10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ________________

Commission File Number: 001-38371

One Stop Systems, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	33-0885351
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2235 Enterprise Street #110

Escondido, California 92029

(Address of principal executive offices, including Zip Code)

(760) 745-9883

(Registrant’s telephone number, including area code)

(Former name, former address, and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol	Name of exchange on which registered
Common Stock, $0.0001 par value per share	OSS	The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 31, 2023, the registrant had 20,543,024 shares of common stock (par value $0.0001) outstanding.

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets	4
	Unaudited Consolidated Statements of Operations	5
	Unaudited Consolidated Statements of Comprehensive (Loss) Income	6
	Unaudited Consolidated Statement of Stockholders’ Equity	7
	Unaudited Consolidated Statements of Cash Flows	9
	Notes to Unaudited Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
	Signatures	47

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

In our opinion the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented. We have presented financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these unaudited consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the unaudited consolidated financial statements were issued by filing with the SEC.

This Quarterly Report on Form 10-Q for the three and six month periods ended June 30, 2023 (this "Quarterly Report"), should be read in conjunction with our audited financial statements for the year ended December 31, 2022, included in our Annual Report on Form 10-K, filed with the SEC on March 23, 2023.

The results of operations for the three and six month periods ended June 30, 2023, are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023.

3

ONE STOP SYSTEMS, INC. (OSS)

CONSOLIDATED BALANCE SHEETS

	Unaudited			Audited
	June 30,			December 31,
	2023			2022
ASSETS
Current assets
Cash and cash equivalents	$	6,100,317		$	3,112,196
Short-term investments (Note 3)		9,321,456			10,123,535
Accounts receivable, net (Note 4)		9,225,346			11,327,244
Inventories, net (Note 5)		21,463,925			20,775,366
Prepaid expenses and other current assets		1,231,609			502,156
Total current assets		47,342,653			45,840,497
Property and equipment, net		2,432,900			2,570,124
Operating lease right-of use assets		569,296			731,043
Deposits and other		48,093			60,243
Goodwill		4,420,510			7,120,510
Intangible assets, net (Note 6)		10,538			42,154
Total Assets	$	54,823,990		$	56,364,571
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	2,811,093		$	4,592,713
Accrued expenses and other liabilities (Note 7)		4,987,695			3,013,869
Current portion of operating lease obligation (Note 10)		583,675			536,588
Current portion of notes payable (Note 8)		3,012,945			2,952,447
Total current liabilities		11,395,408			11,095,617
Long-term debt, net of current portion (Note 8)		-			409,294
Deferred tax liability, net		136,746			138,662
Operating lease obligation, net of current portion (Note 10)		148,830			397,249
Total liabilities		11,680,984			12,040,822
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock, $0.0001 par value; 50,000,000 shares authorized;    20,543,024 and 20,084,528 shares issued and outstanding, respectively		2,053			2,008
Additional paid-in capital		46,404,428			45,513,807
Accumulated other comprehensive income		1,239,084			510,485
Accumulated deficit		(4,502,559	)		(1,702,551	)
Total stockholders’ equity		43,143,006			44,323,749
Total Liabilities and Stockholders' Equity	$	54,823,990		$	56,364,571

See accompanying notes to unaudited consolidated financial statements

4

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022
Revenue	$	17,211,532		$	18,303,343		$	33,993,426		$	35,356,020
Cost of revenue		12,413,594			13,103,025			24,124,726			25,015,047
Gross profit		4,797,938			5,200,318			9,868,700			10,340,973
Operating expenses:
General and administrative		3,072,880			1,821,445			5,357,981			3,596,133
Impairment of goodwill		2,700,000			-			2,700,000			-
Marketing and selling		1,483,965			1,724,913			3,270,646			3,196,633
Research and development		954,650			1,252,037			2,149,978			2,496,152
Total operating expenses		8,211,495			4,798,395			13,478,605			9,288,918
(Loss) income from operations		(3,413,557	)		401,923			(3,609,905	)		1,052,055
Other income (expense), net:
Interest income		104,785			55,507			215,051			106,512
Interest expense		(23,939	)		(44,949	)		(56,644	)		(103,665	)
Employee retention credit (ERC) (Note 2)		1,298,241			-			1,298,241			-
Other income (expense), net		31,837			(4,169	)		11,614			97,952
Total other income, net		1,410,924			6,389			1,468,262			100,799
Income before income taxes		(2,002,633	)		408,312			(2,141,643	)		1,152,854
Provision for income taxes		396,863			85,490			658,365			250,798
Net (loss) income	$	(2,399,496	)	$	322,822		$	(2,800,008	)	$	902,056
Net (loss) income per share:
Basic	$	(0.12	)	$	0.02		$	(0.14	)	$	0.05
Diluted	$	(0.12	)	$	0.02		$	(0.14	)	$	0.04
Weighted average common shares    outstanding:
Basic		20,397,741			19,940,902			20,325,029			19,416,832
Diluted		20,397,741			21,180,490			20,325,029			20,346,917

See accompanying notes to unaudited consolidated financial statements

5

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022
Net (loss) income	$	(2,399,496	)	$	322,822		$	(2,800,008	)	$	902,056
Other comprehensive income (loss):
Net unrealized income (loss) on short-term investments		(13,078	)		4,577			867			(1,419	)
Currency translation adjustment		388,642			(168,384	)		727,732			(218,750	)
Total other comprehensive income (loss)		375,564			(163,807	)		728,599			(220,169	)
Comprehensive (loss) income	$	(2,023,932	)	$	159,015		$	(2,071,409	)	$	681,887

See accompanying notes to unaudited consolidated financial statements

6

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2023

	Common Stock							Accumulated Other			Accumulated			Total
	Shares		Amount		Additional Paid-in-Capital			Comprehensive income			(Deficit) Earnings			Stockholders' Equity
Balance, January 1, 2023		20,084,528	$	2,008	$	45,513,807		$	510,485		$	(1,702,551	)		44,323,749
Stock-based compensation		-		-		474,209			-			-			474,209
Exercise of stock options, RSU's and warrants		274,591		27		(27	)		-			-			-
Taxes paid on net issuance of employee stock options		-		-		(326,534	)		-			-			(326,534	)
Currency translation adjustment		-		-		-			339,090			-			339,090
Net unrealized gain on short-term investments		-		-		-			13,945			-			13,945
Net loss		-		-		-			-			(400,512	)		(400,512	)
Balance, March 31, 2023		20,359,119	$	2,035	$	45,661,455		$	863,520		$	(2,103,063	)	$	44,423,947
Stock-based compensation		-		-		898,008			-			-			898,008
Exercise of stock options, RSU's and warrants		183,905		18		51,031			-			-			51,049
Taxes paid on net issuance of employee stock options		-		-		(206,066	)		-			-			(206,066	)
Currency translation adjustment		-		-		-			388,642			-			388,642
Net unrealized gain on short-term investments		-		-		-			(13,078	)		-			(13,078	)
Net loss		-		-		-			-			(2,399,496	)		(2,399,496	)
Balance, June 30, 2023		20,543,024	$	2,053	$	46,404,428		$	1,239,084		$	(4,502,559	)	$	43,143,006

