ONE STOP SYSTEMS INC

Previous wording

The following tables set forth our results of operations for the three month periods ended March 31, 2024 and 2023, presented in dollars and as a percentage of revenue, respectively.

Current wording

The following tables set forth our results of operations for the three and six month periods ended June 30, 2024 and 2023, presented in dollars and as a percentage of revenue, respectively.

Previous wording

Comparison of the three month periods ended March 31, 2024 and 2023:

Current wording

Comparison of the Three and Six Month Periods Ended June 30, 2024 and 2023:

Previous wording

For the three months ended March 31, 2024, our total revenue decreased $4,130,108, or 24.6%, as compared to the same period in 2023. OSS saw a decrease in revenue of $3,096,714, or 35.9%, as compared to the same period in 2023. The primary contributors to this deduction are the discontinuation of sales to our former media and entertainment customer (disguise) of approximately $1,500,000 and a reduction of revenue attributable to delayed timing of a defense contract for our data storage units and parts of approximately of $4,400,000. These reductions were offset by approximately $2,000,000 attributable to the sale of avionics hardware and other business opportunities. Bressner experienced a decrease of $1,033,394, or 12.7%, as compared to the same period in 2023 as a result of discontinuance of certain programs.

Current wording

For the six months ended June 30, 2024, our total revenue decreased $8,140,310, or 23.9%, as compared to the same period in 2023. OSS saw a decrease in revenue of $5,852,776, or 34.6%, as compared to the same period in 2023. The primary contributors to this reduction are the discontinuation of sales to our former media and entertainment customer (disguise) of approximately $4,713,000 and a reduction of revenue attributable to delayed timing of a defense contract for our data storage units and parts. Bressner experienced a decrease of $2,287,534, or 13.4%, as compared to the same period in 2023 as a result of discontinuance of certain programs.

Previous wording

Cost of revenue decreased $2,782,639, or 23.8%, for the three months ended March 31, 2024, as compared to the same period in 2023. OSS saw a decrease in cost of revenue of $1,860,615, or 33.8%, as compared to the same period in 2023. This decrease in cost of revenue is mainly attributable to the discontinuation of our sales to our former media and entertainment customer (disguise) and sales of data storage units. Bressner’s cost of revenue decreased $922,024, or 14.8%, as compared to the same period in 2023, due to reduced overall sales due to a difficult economy and a reduction of additional sales attributable to project based related business.

Current wording

Cost of revenue decreased $5,328,166, or 22.1%, for the six months ended June 30, 2024, as compared to the same period in 2023. OSS saw a decrease in cost of revenue of $3,578,619, or 31.5%, as compared to the same period in 2023. This decrease in cost of revenue is mainly attributable to the discontinuation of our sales to our former media and entertainment customer (disguise) and sales of data storage units. Bressner’s cost of revenue decreased $1,749,547, or 13.7%, as compared to the same period in 2023, due to reduced overall sales due to a difficult economy and a reduction of additional sales attributable to project based related business.

Previous wording

The overall gross margin percentage was 29.4%. OSS’ gross margin percentage for the three months ended March 31, 2024, was 34.2%, a reduction of 2.1 percentage points as compared to the prior year period in 2023 of 36.3%, due to the predominance of higher margin data storage units and componentry to Raytheon in the same period in 2023. Bressner contributed gross margin at a rate of 25.7%, as compared to the same period in 2023 of 23.8%, an increase of 1.9 percentage points, resulting from a more favorable mix of products.

Current wording

The overall gross margin percentage was 27.3% for the six months ended June 30, 2024. OSS’ gross margin percentage for the six months ended June 30, 2024, was 29.6%, a reduction of 3.2 percentage points as compared to the prior year period in 2023 of 32.8%, due to underutilization of production facility and additional inventory reserves. Bressner contributed gross margin at a rate of 25.6%, as compared to the same period in 2023 of 25.3%, an increase of 0.3 percentage points.

