ONE STOP SYSTEMS INC

For the Three and Nine Month Periods Ended September 30, 2024 and 2023

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Nature of Operations

One Stop Systems, Inc. (“we,” “our,” “OSS,” or the “Company”) was originally incorporated as a California corporation in 1999, after initially being formed as a California limited liability company in 1998. On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with its initial public offering. The Company designs, manufactures, and markets specialized rugged high-performance compute, high speed switch fabrics and storage systems, which are designed to target edge applications for artificial intelligence (“AI”)/machine learning (“ML”), sensor processing, sensor fusion and autonomy. The Company markets its products to manufacturers of equipment used for autonomous vehicles, medical, industrial, and military applications, with special focus on platforms that move, such as planes, trucks, ships, submarines and mobile datacenters or command posts where sensor processing, sensor fusion, AI and ML are integrated to support such applications.

During the year ended December 31, 2015, the Company formed a wholly owned subsidiary in Germany, One Stop Systems, GmbH (“OSS GmbH”). In July 2016, the Company acquired Mission Technologies Group, Inc. (“Magma”) and its operations that complemented OSS' manufacture of custom high-performance compute servers.

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

On October 31, 2018, OSS GmbH acquired 100% of the outstanding equity of Bressner Technology GmbH, a limited liability company registered under the laws of Germany and located near Munich, Germany (“Bressner”). Bressner designs and manufactures standard and customized servers, panel PCs, and PCIe accelerator systems. It also operates as a systems integrator with standard and custom all in one hardware systems and components. In addition, Bressner serves as a channel to market for OSS ruggedized datacenter level compute and storage products to the European and Middle Eastern markets.

The Company completed and fulfilled all remaining orders associated with its long-term media and entertainment customer during the year ended December 31, 2023, and does not anticipate further business from this customer in the future. This resulted from an acceleration in the customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry. This customer’s transition to cloud solutions had a negative impact on the Company’s results of operations for the year ended December 31, 2023 and for the nine months ended September 30, 2024.

With the Company's shift in focus to the development and sale of AI Transportables, we have significantly increased our efforts to penetrate the military and defense sectors. With the hiring of Michael Knowles and Robert Kalebaugh in mid-2023, each of whom has extensive experience in contracting in the defense industry, as our new president and chief executive officer, and vice president of sales, respectively, we further increased our emphasis and focus on the pursuit of revenue opportunities with major defense contractors and the military. 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.

The negative impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the ongoing military conflict between Russia and Ukraine and Israel and Hamas, have contributed to economic uncertainty. 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. With the recent decrease in interest rates, economists now are anticipating a soft landing for both the U.S. and in Germany. 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. As a result of the foregoing, there is continued economic uncertainty and volatility in the capital markets in the near term that could negatively affect our operations.

Due to the Company’s shift in focus to the military and defense sector, deviations from management’s expectations with respect to product sales and advances in technology that rendered certain inventory obsolete, during the quarter ended September 30, 2024, and certain of the Company's inventory had to be written down. The Company determined to take an inventory charge of $6,099,259 as a result of our increased emphasis and focus on the pursuit of revenue opportunities with major defense contractors and the military. The Company recently reviewed its existing pipeline and has made adjustments to reflect the procurement habits and timing of the military and defense sector in an effort to avoid similar inventory valuation charges in the future.

These global issues and concerns are impacting our business as well as some of our customers, who are continuing to experience downturns or uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts. During the quarter ended September 30, 2024, the Company experienced delays in orders due to certain customers’ funding or program delays. If such decreases in orders or postponements continue in the future, or we experience cancellations of orders, our operating results will be further impacted, and our revenues may decline in future periods.

These global issues and events may also have the effect of heightening many risks associated with our customers and supply chain. We may take further actions that alter our operations from time to time, or which we determine are in our best interests. In addition, we may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business.

As a result of these global issues, as well as other factors discussed in these notes, it has been difficult to accurately forecast our revenues or financial results. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause our stock price to decline.

Management’s plans with respect to the above are to continue their efforts towards responding to the changing economic landscape, to continue to control costs, conserve cash, strengthen margins through the introduction of new product lines focusing on AI compute capabilities for military and industrial applications, autonomous truck driving and improve company-wide execution through increased investments in product marketing.

Basis of Presentation

The accompanying consolidated financial statements have been prepared on an accrual basis of accounting in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”), as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).

The unaudited consolidated financial statements herein have been prepared by the Company pursuant to the rules and regulations of the SEC. The accompanying interim unaudited consolidated financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the latest year ended December 31, 2023.

Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, 2023 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements. The Company’s management has evaluated all subsequent events and transactions through the date of filing this Quarterly Report.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 21, 2024.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation. In the current year, the Company began disclosing as a separate component of revenue and cost of sales, the amounts related to customer funded development revenue and costs. Customer funded development is revenue from customers for which the Company's performance obligations are satisfied over time and for which the customer receives benefits as the Company performs. Products revenue performance obligations are typically satisfied at a point in time, predominately upon shipment.

Gross versus net revenue

Accounting Standards Codification ("ASC") 606 provides guidance on proper recognition of principal versus agent considerations, which is used to determine gross versus net revenue recognition. Under ASC 606, the core objective of the guidance on gross versus net revenue recognition is to help determine whether the Company is a principal or an agent in a transaction. In general, the primary difference between these two is the performance obligation being satisfied by the company recognizing revenue. The principal has a performance obligation to provide the desired goods or services to the end customer, whereas the agent arranges for the principal to provide the desired goods or services. Additionally, a fundamental characteristic of a principal in a transaction is control. A principal substantively controls the goods and services before they are transferred to the customer as well as controlling the price of the good or service being provided.

The Company is an agent if the Company's performance obligation is to arrange for the delivery of the specified good or service by another party. An entity that is an agent does not control the specified good or service provided by another party before that good or service is transferred to the customer. During the three and nine month periods ended September 30, 2024, the Company recorded net agent consideration as revenue of $26,713 and $349,270, respectively.

Principles of Consolidation

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

There have been no changes to our accounting policies disclosed in our audited consolidated financial statements and the related notes for the year ended December 31, 2023.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions.

On an ongoing basis, our management evaluates these estimates and assumptions, including those related to determination of standalone selling prices of our products and services, allowance for credit losses and sales reserves, income tax valuations, stock-based compensation, goodwill, intangible assets and inventory valuations and recoverability. We base our estimates on historical data and experience, as well as various other factors that our management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities.

Goodwill

Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event has occurred. Management reviews the impairment of goodwill for impairment annually at year end.

In June 2023, management performed an interim impairment test of goodwill, as a result of the overall financial performance of OSS as compared to plan, the transition of and focus on our product strategy of AI Transportables and the defense industry, and deferment of certain orders. As a result of this interim evaluation, the Company recorded an impairment loss to goodwill of $2,700,000, which was charged to operating expenses in the quarter ended June 30, 2023.

Due to the Ukraine war, the continuing conflicts between Israel and Hamas, inflationary pressures, other macroeconomic factors and the loss of our previous media and entertainment customer, there has been uncertainty and disruption in the global economy, financial markets and our ongoing operations. We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions or a revision of the carrying value of our assets or liabilities as of the date of this Quarterly Report. These estimates and assumptions may change as new events occur and additional information is obtained. As a result, actual results could differ materially from these estimates and assumptions.

Recent Accounting Pronouncements

Two new Accounting Standard Updates ("ASU’s") have recently been issued, neither of which are currently expected to significantly impact the Company.

On November 27, 2023, the FASB issued ASU 2023-07 "Segment Reporting (Topic 280): Improvements to reportable segment disclosures." This amendment enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The purpose of the amendments is to enable “investors to better understand an entity’s overall performance” and assess “potential future cash flows.” The adoption of this amendment is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Management does not anticipate any material impact on the consolidated financial statements.

ASU 2023-09: Income Taxes (Topic 740) — Improvements to Income Tax Disclosures (ASU 2023-09) enhances the disclosure requirements related to income taxes. The most significant changes are requiring additional disaggregation in the rate reconciliation disclosure (for public business entities) and income taxes paid disclosure (for all entities). The changes to the rate reconciliation disclosures require entities to disclose specific categories in the rate reconciliation by taxing jurisdiction for any individual reconciling item that exceeds 5% of pretax income multiplied by the statutory tax rate. The new guidance will be effective for public business entities for annual periods beginning after December 15, 2024. For all other entities, the guidance will be effective for annual periods beginning after December 15, 2025. Early adoption is permitted for all entities.

Employee Retention Credit

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provided tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit (“ERC”). The ERC was designed to encourage businesses to keep employees on the payroll during the COVID-19 pandemic. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, we accounted for the ERC funding consistent with our accounting treatment and reporting of the forgiveness of our Paycheck Protection Program ("PPP") Loan.

