美國
證券交易委員會
華盛頓特區20549
表格
(標記一個)
根據1934年證券交易法第13或15(d)條款的季度報告。 |
截至2024年6月30日季度結束
或
根據1934年證券交易法第13或15(d)條款的過渡報告 |
自 __________ 至 ________________ 的過渡期間
委員會檔案編號：
（根據其章程所指定的正式名稱）
(依據所在地或其他管轄區) 的註冊地或組織地點) |
(國稅局雇主識別號碼) 識別號碼) |
(主要行政辦公室地址，包括郵遞區號)
(
(註冊人電話號碼，包括區號)
(如與上次報告不同，請提供以前名稱、地址和會計年度)
根據法案第12(b)條規定註冊的證券：
每種類別的名稱 |
交易標的 |
註冊的交易所名稱 |
The |
請勾選是否註冊人(1)在過去12個月內（或在註冊人被要求提交此類報告的較短期間內）已提交根據1934年證券交易法第13或15(d)條所要求提交的所有報告，以及(2)在過去90天內是否受到此類提交要求的約束。
請以勾選標記表示登記人是否在過去12個月（或登記人被要求提交此類檔案的更短期間）內，依據S-t條例第405條（本章第232.405條）以電子方式提交了每一個互動數據檔案。
勾選表示登記人是大型加速申報人、加速申報人、非加速申報人、較小型申報公司或新興成長公司。詳細定義請參閱《交易所法》第1202條中“大型加速申報人”、“加速申報人”、“較小型申報公司”和“新興成長公司”的定義。
大型加速歸檔人 |
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加速歸檔人 |
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☐ |
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☒ |
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小型報告公司 |
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新興成長型企業 |
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如果一家新興成長型公司，請用勾選標記表示該申報人已選擇不使用根據證交所法案13(a)條款提供的任何新的或修訂過的財務會計準則的延長過渡期。 ☐
請用勾選標示登記人是否為空殼公司（依據交易所法第120億2條的定義）。
是
截至2024年10月31日，申報人持有
目錄
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項目1。 |
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項目2。 |
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項目3。 |
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項目4。 |
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項目 1。 |
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項目1A |
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項目 2。 |
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項目 3。 |
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項目4。 |
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项目5。 |
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第6項。 |
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42 |
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45 |
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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, management 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 month and nine month periods ended September 30, 2024 (this "Quarterly Report"), should be read in conjunction with our audited financial statements for the year ended December 31, 2023, included in our Annual Report on Form 10-K, filed with the SEC on March 21, 2024.
The results of operations for the three month and nine months periods ended September 30, 2024, are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2024.
3
ONE STOP SYSTEMS, INC. (OSS)
CONSOLIDATED BALANCE SHEETS
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Unaudited |
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Audited |
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September 30, |
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December 31, |
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2024 |
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2023 |
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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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Deposits and other |
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Deferred tax asset, net |
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- |
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Goodwill |
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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 6) |
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Current portion of operating lease obligation (Note 9) |
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Current portion of notes payable (Note 7) |
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Total current liabilities |
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Deferred tax liability, net |
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- |
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Operating lease obligation, net of current portion (Note 9) |
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Total liabilities |
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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 income |
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Accumulated deficit |
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( |
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( |
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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 OPERATIONS
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For the Three Months Ended September 30, |
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For the Nine Months Ended September 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenue: |
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Product |
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$ |
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$ |
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$ |
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$ |
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Customer funded development |
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Cost of revenue: |
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Product |
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Customer funded development |
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Gross (loss) profit |
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( |
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Operating expenses: |
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General and administrative |
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Impairment of goodwill |
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- |
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- |
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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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Loss from operations |
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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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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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Employee retention credit (ERC) (Note 2) |
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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, net |
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Loss before income taxes |
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( |
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( |
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( |
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( |
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Provision for income taxes |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Net loss 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 LOSS
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For the Three Months Ended September 30, |
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For the Nine Months Ended September 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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Other comprehensive (loss) income: |
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Net unrealized (loss) income on short-term investments |
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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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Total other comprehensive (loss) income |
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( |
) |
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( |
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Comprehensive loss |
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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 STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three and Nine Month Periods Ended September 30, 2024
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Common Stock |
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Accumulated |
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Accumulated |
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Total |
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Shares |
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Amount |
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Additional |
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Comprehensive |
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(Deficit) Earnings |
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Stockholders' |
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Balance, January 1, 2024 |
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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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( |
) |
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 loss 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 loss |
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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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Balance, June 30, 2024 |
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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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Net unrealized loss 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 loss |
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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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Balance, September 30, 2024 |
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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 STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three and Nine Month Periods Ended September 30, 2023
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Common Stock |
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Accumulated |
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Accumulated |
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Total |
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Shares |
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Amount |
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Additional |
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Comprehensive |
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(Deficit) Earnings |
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Stockholders' |
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Balance, January 1, 2023 |
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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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( |
) |
Currency translation adjustment |
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- |
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- |
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- |
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- |
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Net unrealized gain 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 loss |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
Balance, June 30, 2023 |
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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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( |
) |
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 unrealized gain 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 loss |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
Balance, September 30, 2023 |
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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.
8
ONE STOP SYSTEMS, INC. (OSS)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
||
Deferred income taxes |
|
|
( |
) |
|
|
- |
|
Loss (gain) on disposal of property and equipment |
|
|
|
|
|
( |
) |
|
Provision for bad debt |
|
|
|
|
|
|
||
Impairment of goodwill |
|
|
- |
|
|
|
|
|
Warranty reserves |
|
|
( |
) |
|
|
( |
) |
Amortization of intangibles |
|
|
- |
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
||
Amortization of right-of-use assets |
|
|
|
|
|
|
||
Inventory reserves |
|
|
|
|
|
|
||
Stock-based compensation expense |
|
|
|
|
|
|
||
Employee retention credit |
|
|
- |
|
|
|
( |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( |
) |
|
|
|
|
Inventories |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
( |
) |
Accounts payable |
|
|
|
|
|
( |
) |
|
Accrued expenses and other liabilities |
|
|
|
|
|
|
||
Operating lease liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash provided by operating activities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
||
Redemption of short-term investment grade securities |
|
|
|
|
|
|
||
Purchases of property and equipment, including capitalization of labor |
|
|
( |
) |
|
|
( |
) |
Net cash provided by 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 |
|
|
( |
) |
|
|
( |
) |
Repayments on notes payable |
|
|
( |
) |
|
|
( |
) |
Employee retention credit benefit |
|
|
- |
|
|
|
|
|
Net cash (used in) 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 Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
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: |
|
|
|
|
|
|
||
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 Nine Month Periods Ended September 30, 2024 and 2023
NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION
Nature of Operations
One Stop Systems, Inc. (“we,” “our,” “OSS,” or the “Company”) was originally incorporated as a California corporation in 1999, after initially being formed as a California limited liability company in 1998. On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with its initial public offering. The Company designs, manufactures, and markets specialized rugged high-performance compute, high speed switch fabrics and storage systems, which are designed to target edge applications for artificial intelligence (“AI”)/machine learning (“ML”), sensor processing, sensor fusion and autonomy. The Company markets its products to manufacturers of equipment used for autonomous vehicles, medical, industrial, and military applications, with special focus on platforms that move, such as planes, trucks, ships, submarines and mobile datacenters or command posts where sensor processing, sensor fusion, AI and ML are integrated to support such applications.
During the year ended December 31, 2015, the Company formed a wholly owned subsidiary in Germany, One Stop Systems, GmbH (“OSS GmbH”). In July 2016, the Company acquired Mission Technologies Group, Inc. (“Magma”) and its operations that complemented OSS' manufacture of custom high-performance compute servers.
On August 31, 2018, the Company acquired Concept Development Inc. (“CDI”) located in Irvine, California. CDI specialized in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment, flight safety equipment, and networking systems. CDI’s business was fully integrated into the core operations of the Company as of September 1, 2020.
On October 31, 2018, OSS GmbH acquired
The Company completed and fulfilled all remaining orders associated with its long-term media and entertainment customer during the year ended December 31, 2023, and does not anticipate further business from this customer in the future. This resulted from an acceleration in the customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry. This customer’s transition to cloud solutions had a negative impact on the Company’s results of operations for the year ended December 31, 2023 and for the nine months ended September 30, 2024.
With the Company's shift in focus to the development and sale of AI Transportables, we have significantly increased our efforts to penetrate the military and defense sectors. With the hiring of Michael Knowles and Robert Kalebaugh in mid-2023, each of whom has extensive experience in contracting in the defense industry, as our new president and chief executive officer, and vice president of sales, respectively, we further increased our emphasis and focus on the pursuit of revenue opportunities with major defense contractors and the military. We have also added relevant defense market experience to our board of directors through the appointment of Mr. Knowles, Vice Admiral Dumont and Mitch Herbets as directors.
