Date: 8/11/2022
Form: 10-Q - Quarterly Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ________________
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices including Zip Code
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(Registrant’s telephone number, including area code)
(Former Name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Trading symbol |
Name of exchange on which registered |
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The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,” "accelerated filer,” "smaller reporting company,” and "emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of July 31, 2022, the registrant had
Table of Contents
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Item 1. |
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3 |
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4 |
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5 |
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6 |
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7 |
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9 |
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11 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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29 |
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Item 3. |
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43 |
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Item 4. |
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43 |
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Item 1. |
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44 |
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Item 1A |
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44 |
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Item 2. |
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44 |
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Item 3. |
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44 |
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Item 4. |
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44 |
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Item 5. |
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44 |
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Item 6. |
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45 |
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47 |
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2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented. We have presented financial statements in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these unaudited consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the unaudited consolidated financial statements were issued by filing with the SEC.
This Quarterly Report on Form 10-Q for the three and six month periods ended June 30, 2022, should be read in conjunction with our audited financial statements for the year ended December 31, 2021, included in our Annual Report on Form 10-K, filed with the SEC on March 24, 2022.
The results of operations for the three and six month periods ended June 30, 2022, are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022.
3
ONE STOP SYSTEMS, INC. (OSS)
UNAUDITED CONSOLIDATED BALANCE SHEETS
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Unaudited |
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Audited |
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June 30, |
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December 31, |
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2022 |
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2021 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments (Note 3) |
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Accounts receivable, net (Note 4) |
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Inventories, net (Note 5) |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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- |
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Deposits and other |
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Deferred tax assets, net |
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Goodwill |
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Intangible assets, net (Note 6) |
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Total Assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other liabilities (Note 7) |
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Current portion of operating lease obligation (Note 10) |
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- |
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Current portion of notes payable (Note 8) |
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Current portion of senior secured convertible note, net of debt discounts of $ |
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- |
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Total current liabilities |
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Long-term debt, net of current portion (Note10) |
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- |
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Operating lease obligation, net of current portion (Note 8) |
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- |
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Total liabilities |
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Commitments and contingencies (Note 10) |
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Stockholders’ equity |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive (loss) income |
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( |
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Accumulated earnings |
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Total stockholders’ equity |
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Total Liabilities and Stockholders' Equity |
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$ |
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$ |
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See accompanying notes to unaudited consolidated financial statements
4
ONE STOP SYSTEMS, INC. (OSS)
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenue |
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$ |
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$ |
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$ |
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$ |
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Cost of revenue |
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Gross profit |
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Operating expenses: |
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General and administrative |
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Marketing and selling |
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Research and development |
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Total operating expenses |
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Income from operations |
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Other income (expense), net: |
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Interest income |
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Interest expense |
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( |
) |
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( |
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( |
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( |
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Other income (expense), net |
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( |
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Total other income (expense), net |
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Income before income taxes |
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Provision for income taxes |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Net income per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average common shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes to unaudited consolidated financial statements
5
ONE STOP SYSTEMS, INC. (OSS)
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss): |
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Net unrealized income (losses) on short-term investments |
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( |
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Currency translation adjustment |
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( |
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( |
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( |
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Total other comprehensive income (loss) |
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( |
) |
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( |
) |
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( |
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Comprehensive income |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to unaudited consolidated financial statements
6
ONE STOP SYSTEMS, INC. (OSS)
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Three and Six Months Ended June 30, 2022
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Common Stock |
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Accumulated Other |
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Total |
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Shares |
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Amount |
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Additional Paid-in-Capital |
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Comprehensive Income |
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Accumulated Earnings |
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Stockholders' Equity |
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Balance, January 1, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Adjustment to beginning accumulated earnings for adoption of lease accounting (ASC 842) |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
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Adjusted beginning balance, January 1, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Exercise of stock options, RSUs and warrants |
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- |
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- |
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Taxes paid on net issuance of employee stock options |
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- |
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- |
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( |
) |
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- |
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- |
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( |
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Conversion of senior secured convertible debt to equity |
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- |
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- |
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Currency translation adjustment |
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- |
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- |
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- |
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( |
) |
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- |
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( |
) |
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Net unrealized gains (losses) on short-term investments |
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- |
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- |
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- |
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( |
) |
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- |
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( |
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Net income |
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- |
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- |
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- |
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- |
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Balance, March 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Exercise of stock options, RSUs and warrants |
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- |
|
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- |
|
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Taxes paid on net issuance of employee stock options |
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- |
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- |
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( |
) |
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- |
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- |
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( |
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Currency translation adjustment |
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- |
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- |
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- |
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( |
) |
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- |
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( |
) |
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Net unrealized gains on short-term investments |
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- |
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- |
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- |
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- |
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Net income |
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- |
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- |
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- |
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- |
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Balance, June 30, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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See accompanying notes to unaudited consolidated financial statements
7
ONE STOP SYSTEMS, INC. (OSS)
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Three and Six Months Ended June 30, 2021
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Common Stock |
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Accumulated Other |
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Total |
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Shares |
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Amount |
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Additional Paid-in-Capital |
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Comprehensive Income |
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Accumulated (Deficit) |
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Stockholders' Equity |
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Balance, January 1, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Exercise of stock options, RSU's and warrants |
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- |
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- |
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Proceeds from issuance of stock, net of issuance costs of $ |
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- |
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- |
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Taxes paid on net issuance of employee stock options |
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- |
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- |
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( |
) |
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- |
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- |
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( |
) |
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Currency translation adjustment |
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- |
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- |
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- |
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( |
) |
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- |
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( |
) |
|
Net Income |
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- |
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- |
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- |
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- |
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Balance, March 31, 2021 |
|
|
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$ |
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$ |
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|
$ |
|
|
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$ |
( |
) |
|
$ |
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|
Stock-based compensation |
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- |
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- |
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- |
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- |
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Exercise of stock options, RSU's and warrants |
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- |
|
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- |
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Additional stock issuance costs related to registered direct offering |
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- |
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|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Taxes paid on net issuance of employee stock options |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Currency translation adjustment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net unrealized gains on short-term investments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net Income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements
8
ONE STOP SYSTEMS, INC. (OSS)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
For the Six Months Ended June 30, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
Deferred benefit for income taxes |
|
|
( |
) |
|
|
|
|
|
Gain on disposal of property and equipment |
|
|
|
|
|
|
- |
|
|
Recovery for bad debt |
|
|
( |
) |
|
|
( |
) |
|
Warranty reserves |
|
|
( |
) |
|
|
|
|
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
Inventory reserves |
|
|
|
|
|
|
|
|
|
Amortization of debt discount |
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
Gain on forgiveness of PPP loan and interest |
|
|
- |
|
|
|
( |
) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( |
) |
|
|
|
|
|
Inventories |
|
|
( |
) |
|
|
( |
) |
|
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
( |
) |
|
Accounts payable |
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
|
|
|
|
( |
) |
|
Net cash (used in) provided by operating activities |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Investment in short-term investment grade securities |
|
|
- |
|
|
|
( |
) |
|
Redemption of short-term investment grade securities |
|
|
|
|
|
|
- |
|
|
Proceeds from sale of intangible assets |
|
|
|
|
|
|
- |
|
|
Purchases of property and equipment, including capitalization of labor costs for test equipment and ERP |
|
|
( |
) |
|
|
( |
) |
|
Net cash provided by (used in) investing activities |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and warrants |
|
|
|
|
|
|
|
|
|
Payment of payroll taxes on net issuance of employee stock options |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from issuance of stock |
|
|
- |
|
|
|
|
|
|
Stock issuance costs |
|
|
- |
|
|
|
( |
) |
|
Proceed on borrowing of notes payable |
|
|
|
|
|
|
|
|
|
Repayments on notes payable |
|
|
( |
) |
|
|
( |
) |
|
Repayments on related-party notes payable |
|
|
- |
|
|
|
( |
) |
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
|
Effect of exchange rates on cash |
|
|
( |
) |
|
|
( |
) |
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements
9
ONE STOP SYSTEMS, INC. (OSS)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
|
|
|
For the Six Months Ended June 30, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
|
|
|
$ |
|
|
|
Cash paid during the period for income taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash flow transactions: |
|
|
|
|
|
|
|
|
|
Right of use assets recorded upon adoption of ASC 842 |
|
$ |
|
|
|
$ |
- |
|
|
Lease liabilities recorded upon adoption of ASC 842 |
|
$ |
|
|
|
$ |
- |
|
|
Conversion of senior secured convertible debt to common stock |
|
$ |
|
|
|
$ |
- |
|
|
Forgiveness of PPP loan and interest |
|
$ |
- |
|
|
$ |
|
|
|
Reclassification of inventories to property and equipment |
|
$ |
- |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements
10
ONE STOP SYSTEMS, INC. (OSS)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Month Periods Ended June 30, 2022 and 2021
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 high-performance computing modules and systems, which are designed to target edge computing deployments. The Company markets its products to manufacturers of automated equipment used for media and entertainment, medical, industrial, and military 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.
