20,346,917		19,305,842
Net income per common share:
Basic	$	0.02	$	0.09	$	0.05	$	0.10
Diluted	$	0.02	$	0.09	$	0.04	$	0.09

NOTE 13 – REVENUE, SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in 2 reportable segments: the first being our design and manufacture of high-performance customized computers and flash arrays, which is inclusive of in-flight entertainment and connectivity; and the second being our subsidiary, Bressner, which operates as value-added reseller with minimal product customization. The Company evaluates financial performance on a company-wide basis.

Segment detail for the three and six month periods ended June 30, 2022 and 2021, is as follows:

	For the Three Months Ended June 30, 2022									For the Three Months Ended June 30, 2021
	OSS			Bressner			Total			OSS			Bressner			Total
Revenues	$	10,715,361		$	7,587,982		$	18,303,343		$	9,102,435		$	5,802,574		$	14,905,009
Cost of revenues		(7,180,343	)		(5,922,682	)		(13,103,025	)		(5,762,867	)		(4,489,398	)		(10,252,265	)
Gross profit		3,535,018			1,665,300			5,200,318			3,339,568			1,313,176			4,652,744
Gross margin %		33.0	%		21.9	%		28.4	%		36.7	%		22.6	%		31.2	%
Total operating expenses		(3,876,028	)		(922,367	)		(4,798,395	)		(3,172,432	)		(963,662	)		(4,136,094	)
Income (loss) from operations	$	(341,010	)	$	742,933		$	401,923		$	167,136		$	349,514		$	516,650

	For the Six Months Ended June 30, 2022									For the Six Months Ended June 30, 2021
	OSS			Bressner			Total			OSS			Bressner			Total
Revenues	$	21,297,403		$	14,058,617		$	35,356,020		$	17,704,406		$	10,516,355		$	28,220,761
Cost of revenues		(13,982,054	)		(11,032,993	)		(25,015,047	)		(11,104,229	)		(8,031,004	)		(19,135,233	)
Gross profit		7,315,349			3,025,624			10,340,973			6,600,177			2,485,351			9,085,528
Gross profit %		34.3	%		21.5	%		29.2	%		37.3	%		23.6	%		32.2	%
Total operating expenses		(7,504,643	)		(1,784,275	)		(9,288,918	)		(6,424,217	)		(1,869,630	)		(8,293,847	)
Income (loss) from operations	$	(189,294	)	$	1,241,349		$	1,052,055		$	175,960		$	615,721		$	791,681

Revenue from customers with non-U.S. billing addresses represented approximately 78% and 65% of the Company’s revenue during the three month periods ended June 30, 2022 and 2021, respectively.

Revenue from customers with non-U.S. billing addresses represented approximately 74% and 65% of the Company’s revenue during the six month periods ended June 30, 2022 and 2021, respectively

As of June 30, 2022, substantially all the Company’s long-lived assets are located in the United States of America, with the exception of assets of $155,885 located in Germany.

NOTE 14 – SUBSEQUENT EVENTS

The Company’s management has evaluated subsequent events after the consolidated balance sheet dated as of June 30, 2022, 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.

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. 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 filed on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 24, 2022. Readers are cautioned not to place undue reliance on these forward-looking statements.

Overview

One Stop Systems, Inc. (the “Company”) designs, manufactures, and markets specialized high-performance computing modules and systems, which are designed to target edge 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 artificial intelligence (“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 media and entertainment, 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 the initial public offering of its securities.

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.

On October 31, 2018, OSS GmbH acquired 100% of the outstanding stock 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.

Recent Developments

The negative impact 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, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic uncertainty, which has affected negatively our operations. Additionally, during the second quarter, the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year, which could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.

Currently, we are experiencing increased pricing, longer lead-times, unavailability of 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 carrying increased inventory balances to ensure availability of necessary products and to secure pricing. Additionally, products that are in the “work-in-process” stage have increased due to as the timing and availability of certain componentry necessary to complete our products.

As a result of these global issues, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long-term impact of the pandemic, 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 is to continue their efforts towards responding to the changing economic landscape, to continue to control costs, conserve cash, strengthen margins, 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 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 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 an improvement in margin, as product revenue increases.

Operating expenses

Our operating expenses consist of general and administrative, marketing and selling, 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.

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 consists of miscellaneous income and income received from activities outside of our core business. Other expense includes expenses from activities outside of our core business.

