# One Stop Systems, Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [One Stop Systems, Inc.](/companies/oss.md) (CIK 1394056)
- Form: 10-Q
- Filed: 2023-05-11
- Accepted by EDGAR: May 11, 2023, 16:05 ET
- Period: 2023-03-31
- Accession: 0000950170-23-021209
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1394056/000095017023021209/oss-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1394056/000095017023021209/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $16.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-01-01 to 2023-03-31 | $11.7m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-01-01 to 2023-03-31 | $5.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-01-01 to 2023-03-31 | $1.2m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-03-31 | $2.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | −$196.3k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $32.7k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $261.5k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | −$400.5k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 20,251,509 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $24.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $85.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-03-31 | $3.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $47.9m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $58.2m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $13.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $13.7m | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $207.5k | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-03-31 | $3.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-03-31 | $44.4m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 56,210 characters.

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

### Overview

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

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

During the year ended December 31, 2015, the Company formed a wholly owned subsidiary in Germany, OSS GmbH. Then, in July 2016, the Company acquired Magma and its operations.

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

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

### Recent Developments

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

Furthermore, in the first quarter of 2023, we implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate, our strategy to focus on the AI Transportables industry, and our military business in particular. In furtherance of this strategy and our goals, we are taking various steps to strengthen our management team with individuals who have deep experience and high-level contacts in the defense sector. In connection with this transition, on February 9, 2023, we announced that David Raun, the Company’s chief executive officer, will be stepping down, effective upon the appointment of his successor. Mr. Raun will continue to serve as a member of the Company’s board of directors. Additionally, in connection with this transition, we also (i) appointed James Ison, our chief marketing and sales officer, as our chief product officer, (ii) initiated a search for a vice president of sales, (iii) implemented a reduction in force, consisting of 12 employees, in those areas of our business that we are transitioning our focus away from; and (iv) made certain other internal structural changes.

We have not yet identified a candidate to fill the roles of chief executive officer or a vice president of sales; however, we have retained an internationally recognized search firm to aid in this effort. Additionally, in February 2023, our board of directors constituted a new committee of the board, the Strategic Transition Committee, to assist in the identification, transition and retention of a successor chief executive officer, including to work with the engaged search firm to accomplish the foregoing, to provide support to our management team throughout the transition, and to perform other duties as may be necessary or desirable from time to time in connection with the reorganization of the Company.

Members of the Strategic Transition Committee consist of Jack Harrison (chair of the committee), Gioia Messinger and Kenneth Potashner. As compensation for the services that they are expected to perform as members of the Strategic Transition Committee (i) Mr. Harrison and Ms. Messinger shall be entitled to receive $2,000 per month in cash, commencing January 1, 2023, and continuing for so long as the Strategic Transition Committee remains in effect, which cash payments shall be paid to each of the relevant members in one lump sum at or about such time that the Strategic Transition Committee is disbanded, and (ii) Mr. Potashner shall be entitled to receive (A) 3,333 shares of Company common stock per month, commencing November 1, 2022, and continuing for so long as the Strategic Transition Committee remains in effect, which shares shall be issued to Mr. Potashner in one grant at or about such time that the Strategic Transition Committee is disbanded, and (B) a one-time cash payment equal to 30% of the total value of the shares issued to Mr. Potashner to cover taxes payable in connection with the issuance of such shares.

In connection with the anticipated transition to a new chief executive officer, on April 3, 2023, the Company and Mr. Raun entered into an Amended and Restated Employment Agreement (the “A&R Agreement”), which supersedes that certain Employment Agreement between the Company and Mr. Raun, dated June 24, 2020, as amended by that Amendment to Employment Agreement, dated July 15, 2020 (collectively, the “Prior Agreement”).

The term of the A&R Agreement commenced on April 3, 2023 (the “Effective Date”) and will remain in effect until the earlier of (i) June 24, 2023 and (ii) the first date on which Mr. Raun’s successor commences his or her employment as the chief executive officer of the Company, unless earlier terminated or extended pursuant to terms of the A&R Agreement.

