One Stop Systems, Inc.: Form 10-Q for the period ended Jun 30, 2025

The terms “we,” “us,” “our,” “OSS” or the “Company” refer collectively to One Stop Systems, Inc.. and its wholly-owned subsidiaries, unless otherwise stated. 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, 2024 filed with the SEC on March 19, 2025. Readers are cautioned not to place undue reliance on these forward-looking statements.

Overview

The Company designs, manufactures, and markets specialized enterprise class high-performance compute, high speed switch fabrics and storage hardware and software, which are designed to target edge applications for artificial intelligence ("AI") / machine learning "ML", sensor processing, sensor fusion and autonomy. Edge computing is a form of computing that is done on platform or on site, connected with the data source or the user, rather than in the cloud, minimizing the need for data to be processed remotely. This growing trend increases computing performance and security, as the data does not have to travel to distant datacenter locations. Edge computing is most recognizable in applications such as sensor processing, sensor fusion, autonomy, and AI/ML. To meet the demands at the edge we offer specialized products and system solutions that consist of computers, switch fabrics and storage products that incorporate the latest state-of-the art components with embedded proprietary software. Such products and systems allow us to offer high-end solutions to be integrated into edge platforms in our target markets.

The global increase in load on 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 datacenters.

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 input/output 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.

Recent Developments

Management and Board Changes

On April 12, 2025, Ms. Gioia Messinger notified the board of directors of her resignation from and decision to not stand for re-election for the board of directors, effective as of the date of the Annual Meeting on May 14, 2025. Ms. Messinger was appointed to the board of directors in July 2020. Her decision to resign from the board of directors was not related to any disagreement with the Company on any matter relating to its operations, policies, or practices.

On April 16, 2025, Mr. Joe Manko submitted a letter to the board of directors, resigning from the board of directors, effective April 16, 2025. In the resignation letter, Mr. Manko cited certain disagreements with the Company's governance practices and the composition and leadership of the board.

On May 7, 2025, Mr. Ken Potashner notified the board of directors of his intent to not stand for re-election to the board of directors. He continued to serve until the end of his term at the Annual Meeting on May 14, 2025. Mr. Potashner's decision to not stand for re-election was not the result of any disagreement with the Company on any matter relating to the Company's operations, policies, or practices.

At the Annual Meeting on May 14, 2025, the Company's stockholders re-elected Mitch Herbets, Mike Dumont, Greg Matz, and Mike Knowles to serve on the board of directors. Additionally, at the Annual Meeting, Mr. David Basset was elected as the newest member to the board of directors.

Second Amended and Restated Bylaws

On March 13, 2025, the board of directors adopted the Second Amended and Restated Bylaws of the Company (the “Amended and Restated Bylaws”). The Amended and Restated Bylaws (i) consolidate the amendments to the first amended and restated bylaws (the “Previous Bylaws”) dated April 7, 2023 and August 9, 2024; and (ii) the first sentence of Section 2.8 was amended and restated to read:

“Unless otherwise provided by law, the certificate of incorporation or these bylaws, the holders of the majority of the voting power of the capital stock issued and outstanding and entitled to vote, present in person, or by remote communication, if applicable, or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders”

A copy of the Amended and Restated Bylaws is filed as Exhibit 3.1, which is incorporated by reference.

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 specific point in time. The majority of the Company’s revenue is recognized at that 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 as 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 certain overhead expenses which are allocated to general and administrative expense. 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 for marketing and sales functions, sales commissions, marketing programs, travel, and entertainment expenses, as well as certain overhead expenses which are allocated to marketing and selling expense. 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 for research and development functions, certain prototype expenses, depreciation associated with assets acquired for research and development, third-party engineering and contractor support costs, as well as certain overhead expenses which are allocated to research and development expense. 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 for activities outside of our core business. Other expense includes expenses for 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, 2025 and 2024, presented in dollars and as a percentage of revenue, respectively.