On August 31, 2018, the Company acquired Concept Development Inc. ("CDI”) located in Irvine, California. CDI specializes in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment and networking systems. CDI has been fully integrated into the core operations of OSS as of June 1, 2020.
On October 31, 2018, OSS GmbH acquired
The accompanying consolidated financial statements include the accounts of OSS, which include the acquisition of CDI, and its wholly owned subsidiary, OSS GmbH, which also includes the acquisition of Bressner. Intercompany balances and transactions have been eliminated in consolidation.
The negative impact of the COVID-19 pandemic and the impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the ongoing military conflict between Russia and Ukraine, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic uncertainty, which has negatively affected our operations. Additionally, during the second quarter, the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year, which could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.
Currently, we are experiencing increased pricing, longer lead-times, unavailability of product and limited supplies, protracted delivery dates, changes in minimum order quantities to secure product, and/or shortages of certain parts and supplies that are necessary components for the products and services we offer to our customers. As a result, the Company is carrying increased inventory balances to ensure availability of necessary products and to secure pricing. Additionally, products that are in the "work-in-process” stage have increased due to the timing and availability of certain componentry necessary to complete our products.
These global issues and concerns regarding general economic decline or recession are also impacting some of our customers, who are experiencing downturns or uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts.
As a result of these global issues, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long term impact of the pandemic, geopolitical issues, inflation, the Federal Reserve
11
interest rate increases and the potential for a recession. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause our stock price to decline.
Furthermore, a decrease in orders in a given period could negatively affect our revenues in future periods. These global issues and events may also have the effect of heightening many risks associated with our customers and supply chain. We may take further actions that alter our operations as may be required by federal, state, or local authorities from time to time, or which we determine are in our best interests. In addition, we may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business.
Management 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, and improve company-wide execution.
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, 2021. Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, 2021, 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 report.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. Operating results for the three and six month periods ended June 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2022.
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, 2021, except for the addition of a definition of, and description of our policy for accounting for leases in accordance with the adoption of ASU No. 2016-02, Leases ("ASU 2016-02”) as follows:
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases”, which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. A lease must be classified as a finance lease if any of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the
12
present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.
Right-of-use assets and liabilities are initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right of use assets are reviewed for impairment. The lease liability is initially measured at the present value of future minimum lease payments over the expected lease term at the commencement date of each lease. The Company measures and records a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs.
In these cases where the discount rate implicit in the lease is not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to the Company's incremental borrowing rate it pays on current debt instruments or would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.
The Company and its subsidiary have no leases classified as finance leases. The Company and its subsidiary currently lease plant, office facilities and equipment under operating leases expiring through . As of June 30, 2022, the weighted average remaining lease term for our operating leases was
The Company’s lease agreements may include options to extend the lease following the initial term. On a case-by-case basis, the Company’s management determines if it is reasonably certain to exercise the renewal option; such renewal options were included in determining the initial lease term.
We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2022, and therefore did not reassess (i) whether any expired or existing contracts are, or contain, leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases. We elected to use hindsight for transition when considering judgments and estimates such as assessments of lease options to extend, or terminate, a lease, or to purchase the underlying asset. As result of the adoption of ASC 842, the Company recognized an accumulative adjustment to beginning retained earnings for the 2022 fiscal year of $
For all asset classes, we elected to (i) not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less and (ii) not separate non-lease components from lease components, and we have accounted for combined lease and non-lease components as a single lease component. Variable lease payments associated with the Company’s leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on which those payments are assessed. For those leases that are subsequently modified for terms, such changes may require a remeasurement of the lease liability.
Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense.
13
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 doubtful account 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.
As of June 30, 2022, we had $
On March 11, 2021, Congress passed, and the President signed into law, the American Rescue Plan Act, 2021 (the "ARP”), which includes certain business tax provisions. At this point, we do not believe that these changes will have a material impact on our income tax provision for 2022. We will continue to evaluate the impact of new legislation on our financial position, results of operations, and cash flows.
The U.S. Tax Cuts and Jobs Act ("TCJA”) was signed into law on December 22, 2017. Guidance continues to be issued clarifying the application of this legislation and recent proposed legislation known as Build Back Better is under consideration within both houses of U.S. Congress. Significant business and international provisions have been proposed in various versions of the framework of the bill that could increase our total tax expense. We cannot predict the overall impact that the additional guidance and proposed changes may have on our business. Some jurisdictions have raised tax rates and it is reasonable to expect that other global taxing authorities will be reviewing current legislation for potential modifications in reaction to the implementation of U.S. tax legislation, current economic conditions, and COVID-19 response costs.
Due to the COVID-19 pandemic, economic uncertainty, inflation, increases in interest rates, capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine, and supply chain issues, our business, financial condition and results of operations could be materially adversely affected by any negative impact from these events. 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 on Form 10-Q. 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
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. In November 2019, ASU 2016-13 was amended by ASU 2019-10 that changed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, with early
14
adoption permitted. Further, the ASU clarifies that operating lease receivables are not within the scope of ASC Subtopic 326-20 and should instead be accounted for under the new leasing standard, ASC 842. Management is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements and related disclosures.
NOTE 3 - SHORT-TERM INVESTMENTS
The Company’s short-term investments by significant investment category as of June 30, 2022, are as follows:
|
Description |
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Accrued Interest |
|
|
Estimated Fair Value |
|
|||||
|
Level 1: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash alternatives |
|
$ |
|
|
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
|
|
|
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Municipal Securities |
|
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s short-term investments by significant investment category as of December 31, 2021, are as follows:
|
Description |
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Accrued Interest |
|
|
Estimated Fair Value |
|
|||||
|
Level 1: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash alternatives |
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
Certificates of deposit |
|
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Municipal Securities |
|
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities. |
Cash alternatives represents cash balances in savings accounts 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 any
15
NOTE 4 -ACCOUNTS RECEIVABLE
Accounts receivable, net consists of the following:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
|
|
2022 |
|
|
2021 |
|
||
|
Accounts receivable |
|
$ |
|
|
|
$ |
|
|
|
Unbilled receivables |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
|
|
Unbilled receivables include amounts associated with percentage of completion and milestone billing accounting, which includes cost and gross profit earned in excess of billing, not currently billable due to contractual provisions. (Recovery) provision for bad debt expense related to accounts receivable was $
NOTE 5 – INVENTORIES
Inventories, net consist of the following:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
|
|
2022 |
|
|
2021 |
|
||
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Sub-assemblies |
|
|
|
|
|
|
|
|
|
Work-in-process |
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reserves for obsolete and slow-moving inventories |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 – LONG LIVED INTANGIBLE ASSETS
Definite lived intangible assets related to acquisition are as follows, as of June 30, 2022:
|
|
|
Expected Life |
|
Remaining Months |
|
Gross Intangible Assets |
|
|
Accumulated Amortization |
|
|
Net Intangible Assets |
|
|||
|
Customer lists and relationships |
|
|
|
0 to |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Drawings and technology |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
Trade name, trademarks & other |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
Non-compete |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Definite lived intangibles assets related to acquisitions are as follows, as of December 31, 2021:
|
|
|
Expected Life |
|
Remaining Months |
|
Gross Intangible Assets |
|
|
Accumulated Amortization |
|
|
Net Intangible Assets |
|
|||
|
Customer lists and relationships |
|
|
|
0 to |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Drawings and technology |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
Trade name, trademarks & other |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
Non-compete |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
As of June 30, 2022, amortization expense of the definite lived intangible assets for the years remaining is as follows:
|
2022 |
|
|
2023 |
|
|
Total |
|
|||
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Amortization expense recognized during the three month periods ended June 30, 2022 and 2021, was $
NOTE 7 – ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
|
|
2022 |
|
|
2021 |
|
||
|
Accrued compensation and related liabilities |
|
$ |
|
|
|
$ |
|
|
|
Deferred revenue and customer deposits |
|
|
|
|
|
|
|
|
|
Warranty reserve |
|
|
|
|
|
|
|
|
|
Other accrued expenses |
|
|
|
|
|
|
|
|
|
Deferred rent |
|
|
- |
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 – DEBT
Bank Lines of Credit
The Company has recently obtained a domestic revolving line of credit of $
Bressner has
17
Bressner has
|
|
• |
On June 1, 2022, Bressner borrowed € |
|
|
• |
On February 1, 2022, Bressner converted € |
|
|
• |
On February 16, 2022, Bressner converted € |
|
|
• |
On June 18, 2021, Bressner converted € |
|
|
• |
On June 4, 2021, Bressner converted € |
|
|
• |
On April 9, 2021, Bressner converted € |
Notes Payable
In April 2019, the Company borrowed an aggregate of $
18
Notes Payable – Related Parties
In April 2019, the Company borrowed an aggregate of $
Debt Discount
The relative fair value of warrants issued in connection with the notes payable described above were recorded as debt discount, decreasing notes payable and related-party notes payable and increasing additional paid-in-capital on the accompanying consolidated balance sheets. The debt discounts were amortized to interest expense over the term of the corresponding notes payable using the straight-line method, which approximated the effective interest method.