See accompanying notes to unaudited consolidated financial statements

7

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2022

	Common Stock							Accumulated Other						Total
	Shares		Amount		Additional Paid-in-Capital			Comprehensive Income			Accumulated Earnings / (Deficit)			Stockholders' Equity
Balance, January 1, 2022		18,772,214	$	1,877	$	41,232,441		$	153,361		$	571,037		$	41,958,716
Adjustment to beginning retained for adoption of lease account (ASC 842)		-		-		-			-			(44,533	)		(44,533	)
Adjusted beginning balance, January 1, 2022		18,772,214	$	1,877	$	41,232,441		$	153,361		$	526,504		$	41,914,183
Stock-based compensation		-		-		382,828			-			-			382,828
Exercise of stock options, RSUs and warrants		105,969		10		29,660			-			-			29,670
Taxes paid on net issuance of employee stock options		-		-		(20,478	)		-			-			(20,478	)
Conversion of senior secured convertible debt to equity		1,036,365		104		2,590,805			-			-			2,590,909
Currency translation adjustment		-		-		-			(50,366	)		-			(50,366	)
Net unrealized gains (losses) on short-term investments		-		-		-			(5,996	)		-			(5,996	)
Net income		-		-		-			-			579,234			579,234
Balance, March 31, 2022		19,914,548	$	1,991	$	44,215,256		$	96,999		$	1,105,738		$	45,419,984
Stock-based compensation		-		-		532,636			-			-			532,636
Exercise of stock options, RSUs and warrants		94,337		10		2,548			-			-			2,558
Taxes paid on net issuance of employee stock options		-		-		(131,684	)		-			-			(131,684	)
Currency translation adjustment		-		-		-			(168,384	)		-			(168,384	)
Net unrealized gains on short-term investments		-		-		-			4,577			-			4,577
Net income		-		-		-			-			322,822			322,822
Balance, June 30, 2022		20,008,885	$	2,001	$	44,618,756		$	(66,808	)	$	1,428,560		$	45,982,509

See accompanying notes to unaudited consolidated financial statements

8

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months Ended June 30,
	2023			2022
Cash flows from operating activities:
Net (loss) income	$	(2,800,008	)	$	902,056
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Deferred benefit for income taxes		-			(1,648	)
(Gain) loss on disposal of property and equipment		(69,916	)		36,064
Provision (recovery) for bad debt		38,653			(5,524	)
Impairment of goodwill		2,700,000			-
Warranty reserves		(8,216	)		(35,465	)
Amortization of intangibles		31,616			31,616
Depreciation		510,912			492,604
Inventory reserves		386,998			158,697
Amortization of debt discount		-			1,224
Stock-based compensation expense		1,372,217			915,464
Employee retention credit (ERC)		(1,298,241	)		-
Changes in operating assets and liabilities:
Accounts receivable		2,526,139			(5,041,981	)
Inventories		(918,495	)		(8,962,525	)
Prepaid expenses and other current assets		(711,567	)		(508,546	)
Accounts payable		(1,806,057	)		4,429,156
Accrued expenses and other liabilities		2,094,899			12,453
Net cash provided by (used in) operating activities		2,048,934			(7,576,355	)
Cash flows from investing activities:
Redemption of short-term investment grade securities		802,945			2,895,285
Proceeds from sale of intangible assets		-			125,000
Purchases of property and equipment, including capitalization of labor    costs for test equipment and ERP		(299,891	)		(141,685	)
Net cash provided by investing activities		503,054			2,878,600
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		51,049			32,228
Payment of payroll taxes on net issuance of employee stock options		(532,600	)		(152,162	)
Proceeds on borrowing of notes payable		-			3,663,009
Repayments on notes payable		(403,115	)		(928,612	)
Employee Retention Credit Benefit		1,298,241			-
Net cash provided by financing activities		413,575			2,614,463
Net change in cash and cash equivalents		2,965,563			(2,083,292	)
Effect of exchange rates on cash		22,558			(143,051	)
Cash and cash equivalents, beginning of period		3,112,196			5,101,174
Cash and cash equivalents, end of period	$	6,100,317		$	2,874,831

See accompanying notes to unaudited consolidated financial statements

9

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

	For the Six Months Ended June 30,
	2023		2022
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	60,615	$	13,373
Cash paid during the period for income taxes	$	93,777	$	30,821
Supplemental disclosure of non-cash flow transactions:
Right of use assets recorded upon adoption of ASC 842	$	-	$	1,203,580
Lease liabilities recorded upon adoption of ASC 842	$	-	$	1,477,419
Conversion of senior secured convertible debt to common stock	$	-	$	2,590,909

See accompanying notes to unaudited consolidated financial statements

10

ONE STOP SYSTEMS, INC. (OSS)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Month Periods Ended June 30, 2023 and 2022

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Nature of Operations

One Stop Systems, Inc. (“we,” “our,” “OSS,” or the “Company”) was originally incorporated as a California corporation in 1999, after initially being formed as a California limited liability company in 1998. On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with its initial public offering. The Company designs, manufactures, and markets specialized high-performance compute and storage hardware, software, and systems, which are designed to target edge artificial intelligence (“AI”) Transportable deployments. The Company markets its products to manufacturers of automated equipment used for autonomous vehicle, medical, industrial, and military applications, with special focus on platforms that move, such as trucks, planes, and mobile datacenters.

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 June 1, 2020.

On October 31, 2018, OSS GmbH acquired 100% of the outstanding equity of Bressner Technology GmbH, a limited liability company registered under the laws of Germany and located near Munich, Germany (“OSS Europe”). OSS Europe designs and manufactures standard and customized servers, panel PCs, and PCIe accelerator systems. Although, currently, OSS Europe primarily serves as a value-added reseller for the Company in Europe, we are also focused on growing the AI Transportable portion of our business through OSS Europe and leveraging its existing relationships. OSS Europe also provides manufacturing, test, sales, and marketing services for customers throughout Europe, the Middle East and Africa.