The terms and conditions of the A&R Agreement are substantially similar to those included in the Prior Agreement, with the exception of the following material changes: (i) in addition to his base salary, which remains unchanged, Mr. Raun shall be entitled to receive a retention bonus that is equivalent to 50% of his base salary, which shall be prorated on a daily basis through his termination date; (ii) Mr. Raun shall be eligible to receive, at the sole discretion of the Company’s board of directors, a performance-based grant of 201,000 RSUs (the “Incentive RSUs”) pursuant to the Company’s 2017 Equity Incentive Plan, which, if granted, shall vest at a rate of 183.5 RSUs per day, commencing February 2, 2023 and ending on his termination date, provided that any of such Incentive RSUs that remain unvested as of his termination date shall be forfeited and cancelled; (iii) in addition to those severance payments payable to Mr. Raun in the event that his employment is terminated for a reason other than

“good cause,” as set forth in Section 12(b) of the Prior Agreement and A&R Agreement, and except with respect to any unvested Incentive RSUs, all other RSUs held by Mr. Raun that are scheduled to vest within twelve months from his termination date shall be accelerated to vest as of the date of termination, provided, that with respect to that tranche of unvested RSUs held by Mr. Raun that is scheduled to vest on August 3, 2024, the Company further agrees to prorate and accelerate the vesting of that portion of such tranche that would otherwise vest within twelve months of the termination date if vesting of the RSUs in such tranche were to vest on a daily basis (as opposed to a six month basis) (collectively, the “Severance Benefits”); (iv) Mr. Raun shall also be entitled to receive the Severance Benefits in the event that the A&R Agreement expires pursuant to its terms, subject to execution of a release and waiver by Mr. Raun; and (v) the Board agrees to nominate Mr. Raun for election to the Company’s board of directors at the Company’s 2023 Annual Meeting of Stockholders.

Additionally, on April 7, 2023, we amended our Amended and Restated Bylaws (the “Bylaws”) to (i) revise Article II, Section 2.5 of the Bylaws to incorporate those requirements set forth in Rule 14a-19 of the Securities Exchange Act of 1934, as amended, as recently implemented by the SEC; and (ii) revise Article II, Section 2.8 of the Bylaws to decrease the quorum threshold necessary to conduct business at shareholder meetings of the Company to one-third of the voting power of the Company’s capital stock issued and outstanding as of the relevant record date. Pursuant to Article X of the Bylaws, stockholder approval was not required to amend the Bylaws.

The 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, the general consensus among economists continues to suggest that we should expect a higher recession risk to continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations.

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

With respect to our media and entertainment business, we are seeing an acceleration in our customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry. This is particularly true of their virtual products, which do not require the same level of ruggedization as this system is not typically operated in harsh environments and for which software is being developed to eventually provide a real-time cloud solution. As a result, our customer has begun transitioning to a lower cost, commodity type equipment solution, and we are experiencing a decrease in the demand for our high-compute, ruggedized media and entertainment focused equipment and our expertise.

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.

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, as well as other factors discussed in this Quarterly Report, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long-term impacts of the 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, including in connection with our media and entertainment customer’s transition to the cloud, 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’s plans with respect to the above are to continue their efforts towards responding to the changing economic landscape, to continue to control costs, conserve cash, strengthen margins through the introduction of new product lines focusing on the autonomous truck diving and artificial intelligence compute capabilities for military and industrial applications, and improve company-wide execution.

### Components of Results of Operations

#### Revenue

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

#### Cost of revenue

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

#### Operating expenses

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

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

*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 month periods ended March 31, 2023 and 2022, presented in dollars and as a percentage of revenue, respectively.

|  | For the Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Revenue | $16,781,894 | $17,052,677 |
| Cost of revenue | 11,711,132 | 11,912,022 |
| Gross profit | 5,070,762 | 5,140,655 |
| Operating expenses: |  |  |
| General and administrative | 2,285,101 | 1,774,689 |
| Marketing and selling | 1,786,681 | 1,471,720 |
| Research and development | 1,195,328 | 1,244,115 |
| Total operating expenses | 5,267,110 | 4,490,524 |
| (Loss) income from operations | (196,348) | 650,131 |
| Other income (expense), net: |  |  |
| Interest income | 110,266 | 51,005 |
| Interest expense | (32,705) | (58,715) |
| Other (expense) income, net | (20,223) | 102,121 |
| Total other income, net | 57,338 | 94,411 |
| (Loss) income before income taxes | (139,010) | 744,542 |
| Provision for income taxes | 261,502 | 165,308 |
| Net (loss) income | $(400,512) | $579,234 |