Amortization of debt discounts of $
Paycheck Protection Program Loan
On April 28, 2020, the Company received authorization pursuant to the Paycheck Protection Program ("PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act”) as administered by the U.S. Small Business Administration (the "SBA”) for a "PPP” loan. On May 11, 2020, the loan was funded, and the Company received proceeds in the amount of $
The PPP Loan, which took the form of a two-year promissory note (the "PPP Note”), was scheduled to mature on
The Company submitted an application with the lender to forgive the PPP Loan, in accordance with SBA Procedural Notice, Control No. 5000-20057, effective as of October 2, 2020. On May 3, 2021, the Company received notification from the SBA that its PPP Loan of $
Senior Secured Convertible Note
On April 20, 2020, the Company entered into a Securities Purchase Agreement with an institutional investor, providing for the issuance by the Company of Senior Secured Convertible Promissory Notes with a principal face value of up to $
19
At the initial closing of this offering, the Company issued notes in the principal amount of $
Pursuant to the Securities Purchase Agreement, the Company had the right to consummate additional closings of up to an additional $
The notes were convertible at any time, in whole or in part, at the option of the investors, into shares of Company common stock at the initial conversion price of $
Commencing July 1, 2020, the Company made monthly amortization payments equal to of the initial principal, any accrued and unpaid interest and late charges and any deferred or accelerated amount, of such note, which could be satisfied in cash at a redemption price equal to
Management evaluated the embedded conversion feature to determine whether bifurcation was required as a separate derivative liability. Management first determined that the conversion feature was not within the scope of ASC 480. It then determined that the embedded derivative should be separated from the host instrument and accounted for as a derivative instrument because it met the criteria of ASC 815-15-25-1, primarily because the contract provides for delivery of an asset that puts the recipient in substantially the same position as net settlement. However, due in part to the Company’s adoption of ASC 2017-11 on April 1, 2020, which allowed management to disregard the down round provisions of the conversion feature, management determined that a scope exception to derivative accounting existed by satisfying the additional conditions necessary for equity classification specified by ASC 815-10-15-74 and ASC 815-40-25. As a result of management’s analysis, the conversion feature was not accounted for separately from the debt instrument and the Company will recognize the contingent beneficial conversion feature when, or if, such is triggered.
The original issue discount of
20
Debt issuance costs in the amount of $
A summary of outstanding debt obligations as of June 30, 2022, is as follows:
|
Loan Description |
|
Current Interest Rate |
|
|
Maturity Date |
|
Balance (Euro) |
|
|
Balance ($) |
|
|
Current Portion |
|
|
Long-term Portion |
|
|||||
|
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerzbank AG |
|
|
|
|
|
|
€ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Uni Credit Bank AG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
Uni Credit Bank AG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
Uni Credit Bank AG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
VR Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
€ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding debt obligations as of June 30, 2022, consist of the following:
|
Period Ended June 30, 2022 |
|
Foreign |
|
|
Total |
|
||
|
Current portion: |
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
Less discount |
|
|
- |
|
|
|
- |
|
|
Less loan origination costs |
|
|
- |
|
|
|
- |
|
|
Net liability |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion: |
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
Less discount |
|
|
- |
|
|
|
- |
|
|
Less loan origination costs |
|
|
- |
|
|
|
- |
|
|
Net liability |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
Less discount |
|
|
- |
|
|
|
- |
|
|
Less loan origination costs |
|
|
- |
|
|
|
- |
|
|
Net liability |
|
$ |
|
|
|
$ |
|
|
21
Total future principal payments under notes payable and related party notes payable as of June 30, 2022, are as follows:
|
Period Ending June 30, |
|
Foreign |
|
|
Total |
|
||
|
2023 |
|
$ |
|
|
|
$ |
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
Total minimum payments |
|
|
|
|
|
|
|
|
|
Current portion of notes payable |
|
|
( |
) |
|
|
( |
) |
|
Notes payable, net of current portion |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 – STOCKHOLDERS’ EQUITY
The Company’s amended and restated certificate of incorporation filed on December 14, 2017, authorizes the Company to issue
Amendment to 2017 Plan
On June 24, 2020, the Company amended its 2017 Equity Incentive Plan (as amended, the "2017 Plan”) to increase the maximum limitation of the 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
On May 19, 2021, the Company’s stockholders approved, by a majority of votes cast, the Company’s proposal to increase the number of shares authorized for issuance under the 2017 Plan from
S-8 Registration Statement
On June 21, 2021, the Company filed a Form S-8 Registration Statement relating to
Executive Employment Agreement
Effective June 24, 2020, the Company entered into an employment agreement with David Raun to serve as the Company’s president and chief executive officer. Pursuant to the terms of the employment agreement, Mr. Raun is entitled to receive
The ISOs shall vest at the end of each of the second and fourth quarters, the price of the Company’s common stock as of the end of quarter two or quarter four, as applicable, shall be determined using the ten-day trailing volume weighted average price ("VWAP”) after reporting of quarter two and quarter four earnings, as applicable. The date of each such determination shall be referred to as a "Determination Date.” If on any Determination Date the Company’s stock price has increased from the prior Determination Date, then a portion of the ISOs shall become vested. The number of ISOs that shall become vested on a Determination Date is determined as follows: ((Price at Determination Date – Price at prior Determination Date) x 100) *
22
Date the Company’s stock price is $
In the event that Mr. Raun’s employment agreement is terminated for a reason other than "good cause” or for "good reason,” upon Mr. Raun’s execution of an effective waiver and release of claims, unvested RSUs shall accelerate so that an additional twelve (12) months of RSUs shall vest from the termination date.
Stock Options
A summary of stock option activity under each of the Company’s equity incentive plans during the six month period ended June 30, 2022, is as follows:
|
|
|
Stock Options Outstanding |
|
|||||||||||||
|
|
|
Number of Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Life (in years) |
|
|
Aggregate Intrinsic Value |
|
||||
|
Outstanding on January 1, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Forfeited / Canceled |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Exercised |
|
|
( |
) |
|
$ |
|
|
|
|
- |
|
|
$ |
|
|
|
Outstanding on June 30, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Exercisable as of June 30, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Vested and expected to vest as of June 30, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
There were
|
|
|
For the Six Months Ended June 30, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Grant date fair value of options vested |
|
$ |
|
|
|
$ |
|
|
|
Intrinsic value of options exercised |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2022, the amount of unearned stock-based compensation estimated to be expensed from 2022 through 2025 related to unvested stock options is $
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 Board of Directors under the Company’s 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 of
23
The Company’s RSU activity for the six months ended June 30, 2022, is as follows:
|
|
|
Restricted Stock Units |
|
|||||
|
|
|
Number of Shares |
|
|
Weighted Average Grant Date Fair Value |
|
||
|
Unvested on January 1, 2022 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
$ |
|
|
|
Vested |
|
|
( |
) |
|
$ |
|
|
|
Canceled |
|
|
( |
) |
|
$ |
|
|
|
Unvested on June 30, 2022 |
|
|
|
|
|
$ |
|
|
As of June 30, 2022, there was $
Stock-based compensation expense for the three and six month periods ended June 30, 2022 and 2021, was comprised of the following:
|
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
Stock-based compensation classified as: |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
General and administrative |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Production |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Warrants
The following table summarizes the Company’s warrant activity during the six months ended June 30, 2022:
|
|
|
Number of Warrants |
|
|
Weighted Average Exercise Price |
|
||
|
Warrants outstanding – January 1, 2022 |
|
|
|
|
|
$ |
|
|
|
Warrants granted |
|
|
- |
|
|
$ |
- |
|
|
Warrants exercised |
|
|
- |
|
|
$ |
|
|
|
Warrants outstanding – June 30, 2022 |
|
|
|
|
|
$ |
|
|
NOTE 10 – 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. In the opinion of management, after consultation with legal counsel, the ultimate disposition of any such matters as of June 30, 2022 and December 31, 2021, are not expect to have a materially adverse effect on the consolidated financial position or results of operations of the Company.