As of June 30, 2023, the Company has completed and fulfilled substantially all of its orders associated with its long-term media and entertainment customer and does not anticipate significant business from this customer in the future. This resulted from an acceleration in such 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 is particularly true of their virtual products, which do not require the same level of ruggedization, as this system is not typically operated in harsh environments and for which software is being developed to provide a real-time cloud solution. This customer’s transition to cloud solutions had a negative impact on the Company’s results of operations for the three and six months ended June 30, 2023, and is expected to continue to have a negative impact on the Company’s results of operations for the near term.

As previously disclosed, in 2021, we shifted our primary focus to the development and sale of AI Transportables. Since 2022, we have significantly increased our efforts to penetrate the military and defense sectors in particular. With the formation of a new strategic advisory board in second quarter 2022, and the recent hiring of a new president and chief executive officer, who 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.

11

The lingering negative impacts of the COVID-19 pandemic and the impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the ongoing military conflict between Russia and Ukraine, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic uncertainty, which has negatively affected our operations. Additionally, during the first half of 2023, the general consensus among economists continued to suggest that a risk of recession will continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations.

We are continuing to experience increased pricing, longer lead-times, unavailability of certain product and limited supplies, protracted delivery dates, changes in minimum order quantities to secure product, and/or shortages of certain parts and supplies that are necessary components for the products and services we offer to our customers. As a result, the Company is continuing to carry increased inventory balances to ensure availability of necessary products and to secure pricing.

These global issues and concerns regarding general economic decline or recession are impacting our business as well as some of our customers, who are experiencing downturns or uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts. During the three and six months ended June 30, 2023, the Company experienced delays and postponements of committed 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 negatively impacted the Company’s results of operations for the three and six months ended June 30, 2023. 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.

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

In March 2023, Silicon Valley Bank and Signature Bank, and most recently on May 1, 2023, First Republic Bank, were closed and taken over by the FDIC, which created significant market disruption and uncertainty for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system in the United States, and in particular with respect to regional banks. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened and such events could have a material adverse effect on our business and financial condition.

As a result of these global issues, as well as other factors discussed in this Quarterly Report, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long-term impacts of the economic and geopolitical issues, inflation, the Federal Reserve interest rate increases and the potential for a recession. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause our stock price to decline.

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 diving and improve company-wide execution.

12

In February 2023, the Company announced that David Raun, the Company’s president and chief executive officer as of such date, would be stepping down, effective upon the appointment of his successor. In connection with the anticipated transition, on April 3, 2023, the Company and Mr. Raun entered into an Amended and Restated Employment Agreement (the “A&R Raun Agreement”), which superseded that certain Employment Agreement between the Company and Mr. Raun, dated June 24, 2020, as amended by that Amendment to Employment Agreement, dated July 15, 2020. The term of the A&R Raun Agreement commenced on April 3, 2023, and was to remain in effect until the earlier of (i) June 24, 2023 and (ii) the first date on which Mr. Raun’s successor commenced his or her employment as the chief executive officer of the Company, unless earlier terminated or extended pursuant to terms of the A&R Raun Agreement.

On May 16, 2023, the Company entered into an employment agreement with Michael Knowles, pursuant to which, effective June 5, 2023, Mr. Knowles began serving as president and chief executive officer and president of the Company. Consistent with prior disclosures and the terms and conditions of the A&R Raun Agreement, Mr. Raun stepped down as president and chief executive officer of the Company on June 5, 2023, and the A&R Raun Agreement automatically terminated pursuant to its terms.

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, 2022. Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, 2022 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements. The Company’s management has evaluated all subsequent events and transactions through the date of filing this Quarterly Report.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. Operating results for the three and six month periods ended June 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2023.

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 OSS Europe. 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, 2022, except for the adoption of ASU 2016-13, ("Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”) as follows:

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, which sets out the principles for the recognition of measurement of credit losses on financial instruments. This standard provides guidance on the impairment of financial instruments that is based on expected losses rather than probable or incurred losses. Under this new guidance, the Company will recognize, as an allowance, our estimate of expected credit losses based upon historical

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and current information, and reasonable and supportable forecasts of future events and circumstances, as well as estimates of prepayments. Under this model, we are required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset.

Accounts receivable have been reduced by an allowance for doubtful accounts. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable after considering current market conditions and supportable forecasts when appropriate. This estimate is a result of management's evaluation of collectability, customer creditworthiness, historical levels of credit losses, and future expectations.

The Company shall recognize an allowance for credit losses rather than a reduction to the carrying value of the asset for debt securities. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee.

Upon adoption of this standard on January 1, 2023, there was no immediate material impact to the Company's consolidated financial position, results of operations or cash flows. On an ongoing basis, the Company will contemplate forward-looking economic conditions in recording lifetime expected credit losses for the Company’s financial assets measured at cost, such as the Company’s trade receivables and certain short-term investments.

Use of Estimates

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

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

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. The Company reviews the impairment of goodwill for impairment annually at yearend. The Company completed its annual assessment for goodwill impairment and determined that goodwill is not impaired as of December 31, 2022 and no adjustment was required.

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

Due to the COVID-19 pandemic, Ukraine war, inflationary pressures, other macroeconomic factors, the loss of our media and entertainment customer (which has historically been one of our largest customers), 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.

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Recent Accounting Pronouncements

Management has evaluated recent accounting pronouncements through the date of these consolidated financial statements and believes that the are no recent accounting pronouncements that will have a material impact on the Company's financial statements.

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 provides 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 years 2020 and 2021. For the year 2020, the maximum credit is based upon the lesser of 50% of eligible wages or $5,000 for the year. For the first three quarters only of the year 2021, the maximum quarterly credit is based upon the lesser of 70% of eligible wages or $7,000 per quarter. The total maximum program credit per employee is $26,000.

The Company applied for the ERC program and as of June 30, 2023, has received $1,516,034 in credits, including interest, and paid commissions of $217,793 to a vendor who assisted with the calculations and filing of the application. The net proceeds of $1,298,241 have been reported as other income in the accompanying consolidated statements of operations. Income is recognized when reasonably assured of receipt based upon notice.