The credit is based upon the number of employees in any given quarter in the years 2020 and 2021. For the year 2020, the maximum credit was based upon the lesser of 50% of eligible wages or $5,000 forthe year. For the first three quarters of the year 2021, the maximum quarterly credit was based upon the lesser of 70% of eligible wages or $7,000 per quarter. The total maximum program credit per employee was $26,000.

The Company applied for the ERC program and as of September 30, 2023, had received a total of $2,004,382 in credits, including interest, and paid commissions of $287,656 to a vendor who assisted with the calculations and filing of the application. The net proceeds of $1,716,727 have been reported as other income in the accompanying consolidated statements of operations. Income is recognized when reasonably assured of receipt based upon government notice. No ERC credits were received during the nine month period ended September 30, 2024.

NOTE 3 - SHORT-TERM INVESTMENTS

The Company’s short-term investments by significant investment category as of September 30, 2024, were as follows:

(1)

Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.

The Company’s short-term investments by significant investment category as of December 31, 2023, were as follows:

(1)

Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.

Cash alternatives represent cash balances in savings accounts and U.S. Treasury Bills that are temporarily on-hand that are immediately available for investments in accordance with the Company’s investment policy.

The Company typically invests in highly rated securities and its investment policy limits the amount of credit exposure to anyone issuer. The policy requires investments in fixed income instruments denominated and payable in U.S. dollars only and requires investments to be investment grade, with a primary objective of minimizing the potential risk of principal loss.

NOTE 4 -ACCOUNTS RECEIVABLE

Accounts receivable, net consisted of the following:

Provision (recovery) for bad debt expense related to accounts receivable was $40,000 and $(8,165) for the three month periods ended September 30, 2024 and 2023, respectively, and $40,000 and $38,653 for the nine month periods ended September 30, 2024 and 2023, respectively.

The following tables represent the changes in the allowance for credit losses associated with our trade receivables for the nine month periods ended September 30, 2024 and 2023.

NOTE 5 – INVENTORIES

Inventories, net consisted of the following:

NOTE 6 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consisted of the following:

NOTE 7 – DEBT

Bank Lines of Credit

In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 with Torrey Pines Bank, which was renewed in June 2023 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 September 30, 2024 and December 31, 2023, respectively.

Bressner hasthree revolving lines of credit with German institutions, including UniCredit Bank AG, Commerzbank AG, and VR Bank, with total availability of up to €2,700,000 (US$3,008,586) as of September 30, 2024. Borrowings under the lines of credit bear interest at a variable rate of Euribor plus a stated rate. The rates as of September 30, 2024, for the lines of credit ranged from 3.10% to 5.62%, with the balances remaining open indefinitely or until occurrence of a defined change of control event. There wereno outstanding lines of credit balances as of September 30, 2024 and December 31, 2023, respectively.

Foreign Debt Obligations

Bressner hadtwo term loans outstanding as of September 30, 2024, with an aggregate balance outstanding of €1,000,000 (US$1,114,291) as follows:

•

On June 18, 2021, Bressner converted €500,000 of its line of credit from UniCredit Bank into a note payable. The note was originally due December 17, 2021, and subsequently extended through June 17, 2022. On June 17, 2022, this note was further extended through December 19, 2022, with accrued interest having been paid current as of the revised maturity date. On December 19, 2022, this note was extended through June 19, 2023. However, on June 19, 2023, this note was further extended through December 19, 2023, and the interest rate was increased to 5.80%, with accrued interest having been paid current as of June 19, 2023. On December 29, 2023, this note was further extended through June 19, 2024, with accrued interest having been paid current as of December 19, 2023. On June 19, 2024, this note was further extended through December 19, 2024, with accrued interest having been paid current as of June 19, 2024, and the interest rate was reduced to 5.55%. The balance outstanding on the note as of September 30, 2024, and December 31, 2023, was €500,000 (US$557,145) and €500,000 (US$551,948), respectively; and

•

On April 9, 2021, Bressner converted €500,000 of its line of credit from Commerzbank AG into a note payable. The note was due on September 30, 2021, with a payment of principal and interest due upon maturity. This loan was paid in full on September 30, 2021, with proceeds from a new note with similar terms. This new note had an original maturity date of June 30, 2022; however, this note was further extended through March 31, 2023, with accrued interest having been paid current as of the revised maturity date. On March 30, 2023, this note was further extended through September 29, 2023, and the interest rate was increased to 4.60%, with accrued interest having been paid current as of March 30, 2023. On September 29, 2023, this note was further extended through March 28, 2024, and the interest rate was increased to 5.75%, with accrued interest having been paid current as of September 29, 2023. On March 28, 2024, this note was further extended through September 30, 2024, and the interest rate was reduced to 5.50%, with accrued interest having been paid current as of March 28, 2024. On September 30, 2024, this note was further extended through March 31, 2025, and the interest rate was reduced to 4.75%, with accrued interest having been paid current as of September 29, 2024. The balance outstanding on the note as of September 30, 2024, and December 31, 2023, was €500,000 (US$557,146), and €500,000 (US$551,949), respectively.