30

|  | For the Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Revenue | 100.0% | 100.0% |
| Cost of revenue | 69.8% | 69.9% |
| Gross profit | 30.2% | 30.1% |
| Operating expenses: |  |  |
| General and administrative | 13.6% | 10.4% |
| Marketing and selling | 10.6% | 8.6% |
| Research and development | 7.1% | 7.3% |
| Total operating expenses | 31.4% | 26.3% |
| (Loss) income from operations | -1.17% | 3.8% |
| Other income (expense), net: |  |  |
| Interest income | 0.7% | 0.3% |
| Interest expense | -0.2% | -0.3% |
| Other (expense) income, net | -0.1% | 0.6% |
| Total other income, net | 0.3% | 0.6% |
| (Loss) income before income taxes | -0.8% | 4.4% |
| Provision for income taxes | 1.6% | 1.0% |
| Net (loss) income | -2.4% | 3.4% |

### Comparison of the three month periods ended March 31, 2023 and 2022:

Revenue, cost of revenue and gross profit:

| Entity: | For the Three Months Ended March 31, 2023 Revenue | Cost of Revenue | Gross Profit | Gross Margin % | For the Three Months Ended March 31, 2022 Revenue | Cost of Revenue | Gross Profit | Gross Margin % |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| OSS | $8,630,586 | $(5,501,710) | $3,128,876 | 36.3% | $10,582,042 | $(6,801,711) | $3,780,331 | 35.7% |
| OSS Europe | 8,151,308 | (6,209,422) | 1,941,886 | 23.8% | 6,470,635 | (5,110,311) | 1,360,324 | 21.0% |
|  | $16,781,894 | $(11,711,132) | $5,070,762 | 30.2% | $17,052,677 | $(11,912,022) | $5,140,655 | 30.1% |

#### Revenue

For the three months ended March 31, 2023, our total revenue decreased $270,783, or 1.6%, as compared to the same period in 2022. OSS saw a decrease in revenue of $1,951,456, or 18.4%, as compared to the same period in 2022. The majority of this decrease is primarily attributable to decreases in shipments to our media and entertainment customer. OSS Europe experienced an increase of $1,680,673, or 26.0%, as compared to the same period in 2022 as a result of additional project based related business, increases in the number of smaller accounts and having available inventory.

#### Cost of revenue and gross profit

Cost of revenue decreased $200,890, or 1.7%, for the three months ended March 31, 2023, as compared to the same period in 2022. OSS saw a decrease in cost of revenue of $1,300,001, or 19.1%, as compared to the same period in 2022. This decrease in cost of revenue is mainly attributable to a decrease in our sales to our media and entertainment customer (disguise). OSS Europe’s cost of revenue increased $1,099,111, or 21.5%, as compared to the same period in 2022 due to additional sales attributable to project based related business, increases in the number of smaller accounts and having available inventory.

The overall gross margin percentage was 30.2% (almost flat compared to the same period in 2022 of 30.1%). OSS’ gross margin percentage for the three months ended March 31, 2023, was 36.3%, an improvement of 0.6 percentage points as compared to the prior year period in 2022 of 35.7%, due to the predominance of higher margin data storage units and componentry to Raytheon. OSS Europe contributed gross margin at a rate of 23.8%, as compared to the same period in 2022 of 21.0%, an increase of 2.8 percentage points, resulting from intelligent stock management of having sought-after products available.

#### Operating expenses

#### General and administrative expense

General and administrative expense increased $510,412, or 28.8%, for the three months ended March 31, 2023, as compared to the same period in 2022. OSS experienced an increase of $470,568, or 35.1%. The increase in general and administrative expense is primarily attributable to increased costs associated with our organizational restructuring and outside professional services. OSS Europe had an increase of $39,844, or 9.2% attribution to increased employee costs attributable to new employees and expenditures for additional computer storage. Overall, total general and administrative expense increased as a percentage of revenue to 13.6% for the three months ended March 31, 2023, as compared to 10.4% during the same period in 2022.

#### Marketing and selling expense

Marketing and selling expense increased $314,961, or 21.4%, for the three months ended March 31, 2023, as compared to the same period in 2022. OSS had an increase of $197,438, or 17.2%, which was mainly attributable to a return to a more normalized business environment, which included additional costs for tradeshows, advertising, travel and severance benefits for personnel. OSS Europe had an increase of $117,523, or 36.7%, primarily resulting from the addition of new marketing personnel and sales collateral material. Generally, both OSS and OSS Europe experienced additional marketing expenses, as markets have reopened from the restrictions that were imposed during the height of the COVID-19 pandemic. Overall, total marketing and selling expense increased as a percentage of revenue to 10.6% during the three months ended March 31, 2023, as compared to 8.6% during the same period in 2022.