The negative impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the ongoing military conflict between Russia and Ukraine and Israel and Hamas, have contributed to economic uncertainty. Component shortages and increased lead times on materials sourced from Taiwan, coupled with rising political tensions in Taiwan, resulted in supply chain delays and shortages that negatively impacted the Bressner business during the most recent quarter. With the recent decrease in interest rates, economists now are anticipating a soft landing for both the U.S. and in Germany. Additionally, it is possible that U.S. policy changes and
11
uncertainty about such changes, including changes and uncertainty as a result of the upcoming U.S. presidential election, could increase market volatility and currency exchange rate fluctuations. As a result of the foregoing, there is continued economic uncertainty and volatility in the capital markets in the near term that could negatively affect our operations.
Due to the Company’s shift in focus to the military and defense sector, deviations from management’s expectations with respect to product sales and advances in technology that rendered certain inventory obsolete, during the quarter ended September 30, 2024, and certain of the Company's inventory had to be written down. The Company determined to take an inventory charge of $
These global issues and concerns are impacting our business as well as some of our customers, who are continuing to experience downturns or uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts. During the quarter ended September 30, 2024, the Company experienced delays in orders due to certain customers’ funding or program delays. If such decreases in orders or postponements continue in the future, or we experience cancellations of orders, our operating results will be further impacted, and our revenues may decline in future periods.
These global issues and events may also have the effect of heightening many risks associated with our customers and supply chain. We may take further actions that alter our operations from time to time, or which we determine are in our best interests. In addition, we may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business.
As a result of these global issues, as well as other factors discussed in these notes, it has been difficult to accurately forecast our revenues or financial results. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause our stock price to decline.
Management’s plans with respect to the above are to continue their efforts towards responding to the changing economic landscape, to continue to control costs, conserve cash, strengthen margins through the introduction of new product lines focusing on AI compute capabilities for military and industrial applications, autonomous truck driving and improve company-wide execution through increased investments in product marketing.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on an accrual basis of accounting in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”), as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).
The unaudited consolidated financial statements herein have been prepared by the Company pursuant to the rules and regulations of the SEC. The accompanying interim unaudited consolidated financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the latest year ended December 31, 2023.
Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, 2023 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements. The Company’s management has evaluated all subsequent events and transactions through the date of filing this Quarterly Report.
12
In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 21, 2024.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation. In the current year, the Company began disclosing as a separate component of revenue and cost of sales, the amounts related to customer funded development revenue and costs. Customer funded development is revenue from customers for which the Company's performance obligations are satisfied over time and for which the customer receives benefits as the Company performs. Products revenue performance obligations are typically satisfied at a point in time, predominately upon shipment.
Gross versus net revenue
Accounting Standards Codification ("ASC") 606 provides guidance on proper recognition of principal versus agent considerations, which is used to determine gross versus net revenue recognition. Under ASC 606, the core objective of the guidance on gross versus net revenue recognition is to help determine whether the Company is a principal or an agent in a transaction. In general, the primary difference between these two is the performance obligation being satisfied by the company recognizing revenue. The principal has a performance obligation to provide the desired goods or services to the end customer, whereas the agent arranges for the principal to provide the desired goods or services. Additionally, a fundamental characteristic of a principal in a transaction is control. A principal substantively controls the goods and services before they are transferred to the customer as well as controlling the price of the good or service being provided.
The Company is an agent if the Company's performance obligation is to arrange for the delivery of the specified good or service by another party. An entity that is an agent does not control the specified good or service provided by another party before that good or service is transferred to the customer. During the three and nine month periods ended September 30, 2024, the Company recorded net agent consideration as revenue of $
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of OSS, which include the operating results of its wholly owned subsidiary, OSS GmbH, and its wholly owned subsidiary Bressner. Intercompany balances and transactions have been eliminated in consolidation.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
There have been no changes to our accounting policies disclosed in our audited consolidated financial statements and the related notes for the year ended December 31, 2023.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions.
On an ongoing basis, our management evaluates these estimates and assumptions, including those related to determination of standalone selling prices of our products and services, allowance for credit losses and sales reserves, income tax valuations, stock-based compensation, goodwill, intangible assets and inventory valuations and recoverability. We base our estimates on historical data and experience, as well as various other factors that our management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities.
13
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event has occurred. Management reviews the impairment of goodwill for impairment annually at year end.
In June 2023, management performed an interim impairment test of goodwill, as a result of the overall financial performance of OSS as compared to plan, the transition of and focus on our product strategy of AI Transportables and the defense industry, and deferment of certain orders. As a result of this interim evaluation, the Company recorded an impairment loss to goodwill of $
Due to the Ukraine war, the continuing conflicts between Israel and Hamas, inflationary pressures, other macroeconomic factors and the loss of our previous media and entertainment customer, there has been uncertainty and disruption in the global economy, financial markets and our ongoing operations. We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions or a revision of the carrying value of our assets or liabilities as of the date of this Quarterly Report. These estimates and assumptions may change as new events occur and additional information is obtained. As a result, actual results could differ materially from these estimates and assumptions.
Recent Accounting Pronouncements
Two new Accounting Standard Updates ("ASU’s") have recently been issued, neither of which are currently expected to significantly impact the Company.
On November 27, 2023, the FASB issued ASU 2023-07 "Segment Reporting (Topic 280): Improvements to reportable segment disclosures." This amendment enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The purpose of the amendments is to enable “investors to better understand an entity’s overall performance” and assess “potential future cash flows.” The adoption of this amendment is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Management does not anticipate any material impact on the consolidated financial statements.
ASU 2023-09: Income Taxes (Topic 740) — Improvements to Income Tax Disclosures (ASU 2023-09) enhances the disclosure requirements related to income taxes. The most significant changes are requiring additional disaggregation in the rate reconciliation disclosure (for public business entities) and income taxes paid disclosure (for all entities). The changes to the rate reconciliation disclosures require entities to disclose specific categories in the rate reconciliation by taxing jurisdiction for any individual reconciling item that exceeds 5% of pretax income multiplied by the statutory tax rate. The new guidance will be effective for public business entities for annual periods beginning after December 15, 2024. For all other entities, the guidance will be effective for annual periods beginning after December 15, 2025. Early adoption is permitted for all entities.
Employee Retention Credit
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provided tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit (“ERC”). The ERC was designed to encourage businesses to keep employees on the payroll during the COVID-19 pandemic. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, we accounted for the ERC funding consistent with our accounting treatment and reporting of the forgiveness of our Paycheck Protection Program ("PPP") Loan.
The credit is based upon the number of employees in any given quarter in the years 2020 and 2021. For the year 2020, the maximum credit was based upon the lesser of
14
first three quarters of the year 2021, the maximum quarterly credit was based upon the lesser of
The Company applied for the ERC program and as of September 30, 2023, had received a total of $
NOTE 3 - SHORT-TERM INVESTMENTS
The Company’s short-term investments by significant investment category as of September 30, 2024, were as follows:
Description |
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Accrued |
|
|
Estimated |
|
|||||
Level 1: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash alternatives |
|
$ |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
||||
The Company’s short-term investments by significant investment category as of December 31, 2023, were as follows:
Description |
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Accrued |
|
|
Estimated |
|
|||||
Level 1: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash alternatives |
|
$ |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
||||
Cash alternatives represent cash balances in savings accounts and U.S. Treasury Bills that are temporarily on-hand that are immediately available for investments in accordance with the Company’s investment policy.
The Company typically invests in highly rated securities and its investment policy limits the amount of credit exposure to any
NOTE 4 -ACCOUNTS RECEIVABLE
Accounts receivable, net consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Accounts receivable |
|
$ |
|
|
$ |
|
||
Less: allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
15
Provision (recovery) for bad debt expense related to accounts receivable was $
The following tables represent the changes in the allowance for credit losses associated with our trade receivables for the nine month periods ended September 30, 2024 and 2023.