Previous wording

General and administrative expense decreased $190,784, or 8.4%, for the three months ended March 31, 2024, as compared to the same period in 2023. OSS experienced a decrease of $114,514, or 6.3%. The decrease in general and administrative expense is primarily attributable to the elimination of costs associated with our organizational restructuring and outside professional services. Bressner had a decrease of $76,270, or 16.1%, as a result of an organization realignment. Overall, total general and administrative expense increased as a percentage of revenue to 16.6% for the three months ended March 31, 2024, as compared to 13.6% during the same period in 2023.

Current wording

General and administrative expense decreased $665,482, or 21.7%, for the three months ended June 30, 2024, as compared to the same period in 2023. OSS experienced a decrease of $598,912, or 23.0%. The decrease in general and administrative expense is primarily attributable to the elimination of costs associated with our organizational restructuring and outside professional services. Bressner had a decrease of $66,570, or 14.3%, as a result of an organization realignment. Overall, total general and administrative expense increased as a percentage of revenue to 18.2% for the three months ended June 30, 2024, as compared to 17.9% during the same period in 2023.

Previous wording

Marketing and selling expense increased $133,432, or 7.5%, for the three months ended March 31, 2024, as compared to the same period in 2023. OSS had a decrease of $22,157, or 1.6%. Bressner had an increase of $155,589, or 35.5%, primarily resulting from the addition of new marketing personnel and sales collateral material. Overall, total marketing and selling expense increased as a percentage of revenue to 15.2% during the three months ended March 31, 2024, as compared to 10.6% during the same period in 2023.

Current wording

Marketing and selling expense increased $771,163, or 52.0%, for the three months ended June 30, 2024, as compared to the same period in 2023. OSS had an increase of $530,758, or 48.4% due to an increase in tradeshows and personnel. Bressner had an increase of $240,405, or 61.9%, primarily resulting from the addition of new marketing and program management personnel and sales collateral material. Overall, total marketing and selling expense increased as a percentage of revenue to 17.1% during the three months ended June 30, 2024, as compared to 8.6% during the same period in 2023.

Previous wording

Research and development expense decreased $224,451, or 18.8%, for the three months ended March 31, 2024, as compared to the same period in 2023. OSS saw a decrease of $254,152, or 23.6%. The decrease was largely driven by engineering resources being deployed on chargeable projects, which costs are reclassified as a component of costs of sales. Bressner experienced a modest increase of $29,701, or 25.5%. Overall, total research and development expense as a percentage of revenue increased as a percentage of revenue to 7.7% during the three months ended March 31, 2024, as compared to 7.1% during the same period in 2023.

Current wording

Research and development expense decreased $29,048, or 3.0%, for the three months ended June 30, 2024, as compared to the same period in 2023. OSS saw a decrease of $64,413, or 7.7%. The decrease was largely driven by engineering resources being deployed on chargeable projects, which costs are reclassified as a component of costs of sales. Bressner experienced an increase of $35,365, or 29.6% due to additional personnel and overhead costs. Overall, total research and development expense as a percentage of revenue increased as a percentage of revenue to 7.0% during the three months ended June 30, 2024, as compared to 5.5% during the same period in 2023.

Previous wording

Interest income increased $31,459 for the three months ended March 31, 2024, as compared to the same period in 2023. The increase is attributable to higher interest rates on qualified short-term investments that meet Company requirements.

Current wording

Interest income increased $13,834 for the three months ended June 30, 2024, as compared to the same period in 2023. The increase is attributable to higher interest rates on qualified short-term investments that meet Company requirements.

Previous wording

Interest expense increased $2,637 for the three months ended March 31, 2024, as compared to the same period in 2023 due to higher interest rates, though on a declining balance.

Current wording

Interest income increased $45,293 for the six months ended June 30, 2024, as compared to the same period in 2023. The increase is attributable to higher interest rates on qualified short-term investments that meet Company requirements.