#### Research and development expense

Research and development expense decreased $48,787, or 3.9%, for the three months ended March 31, 2023, as compared to the same period in 2022. OSS saw a decrease of $58,529, or 5.2%. The decrease was largely driven by engineering resources being deployed on chargeable projects, which costs are reclassified as a component of costs of sales. OSS Europe experienced a modest increase of $9,742, or 9.1%. This increase was attributable to increased testing of product to support the increase in revenue. Overall, total research and development expense as a percentage of revenue decreased as a percentage of revenue to 7.1% during the three months ended March 31, 2023, as compared to 7.3% during the same period in 2022.

#### Interest income

Interest income increased $59,261 for the three months ended March 31, 2023, as compared to the same period in 2022. The increase is attributable to higher interest rates on qualified short-term investments that meet Company requirements.

#### Interest expense

Interest expense decreased $26,010 for the three months ended March 31, 2023, as compared to the same period in 2022 as a result of the maturity of the senior secured convertible note that matured on April 1, 2022.

#### Other income (expense), net

Other income (expense), for the three months ended March 31, 2023, resulted in net other expense of $20,223, as compared to net other income of $102,121, in the same period in 2022, for a net decrease of $122,344. The most significant contributions to the year-over-year change include the sale of a URL for Magma.com in 2022 for $125,000.

#### Provision for income taxes

We have recorded an income tax provision of $261,502 and $165,308, respectively, for the three months ended March 31, 2023 and 2022. The effective tax rate for the three months ended March 31, 2023 and 2022, differed from the statutory rate mainly due to permanent non-deductible goodwill amortization for OSS Europe, change in valuation allowance, deductions related to expenses of OSS stock options, research and development credits, and changes in reserves for uncertain tax positions, as well as projecting foreign and state tax liabilities for the year. Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization requirement increases our deferred tax assets and the related valuation allowance and may have an impact on payment of tax liabilities. The effective tax rate for the three months ended March 31, 2023, was 28.9%, as compared to 20.7% in the prior period in 2022.

### Liquidity and Capital Resources

Historically, our primary sources of liquidity have been provided by public and private offerings of our securities and revenues generated from our business operations. As of March 31, 2023, we had total cash and cash equivalents of $3,470,061, with short-term investments of $9,218,870, and total working capital of $34,758,585. Cash and cash equivalents held by OSS Europe totaled US$1,581,071 on March 31, 2023. OSS Europe’s debt covenants do not permit the use of those funds by its parent company.

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

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

As discussed elsewhere in this Quarterly Report, during the first quarter of 2023, the general consensus among economists continued to suggest 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, if appropriate, we may alter our plans to address such concerns as they may arise.

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

While management expects these actions and continued diligence towards cost growth and containment will result in a decreased rate of growth in costs as compared to revenue growth, our results of operations for the three months ended March 31, 2023 and the year ended December 31, 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 $2,000,000 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 $4,000,000. Although the Company has not drawn down on the line of credit to date, it may choose to do so in the future.

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

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

The following table summarizes our cash flows for the three month periods ended March 31, 2023 and 2022:

| Cash flows: | For the Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash provided by (used in) operating activities | $23,964 | $(5,018,398) |
| Net cash provided by investing activities | $833,524 | $1,028,504 |
| Net cash (used by) provided by financing activities | $(525,933) | $1,131,345 |

#### Operating Activities

During the three month period ended March 31, 2023, we provided $23,964 in cash for operating activities, a difference of $5,042,362 when compared to the cash used by operating activities of $5,018,398 during the same period in 2022.

The change in cash used in operating activities during the three month period ended March 31, 2023, as compared to the same period in 2022, is primarily a result of a reduction in profitability from net income in 2022 of $579,234, to a net loss of $400,512 in the current year, a reduction of $979,746. Net favorable adjustments in the current period for non-cash items of $259,836, which were comprised of $424,536 of favorable non-cash items, offset by $164,699 of negative non-cash items that did not affect operating cash flow. Additionally, there was a net increase in the use of operating cash flow for working capital items of $5,762,271.

Net working capital requirements for the three month period ended March 31, 2023, were $483,324, as compared to the prior year period uses of working capital of $6,245,595, a reduction in the use of working capital of $5,762,271. The source of working capital of $7,491,142 was attributable to changes in accounts receivables, inventory levels and accrued expenses and other liabilities for the comparable period. These sources were offset by uses of working capital of $1,728,871 being applied to changes in and prepaid expenses and other current assets and accounts payable.

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

#### Investing Activities

During the three month period ended March 31, 2023, the Company generated cash of $833,524 in investing activities, as compared to $1,028,504 provided by investing activities during the prior year period in 2022, a net decrease of $194,980. The source of investing funds was attributable to the redemption of short-term investments in both years and the sale of the Magma.com URL in the prior year. Additionally, the Company continues to enhance the capabilities of its ERP system, and purchase test equipment for the engineering department. We do not anticipate any significant investments not normally anticipated in the original course of business in the near term.