|
|
For the Nine Months Ended September 30, |
|
|||||
Allowance for Credit Losses |
|
2024 |
|
|
2023 |
|
||
Balance on January 1, |
|
$ |
( |
) |
|
$ |
( |
) |
Provision charged to expense |
|
|
( |
) |
|
|
( |
) |
Receivables written-off |
|
|
- |
|
|
|
- |
|
Recoveries of receivables previously written-off |
|
|
- |
|
|
|
- |
|
Effects of change in exchange rates |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
NOTE 5 – INVENTORIES
Inventories, net consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Sub-assemblies |
|
|
|
|
|
|
||
Work-in-process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: allowances for obsolete and slow-moving inventories |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
NOTE 6 – ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Accrued compensation and related liabilities |
|
$ |
|
|
$ |
|
||
Deferred revenue |
|
|
|
|
|
|
||
Customer deposits (See Note 11) |
|
|
|
|
|
|
||
Warranty reserve |
|
|
|
|
|
|
||
Trade and other taxes |
|
|
|
|
|
|
||
Other accrued expenses |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
16
NOTE 7 – DEBT
Bank Lines of Credit
In April 2022, the Company obtained a domestic revolving line of credit of $
Bressner has
Foreign Debt Obligations
Bressner had
On June 30, 2022, Bressner borrowed €
17
Additionally, on February 16, 2022, Bressner converted €
A summary of outstanding debt obligations as of September 30, 2024, was as follows:
Loan Description |
|
Current |
|
Maturity |
|
Balance |
|
|
Balance ($) |
|
|
Current |
|
|||
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Commerzbank AG |
|
|
|
|
|
|
|
|
|
|
|
|||||
Uni Credit Bank AG |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
€ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
NOTE 8 – STOCKHOLDERS’ EQUITY
The Company’s amended and restated certificate of incorporation, filed with the Delaware Secretary of State on December 14, 2017, authorizes the Company to issue
2017 Equity Incentive Plan
On October 10, 2017, the Company’s board of directors approved and adopted the Company’s 2017 Equity Incentive Plan (as amended to date, the “2017 Plan”), subject to stockholder approval thereof. On December 18, 2017, the Company’s stockholders approved the 2017 Plan. The 2017 Plan allows for the grant of a variety of equity vehicles to provide flexibility in the grant and issuance of equity awards, including stock options, unrestricted stock grants, restricted stock units (“RSUs”), stock bonuses and performance-based awards. An aggregate of
On June 24, 2020, the Company amended the 2017 Plan to increase the maximum number of shares of common stock with respect to one or more Stock Awards (as defined in the 2017 Plan) that may be granted to any one participant under the 2017 Plan during any calendar year from
On May 19, 2021, the Company’s stockholders approved the Company’s proposal to increase the number of shares authorized for issuance under the 2017 Plan from
On March 15, 2024, the Company’s board of directors unanimously approved, and on May 15, 2024, the Company’s stockholders approved, an amendment to the 2017 Plan to increase the number of shares of common stock authorized for issuance thereunder from
18
Executive Employment Agreements
As contemplated by that Amended and Restated Employment Agreement, dated April 3, 2023, entered into by and between the Company and David Raun, in connection with the termination of Mr. Raun’s role as chief executive officer and president of the Company, all those unvested restricted stock units ("RSUs") held by Mr. Raun that were scheduled to vest within twelve months from his termination date (June 5, 2023) became vested as of such date, with the remaining unvested RSUs being forfeited. As a result, the vesting of
On June 5, 2023, in connection with, and as a material inducement to, the appointment of Michael Knowles as the Company’s new chief executive officer and president, Mr. Knowles was granted (i) non-qualified stock options to purchase
Both of the Inducement Grants shall vest over a four-year period as follows:
The Inducement Grants were granted outside of the Company’s 2017 Plan and any other equity incentive plans, and in reliance on the employment inducement exemption provided under the Nasdaq Listing Rule 5635(c)(4).
Stock Options
A summary of stock option activity under the Company’s current equity incentive plans during the nine month period ended September 30, 2024, was as follows:
|
|
Stock Options Outstanding |
|
|||||||||||||
|
|
Number of |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
||||
Outstanding on January 1, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Forfeited / Canceled |
|
|
( |
) |
|
$ |
|
|
|
- |
|
|
$ |
|
||
Exercised |
|
|
( |
) |
|
$ |
|
|
|
- |
|
|
$ |
|
||
Outstanding on September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Exercisable as of September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Vested and expected to vest as of September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
As of September 30, 2024, there was $
The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stock options granted by the Company. There were
19
period ended September 30, 2024.
|
|
For the Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Expected term (in years) |
|
|
- |
|
|
|
|
|
Expected volatility |
|
|
% |
|
|
% |
||
Risk-free interest rate |
|
|
% |
|
|
% |
||
Weighted average grant date fair value per share |
|
$ |
- |
|
|
$ |
|
|
Grant date fair value of options vested |
|
$ |
|
|
$ |
|
||
Intrinsic value of options exercised |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase, or cancel any remaining unearned stock-based compensation expense or calculate and record additional expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional common stock options or other stock-based awards.
Restricted Stock Units
RSUs may be granted at the discretion of the compensation committee of the Company's board of directors under the 2017 Plan in connection with the hiring and retention of personnel and are subject to certain conditions. RSUs generally vest quarterly or semi-annually over a period of to
The Company’s RSU activity for the nine months ended September 30, 2024, was as follows:
|
|
Restricted Stock Units |
|
|||||
|
|
Number of |
|
|
Weighted |
|
||
Unvested on January 1, 2024 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
$ |
|
|
Canceled |
|
|
( |
) |
|
$ |
|
|
Unvested on September 30, 2024 |
|
|
|
|
$ |
|
||
As of September 30, 2024, there was $
Stock-based compensation expense for the three and nine month periods ended September 30, 2024 and 2023, was comprised of the following:
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
||||||||||
Stock-based compensation classified as: |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
General and administrative |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Production |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Marketing and selling |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product and programs |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
20
Warrants
The following table summarizes the Company’s warrant activity during the nine months ended September 30, 2024:
|
|
Number of |
|
|
Weighted |
|
||
Warrants outstanding – January 1, 2024 |
|
|
|
|
$ |
|
||
Warrants granted |
|
|
- |
|
|
$ |
- |
|
Warrants expired |
|
|
( |
) |
|
$ |
|
|
Warrants exercised |
|
|
( |
) |
|
$ |
|
|
Warrants outstanding – September 30, 2024 |
|
|
|
|
$ |
|
||
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Legal
We are subject to litigation, claims, investigations, and audits arising from time to time in the ordinary course of our business. When applicable, we record accruals for contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in our opinion, individually or in the aggregate, no such lawsuits are expected to have a material effect on our consolidated financial position or results of operations.
In the opinion of management, after consultation with legal counsel, the ultimate disposition of any such matters as of September 30, 2024, are not expected to have a materially adverse effect on the consolidated financial position or results of operations of the Company.
Guarantees and Indemnities
The Company has made certain indemnities, under which it may be required to make payments to an indemnified party, in relation to certain transactions. The Company indemnifies its directors, officers, employees, and agents to the maximum extent permitted under the laws of the State of Delaware. In connection with its facility lease, the Company has indemnified its lessor for certain claims arising from the use of the facilities. The duration of the indemnities varies, and in many cases is indefinite. These indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities in the accompanying consolidated balance sheets.
Leases
The Company leases its offices, manufacturing, and warehouse facility in San Diego County under a non-cancelable operating lease. Our corporate headquarters are in a leased space comprising of approximately
21
Other information related to leases as of the three and nine month periods ended September 30, 2024 and 2023, was as follows:
|
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
||||||||||
|
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Operating lease expense |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total lease expense |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash paid for amounts included in the measurement of operating lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating cash flows from operating leases |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
Operating lease obligation for new operating leases |
|
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average remaining lease term - operating leases |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
||||
Weighted-average discount rate - operating leases |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
The following table presents the maturity of the Company’s operating lease liabilities as of September 30, 2024:
Year |
Operating Leases |
|
|
Remaining 2024 |
$ |
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
2028 |
|
|
|
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
Customer Concentration
During the three month period ended September 30, 2024, the Company had
During the nine month periods ended September 30, 2024 and 2023, the Company had
22
As of September 30, 2024 and December 31, 2023, the Company had
During the three month periods ended September 30, 2024 and 2023, the Company had approximately
During the nine month periods ended September 30, 2024 and 2023, the Company had approximately
NOTE 10 – NET LOSS PER SHARE
Basic and diluted net loss per share were calculated as follows for the three and nine month periods ended September 30, 2024 and 2023:
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding - basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Weighted average common shares outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
NOTE 11 – REVENUE, SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in
Segment details for the three and nine month periods ended September 30, 2024 and 2023, was as follows:
|
|
For the Three Months Ended September 30, 2024 |
|
|
For the Three Months Ended September 30, 2023 |
|
||||||||||||||||||
|
|
OSS |
|
|
Bressner |
|
|
Total |
|
|
OSS |
|
|
Bressner |
|
|
Total |
|
||||||
Revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Cost of revenues |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Gross (loss) profit |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||
Gross margin % |
|
|
- |
% |
|
|
% |
|
|
- |
% |
|
|
% |
|
|
% |
|
|
% |
||||
Total operating expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
(Loss) income from operations |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
23
|
|
For the Nine Months Ended September 30, 2024 |
|
|
For the Nine Months Ended September 30, 2023 |
|
||||||||||||||||||
|
|
OSS |
|
|
Bressner |
|
|
Total |
|
|
OSS |
|
|
Bressner |
|
|
Total |
|
||||||
Revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Cost of revenues |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Gross (loss) profit |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Gross margin % |
|
|
- |
% |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|||||
Total operating expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
(Loss) income from operations |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
The table below presents the deferred revenue, warranties and deposit balances along with the significant activity affecting balances during the nine month periods ended September 30, 2024 and 2023:
|
|
September 30, |
|
|
September 30, |
|
||
Deferred revenue |
|
2024 |
|
|
2023 |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Deferral of revenue during the period |
|
|
|
|
|
|
||
Recognition of unearned revenue from beginning of period |
|
|
( |
) |
|
|
( |
) |
Recognition of unearned revenue from additions |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
September 30, |
|
|
September 30, |
|
||
Customer deposits |
|
2024 |
|
|
2023 |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Additions during the period |
|
|
|
|
|
|
||
Deposits recognized from beginning of period |
|
|
( |
) |
|
|
( |
) |
Deposits recognized from additions |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
As of September 30, 2024, the Company had approximately $
Revenue from customers with non-U.S. billing addresses represented approximately
As of September 30, 2024, substantially all the Company’s long-lived assets are in the United States of America, except for assets of $
NOTE 12 – SUBSEQUENT EVENTS
The Company’s management has evaluated subsequent events after the consolidated balance sheet dated as of September 30, 2024, through the date of filing of this Quarterly Report. Based upon the evaluation, management has determined that, other than as disclosed below no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto.
