ONE STOP SYSTEMS INC

Previous wording

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.

Current wording

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. The 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.

Previous 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.

Current wording

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

Previous wording

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

Current wording

Comparison of the Three and Nine Month Periods Ended September 30, 2024 and 2023:

Previous wording

For the three months ended June 30, 2024, our total revenue decreased $4,010,202, or 23.3%, as compared to the same period in 2023. OSS saw a decrease in revenue of $2,756,062, or 33.3%, 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 $3,183,000, offset by recent program wins. Bressner experienced a decrease of $1,254,140, or 14.0%, as compared to the same period in 2023 as a result of economic constraints in the marketplace.

Current wording

For the three months ended September 30, 2024, our total revenue decreased $47,066, or 0.3%, as compared to the same period in 2023. OSS saw an increase in revenue of $960,131, or 17.5%, as compared to the same period in 2023. The primary contributor to this increase were initial shipments on a government contract for a mobile application. Bressner experienced a decrease of $1,007,197, or 12.2%, as compared to the same period in 2023 as a result of economic constraints in the marketplace.

Previous wording

Cost of revenue and gross profit

Current wording

Cost of revenue and gross (loss) profit

Previous wording

Cost of revenue decreased $2,545,527, or 20.5%, for the three months ended June 30, 2024, as compared to the same period in 2023. OSS saw a decrease in cost of revenue of $1,718,005, or 29.3%, 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 data storage units. Bressner’s cost of revenue decreased $827,522, or 12.6%, as compared to the same period in 2023, due to reduced overall sales due to a difficult economy.

Current wording

Cost of revenue increased $5,322,023, or 52.70%, for the three months ended September 30, 2024, as compared to the same period in 2023. OSS saw an increase in cost of revenue of $6,053,855, or 162.9%, as compared to the same period in 2023. This increase in cost of revenue is mainly attributable to an additional allowance for inventory obsolescence of $6,099,259. Bressner’s cost of revenue decreased $731,832, or 11.5%, as compared to the same period in 2023, due to reduced overall sales due to a difficult economy.

Previous wording

The overall gross margin percentage was 25.2% for the three months ended June 30, 2024. OSS’ gross margin percentage for the three months ended June 30, 2024, was 24.9%, a reduction of 4.3 percentage points as compared to the prior year period in 2023 of 29.2%, due to underutilization of production facility and additional inventory reserves. Bressner contributed gross margin at a rate of 25.5%, as compared to the same period in 2023 of 26.7%, a decrease of 1.2 percentage points, resulting from less program revenue and one-time sales that tend to have higher margins as compared to the same 2024 period.

Current wording

The overall gross margin percentage was negative 12.5% for the three months ended September 30, 2024 and on an adjusted basis 32.0% after backing out the impact of the adjustment for the write down of inventory of $6,099,259. OSS’ gross margin percentage for the three months ended September 30, 2024, was negative 51.2%, a reduction of 83.6 percentage points as compared to the prior year period in 2023 of 32.4%, due to an additional inventory allowance charge of $6,099,259 for obsolescence. Excluding this obsolescence charge to cost of revenue, the gross margin would have been 43.2% as compared to that of the prior year period in 2023 of 32.4%. Bressner contributed gross margin at a rate of 22.0%, as compared to the same period in 2023 of 22.6%, a decrease of 0.6 percentage points, due to product mix as compared to the same 2024 period and an additional inventory reserve of $122,530.

Previous 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.

Current wording

Cost of revenue decreased $6,143, or 0.02%, for the nine months ended September 30, 2024, as compared to the same period in 2023. OSS saw an increase in cost of revenue of $2,475,235, or 16.4%, as compared to the same period in 2023. This increase in cost of revenue is mainly attributable to a significant increase in the reserve for obsolete inventory for the nine month period ended September 30, 2024 of $5,841,644 as compared to the prior year. Bressner’s cost of revenue decreased $2,481,378, or 13.0%, 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

General and administrative expense decreased $856,266, or 16.0%, for the six months ended June 30, 2024, as compared to the same period in 2023. OSS experienced a decrease of $713,426, or 16.1%. 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 $142,840, or 15.2%, as a result of an organization realignment. Overall, total general and administrative expense increased as a percentage of revenue to 17.4% for the six months ended June 30, 2024, as compared to 15.8% during the same period in 2023.

Current wording

General and administrative expense increased $121,372, or 6.3%, for the three months ended September 30, 2024, as compared to the same period in 2023. OSS experienced an increase of $167,361, or 11.5%. The increase in general and administrative expense is primarily attributable to increased salaries and stock compensation expense. Bressner had a decrease of $45,989, or 9.6%, as a result of an organization realignment. Overall, total general and administrative expense increased as a percentage of revenue to 15% for the three months ended September 30, 2024, as compared to 14.1% during the same period in 2023.

Previous 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.