Previous wording

Other income (expense), for the three months ended March 31, 2024, resulted in net other income of $7,278, as compared to net other expense of $20,223, in the same period in 2023, for a net increase in other income of $27,501 attributable to gains on foreign currency transactions.

Current wording

Other income (expense), for the six months ended June 30, 2024, resulted in net other income of $29,109 as compared to net other income of $11,614, in the same period in 2023, for a net increase in other income of $17,495 attributable to gains on foreign currency transactions.

Previous wording

We have recorded an income tax provision of $191,269 and $261,502, respectively, for the three months ended March 31, 2024 and 2023. The effective tax rate for the three months ended March 31, 2024 and 2023, 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.

Current wording

We have recorded an income tax provision of $211,027 and $396,863, respectively, for the three months ended June 30, 2024 and 2023 and $402,296 and $658,365, respectively, for the six months ended June 30, 2024 and 2023. The effective tax rate for the six months ended June 30, 2024 and 2023, 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 operations in Germany.

Previous wording

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, 2024, was 29%, as compared to 28.9% in the prior period in 2023.

Current wording

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 six months ended June 30, 2024, was 29.1%, as compared to 28.9% in the prior period in 2023.

Previous wording

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, 2024, we had total cash and cash equivalents of $6,904,102, with short-term investments of $5,955,248, and total working capital of $34,332,569. Cash and cash equivalents held by Bressner totaled US$1,599,957 on March 31, 2024. Bressner’s debt covenants do not permit the use of those funds by its parent company.

Current wording

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, 2024, we had total cash and cash equivalents of $6,751,771, with short-term investments of $5,019,230, and total working capital of $32,573,474. Cash and cash equivalents held by Bressner totaled US$2,384,918 on June 30, 2024. Bressner’s debt covenants do not permit the use of those funds by its parent company.

Previous wording

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 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 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 and on commercially reasonable terms, if at all.

Current wording

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 business. We cannot provide assurances that additional financing will be available to us in any required time and on commercially reasonable terms, if at all.

Previous wording

In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 from its bank, which was renewed in April 2024 and renews on an annual basis at the current prime rate. To access this line of credit, the Company must maintain cash and investments balances at a minimum of $4,000,000. Although the Company has not drawn down on the line of credit to date, it may choose to do so in the future.

Current wording

In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 from its bank, which was renewed in June 2024 and will expire in September 2026 at the current prime rate. 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 to 1.00. The line of credit is also collateralized by the assets of the Company. No balance was outstanding on June 30, 2024 and December 31, 2023, respectively. Although the Company has not drawn down on the line of credit to date, it may choose to do so in the future.

Previous wording

The following table summarizes our cash flows for the three month periods ended March 31, 2024 and 2023:

Current wording

The following table summarizes our cash flows for the six month periods ended June 30, 2024 and 2023:

Previous wording

During the three month period ended March 31, 2024, we provided $2,043,378 in cash for operating activities, a difference of $2,019,415 when compared to the cash provided by operating activities of $23,964 during the same period in 2023.

Current wording

During the six month period ended June 30, 2024, we generated $1,226,742 in cash from operating activities, a reduction of $822,192 when compared to the cash provided by operating activities of $2,048,934 during the same period in 2023.

Previous wording

The change in cash provided by operating activities during the three month period ended March 31, 2024, as compared to the same period in 2023, is primarily a result of three components comprised of (i) an increase in net loss of $939,110 in 2024 to $1,339,622 in the current year, from a net loss of $400,512 in the prior year; (ii) net unfavorable adjustments in the current period for non-cash items of $337,162, which were comprised of a net decrease of $176,731 of favorable non-cash items, offset by an increase of $160,431 of negative non-cash items that did not affect operating cash flow; and (iii) a net increase working capital items of $3,295,687.