On June 30, 2022, Bressner borrowed €1,500,000 (US$1,468,173) from Commerzbank AG, which bore interest at 2.55%, was due in June 2024, and was repayable intwenty-four monthly installments, with payments beginning July 31, 2022. The balance outstanding as of September 30, 2024, and December 31, 2023, was €0 (US$0) and €382,327 (US$422,050), respectively. This loan was collateralized by accounts receivable attributable to a specific customer. This loan was paid in full in July 2024 and will not be extended or renewed.

Additionally, on February 16, 2022, Bressner converted €500,000 of its line of credit from UniCredit Bank into a note payable. On August 16, 2022, this note was extended through February 16, 2023, with accrued interest having been paid current as of the original maturity date. On February 16, 2023, this note was further extended through August 16, 2023, and on August 16, 2023, this note was further extended through February 16, 2024, and the interest rate was increased to 5.63%, with accrued interest having been paid current as of August 16, 2023. The note was repaid in full during the quarter ended March 31, 2024, and the outstanding balance as of September 30, 2024, and December 31, 2023, was €0 (US$0) and €500,000 (US$551,948), respectively.

A summary of outstanding debt obligations as of September 30, 2024, was as follows:

NOTE 8 – STOCKHOLDERS’ EQUITY

The Company’s amended and restated certificate of incorporation, filed with the Delaware Secretary of State on December 14, 2017, authorizes the Company to issue 10,000,000 shares of preferred stock and 50,000,000 shares of common stock.

2017 Equity Incentive Plan

On October 10, 2017, the Company’s board of directors approved and adopted the Company’s 2017 Equity Incentive Plan (as amended to date, the “2017 Plan”), subject to stockholder approval thereof. On December 18, 2017, the Company’s stockholders approved the 2017 Plan. The 2017 Plan allows for the grant of a variety of equity vehicles to provide flexibility in the grant and issuance of equity awards, including stock options, unrestricted stock grants, restricted stock units (“RSUs”), stock bonuses and performance-based awards. An aggregate of 1,500,000 shares of common stock were initially reserved for issuance under the 2017 Plan.

On June 24, 2020, the Company amended the 2017 Plan to increase the maximum number of shares of common stock with respect to one or more Stock Awards (as defined in the 2017 Plan) that may be granted to any one participant under the 2017 Plan during any calendar year from 500,000 shares to 1,000,000 shares. The amendment did not increase the total number of shares of common stock authorized for issuance under the 2017 Plan and did not require stockholder approval.

On May 19, 2021, the Company’s stockholders approved the Company’s proposal to increase the number of shares authorized for issuance under the 2017 Plan from 1,500,000 shares to 3,000,000 shares of common stock of the Company pursuant to the terms and conditions of the 2017 Plan. The amendment took effect upon receipt of stockholder approval.

On March 15, 2024, the Company’s board of directors unanimously approved, and on May 15, 2024, the Company’s stockholders approved, an amendment to the 2017 Plan to increase the number of shares of common stock authorized for issuance thereunder from 3,000,000 to 5,000,000 shares. The amendment took effect upon receipt of stockholder approval.

Executive Employment Agreements

As contemplated by that Amended and Restated Employment Agreement, dated April 3, 2023, entered into by and between the Company and David Raun, in connection with the termination of Mr. Raun’s role as chief executive officer and president of the Company, all those unvested restricted stock units ("RSUs") held by Mr. Raun that were scheduled to vest within twelve months from his termination date (June 5, 2023) became vested as of such date, with the remaining unvested RSUs being forfeited. As a result, the vesting of 150,556 RSUs was accelerated and 52,132 RSUs were forfeited.

On June 5, 2023, in connection with, and as a material inducement to, the appointment of Michael Knowles as the Company’s new chief executive officer and president, Mr. Knowles was granted (i) non-qualified stock options to purchase 400,000 shares of Company common stock (the “Inducement Options”), which Inducement Options have an exercise price equal to $2.95 per share and will expire ten years from the date of the grant; and (ii)400,000 restricted stock units (together with the Inducement Options, the “Inducement Grants”).