Current wording

General and administrative expense decreased $734,894, or 10.1%, for the nine months ended September 30, 2024, as compared to the same period in 2023. OSS experienced a decrease of $546,065, or 9.3%. The decrease in general and administrative expense is primarily attributable to the elimination of costs associated with our organizational restructuring and outside professional services in 2023. Bressner had a decrease of $188,829, or 13.3%, as a result of an organization realignment. Overall, total general and administrative expense increased as a percentage of revenue to 16.6% for the nine months ended September 30, 2024, as compared to 15.3% during the same period in 2023.

Previous wording

During June 2023, the Company took a write-down of $2,700,000 as a result of the overall financial performance of OSS as compared to plan, the transition of and focus on our product strategy on AI Transportables and the defense industry deferment of certain orders. There was no such impairment charge in 2024.

Current wording

During September 2023, the Company took an additional write-down of $2,930,788 as a result of the overall financial performance of OSS as compared to plan, the transition of and focus on our product strategy on AI Transportables and the defense industry deferment of certain orders. Total goodwill impairment loss for the nine month period ended September 30, 2023 was $5,630,788. There was no such impairment charge in 2024.

Previous 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.

Current wording

Marketing and selling expense increased $295,719, or 17.3%, for the three months ended September 30, 2024, as compared to the same period in 2023. OSS had an increase of $149,132, or 11.5%, due to an increase in tradeshows and personnel. Bressner had an increase of $146,587, or 35.1%, 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 14.7% during the three months ended September 30, 2024, as compared to 12.5% during the same period in 2023.

Previous wording

Marketing and selling expense increased $904,595, or 27.7%, for the six months ended June 30, 2024, as compared to the same period in 2023. OSS had an increase of $508,601, or 20.8% due to an increase in tradeshows and personnel. Bressner had an increase of $395,994, or 47.9%, 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 16.1% during the six months ended June 30, 2024, as compared to 9.6% during the same period in 2023.

Current wording

Marketing and selling expense increased $1,200,314, or 24.1%, for the nine months ended September 30, 2024, as compared to the same period in 2023. OSS had an increase of $657,733, or 17.6%, due to an increase in tradeshows and personnel. Bressner had an increase of $542,581, or 43.6%, 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 15.6% during the nine months ended September 30, 2024, as compared to 10.4% during the same period in 2023.

Previous 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.

Current wording

Research and development expense decreased $103,479, or 9.8%, for the three months ended September 30, 2024, as compared to the same period in 2023. OSS saw a decrease of $125,511, or 13.7%. 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 $22,032, or 16.3%, due to additional personnel and overhead costs. Overall, total research and development expense as a percentage of revenue decreased as a percentage of revenue to 6.9% during the three months ended September 30, 2024, as compared to 7.7% during the same period in 2023.

Previous wording

Research and development expense decreased $253,499, or 11.8%, for the six months ended June 30, 2024, as compared to the same period in 2023. OSS saw a decrease of $318,566, or 16.7%. 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 $65,067, or 27.5% 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 7.3% during the six months ended June 30, 2024, as compared to 6.3% during the same period in 2023.

Current wording

Research and development expense decreased $356,978, or 11.1%, for the nine months ended September 30, 2024, as compared to the same period in 2023. OSS saw a decrease of $444,078, or 15.7%. 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 $87,100, or 23.4%, 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 7.2% during the nine months ended September 30, 2024, as compared to 6.7% during the same period in 2023.

Previous wording

Interest expense decreased $4,836 for the three months ended June 30, 2024, as compared to the same period in 2023 due to declining borrowing balances.

Current wording

Interest expense decreased $15,003 for the three months ended September 30, 2024, as compared to the same period in 2023 due to declining borrowing balances.

Previous wording

Interest expense decreased $2,199 for the six months ended June 30, 2024, as compared to the same period in 2023 due to declining borrowing balances.

Current wording

Interest expense decreased $17,202 for the nine months ended September 30, 2024, as compared to the same period in 2023 due to declining borrowing balances.

Previous wording

For the three and six month periods ended June 30, 2023, the Company received a government provided Employee Retention Credit (“ERC”) for the retention of employees during the COVID-19 pandemic during the years of 2020 and 2021, in the amount of $1,516,034 less commissions of $217,793. The Company did not receive any ERC credits in either the three or six month periods ended June 30, 2024.

Current wording

For the three and nine month periods ended September 30, 2023, the Company received a government provided ERC for the retention of employees during the COVID-19 pandemic during the years of 2020 and 2021, in the amount of $488,348 less commissions of $69,862 and $2,004,382 less commission of $287,655, respectively.

Previous wording

Other income (expense), for the three months ended June 30, 2024, resulted in net other income of $21,831 as compared to net other income of $31,837, in the same period in 2023, for a net decrease in other income of $10,006 attributable to changes in foreign currency gain and losses.

Current wording

Other income (expense), for the three months ended September 30, 2024, resulted in net other expense of $14,402 as compared to net other income of $13,035, in the same period in 2023, for a net decrease in other income of $27,437 attributable to changes in foreign currency gain and losses.

Previous 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.