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 six month periods ended June 30, 2022 and 2021, presented in dollars and as a percentage of revenue, respectively.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2022			2021			2022			2021
Revenue	$	18,303,343		$	14,905,009		$	35,356,020		$	28,220,761
Cost of revenue		13,103,025			10,252,265			25,015,047			19,135,233
Gross profit		5,200,318			4,652,744			10,340,973			9,085,528
Operating expenses:
General and administrative		1,821,445			1,648,785			3,596,133			3,806,404
Marketing and selling		1,724,913			1,479,292			3,196,633			2,647,193
Research and development		1,252,037			1,008,017			2,496,152			1,840,250
Total operating expenses		4,798,395			4,136,094			9,288,918			8,293,847
Income from operations		401,923			516,650			1,052,055			791,681
Other income (expense), net:
Interest income		55,507			61,798			106,512			67,098
Interest expense		(44,949	)		(169,031	)		(103,665	)		(319,013	)
Other income (expense), net		(4,169	)		1,522,998			97,952			1,494,369
Total other income, net		6,389			1,415,765			100,799			1,242,454
Income before income taxes		408,312			1,932,415			1,152,854			2,034,135
Provision for income taxes		85,490			235,293			250,798			295,815
Net income	$	322,822		$	1,697,122		$	902,056		$	1,738,320

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2022	2021	2022	2021
Revenue	100.0%	100.0%	100.0%	100.0%
Cost of revenue	71.6%	68.8%	70.8%	67.8%
Gross profit	28.4%	31.2%	29.2%	32.2%
Operating expenses:
General and administrative	10.0%	11.1%	10.2%	13.5%
Marketing and selling	9.4%	9.9%	9.0%	9.4%
Research and development	6.8%	6.8%	7.1%	6.5%
Total operating expenses	26.2%	27.7%	26.3%	29.4%
Income from operations	2.2%	3.5%	3.0%	2.8%
Other income (expense), net:
Interest income	0.3%	0.4%	0.4%	0.2%
Interest expense	-0.2%	-1.1%	-0.3%	-1.1%
Other income (expense), net	0.0%	10.2%	3.3%	5.3%
Total other income, net	0.0%	9.5%	3.4%	4.4%
Income before income taxes	2.2%	13.0%	6.4%	7.2%
Provision for income taxes	0.5%	1.6%	0.7%	1.0%
Net income	1.8%	11.4%	5.7%	6.2%

Comparison of the three and six month periods ended June 30, 2022 and 2021:

Revenue, cost of revenue and gross profit:

	For the Three Months Ended June 30, 2022										For the Three Months Ended June 30, 2021
Entity:	Revenue		Cost of Revenue			Gross Profit		Gross Margin %			Revenue		Cost of Revenue			Gross Profit		Gross Margin %
OSS	$	10,715,361	$	(7,180,343	)	$	3,535,018		33.0	%	$	9,102,435	$	(5,762,867	)	$	3,339,568		36.7	%
Bressner Technology GmbH		7,587,982		(5,922,682	)		1,665,300		21.9	%		5,802,574		(4,489,398	)		1,313,176		22.6	%
	$	18,303,343	$	(13,103,025	)	$	5,200,318		28.4	%	$	14,905,009	$	(10,252,265	)	$	4,652,744		31.2	%

	For the Six Months Ended June 30, 2022										For the Six Months Ended June 30, 2021
Entity:	Revenue		Cost of Revenue			Gross Margin		Gross Margin %			Revenue		Cost of Revenue			Gross Margin		Gross Margin %
OSS	$	21,297,403	$	(13,982,054	)	$	7,315,349		34.3	%	$	17,704,406	$	(11,104,229	)	$	6,600,177		37.3	%
Bressner Technology GmbH		14,058,617		(11,032,993	)		3,025,624		21.5	%		10,516,355		(8,031,004	)		2,485,351		23.6	%
	$	35,356,020	$	(25,015,047	)	$	10,340,973		29.2	%	$	28,220,761	$	(19,135,233	)	$	9,085,528		32.2	%

Revenue

For the three month period ended June 30, 2022, total revenue increased $3,398,334, or 22.8%, as compared to the same period in 2021. OSS saw an increase in revenue of $1,612,926, or 17.7%, as compared to the prior year in 2021. The majority of this increase is attributable to an increase in shipments of product to our media and entertainment customer. Bressner experienced improved revenue of $1,785,408, or 30.8%, as compared to the prior year in 2021. This increase is mainly due to a general economic improvement in Europe attributable to having product available through strategic buys in an environment of global shortages and certain wins on products which are available with good lead times.