#### Financing Activities

Given the current economic, financial, and geopolitical instability, the Company believes it is imperative to maintain opportunities for additional financial resources to ensure financial stability during trying economic times. During the three month period ended March 31, 2023, the Company used $525,933 in cash for debt service payments on OSS Europe borrowings and payment of tax on the net exercise of vested RSUs. During the same period in 2022, the Company generated cash through proceeds for new borrowings for inventory at OSS Europe.

### 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, the world has been affected due to the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine and economic uncertainty, amongst other things. Inflation has risen, Federal Reserve interest rates have increased recently, there is currently a concern regarding instability of the banking systems in the United States and the general consensus among economists suggests that we should continue to 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.

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

With respect to our media and entertainment business, we are seeing an acceleration in our customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry. This is particularly true of their virtual products, which do not require the same level of ruggedization as this system is not typically operated in harsh environments and for which software is being developed to eventually provide a real-time cloud solution. As a result, our customer has begun transitioning to a lower cost, commodity type equipment solution, and we are experiencing a decrease in the demand for our high-compute, ruggedized media and entertainment focused equipment and our expertise.

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.

In the first quarter of 2023, we implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate our strategy to focus on the AI Transportables industry, and our military business in particular. In furtherance of this strategy and our goals, on February 9, 2023, we announced that David Raun, the Company’s chief executive officer, will be stepping down, effective upon the appointment of his successor. Mr. Raun will continue to serve as a member of the Company’s board of directors.

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

### Off balance sheet arrangements

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

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

### Stockholder transactions

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

### Critical accounting policies and estimates

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

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

We periodically re-evaluate and adjust our critical accounting policies as circumstances change. There were no significant changes to our critical accounting policies during the three month period ended March 31, 2023, except for adoption of ASU 2016-13, "Financial Instruments-Credit Losses" (Topic 326): Measurement of Credit Losses on Financial Instruments".

### Recently implemented accounting pronouncements

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

### Interest rate risk

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

### Concentration of credit risk

At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation (“SIPC”), of which both provide basic deposit coverage with limits up to $250,000 per owner. As of March 31, 2023, the Company had $1,360,518 of cash in our accounts that exceeded the insurance limits. The Company has not experienced any losses in these accounts, and believes that the financial institutions at which such amounts are held are stable; however, no assurances can be provided. In Germany, the deposit insurance is €100,000 per bank, per customer. OSS Europe has funds on deposit in both Euro and U.S. dollar denominations of €1,261,987 (US$1,372,071) with banks in excess of the insurance limits.

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

### Foreign currency risk

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

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

### Derivative Financial Instruments

We employ derivatives on a periodic basis to manage certain market risks 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 March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net (loss) income | $(400,512) | $579,234 |
| Depreciation and amortization | 272,273 | 269,791 |
| Stock-based compensation expense | 474,209 | 382,828 |
| Interest expense | 32,705 | 58,715 |
| Interest income | (110,266) | (51,005) |
| Provision for income taxes | 261,502 | 165,308 |
| Adjusted EBITDA | $529,911 | $1,404,871 |

#### 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 and basic and diluted earnings per share:

|  | For the Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net (loss) income | $(400,512) | $579,234 |
| Amortization of intangibles | 15,808 | 15,809 |
| Stock-based compensation expense | 474,209 | 382,828 |
| Non-GAAP net income | $89,505 | $977,871 |
| Non-GAAP net income per share: |  |  |
| Basic | $0.00 | $0.05 |
| Diluted | $0.00 | $0.05 |
| Weighted average common shares outstanding: |  |  |
| Basic | 20,251,509 | 18,886,939 |
| Diluted | 20,380,383 | 19,764,069 |

#### 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:

| Cash flow: | For the Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash provided by (used in) operating activities | $23,964 | $(5,018,398) |
| Capital expenditures | (85,085) | (85,841) |
| Free cash flow | $(61,121) | $(5,104,239) |

39

## Controls and procedures

As filed, 2,890 characters.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

### Limitation on Effectiveness of Controls

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

### Evaluation of Disclosure Controls and Procedures

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

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

## Risk factors

As filed, 828 characters.

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, 2022, 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.

Filed May 11, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-021209. Last ingested by Listed: Oct 28, 2026, 09:14 ET. No prices; not investment advice.