NOTE 3 - SHORT-TERM INVESTMENTS

The Company’s short-term investments by significant investment category as of June 30, 2023, were as follows:

Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	2,431,672	$	25,066	$	-		$	3,268	$	2,460,006
Certificates of deposit		6,806,683		-		(9,244	)		64,011		6,861,450
	$	9,238,355	$	25,066	$	(9,244	)	$	67,279	$	9,321,456

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

The Company’s short-term investments by significant investment category as of December 31, 2022, were as follows:

Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	5,139,940	$	22,646	$	-		$	3,506	$	5,166,092
Certificates of deposit		4,950,527		-		(7,691	)		14,607		4,957,443
	$	10,090,467	$	22,646	$	(7,691	)	$	18,113	$	10,123,535

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

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Cash alternatives represents 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 one issuer. The policy requires investments in fixed income instruments denominated and payable in U.S. dollars only and requires investments to be investment grade, with a primary objective of minimizing the potential risk of principal loss.

NOTE 4 -ACCOUNTS RECEIVABLE

Accounts receivable, net consisted of the following:

	June 30,			December 31,
	2023			2022
Accounts receivable	$	9,310,063		$	11,372,598
Less: allowance for doubtful accounts		(84,717	)		(45,354	)
	$	9,225,346		$	11,327,244

Provision (recovery) for bad debt expense related to accounts receivable was $8,653 and ($5,524) for the three month periods ended June 30, 2023 and 2022, respectively, and $38,653 and ($5,524) for the six month periods ended June 30, 2023 and 2022, respectively.

NOTE 5 – INVENTORIES

Inventories, net consisted of the following:

	June 30,			December 31,
	2023			2022
Raw materials	$	10,944,553		$	9,370,162
Sub-assemblies		849,968			892,123
Work-in-process		700,935			1,343,239
Finished goods		10,379,886			10,357,452
		22,875,342			21,962,976
Less: allowances for obsolete and slow-moving inventories		(1,411,417	)		(1,187,610	)
	$	21,463,925		$	20,775,366

NOTE 6 – LONG LIVED INTANGIBLE ASSETS

Definite lived intangible assets related to acquisition were as follows, as of June 30, 2023:

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	2 months	$	2,084,515	$	(2,073,977	)	$	10,538
Drawings and technology	36 months	0 months		760,207		(760,207	)		-
Trade name, trademarks & other	24 to 36 months	0 months		447,274		(447,274	)		-
Non-compete	36 months	0 months		246,797		(246,797	)		-
			$	3,538,793	$	(3,528,255	)	$	10,538

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Definite lived intangibles assets related to acquisitions were as follows, as of December 31, 2022:

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	8 months	$	2,084,515	$	(2,042,361	)	$	42,154
Drawings and technology	36 months	0 months		760,207		(760,207	)		-
Trade name, trademarks & other	24 to 36 months	0 months		447,274		(447,274	)		-
Non-compete	36 months	0 months		246,797		(246,797	)		-
			$	3,538,793	$	(3,496,639	)	$	42,154

Amortization expense recognized during the three month periods ended June 30, 2023 and 2022, was $15,808 and $15,807, respectively, and $31,616 and $31,616 for the six month periods ended June 30, 2023 and 2022, respectively.

NOTE 7 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consisted of the following:

	June 30,		December 31,
	2023		2022
Accrued compensation and related liabilities	$	1,383,311	$	989,478
Deferred revenue		286,955		378,952
Customer deposits		270,025		61,696
Warranty reserve		582,636		584,268
Trade and other taxes		1,148,261		225,743
Other accrued expenses		1,316,507		773,732
	$	4,987,695	$	3,013,869

NOTE 8 – DEBT

Bank Lines of Credit

In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 with Torrey Pines Bank which was renewed in April 2023, and renews on an annual basis at the current prime rate. To access this line of credit the Company must maintain cash and investments balances at a minimum of $4,000,000. No balance was outstanding on June 30, 2023 and December 31, 2022, respectively.

OSS Europe has three revolving lines of credit with German institutions, including Uni Credit Bank AG, Commerzbank AG, and VR Bank, with total availability of up to €2,200,000 (US$2,401,907) as of June 30, 2023. Borrowings under the lines of credit bear interest at a variable rate of Euribor plus a stated rate. The rates as of June 30, 2023, for the lines of credit ranged from 3.1% to 5.62%, with the balances remaining open indefinitely or until occurrence of a defined change of control event. There were no outstanding lines of credit balances as of June 30, 2023 and December 31, 2022, respectively.

Foreign Debt Obligations

OSS Europe had five term loans outstanding as of June 30, 2023, with an aggregate balance outstanding of €2,759,673 (US$3,012,945) as follows:

•On February 1, 2022, OSS Europe converted €500,000 of its line of credit from VR Bank into a note payable. On August 1, 2022, this note was extended through February 1, 2023, with accrued interest having been paid current as of the original maturity date. On February 1, 2023, this note was further extended through July 31, 2023, and the interest rate was increased to 4.76%, with accrued interest having been paid current as of February 1, 2023. The balance outstanding as of June 30, 2023, and December 31, 2022 was €500,000 (US$545,888) and €500,000 (US$536,616), respectively;

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•On February 16, 2022, OSS Europe converted €500,000 of its line of credit from UniCredit Bank into a note payable. On August 16, 2022, this note was extended through February 16, 2023, with accrued interest having been paid current as of the original maturity date. On February 16, 2023, this note was further extended through August 16, 2023, and the interest rate was increased to 4.70%, with accrued interest having been paid current as of February 16, 2023. The outstanding balance as of June 30, 2023 and December 31, 2022, was €500,000 (US$545,888) and €500,000 (US$536,616), respectively;

•On April 9, 2021, OSS Europe converted €500,000 of its line of credit from Commerzbank AG into a note payable. The note was due on September 30, 2021, with a payment of principal and interest due upon maturity. This loan was paid in full on September 30, 2021, with proceeds from a new note with similar terms. This new note had an original maturity date of June 30, 2022; however, on September 30, 2022, this note was further extended through March 31, 2023, with accrued interest having been paid current as of the revised maturity date. On March 30, 2023, this note was further extended through September 29, 2023, and the interest rate was increased to 4.60%, with accrued interest having been paid current as of March 30, 2023. The balance outstanding on the new note as of June 30, 2023 and December 31, 2022, was €500,000 (US$545,888), and €500,000 (US$536,616), respectively;

•On June 18, 2021, OSS Europe converted €500,000 of its line of credit from UniCredit Bank into a note payable. The note was originally due December 17, 2021, and subsequently extended through June 17, 2022. On June 17, 2022, this note was further extended through December 19, 2022, with accrued interest having been paid current as of the revised maturity date. On December 19, 2022, this note was further extended through June 19, 2023. However, on June 19, 2023, this note was further extended through December 19, 2023, and the interest rate was increased to 5.8%, with accrued interest having been paid current as of June 19, 2023. The balance outstanding on the new note as of June 30, 2023 and December 31, 2022, was €500,000 (US$545,888) and €500,000 (US$536,616) respectively; and

•On June 30, 2022, OSS Europe borrowed €1,500,000 (US$1,468,173) from Commerzbank AG, which bears interest at 2.55%, is due in June 2024, and is repayable in twenty-four monthly installments, with payments beginning July 31, 2022. The balance outstanding as of June 30, 2023 and December 31, 2022, was €759,673 (US$829,393) and €1,132,356 (US$1,215,279), respectively. This loan is collateralized by accounts receivable attributable to a specific customer.