24
On November 4, 2024, John Morrison notified the Company of his decision to retire and resign from his role as Chief Financial Officer of the Company, effective November 11, 2024. Mr. Morrison will continue to serve as an employee of the Company through November 30, 2024, during which time he will continue to receive the same compensation and will aid in the transition of the Chief Financial Officer role to Daniel Gabel.
As a result of Mr. Morrison’s resignation, that employment agreement entered into by and between the Company and Mr. Morrison, dated June 1, 2023, will terminate as of November 11, 2024. In connection with Mr. Morrison’s retirement, and subject to Mr. Morrison executing and returning an effective waiver and release of claims, the Company has agreed to (i) pay Mr. Morrison an aggregate amount of nine months of his current base salary, payable in accordance with the Company’s typical payroll practices, commencing as of November 30, 2024, and (ii) continue group health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”) at the Company’s expense for a period of nine months following November 30, 2024.
On November 4, 2024, the Company entered into an employment agreement with Daniel Gabel (the “Gabel Agreement”), pursuant to which, effective as of the Effective Date, Mr. Gabel will begin serving as Chief Financial Officer of the Company. Pursuant to the Gabel Agreement, Mr. Gabel will be entitled to receive an annual base salary of $315,000 per annum (subject to annual review and adjustment); an annual bonus, with a target amount equivalent to forty percent of his then-current annual base salary, payable if certain applicable bonus criteria are met, subject to approval by the Company’s board of directors; and eligibility to participate in a number of Company-sponsored benefits, including its medical, dental and 401(k) plans, under the terms and conditions of the benefit plans that may be in effect from time to time.
Additionally, as of the Effective Date, in connection with his appointment as Chief Financial Officer of the Company, the Company will grant Mr. Gabel 40,000 RSUs, which RSUs will be granted under the Company’s 2017 Plan and shall vest as follows: 25% on the one-year anniversary of the date of the grant, and the remaining 75% will vest in six equal installments, commencing six months after the one-year anniversary of the date of grant and every six months thereafter until fully vested, subject to Mr. Gabel continued employment by the Company.
25
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 on Form 10-Q (this "Quarterly Report"). This discussion and analysis contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Quarterly Report. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 21, 2024. Readers are cautioned not to place undue reliance on these forward-looking statements.
Overview
The Company designs, manufactures, and markets specialized high-performance compute, high speed switch fabrics and storage hardware and software, which are designed to target edge Artificial Intelligence ("AI") Transportable deployments. 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 datacenter. This growing trend increases computing performance and security, as the data does not have to travel to a distant datacenter location. Edge computing is most recognizable in applications such as sensor processing, sensor fusion, autonomy and AI/machine learning ("ML"). To meet the demands at the edge, we offer specialized modules and systems that consist of computers, switch fabrics and storage products that incorporate the latest state-of-the art components with embedded proprietary software. Such modules and systems allow us to offer high-end solutions to target markets to be integrated into, platforms, vehicles and applications.
The global increase in load on the cloud infrastructure and increase in AI applications are the primary factors driving the growth of the edge computing market. We market our products to manufacturers of automated equipment used for medical, industrial, and military applications. Our customer applications often require connection to a wide array of data sources and sensors, ultra-fast processing power, and the ability to quickly access and store large and ever-growing data sets at their physical location (rather than in the cloud). This equipment requires datacenter class performance optimized for deployment at the edge in challenging environments. Many of these edge applications have unique requirements, including special and compact form factors ruggedized for harsh conditions, which cannot be accommodated by traditional controlled air-conditioned datacenters.
We believe that we are uniquely positioned as a specialized provider to address the needs of this market, providing custom servers, data acquisition platforms, compute accelerators, solid-state storage arrays, system 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 its initial public offering.
During the year ended December 31, 2015, the Company formed a wholly owned subsidiary in Germany, OSS GmbH. Then, in July 2016, the Company acquired Magma and its operations that complemented OSS' manufacture of custom high-performance compute servers.
On August 31, 2018, the Company acquired Concept Development, Inc. ("CDI"), which was located in Irvine, California. CDI specialized in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment, flight safety equipment, and networking systems. CDI’s business was fully integrated into the core operations of OSS as of June 1, 2020.
On October 31, 2018, OSS GmbH acquired 100% of the outstanding equity 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
26
manufacturing, test, sales, and marketing services for customers throughout Europe, the Middle East and Africa ("EMEA").
Recent Developments
On November 4, 2024, John Morrison notified the Company of his decision to retire and resign from his role as Chief Financial Officer of the Company, effective November 11, 2024. Mr. Morrison will continue to serve as an employee of the Company through November 30, 2024, during which time he will continue to receive the same compensation and will aid in the transition of the Chief Financial Officer role to Daniel Gabel.
As a result of Mr. Morrison’s resignation, that employment agreement entered into by and between the Company and Mr. Morrison, dated June 1, 2023, will terminate as of November 11, 2024. In connection with Mr. Morrison’s retirement, and subject to Mr. Morrison executing and returning an effective waiver and release of claims, the Company has agreed to (i) pay Mr. Morrison an aggregate amount of nine months of his current base salary, payable in accordance with the Company’s typical payroll practices, commencing as of November 30, 2024, and (ii) continue group health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”) at the Company’s expense for a period of nine months following November 30, 2024.
On November 4, 2024, the Company entered into an employment agreement with Daniel Gabel (the “Gabel Agreement”), pursuant to which, effective as of the Effective Date, Mr. Gabel will begin serving as Chief Financial Officer of the Company. Pursuant to the Gabel Agreement, Mr. Gabel will be entitled to receive an annual base salary of $315,000 per annum (subject to annual review and adjustment); an annual bonus, with a target amount equivalent to forty percent of his then-current annual base salary, payable if certain applicable bonus criteria are met, subject to approval by the Company’s board of directors; and eligibility to participate in a number of Company-sponsored benefits, including its medical, dental and 401(k) plans, under the terms and conditions of the benefit plans that may be in effect from time to time.
Additionally, as of the Effective Date, in connection with his appointment as Chief Financial Officer of the Company, the Company will grant Mr. Gabel 40,000 RSUs, which RSUs will be granted under the Company’s 2017 Plan and shall vest as follows: 25% on the one-year anniversary of the date of the grant, and the remaining 75% will vest in six equal installments, commencing six months after the one-year anniversary of the date of grant and every six months thereafter until fully vested, subject to Mr. Gabel continued employment by the Company.
Components of Results of Operations
Revenue
The Company recognizes revenue under accounting standard ASC 606. Revenue is primarily generated from the sale of computer hardware and engineering services, and, to a minimal extent, revenue is also generated from the sale of software and sales of software maintenance and support contracts. The Company’s performance obligations are satisfied over time as work is performed or at a point in time. The majority of the Company’s revenue is recognized at a point in time when products ship and control is deemed to be transferred to the customer. The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied.
27
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. The cost of revenue also includes freight, allocated overhead costs and inventory write-offs and changes to our inventory and warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect cost of revenue to increase in absolute dollars with product revenue increases.
Operating expenses
Our operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs.
General and Administrative - General and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, and fees for third-party professional services, as well as allocated overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in growing the business.
Impairment of goodwill - Impairment of goodwill consists of the amount of write down of value attributable to acquisitions of the amount paid that was in excess of the book value of the assets acquired.
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.
Employee Retention Credit is a one-time U.S. government benefit enacted under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic. The CARES Act includes a provision for an Employee Retention Credit (“ERC”). The ERC was designed to encourage businesses to keep employees on the payroll during the COVID-19 pandemic.
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.
28
Results of Operations
The following tables set forth our results of operations for the three and nine month periods ended September 30, 2024 and 2023, presented in dollars and as a percentage of revenue, respectively.