Current wording

Other income (expense), for the nine months ended September 30, 2024, resulted in net other income of $14,707 as compared to net other income of $24,649, in the same period in 2023, for a net increase in other income of $9,942 attributable to gains on foreign currency transactions.

Previous 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.

Current wording

We have recorded an income tax provision of $167,086 and $226,967, respectively, for the three months ended September 30, 2024 and 2023 and $569,382 and $885,332, respectively, for the nine months ended September 30, 2024 and 2023. The effective tax rate for the nine months ended September 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 on 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 six months ended June 30, 2024, was 29.1%, 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 nine months ended September 30, 2024, was 29.4%, as compared to 28.5% 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 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.

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 September 30, 2024, we had total cash and cash equivalents of $9,402,608, with short-term investments of $3,180,213, and total working capital of $26,676,256. Cash and cash equivalents held by Bressner totaled US$3,196,163 on September 30, 2024. Bressner’s debt covenants do not permit the use of those funds by its parent company.

Previous wording

During the year ended December 31, 2023, we had a loss from operations of $7,923,135, with cash used by operating activities of $439,679.

Current wording

During the nine month period ended September 30, 2024, we had a loss from operations of $10,250,905, with cash provided by operating activities of $2,143,545. During the year ended December 31, 2023, we had a loss from operations of $7,923,135, with cash used by operating activities of $439,679.

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. 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 at any required time and on commercially reasonable terms, if at all.

Previous wording

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2023 and as of June 30, 2024, economists continue to suggest that an elevated risk of economic downturn in the U.S. and Germany will continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations. We intend to continue to monitor the effects of inflation, global supply chain shortages and the economic conditions, and, if appropriate, we may alter our plans to address such concerns as they may arise.

Current wording

As of September 30, 2024, economists are suggesting that the economy is beginning to improve and will result in a soft landing. 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.

Previous wording

Management expects these actions and continued diligence towards limiting cost growth and expense containment will provide long-term sustainability. 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.

Current wording

Management expects these actions and continued diligence towards limiting cost growth and expense containment will provide long-term sustainability. 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 the next twelve months.

Previous wording

As a result of management’s commitment to controlling costs, conserving cash, and our potential sources of liquidity, as well as 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.

Current wording

As a result of management’s commitment to controlling costs, conserving cash, and our potential sources of liquidity, as well as 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 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.

Previous wording

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

Current wording

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

Previous 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.

Current wording

During the nine month period ended September 30, 2024, we generated $2,143,545 in cash from operating activities, an increase of $1,918,076 when compared to the cash provided by operating activities of $225,469 during the same period in 2023.

Previous 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.

Current wording

The change in cash provided by operating activities during the nine month period ended September 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 $4,060,935 to $10,499,551 in the current year period, from a net loss of $6,438,616 in the prior year period; (ii) net favorable adjustments in the current period for non-cash items of $471,748, which were comprised of $8,187,318 of favorable non-cash items, offset by $7,715,570 of negative non-cash items that did not affect operating cash flow; and (iii) cash provided by changes in working capital items of $5,507,263.

Previous 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.

Current wording

During the nine month period ended September 30, 2024, the Company generated cash of $4,293,263 from investing activities, as compared to $298,401 provided by investing activities during the prior year period in 2023, a net increase of $3,994,862. This change is attributable to an increase in the number of short-term investments redeemed in the current period as compared to the prior period.

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 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.

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 nine month period ended September 30, 2024, the Company used $1,144,189 in cash for debt service payments on Bressner borrowings and payment of tax on the net exercise of vested RSUs, while generating $237,748 from the exercise of options. During the same period in 2023, the Company generated $135,403 from comparable items, for a difference of $1,279,592 in the current period as compared to the prior period.

Previous wording

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.

Current wording

Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry. 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.

Previous 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.

Current wording

During the nine months ended September 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, 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 hiring of a new president and chief executive officer and new vice president of sales in mid-2023, as well as a new chief financial officer effective as of November 11, 2024, 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 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.

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. Component shortages and increased lead times on materials sourced 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, and 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 experienced some effects due to inflation in both the U.S. and Europe during the most recent period, including increased product pricing due to semiconductor product shortages, increased transportation costs due to increases in the cost of energy and general price increases due to inflation in the economy. 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 minimize price increases. Inflation affects the Company’s manufacturing costs, distribution costs and operating expenses.

Current wording

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

Previous wording

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. Both the Federal Reserve and European Central Bank interest rates have increased rates from historic levels and are currently unchanged.

Current wording

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. Both the Federal Reserve and European Central Bank have increased interest rates from historic levels over the last two years. Although the Federal Reserve cut interest rates by 50 basis points in September 2024, the current rate remains higher than historical rates and there can be no assurances that further cuts will be made in the near term.

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 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.

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”), both of which provide basic deposit coverage with limits up to $250,000 per owner. As of September 30, 2024, the Company had $2,785,706 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 €2,457,160 (US$2,737,991) with banks in excess of the insurance limits.