Current wording

The change in cash provided by operating activities during the six month period ended June 30, 2024, as compared to the same period in 2023, is primarily a result of three components comprised of (i) an increase in net loss of $884,159 in 2024 to $3,684,167 in the current year period, from a net loss of $2,800,008 in the prior year period; (ii) net unfavorable adjustments in the current period for non-cash items of $1,568,036, which were comprised of $1,818,141 of favorable non-cash items, offset by $3,386,177 of negative non-cash items that did not affect operating cash flow; and (iii) a net increase working capital items of $1,630,003.

Previous wording

Net improvements in working capital for the three month period ended March 31, 2024, were $3,295,687 as compared to the prior year period uses of working capital of $601,855. The improvements to working capital of $4,082,431 were attributable to changes in inventory levels, prepaid expenses and other current assets, accounts payable, accrued expenses and other liabilities and lease liabilities for the comparable period. These improvements were offset by unfavorable changes in working capital of $786,744, attributable to changes in accounts receivable .

Current wording

Net improvements in working capital for the six month period ended June 30, 2024, were $1,630,003 as compared to the prior year period of improvement in working capital of $1,017,565. The improvements to working capital of $4,992,321 were attributable to changes in inventory levels, accounts payable and operating lease liabilities for the comparable period. These improvements were offset by unfavorable changes in working capital of $3,362,318, attributable to changes in accounts receivable, prepaid expenses other current assets, accrued expenses and other liabilities and operating lease liabilities.

Previous wording

During the three month period ended March 31, 2024, the Company generated cash of $1,664,196 in investing activities, as compared to $833,524 provided by investing activities during the prior year period in 2023, a net increase of $810,672. This change is basically attributable to an increase in the amount of short-term investments redeemed in the period as compared to the prior period. 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.

Current wording

During the six month period ended June 30, 2024, the Company generated cash of $2,541,086 from investing activities, as compared to $503,054 provided by investing activities during the prior year period in 2023, a net increase of $2,038,032. This change is basically attributable to an increase in the number of short-term investments redeemed in the current period as compared to the prior period. 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.

Previous wording

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, 2024, the Company used $927,324 in cash for debt service payments on Bressner borrowings and payment of tax on the net exercise of vested RSUs, while generating $127,350 from the exercise of options. During the same period in 2023, the Company used $525,933, for comparable items for a difference of $274,041.

Current wording

Given the current economic, financial, and geopolitical instability, the Company believes it is imperative to maintain opportunities for additional financial resources to ensure financial stability during trying economic times. During the six month period ended June 30, 2024, the Company used $1,014,840 in cash for debt service payments on Bressner borrowings and payment of tax on the net exercise of vested RSUs, while generating $219,348 from the exercise of options. During the same period in 2023, the Company generated of $413,575 for comparable items for a difference of $1,428,415.

Previous wording

We are experiencing delays in funding for customer projects, delays in delivery schedules based upon customer requirements and an extended sales cycle. Additionally, certain of our customers are experiencing downturns or uncertainty in their own business operations and revenue, including one customer that declared bankruptcy in 2023, and as a result there is an increased risk that these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts. During the three months ended March 31, 2024, and the year ended December 31, 2023, the Company experienced delays and postponements of purchases and orders due to certain customers’ funding or program delays. We have also experienced cancellations of orders due to disruptions in our customers’ businesses or changes in their business plans. Such delays, postponements and cancellations could negatively impact the Company’s results of operations for the year ending December 31, 2024. If such decreases in orders, postponements or cancellations continue in the future, our operating results will be further impacted, and our revenues may decline in future periods.

Current wording

During the six months ended June 30, 2024, and the year ended December 31, 2023, the Company experienced delays and postponements of purchases and orders due to certain customers’ funding or program delays. We have also experienced cancellations of orders due to disruptions in our customers’ businesses or changes in their business plans. Such delays, postponements and cancellations could negatively impact the Company’s results of operations for the year ending December 31, 2024. If such decreases in orders, postponements or cancellations continue in the future, our operating results will be further impacted, and our revenues may decline in future periods.