For the six month period ended June 30, 2022, total revenue increased $7,135,259, or 25.3%, as compared to the same period in 2021. OSS saw an increase in revenue of $3,592,997, or 20.3%, as compared to the prior year in 2021. The majority of this increase is attributable to an increase in shipments of product to our media and entertainment customer. Bressner experienced improved revenue of $3,542,262, or 33.7%, as compared to the prior year in 2021. This increase is mainly due to a general economic improvement in Europe attributable to product available through strategic buys in an environment of global shortages and certain wins on products which are available with good lead times.

Cost of revenue and gross profit

Cost of revenue increased $2,850,460, or 27.8%, for the three month period ended June 30, 2022, as compared to the prior year in 2021. OSS saw an increase in cost of revenue of $1,417,476, or 24.6%, as compared to the prior year in 2021. The increase in cost of revenue is mainly attributable to our improved sales to our media and entertainment customer which has higher material costs as a percentage of revenue and a fixed charge for labor hours per unit. Bressner’s cost of revenue increased $1,433,284, or 31.9%, as compared to the prior year in 2021, which increase is primarily attributable to higher sales and changes in product mix.

The overall gross margin percentage decreased from 31.2% for the three month period June 30, 2021, to 28.4% for the same period ended June 30, 2022, a decrease of 2.8 percentage points. OSS’ gross margin percentage for the three months ended June 30, 2022, was 33.0%, a decrease of 3.7 percentage points as compared to the prior year period in 2021 of 36.7%, which decrease was primarily attributable to a higher concentration of the sales of our media and entertainment product which has higher material costs as a percentage of revenue and a fixed charge for labor hours per unit. Bressner contributed gross margin at a rate of 21.9% as compared to the same prior year period

in 2021 of 22.6%, a decrease of 0.7 percentage points which decrease was primarily attributable to an increase in material and transportation costs as a result of increasing fuel costs and inflationary pressures.

Cost of revenue increased $5,879,814, or 30.7%, for the six month period ended June 30, 2022, as compared to the prior year in 2021. OSS saw an increase in cost of revenue of $2,877,825, or 25.9%, as compared to the prior year in 2021. The increase in cost of revenue is mainly attributable to our improved sales to our media and entertainment customer. Bressner’s cost of revenue increased $3,001,989, or 37.4%, as compared to the prior year in 2021, which increase is primarily attributable to higher sales and changes in product mix.

The overall gross margin percentage decreased from 32.2% for the six month period June 30, 2021, to 29.2% for the same period ended June 30, 2022, a decrease of 3.0 percentage points. OSS’ gross margin percentage for the six months ended June 30, 2022, was 34.3%, a decrease of 3.0 percentage points as compared to the prior year period in 2021 of 37.3%, which the decrease was primarily attributable to a higher concentration of the sales of our media and entertainment product. Bressner contributed gross margin at a rate of 21.5% as compared to the same prior year period in 2021 of 23.6%, a decrease of 2.1 percentage points which decrease was primarily attributable to an increase in material and transportation costs as a result of increasing fuel costs and inflationary pressures.

Operating expenses

General and administrative expense

General and administrative expense increased $172,660, or 10.5%, for the three month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS experienced an increase of $278,357, or 25.0% and Bressner had a decrease $(105,697), or 19.7%. The overall increase in general and administrative expense is primarily attributable to certain reinstated employee benefits, implemented pay increases and the reestablishment of certain services that were suspended during the strict policies implemented by the Company during the height of the pandemic. Overall, total general and administrative expense decreased as a percentage of revenue to 10.0% during the three month period ended June 30, 2022, as compared to 11.1% during the same period in 2021.

General and administrative expense decreased $210,271, or 5.5%, for the six month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS experienced a decrease of $8,611, or 0.03% and Bressner had a decrease $201,660, or 18.9%. The overall decrease in general and administrative expense is primarily attributable to a reduction stock compensation expense related to general and administrative expense only which was higher in the prior year due to acceleration of performance based vesting, and decreases in amortization and legal expenses which have been offset by increases in certain reinstated employee benefits, implemented pay increases and the reestablishment of certain services that were suspended during the strict policies implemented by the Company during the height of the pandemic. Overall, total general and administrative expense decreased as a percentage of revenue to 10.2% during the six month period ended June 30, 2022, as compared to 13.5% during the same period in 2021.