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Comparison of the Three and Six Month Periods Ended June 30, 2025 and 2024:

Revenue, cost of revenue and gross profit:

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Revenue

For the three months ended June 30, 2025, our total revenue increased $907,255, or 6.9%, as compared to the same period in 2024. The OSS segment saw an increase in revenue of $238,677, or 4.3%, as compared to the same period in 2024. The primary contributors to this increase were higher revenues related to the development and production of custom server products for a defense customer, higher shipments of data storage products to a US government customer, and the initiation of shipments of server products to a medical devices customer, partially offset by lower volume of shipments to a commercial aerospace customer. Bressner experienced an increase of $668,578, or 8.7%, as compared to the same period in 2024, due to higher book-and-ship revenue in the quarter, as well as the impact of foreign exchange rates.

For the six months ended June 30, 2025, our total revenue increased $514,556, or 2%, as compared to the same period in 2024. The OSS segment saw a decrease in revenue of $88,385, or 0.8%. This decrease was primarily driven by lower volume of revenue to a commercial aerospace customer, partially offset by higher volume of revenue to a defense customer and a medical devices customer. Bressner experienced an increase in revenue of $602,941, or 4.1%, as compared to the same period in 2024, due to higher book-and-ship revenue in the period, as well as the impact of foreign exchange rates.

Cost of revenue and gross profit

Cost of revenue decreased by $171,760, or 1.7%, for the three months ended June 30, 2025, as compared to the same period in 2024. The OSS segment saw a decrease in cost of revenue of $767,128, or 18.5%, as compared to the same period in 2024. This decrease in cost of revenue was due to the non-recurrence of a $428,270 inventory charge recognized in the prior year quarter, as well as a more profitable mix of products shipped in the quarter. Bressner’s cost of revenue increased $595,368, or 10.4%, as compared to the same period in 2024, due primarily to higher revenue volume and the impact of foreign exchange rates.

The overall gross margin percentage was 31.3% for the three months ended June 30, 2025, an increase of 6.1 percentage points as compared to the prior year period in 2024 of 25.2%. OSS segment gross margin percentage for the three months ended June 30, 2025, was 41.3%, an increase of 16.4 percentage points as compared to the prior year period in 2024 of 24.9%. This increase was due to the non-recurrence of an inventory charge recognized in the prior year quarter, as well as a more profitable mix of products shipped in the quarter. Bressner contributed gross margin at a rate of 24.3%, as compared to the same period in 2024 of 25.5%, a decrease of 1.2 percentage points, due primarily to product mix.

Cost of revenue decreased $838,157, or 4.5%, for the six months ended June 30, 2025, as compared to the same period in 2024. The OSS segment saw a decrease in cost of revenue of $1,570,623, or 20.2%, as compared to the same period in 2024. This decrease in cost of revenue was mainly due to a more profitable mix of products shipped in the period, as well as the non-recurrence of $566,608 of inventory charges recognized in the prior year period. Bressner's cost of revenue increased $732,466, or 6.7%, as compared to the same period in 2024 due to higher revenue volume, a less profitable mix of products shipped in the quarter, and the impact of foreign exchange rates.

The overall gross margin percentage was 31.9% for the six months ended June 30, 2025, an increase of 4.6 percentage points as compared to the prior year period in 2024 of 27.3%. OSS segment gross margin percentage for the six months ended June 30, 2025, was 43.3%, an increase of 13.7 percentage points, as compared to the prior year period in 2024 of 29.6%. This increase was primarily due to a more profitable mix of products shipped in the period, as well as the non-recurrence of an inventory charge recognized in the prior year period. Bressner contributed gross margin at a rate of 23.8%, as compared to the same period in 2024 of 25.6%, a decrease of 1.8 percentage points, due primarily to product mix.

Operating expenses

General and administrative expense

General and administrative expense decreased $21,197, or 0.9%, for the three months ended June 30, 2025, as compared to the same period in 2024. The OSS segment experienced a decrease of $101,864, or 5.1%. This decrease in general and administrative expense is primarily attributable to a reduction in corporate general expenses, including board compensation. Bressner had an increase of $80,667, or 20.3%, as a result of higher salary and personnel costs, higher insurance costs, higher lease costs due to overlapping lease periods during the transition to a new facility, and the impact of foreign exchange rates. Overall, total general and administrative expense decreased as a percentage of revenue to 16.9% for the three months ended June 30, 2025, as compared to 18.2% during the same period in 2024.