24
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
Other information related to leases as of the three and six month periods ended June 30, 2022, are as follows:
|
Supplement Cash Flow Information: |
|
For the Three Months Ended June 30, 2022 |
|
|
For the Six Months Ended June 30, 2022 |
|
||
|
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents a maturity of the Company’s operating lease liabilities as of June 30, 2022:
|
Year |
Operating Leases |
|
|
|
Remainder of 2022 |
$ |
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
- |
|
|
2026 |
|
- |
|
|
Thereafter |
|
- |
|
|
Total lease payments |
|
|
|
|
Less: Amount representing interest |
|
( |
) |
|
Present value of lease payment |
|
|
|
|
Less: current portion of operating lease obligation |
|
( |
) |
|
Operating lease obligation, net of current portion |
$ |
|
|
|
|
|
|
|
Purchase Commitments
25
Customer Concentration
During the three month periods ended June 30, 2022 and 2021, the Company had
During the six month periods ended June 30, 2022 and 2021, the Company had
As of June 30, 2022 and December 31 2021, the Company had
During the three month periods ended June 30, 2022 and 2021, the Company had approximately
During the six month periods ended June 30, 2022 and 2021, the Company had approximately
NOTE 11 – RELATED PARTY TRANSACTIONS
In April 2019, certain members of the Company’s Board of Directors executed definitive agreements to commit funds of up to $
26
NOTE 12 – NET INCOME PER SHARE
Basic and diluted net income per share were calculated as follows for the three and six month periods ended June 30, 2022 and 2021:
|
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Basic and diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13 – REVENUE, SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in
Segment detail for the three and six month periods ended June 30, 2022 and 2021, is as follows:
|
|
|
For the Three Months Ended June 30, 2022 |
|
|
For the Three Months Ended June 30, 2021 |
|
||||||||||||||||||
|
|
|
OSS |
|
|
Bressner |
|
|
Total |
|
|
OSS |
|
|
Bressner |
|
|
Total |
|
||||||
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Cost of revenues |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin % |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total operating expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Income (loss) from operations |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2022 |
|
|
For the Six Months Ended June 30, 2021 |
|
||||||||||||||||||
|
|
|
OSS |
|
|
Bressner |
|
|
Total |
|
|
OSS |
|
|
Bressner |
|
|
Total |
|
||||||
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Cost of revenues |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit % |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Total operating expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Income (loss) from operations |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers with non-U.S. billing addresses represented approximately
27
Revenue from customers with non-U.S. billing addresses represented approximately
As of June 30, 2022, substantially all the Company’s long-lived assets are located in the United States of America, with the exception of assets of $
NOTE 14 – SUBSEQUENT EVENTS
The Company’s management has evaluated subsequent events after the consolidated balance sheet dated as of June 30, 2022, through the date of filing of this quarterly report. Based upon the evaluation, management has determined that, other than as disclosed in the accompanying notes, no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto.
28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and operating results together with our financial statements and related notes included elsewhere in this Quarterly Report. This discussion and analysis contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors” or in other parts of this Quarterly Report. In evaluating our business, you should carefully consider the information set forth under the heading "Risk Factors” included in our Annual Report filed on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 24, 2022. Readers are cautioned not to place undue reliance on these forward-looking statements.
Overview
One Stop Systems, Inc. (the "Company”) designs, manufactures, and markets specialized high-performance computing modules and systems, which are designed to target edge deployments. These specialized modules and systems consist of computers and storage products that incorporate the latest state-of-the art components with our embedded proprietary software. Such modules and systems allow our customers to offer high-end computing capabilities (often integrated within their equipment) to their target markets and applications. Edge computing is a form of computing that is done on site, near a particular data source or the user (rather than in the cloud), minimizing the need for data to be processed in a remote data center. The global increase in load on the cloud infrastructure and increase in artificial intelligence ("AI”) applications are the primary factors driving the growth of the edge computing market. We market our products to manufacturers of automated equipment used for media and entertainment, medical, industrial, and military applications. Our customer applications often require connection to a wide array of data sources and sensors, ultra-fast processing power, and the ability to quickly access and store large and ever-growing data sets at their physical location (rather than in the cloud). This equipment requires datacenter class performance optimized for deployment at the edge in challenging environments. Many of these edge applications have unique requirements, including special and compact form factors ruggedized for harsh conditions, which cannot be accommodated by traditional controlled air-conditioned data centers. We believe that we are uniquely positioned as a specialized provider to address the needs of this market, providing custom servers, data acquisition platforms, compute accelerators, solid-state storage arrays, system I/O expansion systems, as well as edge optimized industrial and panel PCs, tablets, and handheld compute devices. Our systems also offer industry leading capabilities that occupy less physical space and require less power consumption. We deliver this high-end technology to our customers through the sale of equipment and embedded software.
One Stop Systems, Inc. was originally incorporated as a California corporation in 1999, after initially being formed as a California limited liability company in 1998. On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with the initial public offering of its securities.
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.
On August 31, 2018, the Company acquired Concept Development Inc. ("CDI”) located in Irvine, California. CDI specializes in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment and networking systems. CDI has been fully integrated into the core operations of OSS since June 1, 2020.
On October 31, 2018, OSS GmbH acquired 100% of the outstanding stock of Bressner Technology GmbH, a Germany limited liability company located near Munich, Germany ("Bressner”). Bressner designs and manufactures standard and customized servers, panel PCs, and PCIe expansion systems. Bressner also provides manufacturing, test, sales, and marketing services for customers throughout Europe.
29
Recent Developments
The negative impact of the COVID-19 pandemic and the impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the ongoing military conflict between Russia and Ukraine, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic uncertainty, which has affected negatively our operations. Additionally, during the second quarter, the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year, which could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.
Currently, we are experiencing increased pricing, longer lead-times, unavailability of product and limited supplies, protracted delivery dates, changes in minimum order quantities to secure product, and/or shortages of certain parts and supplies that are necessary components for the products and services we offer to our customers. As a result, the Company is carrying increased inventory balances to ensure availability of necessary products and to secure pricing. Additionally, products that are in the "work-in-process” stage have increased due to as the timing and availability of certain componentry necessary to complete our products.
These global issues and concerns regarding general economic decline or recession are also impacting some of our customers, who are experiencing downturns or uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts.
As a result of these global issues, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long-term impact of the pandemic, geopolitical issues, inflation, the Federal Reserve interest rate increases and the potential for a recession. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause our stock price to decline.
Furthermore, a decrease in orders in a given period could negatively affect our revenues in future periods. These global issues and events may also have the effect of heightening many risks associated with our customers and supply chain. We may take further actions that alter our operations as may be required by federal, state, or local authorities from time to time, or which we determine are in our best interests. In addition, we may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business.
Management’s plans with respect to the above is to continue their efforts towards responding to the changing economic landscape, to continue to control costs, conserve cash, strengthen margins, and improve company-wide execution.
Components of Results of Operations
Revenue
The Company recognizes revenue under accounting standard ASC 606. Revenue is primarily generated from the sale of computer hardware and engineering services and to a minimal extent the sale of software, and sales of software maintenance and support contracts. The Company’s performance obligations are satisfied over time as work is performed or at a point in time. The majority of the Company’s revenue is recognized at a point in time when products ship and control is transferred to the customer. The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied.
30
Cost of revenue
Cost of revenue primarily consists of costs of materials, costs paid to third-party contract manufacturers (which may include the costs of components), and personnel costs associated with manufacturing and support operations. Personnel costs consist of wages, bonuses, benefits, and stock-based compensation expenses. Cost of revenue also includes freight, allocated overhead costs and inventory write-offs and changes to our inventory and warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect cost of revenue to increase in absolute dollars with an improvement in margin, as product revenue increases.
Operating expenses
Our operating expenses consist of general and administrative, marketing and selling, and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs.
General and Administrative - General and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, and fees for third-party professional services, as well as allocated overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in growing the business.
Marketing and Selling – Marketing and selling expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel, and entertainment expenses as well as allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications, and brand-building activities. We expect marketing and selling expenses to increase in absolute dollars as we expand our sales force, increase marketing resources, and further develop sales channels.
Research and Development - Research and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for research and development, third-party engineering, and contractor support costs, as well as allocated overhead. We expect our research and development expenses to increase in absolute dollars as we continue to invest in new and existing products.
Other Income (Expense), net
Other income consists of miscellaneous income and income received from activities outside of our core business. Other expense includes expenses from activities outside of our core business.
Provision for Income Taxes
Provision for income taxes consists of estimated income taxes due to the United States and German governments as well as state tax authorities in jurisdictions in which we conduct business, along with the change in our deferred income tax assets and liabilities.