Both of the Inducement Grants shall vest over a four-year period as follows:25% on the one-year anniversary of the date of the grant, and the remaining 75% will vest in six equal installments, commencing six months after the one-year anniversary of the date of grant and every six months thereafter until fully vested, subject to Mr. Knowles’ continued employment by the Company.

The Inducement Grants were granted outside of the Company’s 2017 Plan and any other equity incentive plans, and in reliance on the employment inducement exemption provided under the Nasdaq Listing Rule 5635(c)(4).

Stock Options

A summary of stock option activity under the Company’s current equity incentive plans during the nine month period ended September 30, 2024, was as follows:

As of September 30, 2024, there was $533,458 of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 1.57 years.

The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stock options granted by the Company. There wereno options granted during the nine month period ended September 30, 2024. The following table presents the grant date fair value of options vested and the intrinsic value of options exercised:

If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase, or cancel any remaining unearned stock-based compensation expense or calculate and record additional expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional common stock options or other stock-based awards.

Restricted Stock Units

RSUs may be granted at the discretion of the compensation committee of the Company's board of directors under the 2017 Plan in connection with the hiring and retention of personnel and are subject to certain conditions. RSUs generally vest quarterly or semi-annually over a period ofone tothree years and are typically forfeited if employment is terminated before the RSUs vest. The compensation expense related to the RSUs is calculated as the fair value of the common stock on the grant date and is amortized to expense over the vesting period and is adjusted for estimated forfeitures.

The Company’s RSU activity for the nine months ended September 30, 2024, was as follows:

As of September 30, 2024, there was $2,405,492 of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.29 years.

Stock-based compensation expense for the three and nine month periods ended September 30, 2024 and 2023, was comprised of the following:

Warrants

The following table summarizes the Company’s warrant activity during the nine months ended September 30, 2024:

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Legal

We are subject to litigation, claims, investigations, and audits arising from time to time in the ordinary course of our business. When applicable, we record accruals for contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in our opinion, individually or in the aggregate, no such lawsuits are expected to have a material effect on our consolidated financial position or results of operations.

In the opinion of management, after consultation with legal counsel, the ultimate disposition of any such matters as of September 30, 2024, are not expected to have a materially adverse effect on the consolidated financial position or results of operations of the Company.

Guarantees and Indemnities

The Company has made certain indemnities, under which it may be required to make payments to an indemnified party, in relation to certain transactions. The Company indemnifies its directors, officers, employees, and agents to the maximum extent permitted under the laws of the State of Delaware. In connection with its facility lease, the Company has indemnified its lessor for certain claims arising from the use of the facilities. The duration of the indemnities varies, and in many cases is indefinite. These indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities in the accompanying consolidated balance sheets.

Leases

The Company leases its offices, manufacturing, and warehouse facility in San Diego County under a non-cancelable operating lease. Our corporate headquarters are in a leased space comprising of approximately 29,342 square feet in Escondido, California under a lease that was last modified and extended in September 2023 and expires in August 2030. The Company also leases a 3,208 square foot facility in Salt Lake City, Utah, under a lease expiring in June 2025, that houses our Ion software development team. Additionally, we lease a 1,632 square foot facility located in Anaheim, California, with the lease expiring in June 2025. Bressner leases space in Germany comprising of 11,836 square feet on a month-to-month basis. In June 2024, Bressner leased an additional 2,500 square feet of office space in Germany on a month-to-month basis with payments of approximately $5,950 per month, beginning in October 2024.

Other information related to leases as of the three and nine month periods ended September 30, 2024 and 2023, was as follows:

The following table presents the maturity of the Company’s operating lease liabilities as of September 30, 2024:

Purchase Commitments

In the normal course of business, the Company may enter into purchase commitments for inventory components to be delivered based upon non-cancellable, pre-established, delivery schedules that are over a period that may exceed one year. Total non-cancellable purchase orders as of September 30, 2024, were $5,302,753.

Customer Concentration

During the three month period ended September 30, 2024, the Company hadone customer that accounted for approximately 13.6% of revenue. During the three month period ended September 30, 2023, the Company hadno customers that represented more than 10% of revenue.

During the nine month periods ended September 30, 2024 and 2023, the Company hadone andtwo customers, respectively, that accounted for (in the aggregate) approximately 10% and 25%, respectively, of revenue for which each represented greater than 10% of our consolidated quarterly revenue.