Selling and marketing expense

Selling and marketing expense increased $245,621, or 16.6%, during the three month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS had an increase of $187,382, or16.3%, which was mainly attributable to normalized business activities which include trade shows, business travel, and increased marketing activities. Bressner had an increase of $58,239, or 17.8%, due to new marketing personnel and sales collateral materials. Generally, both OSS and Bressner experienced additional marketing costs, as markets are beginning to re-open now that certain restrictions have been lifted that were previously imposed during the height of the COVID-19 pandemic. Overall, total marketing and selling expense decreased as a percentage of revenue to 9.4% during the three month period ended June 30, 2022, as compared to 9.9% during the same period in 2021.

Selling and marketing expense increased $549,440, or 20.8%, during the six month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS had an increase of $447,606, or 21.9%, which was mainly attributable to normalized business activities, which include trade shows, business travel, and increased marketing activities. Bressner had an increase of $101,834, or 16.8%, due to new marketing personnel and sales collateral materials. Generally, both OSS and Bressner experienced additional marketing costs as markets are

beginning to re-open now that certain restrictions have been lifted that were previously imposed during the height of the COVID-19 pandemic. Overall, total marketing and selling expense decreased as a percentage of revenue to 9.0% during the six month period ended June 30, 2022, as compared to 9.4% during the same period in 2021.

Research and development expense

Research and development expense increased $244,020, or 24.2%, during the three month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS saw an increase of $237,857, or 26.2%. This increase was largely driven by the deployment of more engineering resources on internal development projects rather than on customer billable projects for which such costs would have been charged to cost of revenue rather than being charged to research and development expense. Bressner had a modest increase of $6,163, or 6.2%. Overall, total research and development expense as a percentage of revenue was relatively flat at 6.8% as a percentage of revenue the three month periods ended June 30, 2022 and 2021.

Research and development expense increased $655,902, or 35.6%, during the six month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS saw an increase of $641,431, or 39.0%. This increase was largely driven by the deployment of more engineering resources on internal development projects rather than on customer billable projects for which such costs would have been charged to cost of revenue rather than being charged to research and development expense. Bressner had a modest increase of $14,471, or 7.3%. Overall, total research and development expense as a percentage of revenue increased as a percentage of revenue to 7.1% during the six month period ended June 30, 2022, as compared to 6.5% during the same period in 2021.

Interest income

Interest income decreased $6,291 for the three month period ended June 30, 2022, as compared to the same prior year period in 2021. The decrease is attributable to lower investments in marketable securities and lower yields during the current period.

Interest income increased $39,414 for the six month period ended June 30, 2022, as compared to the same prior year period in 2021. The increase is attributable to interest on marketable securities that were purchased in April 2021.

Interest expense

Interest expense decreased $124,082 for the three month period ended June 30, 2022, as compared to the same period in 2021. On April 24, 2020, the Company borrowed $3,000,000 through a senior secured convertible debt offering issued with a 10% original issue discount and incurred legal costs associated with this debt offering. Interest and related transaction costs are amortized using the effective interest method for which the periodic amortization costs decreases over the time. The notes issued in the debt offering were scheduled to mature on April 1, 2022; however, on March 30, 2022, these notes converted into shares of common stock of the Company, resulting in this reduction in interest expense.

Interest expense decreased $215,348 for the six month period ended June 30, 2022, as compared to the same period in 2021. On April 24, 2020, the Company borrowed $3,000,000 through a senior secured convertible debt offering issued with a 10% original issue discount and incurred legal costs associated with this debt offering. Interest and related transaction costs are amortized using the effective interest method for which the periodic amortization costs decreases over the time. The notes issued in the debt offering were scheduled to mature on April 1, 2022; however, on March 30, 2022, these notes converted into shares of common stock of the Company, resulting in this reduction in interest expense.

Other income (expense), net

Other income (expense) for the three month period ended June 30, 2022, resulted in net other expense of ($4,169), as compared to net other income of $1,522,998 in the same prior year period in 2021, for a net decrease of

$1,527,167. The most significant difference was the recognition of a gain on the forgiveness of the PPP loan and interest in the amount of $1,514,354 that occurred in the prior year.