31
Results of Operations
The following tables set forth our results of operations for the three and six month periods ended June 30, 2022 and 2021, presented in dollars and as a percentage of revenue, respectively.
|
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Revenue |
|
$ |
18,303,343 |
|
|
$ |
14,905,009 |
|
|
$ |
35,356,020 |
|
|
$ |
28,220,761 |
|
|
Cost of revenue |
|
|
13,103,025 |
|
|
|
10,252,265 |
|
|
|
25,015,047 |
|
|
|
19,135,233 |
|
|
Gross profit |
|
|
5,200,318 |
|
|
|
4,652,744 |
|
|
|
10,340,973 |
|
|
|
9,085,528 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
1,821,445 |
|
|
|
1,648,785 |
|
|
|
3,596,133 |
|
|
|
3,806,404 |
|
|
Marketing and selling |
|
|
1,724,913 |
|
|
|
1,479,292 |
|
|
|
3,196,633 |
|
|
|
2,647,193 |
|
|
Research and development |
|
|
1,252,037 |
|
|
|
1,008,017 |
|
|
|
2,496,152 |
|
|
|
1,840,250 |
|
|
Total operating expenses |
|
|
4,798,395 |
|
|
|
4,136,094 |
|
|
|
9,288,918 |
|
|
|
8,293,847 |
|
|
Income from operations |
|
|
401,923 |
|
|
|
516,650 |
|
|
|
1,052,055 |
|
|
|
791,681 |
|
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
55,507 |
|
|
|
61,798 |
|
|
|
106,512 |
|
|
|
67,098 |
|
|
Interest expense |
|
|
(44,949 |
) |
|
|
(169,031 |
) |
|
|
(103,665 |
) |
|
|
(319,013 |
) |
|
Other income (expense), net |
|
|
(4,169 |
) |
|
|
1,522,998 |
|
|
|
97,952 |
|
|
|
1,494,369 |
|
|
Total other income, net |
|
|
6,389 |
|
|
|
1,415,765 |
|
|
|
100,799 |
|
|
|
1,242,454 |
|
|
Income before income taxes |
|
|
408,312 |
|
|
|
1,932,415 |
|
|
|
1,152,854 |
|
|
|
2,034,135 |
|
|
Provision for income taxes |
|
|
85,490 |
|
|
|
235,293 |
|
|
|
250,798 |
|
|
|
295,815 |
|
|
Net income |
|
$ |
322,822 |
|
|
$ |
1,697,122 |
|
|
$ |
902,056 |
|
|
$ |
1,738,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Revenue |
|
100.0% |
|
|
100.0% |
|
|
100.0% |
|
|
100.0% |
|
||||
|
Cost of revenue |
|
71.6% |
|
|
68.8% |
|
|
70.8% |
|
|
67.8% |
|
||||
|
Gross profit |
|
28.4% |
|
|
31.2% |
|
|
29.2% |
|
|
32.2% |
|
||||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
10.0% |
|
|
11.1% |
|
|
10.2% |
|
|
13.5% |
|
||||
|
Marketing and selling |
|
9.4% |
|
|
9.9% |
|
|
9.0% |
|
|
9.4% |
|
||||
|
Research and development |
|
6.8% |
|
|
6.8% |
|
|
7.1% |
|
|
6.5% |
|
||||
|
Total operating expenses |
|
26.2% |
|
|
27.7% |
|
|
26.3% |
|
|
29.4% |
|
||||
|
Income from operations |
|
2.2% |
|
|
3.5% |
|
|
3.0% |
|
|
2.8% |
|
||||
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
0.3% |
|
|
0.4% |
|
|
0.4% |
|
|
0.2% |
|
||||
|
Interest expense |
|
-0.2% |
|
|
-1.1% |
|
|
-0.3% |
|
|
-1.1% |
|
||||
|
Other income (expense), net |
|
0.0% |
|
|
10.2% |
|
|
3.3% |
|
|
5.3% |
|
||||
|
Total other income, net |
|
0.0% |
|
|
9.5% |
|
|
3.4% |
|
|
4.4% |
|
||||
|
Income before income taxes |
|
2.2% |
|
|
13.0% |
|
|
6.4% |
|
|
7.2% |
|
||||
|
Provision for income taxes |
|
0.5% |
|
|
1.6% |
|
|
0.7% |
|
|
1.0% |
|
||||
|
Net income |
|
1.8% |
|
|
11.4% |
|
|
5.7% |
|
|
6.2% |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Comparison of the three and six month periods ended June 30, 2022 and 2021:
Revenue, cost of revenue and gross profit:
|
|
|
For the Three Months Ended June 30, 2022 |
|
|
For the Three Months Ended June 30, 2021 |
|
||||||||||||||||||||||||||
|
Entity: |
|
Revenue |
|
|
Cost of Revenue |
|
|
Gross Profit |
|
|
Gross Margin % |
|
|
Revenue |
|
|
Cost of Revenue |
|
|
Gross Profit |
|
|
Gross Margin % |
|
||||||||
|
OSS |
|
$ |
10,715,361 |
|
|
$ |
(7,180,343 |
) |
|
$ |
3,535,018 |
|
|
|
33.0 |
% |
|
$ |
9,102,435 |
|
|
$ |
(5,762,867 |
) |
|
$ |
3,339,568 |
|
|
|
36.7 |
% |
|
Bressner Technology GmbH |
|
|
7,587,982 |
|
|
|
(5,922,682 |
) |
|
|
1,665,300 |
|
|
|
21.9 |
% |
|
|
5,802,574 |
|
|
|
(4,489,398 |
) |
|
|
1,313,176 |
|
|
|
22.6 |
% |
|
|
|
$ |
18,303,343 |
|
|
$ |
(13,103,025 |
) |
|
$ |
5,200,318 |
|
|
|
28.4 |
% |
|
$ |
14,905,009 |
|
|
$ |
(10,252,265 |
) |
|
$ |
4,652,744 |
|
|
|
31.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2022 |
|
|
For the Six Months Ended June 30, 2021 |
|
||||||||||||||||||||||||||
|
Entity: |
|
Revenue |
|
|
Cost of Revenue |
|
|
Gross Margin |
|
|
Gross Margin % |
|
|
Revenue |
|
|
Cost of Revenue |
|
|
Gross Margin |
|
|
Gross Margin % |
|
||||||||
|
OSS |
|
$ |
21,297,403 |
|
|
$ |
(13,982,054 |
) |
|
$ |
7,315,349 |
|
|
|
34.3 |
% |
|
$ |
17,704,406 |
|
|
$ |
(11,104,229 |
) |
|
$ |
6,600,177 |
|
|
|
37.3 |
% |
|
Bressner Technology GmbH |
|
|
14,058,617 |
|
|
|
(11,032,993 |
) |
|
|
3,025,624 |
|
|
|
21.5 |
% |
|
|
10,516,355 |
|
|
|
(8,031,004 |
) |
|
|
2,485,351 |
|
|
|
23.6 |
% |
|
|
|
$ |
35,356,020 |
|
|
$ |
(25,015,047 |
) |
|
$ |
10,340,973 |
|
|
|
29.2 |
% |
|
$ |
28,220,761 |
|
|
$ |
(19,135,233 |
) |
|
$ |
9,085,528 |
|
|
|
32.2 |
% |
Revenue
For the three month period ended June 30, 2022, total revenue increased $3,398,334, or 22.8%, as compared to the same period in 2021. OSS saw an increase in revenue of $1,612,926, or 17.7%, as compared to the prior year in 2021. The majority of this increase is attributable to an increase in shipments of product to our media and entertainment customer. Bressner experienced improved revenue of $1,785,408, or 30.8%, as compared to the prior year in 2021. This increase is mainly due to a general economic improvement in Europe attributable to having product available through strategic buys in an environment of global shortages and certain wins on products which are available with good lead times.
For the six month period ended June 30, 2022, total revenue increased $7,135,259, or 25.3%, as compared to the same period in 2021. OSS saw an increase in revenue of $3,592,997, or 20.3%, as compared to the prior year in 2021. The majority of this increase is attributable to an increase in shipments of product to our media and entertainment customer. Bressner experienced improved revenue of $3,542,262, or 33.7%, as compared to the prior year in 2021. This increase is mainly due to a general economic improvement in Europe attributable to product available through strategic buys in an environment of global shortages and certain wins on products which are available with good lead times.
Cost of revenue and gross profit
Cost of revenue increased $2,850,460, or 27.8%, for the three month period ended June 30, 2022, as compared to the prior year in 2021. OSS saw an increase in cost of revenue of $1,417,476, or 24.6%, as compared to the prior year in 2021. The increase in cost of revenue is mainly attributable to our improved sales to our media and entertainment customer which has higher material costs as a percentage of revenue and a fixed charge for labor hours per unit. Bressner’s cost of revenue increased $1,433,284, or 31.9%, as compared to the prior year in 2021, which increase is primarily attributable to higher sales and changes in product mix.
The overall gross margin percentage decreased from 31.2% for the three month period June 30, 2021, to 28.4% for the same period ended June 30, 2022, a decrease of 2.8 percentage points. OSS’ gross margin percentage for the three months ended June 30, 2022, was 33.0%, a decrease of 3.7 percentage points as compared to the prior year period in 2021 of 36.7%, which decrease was primarily attributable to a higher concentration of the sales of our media and entertainment product which has higher material costs as a percentage of revenue and a fixed charge for labor hours per unit. Bressner contributed gross margin at a rate of 21.9% as compared to the same prior year period
33
in 2021 of 22.6%, a decrease of 0.7 percentage points which decrease was primarily attributable to an increase in material and transportation costs as a result of increasing fuel costs and inflationary pressures.