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product |
|
$ |
12,682,241 |
|
|
$ |
13,632,223 |
|
|
$ |
36,722,411 |
|
|
$ |
46,865,026 |
|
Customer funded development |
|
|
1,018,856 |
|
|
|
115,940 |
|
|
|
2,831,802 |
|
|
|
876,563 |
|
|
|
|
13,701,097 |
|
|
|
13,748,163 |
|
|
|
39,554,213 |
|
|
|
47,741,589 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product |
|
|
14,601,408 |
|
|
|
10,074,304 |
|
|
|
32,123,488 |
|
|
|
33,678,209 |
|
Customer funded development |
|
|
817,427 |
|
|
|
22,508 |
|
|
|
2,091,907 |
|
|
|
543,329 |
|
|
|
|
15,418,835 |
|
|
|
10,096,812 |
|
|
|
34,215,395 |
|
|
|
34,221,538 |
|
Gross (loss) profit |
|
|
(1,717,738 |
) |
|
|
3,651,351 |
|
|
|
5,338,818 |
|
|
|
13,520,051 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
|
2,057,092 |
|
|
|
1,935,720 |
|
|
|
6,558,807 |
|
|
|
7,293,701 |
|
Impairment of goodwill |
|
|
- |
|
|
|
2,930,788 |
|
|
|
- |
|
|
|
5,630,788 |
|
Marketing and selling |
|
|
2,008,824 |
|
|
|
1,713,105 |
|
|
|
6,184,065 |
|
|
|
4,983,751 |
|
Research and development |
|
|
950,373 |
|
|
|
1,053,852 |
|
|
|
2,846,852 |
|
|
|
3,203,830 |
|
Total operating expenses |
|
|
5,016,289 |
|
|
|
7,633,465 |
|
|
|
15,589,724 |
|
|
|
21,112,070 |
|
Loss from operations |
|
|
(6,734,027 |
) |
|
|
(3,982,114 |
) |
|
|
(10,250,906 |
) |
|
|
(7,592,019 |
) |
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
116,596 |
|
|
|
170,420 |
|
|
|
376,940 |
|
|
|
385,471 |
|
Interest expense |
|
|
(16,465 |
) |
|
|
(31,468 |
) |
|
|
(70,910 |
) |
|
|
(88,112 |
) |
Employee retention credit (ERC) (Note 2) |
|
|
- |
|
|
|
418,486 |
|
|
|
- |
|
|
|
1,716,727 |
|
Other income (expense), net |
|
|
(14,402 |
) |
|
|
13,035 |
|
|
|
14,707 |
|
|
|
24,649 |
|
Total other income, net |
|
|
85,729 |
|
|
|
570,473 |
|
|
|
320,737 |
|
|
|
2,038,735 |
|
Loss before income taxes |
|
|
(6,648,298 |
) |
|
|
(3,411,641 |
) |
|
|
(9,930,169 |
) |
|
|
(5,553,284 |
) |
Provision for income taxes |
|
|
167,086 |
|
|
|
226,967 |
|
|
|
569,382 |
|
|
|
885,332 |
|
Net loss |
|
$ |
(6,815,384 |
) |
|
$ |
(3,638,608 |
) |
|
$ |
(10,499,551 |
) |
|
$ |
(6,438,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
29
|
|
For the Three Months Ended September 30, |
|
For the Nine Months Ended September 30, |
||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
Revenue: |
|
|
|
|
|
|
|
|
Product |
|
92.6% |
|
99.2% |
|
92.8% |
|
98.2% |
Customer funded development |
|
7.4% |
|
0.8% |
|
7.2% |
|
1.8% |
|
|
100.0% |
|
100.0% |
|
100.0% |
|
100.0% |
Cost of revenue: |
|
|
|
|
|
|
|
|
Product |
|
106.5% |
|
73.2% |
|
81.2% |
|
69.6% |
Customer funded development |
|
6.0% |
|
0.2% |
|
5.3% |
|
1.1% |
|
|
112.5% |
|
73.4% |
|
86.5% |
|
70.7% |
Gross (loss) profit |
|
-12.5% |
|
26.6% |
|
13.5% |
|
28.3% |
Operating expenses: |
|
|
|
|
|
|
|
|
General and administrative |
|
15.0% |
|
14.1% |
|
16.6% |
|
15.3% |
Impairment of goodwill |
|
0.0% |
|
21.3% |
|
0.0% |
|
11.8% |
Marketing and selling |
|
14.7% |
|
12.5% |
|
15.6% |
|
10.4% |
Research and development |
|
6.9% |
|
7.7% |
|
7.2% |
|
6.7% |
Total operating expenses |
|
36.6% |
|
55.6% |
|
39.4% |
|
44.2% |
Loss from operations |
|
-49.1% |
|
-29.0% |
|
-25.9% |
|
-15.9% |
Other income (expense), net: |
|
|
|
|
|
|
|
|
Interest income |
|
0.9% |
|
1.2% |
|
1.0% |
|
0.8% |
Interest expense |
|
-0.2% |
|
-0.2% |
|
-0.2% |
|
-0.2% |
Employee retention credit (ERC) (Note2) |
|
0.0% |
|
3.0% |
|
0.0% |
|
3.6% |
Other (expense) income, net |
|
-0.1% |
|
0.1% |
|
0.0% |
|
0.1% |
Total other income, net |
|
0.6% |
|
4.1% |
|
0.8% |
|
4.3% |
Loss before income taxes |
|
-48.5% |
|
-24.9% |
|
-25.1% |
|
-11.6% |
Provision for income taxes |
|
1.2% |
|
1.7% |
|
1.4% |
|
1.9% |
Net loss |
|
-49.7% |
|
-26.6% |
|
-26.5% |
|
-13.5% |
|
|
|
|
|
|
|
|
|
Comparison of the Three and Nine Month Periods Ended September 30, 2024 and 2023:
Revenue, cost of revenue and gross profit:
|
|
For the Three Months Ended September 30, 2024 |
|
|
For the Three Months Ended September 30, 2023 |
|
||||||||||||||||||||||||||
Entity: |
|
Revenue |
|
|
Cost of |
|
|
Gross (loss) profit |
|
|
Gross |
|
|
Revenue |
|
|
Cost of |
|
|
Gross |
|
|
Gross |
|
||||||||
OSS |
|
$ |
6,460,290 |
|
|
$ |
(9,770,331 |
) |
|
$ |
(3,310,041 |
) |
|
|
-51.2 |
% |
|
$ |
5,500,159 |
|
|
$ |
(3,716,476 |
) |
|
$ |
1,783,683 |
|
|
|
32.4 |
% |
Bressner |
|
|
7,240,807 |
|
|
|
(5,648,504 |
) |
|
|
1,592,303 |
|
|
|
22.0 |
% |
|
|
8,248,004 |
|
|
|
(6,380,336 |
) |
|
|
1,867,668 |
|
|
|
22.6 |
% |
|
|
$ |
13,701,097 |
|
|
$ |
(15,418,835 |
) |
|
$ |
(1,717,738 |
) |
|
|
-12.5 |
% |
|
$ |
13,748,163 |
|
|
$ |
(10,096,812 |
) |
|
$ |
3,651,351 |
|
|
|
26.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
For the Nine Months Ended September 30, 2024 |
|
|
For the Nine Months Ended September 30, 2023 |
|
||||||||||||||||||||||||||
Entity: |
|
Revenue |
|
|
Cost of |
|
|
Gross |
|
|
Gross |
|
|
Revenue |
|
|
Cost of |
|
|
Gross |
|
|
Gross |
|
||||||||
OSS |
|
$ |
17,516,196 |
|
|
$ |
(17,557,395 |
) |
|
$ |
(41,199 |
) |
|
|
-0.2 |
% |
|
$ |
22,408,841 |
|
|
$ |
(15,082,160 |
) |
|
$ |
7,326,681 |
|
|
|
32.7 |
% |
Bressner |
|
|
22,038,017 |
|
|
|
(16,658,000 |
) |
|
|
5,380,017 |
|
|
|
24.4 |
% |
|
|
25,332,748 |
|
|
|
(19,139,378 |
) |
|
|
6,193,370 |
|
|
|
24.4 |
% |
|
|
$ |
39,554,213 |
|
|
$ |
(34,215,395 |
) |
|
$ |
5,338,818 |
|
|
|
13.5 |
% |
|
$ |
47,741,589 |
|
|
$ |
(34,221,538 |
) |
|
$ |
13,520,051 |
|
|
|
28.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
30
Revenue
For the three months ended September 30, 2024, our total revenue decreased $47,066, or 0.3%, as compared to the same period in 2023. OSS saw an increase in revenue of $960,131, or 17.5%, as compared to the same period in 2023. The primary contributor to this increase were initial shipments on a government contract for a mobile application. Bressner experienced a decrease of $1,007,197, or 12.2%, as compared to the same period in 2023 as a result of economic constraints in the marketplace.
For the nine months ended September 30, 2024, our total revenue decreased $8,187,376, or 17.2%, as compared to the same period in 2023. OSS saw a decrease in revenue of $4,892,645, or 21.8%, as compared to the same period in 2023. The primary contributor to this reduction is a reduction of approximately $4.8 million in sales to a former media and entertainment customer with which we no longer have as a customer. This relationship was terminated in the second quarter of the prior year. Bressner experienced a decrease of $3,294,731, or 13.0%, as compared to the same period in 2023 as a result of a slowdown in the economy in Germany.