Other income for the six month period ended June 30, 2022, resulted in net other income of $97,952, as compared to net other income of $1,494,369 in the same prior year period in 2021, for a net decrease of $1,396,417. The most significant difference was the recognition of a gain on the forgiveness of the PPP loan and interest in the amount of $1,514,354 that occurred in the prior year as well as the sale of the URL for Magma.com, in the current year which has been offset by foreign currency losses.

Provision (benefit) for income taxes

We have recorded an income tax provision of $85,490 and $235,293, respectively, for the three month period ended June 30, 2022 and 2021, respectively, and $250,798 and $295,815, respectively, for the six month period ended June 30, 2022 and 2021, respectively The effective tax rate for the period ended June 30, 2022 and 2021, differs from the statutory rate mainly due to permanent non-deductible goodwill amortization for Bressner Technology GmbH, deductions related to expenses of OSS stock options, as well as projecting federal, foreign and state tax liabilities for the year. The annual expect tax rate for 2022 is anticipated to be approximately 20.86%.

Liquidity and Capital Resources

On March 3, 2021, we sold and issued 1,497,006 shares of Company common stock to an accredited investor pursuant to a Securities Purchase Agreement through a registered direct offering, resulting in net proceeds of $9,188,673 to us.

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 June 30, 2022, we had total cash and cash equivalents of $2,874,831, with short-term investments of $11,514,047, and total working capital of $32,914,013. Cash and cash equivalents held by Bressner totaled US$2,636,852 on June 30, 2022. Bressner’s debt covenants do not permit the use of those funds by its parent company.

During the year ended December 31, 2021, we had income from operations of $1,747,027, with cash generated by operating activities of $5,622,596.

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 Report, during the second quarter, the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year, 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 we may alter our plans to address concerns as they may arise. For a further description and risk factors associated with COVID-19, please see Part 1A of our Annual Report filed on March 24, 2022.

Management’s plans are to continue its efforts towards responding to the changing economic landscape, including due to inflation, a potential recession, increases in the Federal Reserve interest rate, supply chain constraints and international conflicts, by continuing to control hiring and costs, conserve cash, strengthen margins, and improve company-wide execution.

While management expects these actions to result in prospective cost containment, and our results of operations for the year ended December 31, 2021, and the three and six month periods ended June 30, 2022, improved partially as a result of such actions, 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 million from its bank, which 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 million. Although the Company has not drawn down on the line of credit to date, it may choose to do so in the future.

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 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 million 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 wants 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 six month periods ended June 30, 2022 and 2021:

	For the Six Months Ended June 30,
Cash flows:	2022			2021
Net cash (used in) provided by operating activities	$	(7,576,355	)	$	2,788,363
Net cash provided by (used in) investing activities	$	2,878,600		$	(14,723,446	)
Net cash provided by financing activities	$	2,614,463		$	9,628,718

Operating Activities

During the six month period ended June 30, 2022, we used $7,576,355 in cash for operating activities, a difference of $10,364,718 when compared to the cash provided by operating activities of $2,788,363 during the six month period in year 2021. This significant decrease in operating cash flow is mainly attributable to significant increases in working capital requirements for accounts receivable and inventories.

The change in cash used in operating activities during the six month period ended June 30, 2022, as compared to the same period in 2021, is primarily a result of a reduction in profitability from net income of $1,738,320, which

included the PPP loan and interest forgiveness of $1,514,354 in the prior year period to net income of $902,056 in the current year, a reduction of $836,264. Net favorable adjustments in the current period for non-cash items of $1,593,032 were comprised of $1,635,669 of favorable non-cash items, offset by $42,637 of negative non-cash items that did not affect operating cash flow. Additionally, there was an increase in the use of operating cash flow for working capital items of $10,360,900.

Net working capital requirements for the six month period ended June 30, 2022, were $10,071,443, as compared to the prior year period sources of working capital of $289,457, an increase in the use of working capital of $10,360,900. The source of working capital of $4,441,609 was attributable to changes in accounts payable and accrued expenses and other liabilities for the comparable period. These sources were offset by uses of working capital of $14,513,052 being applied to changes in accounts receivables, inventory levels, prepaid and other current assets.

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 six month period ended June 30, 2022, the Company generated cash of $2,878,600 in investing activities, as compared to $14,723,446 used during the prior year period in 2021, a net change of $17,602,046. The source of investing funds was attributable to the redemption of short-term investments and the sale of the Magma.com URL. 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 six month period ended June 30, 2022, the Company generated $2,614,463 in cash from borrowing activities for Bressner for working capital to finance inventory purchases, as compared to the cash provided by financing activities of $9,628,718, during the same six month period year in 2021. The main differences between the comparative periods are new borrowings from our German subsidiary, Bressner for inventories, and the proceeds received in the prior year from a $10,000,000 registered direct offering that was completed in March 2021.