General and administrative expense increased $250,856, or 5.6%, for the six months ended June 30, 2025, as compared to the same period in 2025. OSS segment general and administrative expense increased $110,130, or 3%, due primarily to increased stock compensation expense due to a higher grant date fair value of employee restricted stock units recognized as expense in the period, partially offset by a reduction in general corporate expenses. Bressner segment general and administrative expense increased $140,726, or 17.7%, primarily due to higher salary and personnel costs and higher lease cost due to overlapping lease periods during the transition to a new facility, as well as the impact of foreign exchange rates. Overall, total general and administrative expense increased as a percentage of revenue to 18% for the six months ended June 30, 2025, as compared to 17.4% during the same period in 2024.

Marketing and selling expense

Marketing and selling expense increased $70,002, or 3.1%, for the three months ended June 30, 2025, as compared to the same period in 2024. OSS had an increase of $32,167, or 2%, due to an increase in personnel costs. Bressner had an increase of $37,835, or 6%, due primarily to higher personnel costs and the impact of foreign exchange rates. Overall, total marketing and selling expense decreased as a percentage of revenue to 16.5% during the three months ended June 30, 2025, as compared to 17.1% during the same period in 2024.

Marketing and selling expense increased $368,078, or 8.8%, for the six months ended June 30, 2025, as compared to the same period in 2024. OSS segment marketing and selling expense increased $312,719, or 10.6%, due to an increase in personnel costs resulting from additions in headcount made during the course of 2024. Bressner segment marketing and selling expense increased $55,359, or 4.5%, due primarily to higher personnel costs and the impact of foreign exchange rates. Overall, total marketing and selling expense increased as a percentage of revenue to 17.2% for the six months ended June 30, 2025, as compared to 16.1% during the same period in 2024.

Research and development expense

Research and development expense increased $599,298, or 64.7%, for the three months ended June 30, 2025, as compared to the same period in 2024. OSS segment research and development expense increased $591,528, or 76.8%, due to higher engineering costs to support targeted investments in new product development. Bressner segment research and development expense increased $7,770, or 5%. Overall, total research and development expense as a percentage of revenue increased to 10.8% for the three months ended June 30, 2025, as compared to 7% during the same period in 2024.

Research and development expense increased $985,713, or 52%, for the six months ended June 30, 2025, as compared to the same period in 2024. OSS segment research and development expense increased $972,114, or 60.9%, due to higher engineering costs to support targeted investments in new product development. Bressner segment research and development expense increased $13,599, or 4.5%. Overall, total research and development expense as a percentage of revenue increased to 10.9% for the three months ended June 30, 2025, as compared to 7.3% during the same period in 2024.

Interest income

Interest income decreased $68,323 for the three months ended June 30, 2025, as compared to the same period in 2024. The decrease is primarily attributable to lower investment balances due to the company's usage of cash for operations and debt repayment.

Interest income decreased $137,537 for the six months ended June 30, 2025, as compared to the same period in 2024. The decrease is primarily attributable to lower investment balances due to the company's usage of cash for operations and debt repayment.

Interest expense

Interest expense decreased $5,413 for the three months ended June 30, 2025, as compared to the same period in 2024. The decrease is attributable to declining borrowing balances due to the repayment of debt, as well as lower interest rates on outstanding notes payable.

Interest expense decreased $26,569 for the six months ended June 30, 2025, as compared to the same period in 2024. The decrease is attributable to declining borrowing balances due to the repayment of debt, as well as lower interest rates on outstanding notes payable.

Other income (expense), net

Other income (expense), for the three months ended June 30, 2025, resulted in net other expense of $9,195, as compared to net other income of $21,831 in the same period in 2024, for a net decrease in other income of $31,026, attributable primarily to changes in foreign currency gain and losses.