Cost of revenue and gross (loss) profit
Cost of revenue increased $5,322,023, or 52.70%, for the three months ended September 30, 2024, as compared to the same period in 2023. OSS saw an increase in cost of revenue of $6,053,855, or 162.9%, as compared to the same period in 2023. This increase in cost of revenue is mainly attributable to an additional allowance for inventory obsolescence of $6,099,259. Bressner’s cost of revenue decreased $731,832, or 11.5%, as compared to the same period in 2023, due to reduced overall sales due to a difficult economy.
The overall gross margin percentage was negative 12.5% for the three months ended September 30, 2024 and on an adjusted basis 32.0% after backing out the impact of the adjustment for the write down of inventory of $6,099,259. OSS’ gross margin percentage for the three months ended September 30, 2024, was negative 51.2%, a reduction of 83.6 percentage points as compared to the prior year period in 2023 of 32.4%, due to an additional inventory allowance charge of $6,099,259 for obsolescence. Excluding this obsolescence charge to cost of revenue, the gross margin would have been 43.2% as compared to that of the prior year period in 2023 of 32.4%. Bressner contributed gross margin at a rate of 22.0%, as compared to the same period in 2023 of 22.6%, a decrease of 0.6 percentage points, due to product mix as compared to the same 2024 period and an additional inventory reserve of $122,530.
Cost of revenue decreased $6,143, or 0.02%, for the nine months ended September 30, 2024, as compared to the same period in 2023. OSS saw an increase in cost of revenue of $2,475,235, or 16.4%, as compared to the same period in 2023. This increase in cost of revenue is mainly attributable to a significant increase in the reserve for obsolete inventory for the nine month period ended September 30, 2024 of $5,841,644 as compared to the prior year. Bressner’s cost of revenue decreased $2,481,378, or 13.0%, as compared to the same period in 2023, due to reduced overall sales due to a difficult economy and a reduction of additional sales attributable to project based related business.
The overall gross margin percentage was 13.5% for the nine months ended September 30, 2024, or 28.9%, after backing out the impact of the adjustment for the write down of inventory of $6,099,259. OSS’ gross margin percentage for the nine months ended September 30, 2024, was negative 0.2%, a reduction of 32.9 percentage points as compared to the prior year period in 2023 of 32.7%, due to the additional charge for obsolescence. Excluding the obsolescence charge to cost of revenue, the gross margin on an adjusted basis would have been 34.6% as compared to that of the prior year period in 2023 of 32.7%. Bressner contributed gross margin at a rate of 24.4%, as compared to the same period in 2023 of 24.4%, consistent with the prior year.
Operating expenses
General and administrative expense
General and administrative expense increased $121,372, or 6.3%, for the three months ended September 30, 2024, as compared to the same period in 2023. OSS experienced an increase of $167,361, or 11.5%. The increase in general and administrative expense is primarily attributable to increased salaries and stock compensation expense. Bressner had a decrease of $45,989, or 9.6%, as a result of an organization realignment. Overall, total general and administrative expense increased as a percentage of revenue to 15% for the three months ended September 30, 2024, as compared to 14.1% during the same period in 2023.
31
General and administrative expense decreased $734,894, or 10.1%, for the nine months ended September 30, 2024, as compared to the same period in 2023. OSS experienced a decrease of $546,065, or 9.3%. The decrease in general and administrative expense is primarily attributable to the elimination of costs associated with our organizational restructuring and outside professional services in 2023. Bressner had a decrease of $188,829, or 13.3%, as a result of an organization realignment. Overall, total general and administrative expense increased as a percentage of revenue to 16.6% for the nine months ended September 30, 2024, as compared to 15.3% during the same period in 2023.
Impairment of goodwill
During September 2023, the Company took an additional write-down of $2,930,788 as a result of the overall financial performance of OSS as compared to plan, the transition of and focus on our product strategy on AI Transportables and the defense industry deferment of certain orders. Total goodwill impairment loss for the nine month period ended September 30, 2023 was $5,630,788. There was no such impairment charge in 2024.
Marketing and selling expense
Marketing and selling expense increased $295,719, or 17.3%, for the three months ended September 30, 2024, as compared to the same period in 2023. OSS had an increase of $149,132, or 11.5%, due to an increase in tradeshows and personnel. Bressner had an increase of $146,587, or 35.1%, primarily resulting from the addition of new marketing and program management personnel and sales collateral material. Overall, total marketing and selling expense increased as a percentage of revenue to 14.7% during the three months ended September 30, 2024, as compared to 12.5% during the same period in 2023.
Marketing and selling expense increased $1,200,314, or 24.1%, for the nine months ended September 30, 2024, as compared to the same period in 2023. OSS had an increase of $657,733, or 17.6%, due to an increase in tradeshows and personnel. Bressner had an increase of $542,581, or 43.6%, primarily resulting from the addition of new marketing and program management personnel and sales collateral material. Overall, total marketing and selling expense increased as a percentage of revenue to 15.6% during the nine months ended September 30, 2024, as compared to 10.4% during the same period in 2023.
Research and development expense
Research and development expense decreased $103,479, or 9.8%, for the three months ended September 30, 2024, as compared to the same period in 2023. OSS saw a decrease of $125,511, or 13.7%. The decrease was largely driven by engineering resources being deployed on chargeable projects, which costs are reclassified as a component of costs of sales. Bressner experienced an increase of $22,032, or 16.3%, due to additional personnel and overhead costs. Overall, total research and development expense as a percentage of revenue decreased as a percentage of revenue to 6.9% during the three months ended September 30, 2024, as compared to 7.7% during the same period in 2023.
Research and development expense decreased $356,978, or 11.1%, for the nine months ended September 30, 2024, as compared to the same period in 2023. OSS saw a decrease of $444,078, or 15.7%. The decrease was largely driven by engineering resources being deployed on chargeable projects, which costs are reclassified as a component of costs of sales. Bressner experienced an increase of $87,100, or 23.4%, due to additional personnel and overhead costs. Overall, total research and development expense as a percentage of revenue increased as a percentage of revenue to 7.2% during the nine months ended September 30, 2024, as compared to 6.7% during the same period in 2023.
Interest income
Interest income decreased $53,824 for the three months ended September 30, 2024, as compared to the same period in 2023. The decrease is attributable to lower investment balances, partially offset by higher interest rates.
Interest income decreased $8,531 for the nine months ended September 30, 2024, as compared to the same period in 2023. The decrease is attributable to lower investment balances, partially offset by higher interest rates.
32
Interest expense
Interest expense decreased $15,003 for the three months ended September 30, 2024, as compared to the same period in 2023 due to declining borrowing balances.
Interest expense decreased $17,202 for the nine months ended September 30, 2024, as compared to the same period in 2023 due to declining borrowing balances.
Employee Retention Credit
For the three and nine month periods ended September 30, 2023, the Company received a government provided ERC for the retention of employees during the COVID-19 pandemic during the years of 2020 and 2021, in the amount of $488,348 less commissions of $69,862 and $2,004,382 less commission of $287,655, respectively.
Other income (expense), net
Other income (expense), for the three months ended September 30, 2024, resulted in net other expense of $14,402 as compared to net other income of $13,035, in the same period in 2023, for a net decrease in other income of $27,437 attributable to changes in foreign currency gain and losses.
Other income (expense), for the nine months ended September 30, 2024, resulted in net other income of $14,707 as compared to net other income of $24,649, in the same period in 2023, for a net increase in other income of $9,942 attributable to gains on foreign currency transactions.
Provision for income taxes
We have recorded an income tax provision of $167,086 and $226,967, respectively, for the three months ended September 30, 2024 and 2023 and $569,382 and $885,332, respectively, for the nine months ended September 30, 2024 and 2023. The effective tax rate for the nine months ended September 30, 2024 and 2023, differed from the statutory rate mainly due to permanent non-deductible goodwill amortization for Bressner, change in valuation allowance, deductions related to expenses of OSS stock options, research and development credits, and changes in reserves for uncertain tax positions, as well as projecting foreign and state tax liabilities for the year. The tax provision is predominately attributable to profit on operations in Germany.
Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization requirement increases our deferred tax assets and the related valuation allowance and may have an impact on payment of tax liabilities. The effective tax rate for the nine months ended September 30, 2024, was 29.4%, as compared to 28.5% in the prior period in 2023.
Liquidity and Capital Resources
Historically, our primary sources of liquidity have been provided by public and private offerings of our securities and revenues generated from our business operations. As of September 30, 2024, we had total cash and cash equivalents of $9,402,608, with short-term investments of $3,180,213, and total working capital of $26,676,256. Cash and cash equivalents held by Bressner totaled US$3,196,163 on September 30, 2024. Bressner’s debt covenants do not permit the use of those funds by its parent company.