Cost of revenue increased $5,879,814, or 30.7%, for the six month period ended June 30, 2022, as compared to the prior year in 2021. OSS saw an increase in cost of revenue of $2,877,825, or 25.9%, as compared to the prior year in 2021. The increase in cost of revenue is mainly attributable to our improved sales to our media and entertainment customer. Bressner’s cost of revenue increased $3,001,989, or 37.4%, as compared to the prior year in 2021, which increase is primarily attributable to higher sales and changes in product mix.
The overall gross margin percentage decreased from 32.2% for the six month period June 30, 2021, to 29.2% for the same period ended June 30, 2022, a decrease of 3.0 percentage points. OSS’ gross margin percentage for the six months ended June 30, 2022, was 34.3%, a decrease of 3.0 percentage points as compared to the prior year period in 2021 of 37.3%, which the decrease was primarily attributable to a higher concentration of the sales of our media and entertainment product. Bressner contributed gross margin at a rate of 21.5% as compared to the same prior year period in 2021 of 23.6%, a decrease of 2.1 percentage points which decrease was primarily attributable to an increase in material and transportation costs as a result of increasing fuel costs and inflationary pressures.
Operating expenses
General and administrative expense
General and administrative expense increased $172,660, or 10.5%, for the three month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS experienced an increase of $278,357, or 25.0% and Bressner had a decrease $(105,697), or 19.7%. The overall increase in general and administrative expense is primarily attributable to certain reinstated employee benefits, implemented pay increases and the reestablishment of certain services that were suspended during the strict policies implemented by the Company during the height of the pandemic. Overall, total general and administrative expense decreased as a percentage of revenue to 10.0% during the three month period ended June 30, 2022, as compared to 11.1% during the same period in 2021.
General and administrative expense decreased $210,271, or 5.5%, for the six month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS experienced a decrease of $8,611, or 0.03% and Bressner had a decrease $201,660, or 18.9%. The overall decrease in general and administrative expense is primarily attributable to a reduction stock compensation expense related to general and administrative expense only which was higher in the prior year due to acceleration of performance based vesting, and decreases in amortization and legal expenses which have been offset by increases in certain reinstated employee benefits, implemented pay increases and the reestablishment of certain services that were suspended during the strict policies implemented by the Company during the height of the pandemic. Overall, total general and administrative expense decreased as a percentage of revenue to 10.2% during the six month period ended June 30, 2022, as compared to 13.5% during the same period in 2021.
Selling and marketing expense
Selling and marketing expense increased $245,621, or 16.6%, during the three month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS had an increase of $187,382, or16.3%, which was mainly attributable to normalized business activities which include trade shows, business travel, and increased marketing activities. Bressner had an increase of $58,239, or 17.8%, due to new marketing personnel and sales collateral materials. Generally, both OSS and Bressner experienced additional marketing costs, as markets are beginning to re-open now that certain restrictions have been lifted that were previously imposed during the height of the COVID-19 pandemic. Overall, total marketing and selling expense decreased as a percentage of revenue to 9.4% during the three month period ended June 30, 2022, as compared to 9.9% during the same period in 2021.
Selling and marketing expense increased $549,440, or 20.8%, during the six month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS had an increase of $447,606, or 21.9%, which was mainly attributable to normalized business activities, which include trade shows, business travel, and increased marketing activities. Bressner had an increase of $101,834, or 16.8%, due to new marketing personnel and sales collateral materials. Generally, both OSS and Bressner experienced additional marketing costs as markets are
34
beginning to re-open now that certain restrictions have been lifted that were previously imposed during the height of the COVID-19 pandemic. Overall, total marketing and selling expense decreased as a percentage of revenue to 9.0% during the six month period ended June 30, 2022, as compared to 9.4% during the same period in 2021.
Research and development expense
Research and development expense increased $244,020, or 24.2%, during the three month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS saw an increase of $237,857, or 26.2%. This increase was largely driven by the deployment of more engineering resources on internal development projects rather than on customer billable projects for which such costs would have been charged to cost of revenue rather than being charged to research and development expense. Bressner had a modest increase of $6,163, or 6.2%. Overall, total research and development expense as a percentage of revenue was relatively flat at 6.8% as a percentage of revenue the three month periods ended June 30, 2022 and 2021.
Research and development expense increased $655,902, or 35.6%, during the six month period ended June 30, 2022, as compared to the same prior year period in 2021. OSS saw an increase of $641,431, or 39.0%. This increase was largely driven by the deployment of more engineering resources on internal development projects rather than on customer billable projects for which such costs would have been charged to cost of revenue rather than being charged to research and development expense. Bressner had a modest increase of $14,471, or 7.3%. Overall, total research and development expense as a percentage of revenue increased as a percentage of revenue to 7.1% during the six month period ended June 30, 2022, as compared to 6.5% during the same period in 2021.
Interest income
Interest income decreased $6,291 for the three month period ended June 30, 2022, as compared to the same prior year period in 2021. The decrease is attributable to lower investments in marketable securities and lower yields during the current period.
Interest income increased $39,414 for the six month period ended June 30, 2022, as compared to the same prior year period in 2021. The increase is attributable to interest on marketable securities that were purchased in April 2021.
Interest expense
Interest expense decreased $124,082 for the three month period ended June 30, 2022, as compared to the same period in 2021. On April 24, 2020, the Company borrowed $3,000,000 through a senior secured convertible debt offering issued with a 10% original issue discount and incurred legal costs associated with this debt offering. Interest and related transaction costs are amortized using the effective interest method for which the periodic amortization costs decreases over the time. The notes issued in the debt offering were scheduled to mature on April 1, 2022; however, on March 30, 2022, these notes converted into shares of common stock of the Company, resulting in this reduction in interest expense.
Interest expense decreased $215,348 for the six month period ended June 30, 2022, as compared to the same period in 2021. On April 24, 2020, the Company borrowed $3,000,000 through a senior secured convertible debt offering issued with a 10% original issue discount and incurred legal costs associated with this debt offering. Interest and related transaction costs are amortized using the effective interest method for which the periodic amortization costs decreases over the time. The notes issued in the debt offering were scheduled to mature on April 1, 2022; however, on March 30, 2022, these notes converted into shares of common stock of the Company, resulting in this reduction in interest expense.
Other income (expense), net
Other income (expense) for the three month period ended June 30, 2022, resulted in net other expense of ($4,169), as compared to net other income of $1,522,998 in the same prior year period in 2021, for a net decrease of
35
$1,527,167. The most significant difference was the recognition of a gain on the forgiveness of the PPP loan and interest in the amount of $1,514,354 that occurred in the prior year.
Other income for the six month period ended June 30, 2022, resulted in net other income of $97,952, as compared to net other income of $1,494,369 in the same prior year period in 2021, for a net decrease of $1,396,417. The most significant difference was the recognition of a gain on the forgiveness of the PPP loan and interest in the amount of $1,514,354 that occurred in the prior year as well as the sale of the URL for Magma.com, in the current year which has been offset by foreign currency losses.
Provision (benefit) for income taxes
We have recorded an income tax provision of $85,490 and $235,293, respectively, for the three month period ended June 30, 2022 and 2021, respectively, and $250,798 and $295,815, respectively, for the six month period ended June 30, 2022 and 2021, respectively The effective tax rate for the period ended June 30, 2022 and 2021, differs from the statutory rate mainly due to permanent non-deductible goodwill amortization for Bressner Technology GmbH, deductions related to expenses of OSS stock options, as well as projecting federal, foreign and state tax liabilities for the year. The annual expect tax rate for 2022 is anticipated to be approximately 20.86%.
Liquidity and Capital Resources
On March 3, 2021, we sold and issued 1,497,006 shares of Company common stock to an accredited investor pursuant to a Securities Purchase Agreement through a registered direct offering, resulting in net proceeds of $9,188,673 to us.
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, 2022, we had total cash and cash equivalents of $2,874,831, with short-term investments of $11,514,047, and total working capital of $32,914,013. Cash and cash equivalents held by Bressner totaled US$2,636,852 on June 30, 2022. Bressner’s debt covenants do not permit the use of those funds by its parent company.
During the year ended December 31, 2021, we had income from operations of $1,747,027, with cash generated by operating activities of $5,622,596.
Our sources of liquidity and cash flows are used to fund ongoing operations, fund research and development projects for new products technologies and provide ongoing support services for our customers. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, successfully integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all.
As discussed elsewhere in this Report, during the second quarter, the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year, which could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations. We intend to continue to monitor the effects of inflation, global supply chain shortages and the economic conditions, and we may alter our plans to address concerns as they may arise. For a further description and risk factors associated with COVID-19, please see Part 1A of our Annual Report filed on March 24, 2022.
Management’s plans are to continue its efforts towards responding to the changing economic landscape, including due to inflation, a potential recession, increases in the Federal Reserve interest rate, supply chain constraints and international conflicts, by continuing to control hiring and costs, conserve cash, strengthen margins, and improve company-wide execution.