Senior Secured Convertible Note

On April 20, 2020, the Company entered into a Securities Purchase Agreement with an institutional investor, providing for the issuance by the Company of Senior Secured Convertible Promissory Notes with a principal face value of up to $6,000,000. The notes were, subject to certain conditions, convertible into shares of the Company’s common stock, par value $0.0001 per share, at an initial conversion price per share of $2.50. Notes issued under the Securities Purchase Agreement had a 10% original issue discount.

At the initial closing of this offering, the Company issued notes in the principal amount of $3,000,000 with a 10% original issue discount, resulting in an aggregate purchase price of $2,700,000 at the initial closing. The notes bore no interest rate (except upon event of default) and, unless earlier converted or redeemed, were scheduled to mature on April 1, 2022.

Commencing July 1, 2020, the Company made monthly amortization payments equal to 1/22nd of the initial principal, any accrued and unpaid interest, and late charges and any deferred or accelerated amount, of such note, which could be satisfied in cash at a redemption price equal to 105% of such installment amount (110% of such installment amount on notes issued at additional closings). The remaining balance of the notes of $2,590,909 was converted into Company common stock on March 30, 2022; accordingly, the outstanding balance of the notes as of June 30, 2023 and 2022, was $0, respectively.

The original issue discount of 10% on the note was recorded as a debt discount, decreasing the note payable. This debt discount is amortized to interest expense using the effective interest rate method over the term of the loan. For the three month periods ended June 30, 2023 and 2022, total debt discount amortization was $0, respectively, and for the six month periods ended June 30, 2023 and 2022, total debt discount amortization was $0 and $1,161, respectively. Such amounts are included in interest expense in the accompanying consolidated statements of operations.

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Debt issuance costs in the amount of $316,274 related to this indebtedness were deducted from the face value of the note. Such costs are amortized to interest expense using the effective interest rate method over the term of the loan. Total debt issuance costs amortized during the three month periods ended June 30, 2023 and 2022, was $0, respectively and for the six month periods ended June 30, 2023 and 2022 was $0 and $1,223, respectively. Such amounts are included in interest expense in the accompanying consolidated statements of operations.

A summary of outstanding debt obligations as of June 30, 2023, was as follows:

Loan Description	Current Interest Rate	Maturity Date	Balance (Euro)		Balance ($)		Current Portion		Long-term Portion
Foreign:
VR Bank	4.760%	July-23	€	500,000	$	545,888	$	545,888	$	-
Uni Credit Bank AG	4.700%	August-23		500,000		545,888		545,888		-
Commerzbank AG	4.600%	September-23		500,000		545,888		545,888		-
Uni Credit Bank AG	5.800%	December-23		500,000		545,888		545,888		-
Commerzbank AG	2.550%	June-24		759,673		829,393		829,393		-
			€	2,759,673	$	3,012,945	$	3,012,945	$	-

Total future principal payments under notes payable as of June 30, 2023, was as follows:

Period Ending June 30,	Foreign			Total
2024	$	3,012,945		$	3,012,945
2025		-			-
Total minimum payments		3,012,945			3,012,945
Current portion of notes payable		(3,012,945	)		(3,012,945	)
Notes payable, net of current portion	$	-		$	-

NOTE 9 – STOCKHOLDERS’ EQUITY

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

2017 Equity Incentive Plan Amendments

On October 10, 2017, the Company’s board of directors approved and adopted the 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, stock bonuses and performance-based awards. An aggregate of 1,500,000 shares of common stock were initially reserved for issuance under the Plan.

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

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

On March 16, 2023, the Company’s board of directors unanimously approved, subject to stockholder approval, an amendment to the 2017 Plan (the “Plan Amendment”), which if approved by our stockholders, would

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have resulted in an increase in the number of shares of common stock authorized for issuance thereunder from 3,000,000 to 4,500,000 shares of common stock. The Plan Amendment was presented to stockholders for approval at the Company’s 2023 Annual Meeting of Stockholders; however, the proposal was not approved, and therefor the Plan Amendment was not implemented and the 2017 Plan was not altered.

Executive Employment Agreements

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

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

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

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

Stock Options

A summary of stock option activity under each of the Company’s equity incentive plans during the six month period ended June 30, 2023, was as follows:

	Stock Options Outstanding
	Number of Underlying Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding on January 1, 2023		970,680		$	2.07		5.61	$	864,762
Granted		400,000		$	2.95		9.94		-
Forfeited / Canceled		(1,250	)	$	2.10		-	$	962
Exercised		(20,935	)	$	0.61		-	$	47,233
Outstanding on June 30, 2023		1,348,495		$	2.35		2.24	$	816,567
Exercisable as of June 30, 2023		948,495		$	2.10		2.24	$	816,567
Vested and expected to vest as of June 30, 2023		948,495		$	2.10		2.24	$	816,567

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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 no options granted under the Company's 2017 Plan during the six month period ended June 30, 2022. The following table presents the grant date fair value of options vested and the intrinsic value of options exercised:

	For the Six Months Ended June 30,
	2023			2022
Expected term (in years)		6.16			-
Expected volatility		72.73	%		0.00	%
Risk-free interest rate		3.79	%		0.00	%
Weighted average grant date fair value per share	$	2.95		$	-
Grant date fair value of options vested	$	933,399		$	2,005,285
Intrinsic value of options exercised	$	47,233		$	119,927

As of June 30, 2023, the amount of unearned stock-based compensation estimated to be expensed from 2023 through 2027 related to unvested stock options is $782,295, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 2.27 years.

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 Company’s 2017 Plan in connection with the hiring and retention of personnel and are subject to certain conditions. RSUs vest quarterly or semi-annually over a period of one to four years and are typically forfeited if employment is terminated before the RSUs vest. The compensation expense related to the RSUs is calculated as the fair value of the common stock on the grant date and is amortized to expense over the vesting period and is adjusted for estimated forfeitures.