During the nine month period ended September 30, 2024, we had a loss from operations of $10,250,905, with cash provided by operating activities of $2,143,545. During the year ended December 31, 2023, we had a loss from operations of $7,923,135, with cash used by operating activities of $439,679.
Our sources of liquidity and cash flows are used to fund ongoing operations, fund research and development projects for new products technologies and provide ongoing support services for our customers. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our business. We cannot provide assurances that additional financing will be available to us at any required time and on commercially reasonable terms, if at all.
33
As of September 30, 2024, economists are suggesting that the economy is beginning to improve and will result in a soft landing. We intend to continue to monitor the effects of inflation, global supply chain shortages and the economic conditions, and, if appropriate, we may alter our plans to address such concerns as they may arise.
Management’s plans are to focus on acquiring new customer orders to replace lost revenue attributable to our previous media customer, to continue our efforts towards responding to the changing economic landscape, including significant inflation, both domestically and internationally, foreign currency exchange rates, a potential recession in the U.S. and/or Germany, the high Federal Reserve and European Central Bank interest rates, supply chain constraints and international conflicts, by continuing to control hiring and operating costs, conserve cash, and continual focus on improving margin.
Management expects these actions and continued diligence towards limiting cost growth and expense containment will provide long-term sustainability. Management is also committed to conserving cash and securing debt and/or equity financing, as required, for liquidity to meet our cash requirements through at least the next twelve months.
In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 from its bank, which was renewed in September 2024 and will expire in September 2026 at the current prime rate. To access this line of credit, the Company must maintain a minimum cash balance of $2,500,000 with the bank and maintain a maximum debt to tangible net worth of ratio of 1.00 to 1.00. The line of credit is also collateralized by the assets of the Company. No balance was outstanding on September 30, 2024 and December 31, 2023, respectively. Although the Company has not drawn down on the line of credit to date, it may choose to do so in the future.
Additionally, in August 2023, we filed a registration statement on Form S-3 (Registration No. 333-274073) with the SEC, which became effective on August 25, 2023, and allows us to offer and sell up to an aggregate of $100,000,000 of our common stock, preferred stock, debt securities, warrants to purchase our common stock, preferred stock or debt securities, subscription rights to purchase our common stock, preferred stock or debt securities and/or units consisting of some or all of these securities, in any combination, together or separately, in one or more offerings, in amounts, at prices and on the terms that we will determine at the time of the offering and which will be set forth in a prospectus supplement and any related free writing prospectus. In the event that we need additional financing, we may choose to consummate an offering of our securities under the registration statement on S-3 in order to raise capital.
As a result of management’s commitment to controlling costs, conserving cash, and our potential sources of liquidity, as well as management’s most recent cash flow forecasts, management believes that we have sufficient liquidity to satisfy our anticipated working capital requirements for our ongoing operations and obligations for at least the next twelve months. However, there can be no assurance that management’s efforts will be effective or the forecasted cash flows will be achieved. Furthermore, we will continue to evaluate our capital expenditure needs based upon various factors, including but not limited to, our sales from operations, growth rate, the timing and extent of spending to support development efforts, the expansion of our sales and marketing efforts, the timing of new product introductions, and the continuing market acceptance of our products and services.
If cash generated from operations is insufficient to satisfy our capital requirements, we may borrow up to $2,000,000 from our revolving line of credit with our bank (subject to satisfaction of certain borrowing conditions), may have to sell additional equity or debt securities, or may obtain expanded credit facilities to fund our operating expenses, pay our obligations, diversify our geographical reach, and grow the Company. In the event such financing is needed in the future, there can be no assurance that such financing will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional financing were obtained, then management would consider restructuring the Company in a way to preserve its business while maintaining expenses within operating cash flows.
34
The following table summarizes our cash flows for the nine month periods ended September 30, 2024 and 2023:
|
|
For the Nine Months Ended September 30, |
|
|||||
Cash flows: |
|
2024 |
|
|
2023 |
|
||
Net cash provided by operating activities |
|
$ |
2,143,545 |
|
|
$ |
225,469 |
|
Net cash provided by investing activities |
|
$ |
4,293,263 |
|
|
$ |
298,401 |
|
Net cash (used in) provided by financing activities |
|
$ |
(1,144,189 |
) |
|
$ |
135,403 |
|
|
|
|
|
|
|
|
||
Operating Activities
During the nine month period ended September 30, 2024, we generated $2,143,545 in cash from operating activities, an increase of $1,918,076 when compared to the cash provided by operating activities of $225,469 during the same period in 2023.
The change in cash provided by operating activities during the nine month period ended September 30, 2024, as compared to the same period in 2023, is primarily a result of three components comprised of (i) an increase in net loss of $4,060,935 to $10,499,551 in the current year period, from a net loss of $6,438,616 in the prior year period; (ii) net favorable adjustments in the current period for non-cash items of $471,748, which were comprised of $8,187,318 of favorable non-cash items, offset by $7,715,570 of negative non-cash items that did not affect operating cash flow; and (iii) cash provided by changes in working capital items of $5,507,263.
Cash provided by changes in working capital for the nine month period ended September 30, 2024, was $3,296,266 as compared to the prior year period uses in working capital of $2,210,997. The net change in cash provided by changes in working capital items during the comparative periods was $5,507,263.
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 nine month period ended September 30, 2024, the Company generated cash of $4,293,263 from investing activities, as compared to $298,401 provided by investing activities during the prior year period in 2023, a net increase of $3,994,862. This change is attributable to an increase in the number of short-term investments redeemed in the current period as compared to the prior period.
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 nine month period ended September 30, 2024, the Company used $1,144,189 in cash for debt service payments on Bressner borrowings and payment of tax on the net exercise of vested RSUs, while generating $237,748 from the exercise of options. During the same period in 2023, the Company generated $135,403 from comparable items, for a difference of $1,279,592 in the current period as compared to the prior period.
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. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.
We are continuing to experience delays in funding for customer projects, delays in delivery schedules based upon customer requirements and an extended sales cycle. Additionally, certain of our customers are experiencing downturns or uncertainty in their own business operations and revenue, including one customer that declared
35
bankruptcy in 2023, and as a result there is an increased risk that these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts.
During the nine months ended September 30, 2024, and the year ended December 31, 2023, the Company experienced delays and postponements of purchases and orders due to certain customers’ funding or program delays. We have also experienced cancellations of orders due to disruptions in our customers’ businesses or changes in their business plans. Such delays, postponements and cancellations could negatively impact the Company’s results of operations for the year ending December 31, 2024. If such decreases in orders, postponements or cancellations continue in the future, our operating results will be further impacted, and our revenues may decline in future periods.
With the Company's shifted focus to the development and sale of AI Transportables, we have significantly increased our efforts to penetrate the military and defense sectors, which typically have protracted sales cycles, significant contracting requirements, and multi-year deliverables. With the hiring of a new president and chief executive officer and new vice president of sales in mid-2023, as well as a new chief financial officer effective as of November 11, 2024, each of whom has extensive experience in contracting in the defense industry, we have further increased our emphasis and focus on the pursuit of revenue opportunities with major defense contractors and the military. We have recently reviewed our existing pipeline and have made adjustments to reflect the procurement habits and timing of the military and defense sector. We have also added relevant defense market experience to our board of directors through the appointment of Mr. Knowles, Vice Admiral Dumont and Mitch Herbets as directors. We believe that these changes will allow us to further penetrate the defense sector and enhance our business strategies with respect to this target market.
The world continues to be affected by the ongoing conflicts between Russia and Ukraine and in the Middle East and economic uncertainty, amongst other things. Component shortages and increased lead times on materials sourced from Taiwan, coupled with rising political tensions in Taiwan, resulted in supply chain delays and shortages that negatively impacted the Bressner business during the most recent quarter, and could continue to negatively impact our business in the near term. Additionally, it is possible that U.S. policy changes and uncertainty about such changes, including changes and uncertainty as a result of the upcoming U.S. presidential election, could increase market volatility and currency exchange rate fluctuations. These factors, amongst other things, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.
We believe that the need for improved productivity in the research and development activities directed toward developing new products and/or software will continue to result in increasing adoption of high-performance computers and interconnect technologies such as those we produce. New product and/or software developments in the specialized compute-business segment could result in increased revenues and earnings if they are accepted by our markets; however, there can be no assurances that new products and/or software will result in significant improvements to revenues or earnings. For competitive reasons, we do not disclose all our new product development activities.
Additionally, 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 have recently experienced some and, continue to feel, the effects due to inflation in both the U.S. and Europe. Although the Company attempts to pass on increases in raw material, labor, energy and fuel-related costs to our customers, the Company’s ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Company’s products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be fully recovered. These increasing costs are being aggressively managed by the Company and actions are being taken to minimize the impact to the
36
Company, particularly in the purchase of inventories to minimize price increases. Inflation affects the Company’s manufacturing costs, distribution costs and operating expenses.
Off balance sheet arrangements
We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity.