Other income (expense), for the six months ended June 30, 2025, resulted in net other expenses of $30,828, as compared to net other income of $29,109 in the same period in 2024, for a a net decrease in other income of $59,937, attributable primarily to changes in foreign currency gain and losses.

Provision for income taxes

We have recorded an income tax provision of $224,188 and $211,027 for the three months ended June 30, 2025 and 2024, respectively, and $333,654 and $402,296 for the six months ended June 30, 2025 and 2024, respectively. The effective tax rate for the six months ended June 30, 2025 and 2024 differed from the statutory rate mainly due to permanent non-deductible goodwill amortization for Bressner, 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. The tax provision is predominately attributable to profit on operations in Germany.

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 June 30, 2025, we had total cash and cash equivalents of $8,458,920, with short-term investments of $1,030,416, and total net working capital of $23,171,142. Cash and cash equivalents held by Bressner totaled $4,354,279 on June 30, 2025. Bressner’s debt covenants limit the use of those funds by its parent company.

During the six month period ended June 30, 2025, we had a loss from operations of $3,768,813, with net cash used in operating activities of $1,504,300.

During the six month period ended June 30, 2024, we had a loss from operations of $3,516,879, with cash provided by operating activities of $1,226,742.

During the year ended December 31, 2024, we had a loss from operations of $13,356,813, with net cash used in operating activities of $108,098.

Our sources of liquidity and cash flows are used to fund ongoing operations, to fund research and development projects for new products and technologies, and to 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 business. 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 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 at any required time and on commercially reasonable terms, if at all.

As of June 30, 2025, there remains an elevated level of uncertainty regarding the economic outlook. We intend to continue to monitor the effects of trade and tariff policy, inflation, global supply chain disruptions, and economic conditions, and, if appropriate, we may alter our plans to address such concerns as they may arise.

Management’s plans are to focus on acquiring new customer orders, to further grow and expand our business in both commercial and military markets, and to respond to the changing economic landscape by continuing to control hiring and operating costs, conserve cash and focus on growth and margin expansion. Management is committed to conserving cash and securing debt and/or equity financing, as required, for liquidity to meet our near-term cash requirements.

In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 at Torrey Pines Bank. To access this line of credit, the Company must maintain a minimum cash balance of $2,500,000 with the bank and maintain a maximum debt to tangible net worth of ratio of 1.00. The line of credit is also collateralized by the assets of the Company. No balance was outstanding on June 30, 2025 or December 31, 2024.

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

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 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 six month periods ended June 30, 2025 and 2024:

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Operating Activities

During the six month period ended June 30, 2025, we used $1,504,300 in cash from operating activities, compared to cash generated from operating activities of $1,226,742 in the same period in 2024.

Net cash used in operating activities during the six month period ended June 30, 2025 was the result of three components: (i) net loss of $4,038,364; (ii) net adjustments to net loss for non-cash items of $1,094,477, of which the largest component was stock based compensation expense of $1,128,335; and (iii) cash provided by net changes in operating assets and liabilities of $1,439,587.

Cash provided by net changes in operating assets and liabilities for the six month period ended June 30, 2025 was $1,439,587, compared to $2,647,568 for the same period in 2024. The change in cash provided by net changes in working capital from the prior year period was primarily due to cash disbursements in 2025 related to accrued expenses for a contract loss and for accrued losses related to supplier material received on non-cancellable purchase orders.

In the six month period ended June 30, 2025, the total cash provided by changes in operating assets and liabilities of $1,439,587 was primarily due to an increase in accounts payable driven by timing of material receipts and payments and a decrease in accounts receivable due primarily to collections of customer payments for products shipped in Q4 2024, partially offset by cash usage from changes in accrued expenses due to cash disbursements related to a contract loss and supplier material received on non-cancellable purchase orders.