Previous wording

With the Company's shifted focus to the development and sale of AI Transportables, we have significantly increased our efforts to penetrate the military and defense sectors in particular, which typically have protracted sales cycles, significant contracting requirements, and multi-year deliverables. With the recent hiring of a new president and chief executive officer and new vice president of sales, each of whom has extensive experience in contracting in the defense industry, we have further increased our emphasis and focus on the pursuit of revenue opportunities with major defense contractors and the military. We have recently reviewed our existing pipeline and have made adjustments to reflect the procurement habits and timing of the military and defense sector. We have also added relevant defense market experience to our board of directors through the appointment of Mr. Knowles, Vice Admiral Dumont and Mitch Herbets as directors. We believe that these changes will allow us to further penetrate the defense sector and enhance our business strategies with respect to this target market.

Current wording

With the Company's shifted focus to the development and sale of AI Transportables, we have significantly increased our efforts to penetrate the military and defense sectors, which typically have protracted sales cycles, significant contracting requirements, and multi-year deliverables. With the recent hiring of a new president and chief executive officer and new vice president of sales, each of whom has extensive experience in contracting in the defense industry, we have further increased our emphasis and focus on the pursuit of revenue opportunities with major defense contractors and the military. We have recently reviewed our existing pipeline and have made adjustments to reflect the procurement habits and timing of the military and defense sector. We have also added relevant defense market experience to our board of directors through the appointment of Mr. Knowles, Vice Admiral Dumont and Mitch Herbets as directors. We believe that these changes will allow us to further penetrate the defense sector and enhance our business strategies with respect to this target market.

Previous wording

The world continues to be affected by the lingering effects of the COVID-19 pandemic, the ongoing conflicts between Russia and Ukraine and in the Middle East, and economic uncertainty, amongst other things. Inflation has risen both domestically and internationally, Federal Reserve and European Central Bank interest rates have increased significantly over the last year, and economists suggest that risk of a recession in the U.S. remains elevated. Germany was in a recession for most of 2023, largely due to persistent high inflation and falling household spending. Volatility and recessionary conditions in Europe, and in particular in Germany, are expected to remain a concern for the near term. 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.

Current wording

The world continues to be affected by the ongoing conflicts between Russia and Ukraine and in the Middle East and economic uncertainty, amongst other things. Inflation has risen both domestically and internationally, Federal Reserve and European Central Bank interest rates have increased significantly over the last year, and economists suggest that risk of a recession in the U.S. remains elevated. Germany was in a recession for most of 2023, largely due to persistent high inflation and falling household spending. Volatility and recessionary conditions in Europe, and in Germany in particular, are expected to remain a concern for the near term. Component shortages and increased lead times from Taiwan, coupled with rising political tensions in Taiwan, resulted in supply chain delays and shortages that negatively impacted the Bressner business during the most recent quarter. which could continue to negatively impact our business in the near term. Additionally, it is possible that U.S. policy changes and uncertainty about such changes, including changes and uncertainty as a result of the upcoming U.S. presidential election, could increase market volatility and currency exchange rate fluctuations. 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.

Previous wording

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.

Current wording

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 our new product development activities.

Previous wording

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, 2024, the Company had $1,351,930 of cash in our accounts that exceeded the insurance limits. The Company has not experienced any losses in these accounts and believes that the financial institutions at which such amounts are held are stable; however, no assurances can be provided. In Germany, the deposit insurance is €100,000 per bank, per customer. Bressner has funds on deposit in both Euro and U.S. dollar denominations of €1,049,186 (US$1,134,247) with banks in excess of the insurance limits.

Current wording

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 June 30, 2024, the Company had $2,752,541 of cash in our accounts that exceeded the insurance limits. The Company has not experienced any losses in these accounts and believes that the financial institutions at which such amounts are held are stable; however, no assurances can be provided. In Germany, the deposit insurance is €100,000 per bank, per customer. Bressner has funds on deposit in both Euro and U.S. dollar denominations of €1,865,944 (US$1,997,598) with banks in excess of the insurance limits.

Previous wording

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.

Current wording

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.

Previous wording

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

Current wording

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