36
While management expects these actions to result in prospective cost containment, and our results of operations for the year ended December 31, 2021, and the three and six month periods ended June 30, 2022, improved partially as a result of such actions, management is also committed to conserving cash and securing debt and/or equity financing, as required, for liquidity to meet our cash requirements through at least a period of the next twelve months.
In April 2022, the Company obtained a domestic revolving line of credit of $2 million from its bank, which renews on an annual basis at the current prime rate. To access this line of credit the Company must maintain cash and investments balances at a minimum of $4 million. Although the Company has not drawn down on the line of credit to date, it may choose to do so in the future.
While management expects these actions to result in prospective cost containment, and our results of operations for the year ended December 31, 2021, and the three and six month periods ended June 30, 2022, improved partially as a result of such actions, management is also committed to conserving cash and securing debt and/or equity financing, as required, for liquidity to meet our cash requirements through at least a period of the next twelve months.
As a result of management’s implementation of our cost reduction plans, our potential sources of liquidity and management’s most recent cash flow forecasts, management believes that we have sufficient liquidity to satisfy our anticipated working capital requirements for our ongoing operations and obligations for at least the next twelve months. However, there can be no assurance that management’s cost reduction efforts will be effective or the forecasted cash flows will be achieved. Furthermore, we will continue to evaluate our capital expenditure needs based upon factors including but not limited to, our sales from operations, growth rate, the timing and extent of spending to support development efforts, the expansion of our sales and marketing efforts, the timing of new product introductions, and the continuing market acceptance of our products and services.
If cash generated from operations is insufficient to satisfy our capital requirements, we may borrow up to $2 million from our revolving line of credit with our bank (subject to satisfaction of certain borrowing conditions), may have to sell additional equity or debt securities, or may obtain expanded credit facilities to fund our operating expenses, pay our obligations, diversify our geographical reach, and grow the Company. In the event such financing is needed in the future, there can be no assurance that such financing will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If we cannot raise additional funds when we need or wants them, our operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional financing were obtained, then management would consider restructuring the Company in a way to preserve its business while maintaining expenses within operating cash flows.
The following table summarizes our cash flows for the six month periods ended June 30, 2022 and 2021:
|
|
|
For the Six Months Ended June 30, |
|
|||||
|
Cash flows: |
|
2022 |
|
|
2021 |
|
||
|
Net cash (used in) provided by operating activities |
|
$ |
(7,576,355 |
) |
|
$ |
2,788,363 |
|
|
Net cash provided by (used in) investing activities |
|
$ |
2,878,600 |
|
|
$ |
(14,723,446 |
) |
|
Net cash provided by financing activities |
|
$ |
2,614,463 |
|
|
$ |
9,628,718 |
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
During the six month period ended June 30, 2022, we used $7,576,355 in cash for operating activities, a difference of $10,364,718 when compared to the cash provided by operating activities of $2,788,363 during the six month period in year 2021. This significant decrease in operating cash flow is mainly attributable to significant increases in working capital requirements for accounts receivable and inventories.
The change in cash used in operating activities during the six month period ended June 30, 2022, as compared to the same period in 2021, is primarily a result of a reduction in profitability from net income of $1,738,320, which
37
included the PPP loan and interest forgiveness of $1,514,354 in the prior year period to net income of $902,056 in the current year, a reduction of $836,264. Net favorable adjustments in the current period for non-cash items of $1,593,032 were comprised of $1,635,669 of favorable non-cash items, offset by $42,637 of negative non-cash items that did not affect operating cash flow. Additionally, there was an increase in the use of operating cash flow for working capital items of $10,360,900.
Net working capital requirements for the six month period ended June 30, 2022, were $10,071,443, as compared to the prior year period sources of working capital of $289,457, an increase in the use of working capital of $10,360,900. The source of working capital of $4,441,609 was attributable to changes in accounts payable and accrued expenses and other liabilities for the comparable period. These sources were offset by uses of working capital of $14,513,052 being applied to changes in accounts receivables, inventory levels, prepaid and other current assets.
Our ability to generate cash from operations in future periods will depend in large part on our profitability, the rate and timing of collections of our accounts receivable, our inventory turns and our ability to manage other areas of working capital, including accounts payable and accrued expenses
Investing Activities
During the six month period ended June 30, 2022, the Company generated cash of $2,878,600 in investing activities, as compared to $14,723,446 used during the prior year period in 2021, a net change of $17,602,046. The source of investing funds was attributable to the redemption of short-term investments and the sale of the Magma.com URL. Additionally, the Company continues to enhance the capabilities of its ERP system, and purchase test equipment for the engineering department. We do not anticipate any significant investments not normally anticipated in the original course of business in the near term.
Financing Activities
Given the current economic, financial, and geopolitical instability, the Company believes it is imperative to maintain opportunities for additional financial resources to ensure financial stability during trying economic times. During the six month period ended June 30, 2022, the Company generated $2,614,463 in cash from borrowing activities for Bressner for working capital to finance inventory purchases, as compared to the cash provided by financing activities of $9,628,718, during the same six month period year in 2021. The main differences between the comparative periods are new borrowings from our German subsidiary, Bressner for inventories, and the proceeds received in the prior year from a $10,000,000 registered direct offering that was completed in March 2021.
Known trends or uncertainties
Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.
As discussed in this Quarterly Report on Form 10-Q, the world has been affected due to the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine and economic uncertainty. Inflation has risen, Federal Reserve interest rates have increased recently, and the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year. These factors, amongst other things, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.
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
38
improvements to revenues or earnings. For competitive reasons, we do not disclose all of our new product development activities.
Also, the potential for growth in new markets is uncertain. We will continue to explore these opportunities until such time as we either generate sales or determine that resources would be more efficiently used elsewhere.
Inflation
We experienced some affects due to inflation during the most recent period, including increased product pricing 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. These increasing costs are being aggressively managed by the Company and actions are being taken to minimize the impact to the Company, particularly in the purchase of inventories to minimizing price increases.
Off balance sheet arrangements
We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity.
We do not have any majority-owned subsidiaries that are not consolidated in the financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose entities.
Stockholder transactions
See Note 9 to the accompanying financial statements for a discussion regarding our stockholder transactions for the relevant periods.
Critical accounting policies and estimates
In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and our historical experience.
Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for year ended December 31, 2021. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. There were no significant changes to our critical accounting policies during the three and six month periods ended June 30, 2022, except for adoption of ASU 842, Leases ("ASU 842”).
Leases
On January 1, 2022, the Company adopted ASC 842 using the Transition method. The reported results for the three and six month periods ended June 30, 2022, reflect the application of the guidance of ASC 842 while the reported results for the three and six month periods ended June 30, 2021, were prepared under the guidance of ASC 840.
Per the Company’s consolidated financial statements Note 2- Significant Accounting Policies, we have adopted "Lease accounting” as required by FASB ASC 842. See Note 2 to the accompanying financial statements for further details.
39
Recently implemented accounting pronouncements
Effective January 1, 2022, the Company implemented ASU No. 2016-02, Leases ("ASU 2016-02”). Under ASU 2016-02, the Company recognized for all leases a lease liability, which is our obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company elected to use the transition method and reflected the cumulative effect of adoption as an adjustment to beginning retained earnings.
Interest rate risk
Our exposure to interest rate risk is primarily associated with borrowing on revolving lines of credit denominated in both U.S. dollars and Euros. We are exposed to the impact of interest rate changes primarily through our borrowing activities for our variable rate borrowings. The Federal Reserve interest rates have increased recently, and may increase further in the near term.
Concentration of credit risk
Financial instruments that potentially expose us to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. We place our cash and cash equivalents with financial institutions with high credit quality. On June 30, 2022 and December 31, 2021, we had $2,874,831 and $5,101,174, respectively, of cash and cash equivalents on deposit or invested with our financial and lending institutions. We provide credit to our customers in the normal course of business. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary.
Foreign currency risk
We operate primarily in the United States. Foreign sales of products and services are primarily denominated in U.S. dollars. We also conduct business outside the United States through our foreign subsidiary in Germany, where business is largely transacted in non-U.S. dollar currencies, particularly the Euro, which is subject to fluctuations due to changes in foreign currency exchange rates. Accordingly, we are subject to exposure from changes in the exchange rates of local currencies. Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of income.
OSS GmbH operates as an extension of OSS’ domestic operations and acquired Bressner in October 2018. The functional currency of OSS GmbH is the Euro. Transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, monetary assets and liabilities are translated using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Consequently, changes in the exchange rates of the currencies may impact the translation of the foreign subsidiaries’ statements of operations into U.S. dollars, which may in turn affect our consolidated statement of income. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income in the consolidated statement of comprehensive income.
Derivative Financial Instruments
We employ derivatives on a periodic basis to manage certain market risks through the use of foreign exchange forward contracts. We do not use derivatives for trading or speculative purposes. Our derivatives are designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we may enter into foreign exchange contracts to provide currency at a fixed rate.