As of September 30, 2024 and December 31, 2023, the Company hadone andtwo customers, respectively, that accounted for (in the aggregate) approximately 21% and 22%, respectively, of trade accounts receivables for which each of such customer’s balances represented greater than 10% of our consolidated trade accounts receivable balance.

During the three month periods ended September 30, 2024 and 2023, the Company had approximately 37% and 36% (in the aggregate), respectively, of purchases fromtwo vendors/suppliers for which each represents greater than 10% of our consolidated purchases.

During the nine month periods ended September 30, 2024 and 2023, the Company had approximately 36% and 36% (in the aggregate), respectively, of purchases fromtwo vendors/suppliers for which each represents greater than 10% of our consolidated purchases.

NOTE 10 – NET LOSS PER SHARE

Basic and diluted net loss per share were calculated as follows for the three and nine month periods ended September 30, 2024 and 2023:

NOTE 11 – REVENUE, SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates intwo reportable segments: (i) the design and manufacture of high-performance customized computers and flash arrays, in-flight entertainment and connectivity, and (ii) our subsidiary, Bressner, which operates as a value-added reseller with minimal product customization. The Company evaluates financial performance on a company-wide basis.

Segment details for the three and nine month periods ended September 30, 2024 and 2023, was as follows:

The table below presents the deferred revenue, warranties and deposit balances along with the significant activity affecting balances during the nine month periods ended September 30, 2024 and 2023:

As of September 30, 2024, the Company had approximately $973,777 of remaining performance obligations under fully funded contracts for customer funded development. The Company currently expects to recognize the remaining performance obligations as revenue in fiscal 2024. Customer funded development is revenue from customers for which the Company's performance obligations are satisfied over time and for which the customer receives benefits as the Company performs. Products revenue performance obligations are typically satisfied at a point in time, predominately upon shipment.

Revenue from customers with non-U.S. billing addresses represented approximately 55% and 65% of the Company’s revenue during the three month periods ended September 30, 2024 and 2023, respectively, and 59% and 67% and the nine month periods ended September 30, 2024 and 2023, respectively.

As of September 30, 2024, substantially all the Company’s long-lived assets are in the United States of America, except for assets of $384,639 located in Germany.

NOTE 12 – SUBSEQUENT EVENTS

The Company’s management has evaluated subsequent events after the consolidated balance sheet dated as of September 30, 2024, through the date of filing of this Quarterly Report. Based upon the evaluation, management has determined that, other than as disclosed below no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto.

On November 4, 2024, John Morrison notified the Company of his decision to retire and resign from his role as Chief Financial Officer of the Company, effective November 11, 2024. Mr. Morrison will continue to serve as an employee of the Company through November 30, 2024, during which time he will continue to receive the same compensation and will aid in the transition of the Chief Financial Officer role to Daniel Gabel.

As a result of Mr. Morrison’s resignation, that employment agreement entered into by and between the Company and Mr. Morrison, dated June 1, 2023, will terminate as of November 11, 2024. In connection with Mr. Morrison’s retirement, and subject to Mr. Morrison executing and returning an effective waiver and release of claims, the Company has agreed to (i) pay Mr. Morrison an aggregate amount of nine months of his current base salary, payable in accordance with the Company’s typical payroll practices, commencing as of November 30, 2024, and (ii) continue group health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”) at the Company’s expense for a period of nine months following November 30, 2024.

On November 4, 2024, the Company entered into an employment agreement with Daniel Gabel (the “Gabel Agreement”), pursuant to which, effective as of the Effective Date, Mr. Gabel will begin serving as Chief Financial Officer of the Company. Pursuant to the Gabel Agreement, Mr. Gabel will be entitled to receive an annual base salary of $315,000 per annum (subject to annual review and adjustment); an annual bonus, with a target amount equivalent to forty percent of his then-current annual base salary, payable if certain applicable bonus criteria are met, subject to approval by the Company’s board of directors; and eligibility to participate in a number of Company-sponsored benefits, including its medical, dental and 401(k) plans, under the terms and conditions of the benefit plans that may be in effect from time to time.

Additionally, as of the Effective Date, in connection with his appointment as Chief Financial Officer of the Company, the Company will grant Mr. Gabel 40,000 RSUs, which RSUs will be granted under the Company’s 2017 Plan and shall vest as follows: 25% on the one-year anniversary of the date of the grant, and the remaining 75% will vest in six equal installments, commencing six months after the one-year anniversary of the date of grant and every six months thereafter until fully vested, subject to Mr. Gabel continued employment by the Company.