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.

As discussed in this Quarterly Report on Form 10-Q, the world has been affected due to the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine and economic uncertainty. Inflation has risen, Federal Reserve interest rates have increased recently, and the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year. 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.

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.

Also, 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.

Inflation

We experienced some affects due to inflation during the most recent period, including increased product pricing due to semiconductor product shortages, increased transportation costs due to increases in the cost of energy and general price increases due to inflation in the economy. 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.

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 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 year ended December 31, 2021. 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 and six month periods ended June 30, 2022, except for adoption of ASU 842, Leases (“ASU 842”).

Leases

On January 1, 2022, the Company adopted ASC 842 using the Transition method. The reported results for the three and six month periods ended June 30, 2022, reflect the application of the guidance of ASC 842 while the reported results for the three and six month periods ended June 30, 2021, were prepared under the guidance of ASC 840.

Per the Company’s consolidated financial statements Note 2- Significant Accounting Policies, we have adopted “Lease accounting” as required by FASB ASC 842. See Note 2 to the accompanying financial statements for further details.

Recently implemented accounting pronouncements

Effective January 1, 2022, the Company implemented ASU No. 2016-02, Leases (“ASU 2016-02”). Under ASU 2016-02, the Company recognized for all leases a lease liability, which is our obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company elected to use the transition method and reflected the cumulative effect of adoption as an adjustment to beginning retained earnings.

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

Financial instruments that potentially expose us to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. We place our cash and cash equivalents with financial institutions with high credit quality. On June 30, 2022 and December 31, 2021, we had $2,874,831 and $5,101,174, respectively, of cash and cash equivalents on deposit or invested with our financial and lending institutions. 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 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 income.

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 income. 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 through the use of 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 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 June 30,						For the Six Months Ended June 30,
	2022			2021			2022			2021
Net income	$	322,822		$	1,697,122		$	902,056		$	1,738,320
Depreciation and amortization		254,429			394,794			524,220			775,572
Stock-based compensation expense		532,636			465,336			915,464			903,730
Interest expense		44,949			169,031			103,665			319,013
Interest income		(55,507	)		(61,798	)		(106,512	)		(67,098	)
PPP loan and interest forgiveness		-			(1,514,354	)		-			(1,514,354	)
Provision for income taxes		85,490			235,293			250,798			295,815
Adjusted EBITDA	$	1,184,819		$	1,385,424		$	2,589,691		$	2,450,998

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, 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 (loss) and basic and diluted earnings per share:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2022		2021			2022		2021
Net income	$	322,822	$	1,697,122		$	902,056	$	1,738,320
Amortization of intangibles		15,807		163,901			31,616		327,801
Stock-based compensation expense		532,636		465,336			915,464		903,730
PPP loan and interest forgiveness		-		(1,514,354	)		-		(1,514,354	)
Non-GAAP net income	$	871,265	$	812,005		$	1,849,136	$	1,455,497
Non-GAAP net income per share:
Basic	$	0.04	$	0.04		$	0.10	$	0.08
Diluted	$	0.04	$	0.04		$	0.09	$	0.08
Weighted average common shares outstanding:
Basic		19,940,902		18,513,620			19,416,832		17,934,022
Diluted		21,180,490		19,735,383			20,346,917		19,305,842

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 Six Months Ended June 30,
Cash flow:	2022			2021
Net cash (used in) provided by operating activities	$	(7,576,355	)	$	2,788,363
Capital expenditures		(141,685	)		(199,799	)
Free cash flow	$	(7,718,040	)	$	2,588,564

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 on Form 10-Q, 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 June 30, 2022, 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 condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2021, 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 on Form 10-K, 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.

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

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.					X

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.					X

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)

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: August 11, 2022	By:	/s/ David Raun
		David Raun
		President and Chief Executive Officer (Principal Executive Officer)

Date: August 11, 2022	By:	/s/ John W. Morrison Jr.
		John W. Morrison Jr.
		Chief Financial Officer (Principal Financial and Accounting Officer)

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One Stop Systems (OSS) 10-Q2022 Q2 Quarterly report

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