We do not have any majority-owned subsidiaries that are not consolidated in the financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose entities.
Stockholder transactions
See Note 8 to the accompanying consolidated financial statements for a discussion regarding our stockholder transactions for the relevant periods.
Critical accounting policies and estimates
In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and our historical experience.
Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2023.
On November 27, 2023, the FASB issued ASU 2023-07 "Segment Reporting (Topic 280): Improvements to reportable segment disclosures." This amendment enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The purpose of the amendments is to enable “investors to better understand an entity’s overall performance” and assess “potential future cash flows.” The adoption of this amendment is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. We do not anticipate any material impact on the consolidated financial statements.
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. Both the Federal Reserve and European Central Bank have increased interest rates from historic levels over the last two years. Although the Federal Reserve cut interest rates by 50 basis points in September 2024, the current rate remains higher than historical rates and there can be no assurances that further cuts will be made in the near term.
Concentration of credit risk
At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation (“SIPC”), both of which provide basic deposit coverage with limits up to $250,000 per owner. As of September 30, 2024, the Company had $2,785,706 of cash in our accounts that exceeded the insurance limits. The Company has not experienced any losses
37
in these accounts and believes that the financial institutions at which such amounts are held are stable; however, no assurances can be provided. In Germany, the deposit insurance is €100,000 per bank, per customer. Bressner has funds on deposit in both Euro and U.S. dollar denominations of €2,457,160 (US$2,737,991) with banks in excess of the insurance limits.
We provide credit to our customers in the normal course of business. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary.
Foreign currency risk
We operate in the United States and Germany. Our primary reporting currency is the United States dollar. Foreign sales of products and services are primarily denominated in U.S. dollars. We also conduct business outside the United States through Bressner, our foreign subsidiary in Germany, where business is largely transacted in non-U.S. dollar currencies, particularly the Euro, which is subject to fluctuations due to changes in foreign currency exchange rates. Accordingly, we are subject to exposure from changes in the exchange rates of local currencies. Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations.
OSS GmbH operates as an extension of OSS’ domestic operations and acquired Bressner in October 2018. The functional currency of OSS GmbH is the Euro. Transactions denominated in currencies other than the functional currency are remeasured in the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, monetary assets and liabilities are translated using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Consequently, changes in the exchange rates of the currencies may impact the translation of the foreign subsidiaries’ statements of operations into U.S. dollars, which may in turn affect our consolidated statement of operations. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income in the consolidated statement of comprehensive income.
Derivative Financial Instruments
We employ derivatives on a periodic basis to manage certain market risks through the use of foreign exchange forward contracts. We do not use derivatives for trading or speculative purposes. Our derivatives are designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we may enter into foreign exchange contracts to provide currency at a fixed rate. The Company is currently not a party to any of these types of transactions.
Non-GAAP Financial Measures
Adjusted EBITDA
We believe that the use of adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, is helpful for an investor to assess the performance of the Company. The Company defines adjusted EBITDA as income (loss) before interest, taxes, depreciation, amortization, acquisition expenses, impairment of long-lived assets, financing costs, fair value adjustments from purchase accounting, stock-based compensation expense and expenses related to discontinued operations.
Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles in the United States, or GAAP. Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company’s non-cash operating expenses, we believe that providing a non-GAAP financial measure that excludes non-cash and non-recurring expenses allows for meaningful comparisons between our core business operating results and those of other companies, as well as providing us with an important tool for financial and operational decision making and for evaluating our own core business operating results over different periods of time.
38
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 September 30, |
|
|
For the Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net loss |
|
$ |
(6,815,384 |
) |
|
$ |
(3,638,608 |
) |
|
$ |
(10,499,551 |
) |
|
$ |
(6,438,616 |
) |
Depreciation |
|
|
252,142 |
|
|
|
271,245 |
|
|
|
815,420 |
|
|
|
813,773 |
|
Amortization of right-of-use assets |
|
|
(10,739 |
) |
|
|
91,607 |
|
|
|
32,373 |
|
|
|
52,800 |
|
Stock-based compensation expense |
|
|
458,011 |
|
|
|
518,680 |
|
|
|
1,423,949 |
|
|
|
1,890,897 |
|
Interest expense |
|
|
16,465 |
|
|
|
31,468 |
|
|
|
70,910 |
|
|
|
88,112 |
|
Interest income |
|
|
(116,596 |
) |
|
|
(170,420 |
) |
|
|
(376,940 |
) |
|
|
(385,471 |
) |
Impairment of goodwill |
|
|
- |
|
|
|
2,930,788 |
|
|
|
- |
|
|
|
5,630,788 |
|
Employee retention credit (ERC) |
|
|
- |
|
|
|
(418,486 |
) |
|
|
- |
|
|
|
(1,716,727 |
) |
Provision for income taxes |
|
|
167,086 |
|
|
|
226,967 |
|
|
|
569,382 |
|
|
|
885,332 |
|
Adjusted EBITDA |
|
$ |
(6,049,015 |
) |
|
$ |
(156,759 |
) |
|
$ |
(7,964,457 |
) |
|
$ |
820,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
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.
39
The following table reconciles non-GAAP net loss and basic and diluted earnings per share:
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net loss |
|
$ |
(6,815,384 |
) |
|
$ |
(3,638,608 |
) |
|
$ |
(10,499,551 |
) |
|
$ |
(6,438,616 |
) |
Amortization of intangibles |
|
|
- |
|
|
|
10,538 |
|
|
|
- |
|
|
|
42,154 |
|
Impairment of goodwill |
|
|
- |
|
|
|
2,930,788 |
|
|
|
- |
|
|
|
5,630,788 |
|
Employee retention credit (ERC) |
|
|
- |
|
|
|
(418,486 |
) |
|
|
- |
|
|
|
(1,716,727 |
) |
Stock-based compensation expense |
|
|
458,011 |
|
|
|
518,680 |
|
|
|
1,423,949 |
|
|
|
1,890,897 |
|
Non-GAAP net loss |
|
$ |
(6,357,373 |
) |
|
$ |
(597,088 |
) |
|
$ |
(9,075,602 |
) |
|
$ |
(591,504 |
) |
Non-GAAP net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
(0.30 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.43 |
) |
|
$ |
(0.03 |
) |
Diluted |
|
$ |
(0.30 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.43 |
) |
|
$ |
(0.03 |
) |
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
21,049,270 |
|
|
|
20,569,111 |
|
|
|
20,897,324 |
|
|
|
20,407,284 |
|
Diluted |
|
|
21,049,270 |
|
|
|
20,569,111 |
|
|
|
20,897,324 |
|
|
|
20,407,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
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 Nine Months Ended September 30, |
|
|||||
Cash flow: |
|
2024 |
|
|
2023 |
|
||
Net cash provided by operating activities |
|
$ |
2,143,545 |
|
|
$ |
225,469 |
|
Capital expenditures |
|
|
(298,789 |
) |
|
|
(374,464 |
) |
Free cash flow |
|
$ |
1,844,756 |
|
|
$ |
(148,995 |
) |
|
|
|
|
|
|
|
||
40
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, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on our management’s evaluation (based upon 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at a reasonable assurance level as of the end of the period covered by this Quarterly Report.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2024, the Company modified and improved the process and procedures surrounding the authorization for the purchasing of inventory through creation of a weekly Sales & Operational Planning meeting ("S&OP") to rationalize future purchases of inventory consistent with our revenue pipeline. In addition, we have increased the scrutiny, and improved the process and procedures to include more input from multiple departments with respect to the identification of obsolete and slow-moving inventory to improve our internal control over financial reporting during the quarter ended September 30, 2024. The foregoing matters, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
41
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
For a description of our material pending legal proceeding, please see Note 9, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.
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, 2023, 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.
Rule 10b5-1 Trading Plans
During the three months ended
Item 6. Exhibits.
42
Exhibit Index
Exhibit Number |
|
Exhibit Description |
|
Form |
|
File No. |
|
Exhibit |
|
Filing Date |
|
Filed Herewith |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
Certificate of Amendment to the Amended and Restated Bylaws of the Company, dated April 7, 2023. |
|
8-K |
|
001-38371 |
|
3.1 |
|
April 7, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.4 |
|
|
8-K |
|
001-38371 |
|
3.1 |
|
August 13, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1 |
|
|
8-K |
|
001-38371 |
|
10.1 |
|
November 6, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1 |
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2 |
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
101 INS |
|
Inline XBRL Instance Document with Embedded Linkbase Documents |
|
|
|
|
|
|
|
|
|
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
101 SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
|
|
|
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 attachments) |
|
|
|
|
|
|
|
|
|
** |
* Furnished herewith
** 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.
44
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: November 6, 2024 |
|
By: |
/s/ Michael Knowles |
|
|
|
Michael Knowles |
|
|
|
President and Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
Date: November 6, 2024 |
|
By: |
/s/ John W. Morrison Jr. |
|
|
|
John W. Morrison Jr. |
|
|
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
45