The Company’s RSU activity for the six months ended June 30, 2023, was as follows:

	Restricted Stock Units
	Number of Underlying Shares			Weighted Average Grant Date Fair Value
Unvested on January 1, 2023		907,507		$	4.04
Granted		889,528		$	2.80
Vested		(512,805	)	$	3.79
Canceled		(97,798	)	$	4.32
Unvested on June 30, 2023		1,186,432		$	3.19

As of June 30, 2023, there was $4,177,442 of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.73 years.

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Stock-based compensation expense for the three and six month periods ended June 30, 2023 and 2022, was comprised of the following:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Stock-based compensation classified as:	2023		2022		2023		2022
General and administrative	$	651,291	$	300,346	$	945,286	$	502,441
Production		86,528		70,959		153,969		126,415
Marketing and selling		86,516		104,364		146,504		186,544
Research and development		73,674		56,967		126,458		100,064
	$	898,009	$	532,636	$	1,372,217	$	915,464

Warrants

The following table summarizes the Company’s warrant activity during the six months ended June 30, 2023:

	Number of Warrants			Weighted Average Exercise Price
Warrants outstanding – January 1, 2023		451,112		$	5.37
Warrants granted		-		$	-
Warrants expired		(380,000	)	$	6.00
Warrants exercised		(28,090	)	$	1.78
Warrants outstanding – June 30, 2023		43,022		$	2.15

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Legal

We are subject to litigation, claims, investigations, and audits arising from time to time in the ordinary course of our business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of any such matters as of June 30, 2023 and December 31, 2022, are not expect to have a materially adverse effect on the consolidated financial position or results of operations of the Company.

Guarantees and Indemnities

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

Leases

The Company leases its offices, manufacturing, and warehouse facility in San Diego County under a non-cancelable operating lease. Our corporate headquarters are in a leased space comprising of approximately 29,342 square feet in Escondido, California under a lease that was modified in February 2019 and expires in August 2024. The Company also leases a 3,208 square foot facility in Salt Lake City, Utah that houses our Ion software development team that was scheduled to expire in June 2023 pursuant to its terms, and was extended through June 2025. The Company is the lessee of 1,632 square feet located in Anaheim, California, which was scheduled to expire in June 2023 pursuant to its terms, and was extended through June 2025. OSS Europe leases space comprised of 11,836 square feet on a month-to-month basis.

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Other information related to leases as of the three and six month periods ended June 30, 2023 and 2022, was as follows:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Operating lease cost	$	196,538	$	165,785	$	334,107	$	326,695
Total lease cost	$	196,538	$	165,785	$	334,107	$	326,695
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows from operating leases	$	81,843	$	165,785	$	243,185	$	326,695
Right-of-use assets obtained in exchange for new operating lease liabilities		-		-		-		-
Weighted-average remaining lease term - operating leases					16.2 months		25.8 months
Weighted-average discount rate - operating leases					12.1%		12.8%

The following table presents a maturity of the Company’s operating lease liabilities as of June 30, 2023:

Year	Operating Leases
Remaining payments in 2023	$	306,030
2024		446,361
2025		21,061
2026		2,408
Total lease payments	$	775,860
Less: Amount representing interest		(43,355	)
Present value of lease payment		732,505
Less: current portion of operating lease obligation		(583,675	)
Operating lease obligation, net of current portion	$	148,830

Purchase Commitments

In the normal course of business, the Company may enter into purchase commitments for inventory components to be delivered based upon non-cancellable, pre-established, delivery schedules that are over a period that may exceed one year. Total non-cancellable purchase orders as of June 30, 2023, were $10,762,867.

Customer Concentration

During the three month period ended June 30, 2023, the Company had two customers that accounted for (in the aggregate) approximately 29% of revenue, and during the three month period ended June 30, 2022, the Company had one customer that accounted for approximately 35% of revenue, for which each of such customers represented greater than 10% of our consolidated quarterly revenue.

During the six month period ended June 30, 2023, the Company had two customers that accounted for (in the aggregate) approximately 33% of revenue, and during the six month period ended June 30, 2022, the Company had one customer that accounted for approximately 31% of revenue, for which each of such customers represented greater than 10% of our consolidated quarterly revenue.

As of June 30, 2023 and December 31, 2022, the Company had two customers that accounted for (in the aggregate) approximately 29% and 47% of trade accounts receivables, respectively, for which each of such customer’s balances represented greater than 10% of our consolidated trade accounts receivable balance.

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During the three month periods ended June 30, 2023 and 2022, the Company had approximately 36% and 23%of purchases, respectively, from vendors/suppliers for which each of such vendors represents greater than 10% of our consolidated purchases.

During the six month periods ended June 30, 2023 and 2022, the Company had approximately 32% and 32% of purchases, respectively, from vendors/suppliers for which each represents greater than 10% of our consolidated purchases.

NOTE 11 – NET (LOSS) INCOME PER SHARE

Basic and diluted net (loss) income per share were calculated as follows for the three and six periods ended June 30, 2023 and 2022:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2023			2022		2023			2022
Basic and diluted net (loss) income per share:
Numerator:
Net (loss) income	$	(2,399,496	)	$	322,822	$	(2,800,008	)	$	902,056
Denominator:
Weighted average common shares outstanding - basic		20,397,741			19,940,902		20,325,029			19,416,832
Effect of dilutive securities		-			1,239,588		-			930,085
Weighted average common shares outstanding - diluted		20,397,741			21,180,490		20,325,029			20,346,917
Net (loss) income per share:
Basic	$	(0.12	)	$	0.02	$	(0.14	)	$	0.05
Diluted	$	(0.12	)	$	0.02	$	(0.14	)	$	0.04

NOTE 12 – REVENUE, SEGMENT AND GEOGRAPHIC INFORMATION

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

Segment details for the three and six month periods ended June 30, 2023 and 2022, were as follows:

	For the Three Months Ended June 30, 2023									For the Three Months Ended June 30, 2022
	OSS Classic			OSS Europe			Total			OSS Classic			OSS Europe			Total
Revenues	$	8,278,096		$	8,933,436		$	17,211,532		$	10,715,361		$	7,587,982		$	18,303,343
Cost of revenues		(5,863,974	)		(6,549,620	)		(12,413,594	)		(7,180,343	)		(5,922,682	)		(13,103,025	)
Gross profit		2,414,122			2,383,816			4,797,938			3,535,018			1,665,300			5,200,318
Gross margin %	29.2%			26.7%			27.9%			33.0%			21.9%			28.4%
Total operating expenses		(7,238,984	)		(972,511	)		(8,211,495	)		(3,876,028	)		(922,367	)		(4,798,395	)
(Loss) income from operations	$	(4,824,862	)	$	1,411,305		$	(3,413,557	)	$	(341,010	)	$	742,933		$	401,923
	For the Six Months Ended June 30, 2023									For the Six Months Ended June 30, 2022
	OSS Classic			OSS Europe			Total			OSS Classic			OSS Europe			Total
Revenues	$	16,908,682		$	17,084,744		$	33,993,426		$	21,297,403		$	14,058,617		$	35,356,020
Cost of revenues		(11,365,683	)		(12,759,043	)		(24,124,726	)		(13,982,054	)		(11,032,993	)		(25,015,047	)
Gross profit		5,542,999			4,325,701			9,868,700			7,315,349			3,025,624			10,340,973
Gross profit %	32.8%			25.3%			29.0%			34.3%			21.5%			29.2%
Total operating expenses		(11,477,078	)		(2,001,527	)		(13,478,605	)		(7,504,643	)		(1,784,275	)		(9,288,918	)
(Loss) income from operations	$	(5,934,079	)	$	2,324,174		$	(3,609,905	)	$	(189,294	)	$	1,241,349		$	1,052,055

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Revenue from customers with non-U.S. billing addresses represented approximately 75% and 78% of the Company’s revenue during the three month periods ended June 30, 2023 and 2022, respectively, and 67% and 74% of the Company’s revenue during the six month periods ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, substantially all the Company’s long-lived assets are located in the United States of America, with the exception of assets of $247,781 located in Germany.

NOTE 13 – SUBSEQUENT EVENTS

The Company’s management has evaluated subsequent events after the consolidated balance sheet dated as of June 30, 2023, through the date of filing of this Quarterly Report. Based upon the evaluation, management has determined that, other than as disclosed in the accompanying notes, no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto.

On July 17, 2023, the Company received a final payment of ERC funds of $418,430, net of commission paid to a vendor who assisted with the calculations and filing of the application.

On July 17, 2023, the Company entered into an employee agreement with its newly hired vice president of sales, pursuant to which, as a material inducement to his entering into employment with the Company, the Company granted him 35,715 RSUs, valued at $100,000. The RSUs vest over a three year period as follows: 33 1/3% will vest on the one-year anniversary of the date of the grant, and the remaining 66 2/3% will vest in four 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 continued employment by the Company. The RSUs were granted as inducement grants outside of the Company’s equity incentive plans in accordance with the employment inducement exemption provided under the Nasdaq Listing Rule 5635(c)(4).

On July 14, 2023, the board of directors of the Company disbanded the Strategic Transition Committee that was formed on February 2, 2023, for purpose of assisting in the transition and retention of a successor chief executive officer. All remuneration payable to the members of the Strategic Transition Committee through June 5, 2023, the date that the chief executive officer transition was completed, was paid in full.

On July 31, 2023, OSS Europe paid in full their promissory note that matured on July 31, 2023, in the amount of €500,000 (US$550,947).

On August 8, 2023, Jack Harrison and Sita Lowman tendered their resignations from the Company’s board of directors (the “Board”) and the relevant committees thereof, effective September 30, 2023.

On August 8, 2023, the Board appointed Michael Knowles, the Company’s Chief Executive Officer and President, and retired Admiral Michael Dumont, a member of the Company’s advisory board, as directors of the Company, effective September 30, 2023, to fill the vacancies created by the resignations of Mr. Harrison and Ms. Lowman. Commencing September 30, 2023, Mr. Knowles and Mr. Dumont will hold the director positions until the Company’s next annual meeting of stockholders or until their respective successors are elected and qualified, subject to their earlier death, resignation or removal.

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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, 2022, filed with the SEC on March 23, 2023. Readers are cautioned not to place undue reliance on these forward-looking statements.

Overview

One Stop Systems, Inc. (“OSS”) designs, manufactures, and markets specialized high-performance compute and storage hardware, software, and systems, which are designed to target edge artificial intelligence ("AI") Transportable deployments. These specialized modules and systems consist of computers and storage products that incorporate the latest state-of-the art components with our embedded proprietary software. Such modules and systems allow our customers to offer high-end computing capabilities (often integrated within their equipment) to their target markets and applications. Edge computing is a form of computing that is done on site, near a particular data source or the user (rather than in the cloud), minimizing the need for data to be processed in a remote data center. The global increase in load on the cloud infrastructure and increase in 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 data centers. We believe that we are uniquely positioned as a specialized provider to address the needs of this market, providing custom servers, data acquisition platforms, compute accelerators, solid-state storage arrays, system I/O expansion systems, as well as edge optimized industrial and panel PCs, tablets, and handheld compute devices. Our systems also offer industry leading capabilities that occupy less physical space and require less power consumption. We deliver this high-end technology to our customers through the sale of equipment and embedded software.

One Stop Systems, Inc. was originally incorporated as a California corporation in 1999, after initially being formed as a California limited liability company in 1998. On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with 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 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 ("OSS Europe"). OSS Europe designs and manufactures standard and customized servers, panel PCs, and PCIe expansion systems. OSS Europe also provides manufacturing, test, sales, and marketing services for customers throughout Europe, the Middle East and Africa.

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Recent Developments

In the second quarter of 2022, we formed a new strategic advisory board to aid in the acceleration of our pursuit of the AI Transportables market, and the military sector in particular. The advisory board is comprised of retired high-ranking military officials and corporate executives with decades of experience in technology, high performance computing and M&A for the defense, oil & gas, AI and autonomous vehicle industry verticals. Members of the advisory board provide input on product and market strategy, as well as help us navigate government bureaucracy and identify/introduce us to key decision makers, all with the goal of accelerating our success through their contacts, knowledge and experience.

Furthermore, in the first quarter of 2023, we implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate, our strategy to focus on the AI Transportables industry and our military business. In furtherance of this strategy and our goals, we have taken various steps to strengthen our management team with individuals who have deep experience and high-level contacts in the defense sector. In connection with this transition, on June 5, 2023, Michael Knowles was appointed as the Company’s president and chief executive officer and David Raun stepped down from such roles. Additionally, we initiated a search for a vice president of sales with significant military experience, which position we filled effective as of July 17, 2023. Furthermore, as previously disclosed, we are planning to reprofile our board of directors, as needed, to further align with our focus on AI Transportables and our military business, which we intend to do in multiple steps over the coming year.