40
Non-GAAP Financial Measures
Adjusted EBITDA
We believe that the use of adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, is helpful for an investor to assess the performance of the Company. The Company defines adjusted EBITDA as income (loss) before interest, taxes, depreciation, amortization, acquisition expenses, impairment of long-lived assets, financing costs, fair value adjustments from purchase accounting, stock-based compensation expense and expenses related to discontinued operations.
Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles in the United States, or GAAP. Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company’s non-cash operating expenses, we believe that providing a non-GAAP financial measure that excludes non-cash and non-recurring expenses allows for meaningful comparisons between our core business operating results and those of other companies, as well as providing us with an important tool for financial and operational decision making and for evaluating our own core business operating results over different periods of time.
Our adjusted EBITDA measure may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. Our adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to operating income or as an indication of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider adjusted EBITDA to be a substitute for, or superior to, the information provided by GAAP financial results.
|
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Net income |
|
$ |
322,822 |
|
|
$ |
1,697,122 |
|
|
$ |
902,056 |
|
|
$ |
1,738,320 |
|
|
Depreciation and amortization |
|
|
254,429 |
|
|
|
394,794 |
|
|
|
524,220 |
|
|
|
775,572 |
|
|
Stock-based compensation expense |
|
|
532,636 |
|
|
|
465,336 |
|
|
|
915,464 |
|
|
|
903,730 |
|
|
Interest expense |
|
|
44,949 |
|
|
|
169,031 |
|
|
|
103,665 |
|
|
|
319,013 |
|
|
Interest income |
|
|
(55,507 |
) |
|
|
(61,798 |
) |
|
|
(106,512 |
) |
|
|
(67,098 |
) |
|
PPP loan and interest forgiveness |
|
|
- |
|
|
|
(1,514,354 |
) |
|
|
- |
|
|
|
(1,514,354 |
) |
|
Provision for income taxes |
|
|
85,490 |
|
|
|
235,293 |
|
|
|
250,798 |
|
|
|
295,815 |
|
|
Adjusted EBITDA |
|
$ |
1,184,819 |
|
|
$ |
1,385,424 |
|
|
$ |
2,589,691 |
|
|
$ |
2,450,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EPS
Adjusted EPS excludes the impact of certain items, and therefore, has not been calculated in accordance with GAAP. We believe that exclusion of certain selected items assists in providing a more complete understanding of our underlying results and trends and allows for comparability with our peer company index and industry. We use this measure along with the corresponding GAAP financial measures to manage our business and to evaluate our performance compared to prior periods and the marketplace. The Company defines non-GAAP income (loss) as income or (loss) before amortization, stock-based compensation, expenses related to discontinued operations, impairment of long-lived assets and non-recurring acquisition costs. Adjusted EPS expresses adjusted income (loss) on a per share basis using weighted average diluted shares outstanding.
Adjusted EPS is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses similar to the adjusted income from continuing operations and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring.
41
The following table reconciles non-GAAP net income (loss) and basic and diluted earnings per share:
|
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Net income |
|
$ |
322,822 |
|
|
$ |
1,697,122 |
|
|
$ |
902,056 |
|
|
$ |
1,738,320 |
|
|
Amortization of intangibles |
|
|
15,807 |
|
|
|
163,901 |
|
|
|
31,616 |
|
|
|
327,801 |
|
|
Stock-based compensation expense |
|
|
532,636 |
|
|
|
465,336 |
|
|
|
915,464 |
|
|
|
903,730 |
|
|
PPP loan and interest forgiveness |
|
|
- |
|
|
|
(1,514,354 |
) |
|
|
- |
|
|
|
(1,514,354 |
) |
|
Non-GAAP net income |
|
$ |
871,265 |
|
|
$ |
812,005 |
|
|
$ |
1,849,136 |
|
|
$ |
1,455,497 |
|
|
Non-GAAP net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.10 |
|
|
$ |
0.08 |
|
|
Diluted |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.09 |
|
|
$ |
0.08 |
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
19,940,902 |
|
|
|
18,513,620 |
|
|
|
19,416,832 |
|
|
|
17,934,022 |
|
|
Diluted |
|
|
21,180,490 |
|
|
|
19,735,383 |
|
|
|
20,346,917 |
|
|
|
19,305,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by or used in operating activities, less capital expenditures for property and equipment, which includes capitalized software development costs for the implementation of the Company’s ERP system. We believe free cash flow provides investors with an important perspective on cash available for investments and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. We believe that trends in our free cash flow can be valuable indicators of our operating performance and liquidity.
Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies.
We expect to continue to incur expenditures similar to the free cash flow adjustments described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash. The following table reconciles cash provided by or used in operating activities, the most directly comparable GAAP financial measure, to free cash flow:
|
|
|
For the Six Months Ended June 30, |
|
|||||
|
Cash flow: |
|
2022 |
|
|
2021 |
|
||
|
Net cash (used in) provided by operating activities |
|
$ |
(7,576,355 |
) |
|
$ |
2,788,363 |
|
|
Capital expenditures |
|
|
(141,685 |
) |
|
|
(199,799 |
) |
|
Free cash flow |
|
$ |
(7,718,040 |
) |
|
$ |
2,588,564 |
|
|
|
|
|
|
|
|
|
|
|
42
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Limitation on Effectiveness of Controls
The design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals. The inherent limitations in any control system include the realities that judgments related to decision-making can be faulty, and that reduced effectiveness in controls can occur because of simple errors or mistakes. Due to the inherent limitations in a cost-effective control system, misstatements due to error may occur and may not be detected.
Evaluation of Disclosure Controls and Procedures
Management is required to evaluate our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act”). Disclosure controls and procedures are controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at a reasonable assurance level as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
43
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
For a description of our material pending legal proceeding, please see Note 10, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors.
Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect our business, financial condition, or future results. In evaluating our business, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K, as updated by our subsequent filings under the Exchange Act. The occurrence of any of the risks discussed in such filings, or other events that we do not currently anticipate or that we currently deem immaterial, could harm our business, prospects, financial condition and results of operations. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
44
Item 6. Exhibits.
Exhibit Index
|
Exhibit Number |
|
Exhibit Description |
|
Form |
|
File No. |
|
Exhibit |
|
Filing Date |
|
Filed Herewith |
|
2.1 |
|
|
8-K |
|
001-38371 |
|
2.1 |
|
September 6, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2 |
|
Share Purchase Agreement, dated October 31, 2018, with Bressner Technology GmbH. |
|
8-K |
|
001-38371 |
|
2.1 |
|
November 6, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
Amended and Restated Certificate of Incorporation (currently in effect). |
|
8-K/A |
|
001-38371 |
|
3.1 |
|
March 21, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
|
8-K |
|
001-38371 |
|
3.2 |
|
February 6, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
Second Amended and Restated Investors’ Rights Agreement, dated January 2007. |
|
S-1 |
|
333-222121 |
|
4.2 |
|
December 18, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2 |
|
Common Shareholder Piggyback Registration Rights Agreement, dated July 15, 2016. |
|
S-1 |
|
333-222121 |
|
4.3 |
|
December 18, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1 |
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2 |
|
|
|
|
|
|
|
|
|
|
X |
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 INS* |
|
Inline XBRL Instance Document |
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104* |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 attachments) |
|
|
|
|
|
|
|
|
|
X |
|
* |
The XBRL related information in Exhibit 101 shall not be deemed "filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document. |
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
One Stop Systems, Inc. |
|
|
|
|
|
|
|
Date: August 11, 2022 |
|
By: |
/s/ David Raun |
|
|
|
|
David Raun |
|
|
|
|
President and Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
|
Date: August 11, 2022 |
|
By: |
/s/ John W. Morrison Jr. |
|
|
|
|
John W. Morrison Jr. |
|
|
|
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
47
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David Raun, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of One Stop Systems, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
(d) |
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
|
5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: August 11, 2022 |
|
By: |
|
/s/ David Raun |
|
|
|
|
|
David Raun |
|
|
|
|
|
President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John W. Morrison Jr., certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of One Stop Systems, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
(d) |
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
|
5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: August 11, 2022 |
|
By: |
|
/s/ John W. Morrison Jr. |
|
|
|
|
|
John W. Morrison Jr. |
|
|
|
|
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of One Stop Systems, Inc. (the "Company”) on Form 10-Q for the period ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the "Report”), I, David Raun, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
|
|
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
|
Date: August 11, 2022 |
|
By: |
/s/ David Raun |
|
|
|
|
David Raun |
|
|
|
|
President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of One Stop Systems, Inc. (the "Company”) on Form 10-Q for the period ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the "Report”), I, John W. Morrison Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
|
|
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
|
Date: August 11, 2022 |
|
By: |
/s/ John W. Morrison Jr. |
|
|
|
|
John W. Morrison Jr. |
|
|
|
|
Chief Financial Officer (Principal Accounting and Financial Officer) |