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, 2025, the Company generated cash of $2,010,973 from investing activities, as compared to $2,541,086 provided by investing activities during the prior year period in 2024, a net reduction of $530,113. This change is attributable to a decrease in the number of short-term investments redeemed in the current year period as compared to the prior year period, partially offset by lower capital expenditures.

Financing Activities

During the six month period ended June 30, 2025, the Company generated $697,303 in cash from the exercise of options, net of payments of payroll taxes on the net issuance of employee stock. During the same period in 2024, cash used in financing activities was $1,014,840, which was driven by a usage of $884,892 for the repayment of debt and a usage of $349,296 for payment of tax on the net exercise of vested RSUs and employee stock options, partially offset by $219,348 of cash generated from the exercise of options.

Known Trends or Uncertainties

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

We are experiencing delays in funding for customer projects, delays in delivery schedules based upon customer requirements, and an extended sales cycle. Such delays could negatively impact the Company’s results of operations for the year ending December 31, 2025. If such delays in orders continue in the future, our operating results will be further impacted, and our revenues may decline in future periods.

With the Company's shifted focus to the development and sale of edge computing, we have significantly increased our efforts to penetrate the military and defense sectors in particular, which typically have protracted sales cycles, significant contracting requirements, and multi-year deliverables. Our pipeline reflects the procurement habits and timing of the military and defense sector.

Impacts resulting in part from tariffs and the threat of tariffs, ongoing military conflicts in Europe and Middle East, Federal Reserve and European Central Bank interest rate policy, inflation and the risk of inflation, and uncertainty about the timing and substance of U.S. government budgets and policy actions have contributed to economic uncertainty and capital markets volatility in the near term that could negatively affect our operations. Weakness in the European and more specifically the German economy negatively affected our Bressner segment in 2024. Economic uncertainty, volatility, and the risk of recessionary conditions in Europe and North America remain elevated.

Inflation

We have recently experienced some and, continue to feel, the effects due to inflation in both the U.S. and Europe. 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. Inflation affects the Company’s manufacturing costs, distribution costs and operating expenses.

Tariffs

Tariffs and the threat of tariffs, including both United States sanctioned tariffs and the potential for retaliatory tariffs, have contributed to uncertainty and supply chain disruptions that could impact our operations. The Company's OSS segment conducts final assembly and test of products at our facility in California. However, we source components and subassemblies from both within and outside of the United States. While we attempt to pass on the cost of tariffs to our customers, our ability to do so is dependent upon the many factors, including the predictability of tariff rates and market conditions for the Company's products. Management is closely monitoring and managing impacts and potential impacts to our business from ongoing trade policy developments.

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

Critical accounting policies and estimates

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

Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2024.

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.

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”), both of which provide basic deposit coverage with limits up to $250,000 per owner. As of June 30, 2025, the Company had $2,782,190 in 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 as to such. In Germany, the deposit insurance is €100,000 per bank, per customer. Bressner has funds on deposit in both Euro and U.S. dollar denominations of €3,328,868 (US$3,918,290) 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 in the United States and Germany. Our primary reporting currency is the United States dollar. Foreign sales of products and services are primarily denominated in U.S. dollars. We also conduct business outside the United States through Bressner, our foreign subsidiary in Germany, where business is largely transacted in non-U.S. dollar currencies, particularly the Euro, which is subject to fluctuations due to changes in foreign currency exchange rates. Accordingly, we are subject to exposure from changes in the exchange rates of local currencies. Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations.

OSS GmbH operates as an extension of OSS’ domestic operations and acquired Bressner in October 2018. The functional currency of OSS GmbH is the Euro. Transactions denominated in currencies other than the functional currency are remeasured in 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. The Company is currently not a party to any of these types of transactions.

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.

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 loss and basic and diluted earnings per share:

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. 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.

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:

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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 (based upon 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and 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 Quarterly 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, 2025, which were identified in connection with management's evaluation required by paragraph (d) 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.

Please carefully consider the information set forth in this Quarterly Report and the risk factors discussed in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2024, 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.

There have not been any material changes to the risk factors disclosed in our Form 10-K for the year ended December 31, 2024, as filed with the SEC.