On August 8, 2023, Jack Harrison and Sita Lowman tendered their resignations from our board of directors and the relevant committees thereof, effective September 30, 2023. Additionally, on August 8, 2023, the board appointed Michael Knowles, our Chief Executive Officer and President, and retired Admiral Michael Dumont, a member of our advisory board, as directors of the Company, effective September 30, 2023, to fill the vacancies created by the resignations of Mr. Harrison and Ms. Lowman. Commencing September 30, 2023, Mr. Knowles and Mr. Dumont will hold the director positions until our next annual meeting of stockholders or until their respective successors are elected and qualified, subject to their earlier death, resignation or removal. These changes were part of the first phase of our previously announced plans to reprofile our board of directors to further align with our focus on AI Transportables and our military business. Consistent with previous disclosures, we intend to make additional changes to the composition of our board over the coming year.

On April 3, 2023, in connection with the anticipated transition, the Company and Mr. Raun entered into an Amended and Restated Employment Agreement (the “A&R Raun Agreement”), which superseded that certain Employment Agreement between the Company and Mr. Raun, dated June 24, 2020, as amended by that Amendment to Employment Agreement, dated July 15, 2020 (collectively, the “Prior Agreement”). The term of the A&R Raun Agreement commenced on April 3, 2023, and the A&R Raun Agreement automatically terminated pursuant to its terms on June 5, 2023, which is the date on which Mr. Knowles was appointed as chief executive officer and president of the Company.

The terms and conditions of the A&R Raun Agreement were substantially similar to those included in the Prior Agreement, with the exception of the following material changes: (i) in addition to his base salary, which remained unchanged, Mr. Raun was entitled to receive a retention bonus that was equivalent to 50% of his base salary, which was prorated on a daily basis through his termination date; (ii) Mr. Raun was eligible to receive, at the sole discretion of the Company’s board of directors, a performance-based grant of 201,000 RSUs pursuant to the Company’s 2017 Equity Incentive Plan, as amended (the “2017 Plan”), which RSUs ultimately were not granted to Mr. Raun; (iii) in addition to those severance payments payable to Mr. Raun in the event that his employment is terminated for a reason other than “good cause,” as set forth in Section 12(b) of the Prior Agreement and A&R Raun Agreement, all other RSUs held by Mr. Raun that were scheduled to vest within twelve months from his termination date were to be accelerated to vest as of the date of termination, provided, that with respect to that tranche of unvested RSUs held by Mr. Raun that was scheduled to vest on August 3, 2024, the Company further agreed to prorate and accelerate the vesting of that portion of such tranche that would have otherwise vested within twelve months of the termination date if vesting of the RSUs in such tranche were to vest on a daily basis (as opposed to a six month basis) (collectively, the “Severance Benefits”); (iv) Mr. Raun was also entitled to receive the Severance Benefits in the event that the A&R Raun Agreement expired pursuant to its terms, subject to execution of a release

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and waiver by Mr. Raun; and (v) the Board agreed to nominate Mr. Raun for election to the Company’s board of directors at the Company’s 2023 Annual Meeting of Stockholders.

As discussed above, the A&R Raun Agreement automatically terminated pursuant to its terms on June 5, 2023. In connection therewith, Mr. Raun received the Severance Benefits, which included, amongst other compensation, the accelerated vesting of 150,556 RSUs that were scheduled to vest within twelve months from June 5, 2023, and the forfeiture of 52,132 unvested RSUs.

On May 16, 2023, the Company entered into an employment agreement with Mr. Knowles, effective June 5, 2023, to begin serving as chief executive officer and president of the Company. The initial term of the agreement is three years from the effective date, after which it will automatically renew on an annual basis, subject to earlier termination in accordance with the terms of the agreement. Mr. Knowles will be entitled to receive an annual base salary of $460,000 per annum (subject to annual review and adjustment); an annual bonus (paid out annually if targets are met), with a target amount equivalent to seventy-five percent of his then-current annual base salary if certain applicable bonus criteria are met, subject to approval by the Company’s board of directors; a prorated bonus in 2023; and eligibility to participate in a number of Company-sponsored benefits.

In addition to the foregoing compensation, as an inducement material to his entering into his employment with the Company, as of June 5, 2023, Mr. Knowles was granted (i) non-qualified stock options to purchase 400,000 shares of Company common stock, which options have an exercise price of $2.95 and will expire ten years from the date of the grant; and (ii) 400,000 RSUs. Both of such equity grants were granted outside of the Company’s 2017 Plan, and in reliance on the employment inducement exemption provided under the Nasdaq Listing Rule 5635(c)(4).

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

Furthermore, pursuant to agreement, in the event that Mr. Knowles is terminated for a reason other than “good cause” or for “good reason,” Mr. Knowles, upon signing and returning an effective waiver and release of claims, shall be entitled to receive: (i) separation payments in an aggregate amount of twelve months of his then-current base salary; (ii) continuation of group health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”) at the Company’s expense for a period of twelve months following the termination date; and (iii) unvested RSUs held by Mr. Knowles shall accelerate so that an additional twelve months of RSUs shall vest from the termination date.

Additionally, on April 7, 2023, we amended our Amended and Restated Bylaws (the “Bylaws”) to (i) revise Article II, Section 2.5 of the Bylaws to incorporate those requirements set forth in Rule 14a-19 of the Securities Exchange Act of 1934, as amended, as recently implemented by the SEC; and (ii) revise Article II, Section 2.8 of the Bylaws to decrease the quorum threshold necessary to conduct business at shareholder meetings of the Company to one-third of the voting power of the Company’s capital stock issued and outstanding as of the relevant record date. Pursuant to Article X of the Bylaws, stockholder approval was not required to amend the Bylaws.

As of June 30, 2023, the Company has completed and fulfilled substantially all of its orders associated with its long-term media and entertainment customer and does not anticipate significant business from this customer in the future. This resulted from an acceleration in such 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 is particularly true of their virtual products, which do not require the same level of ruggedization, as this system is not typically operated in harsh environments and for which software is being developed to provide a real-time cloud solution. This customer’s transition to cloud solutions had a negative impact on the Company’s results of operations for the three and six months ended June 30, 2023, and is expected to continue to have a negative impact on the Company’s results of operations for the near term.

As previously disclosed, in 2021, we shifted our primary focus to the development and sale of AI Transportables. Since 2022, we have significantly increased our efforts to penetrate the military and defense sectors in particular. With the formation of a new strategic advisory board in second quarter 2022 and the recent hiring of a

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new president and chief executive officer and new vice president of sales, both with 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.

The lingering negative impacts of the COVID-19 pandemic and the impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the ongoing military conflict between Russia and Ukraine, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic uncertainty, which has negatively affected our operations. Additionally, during the first half of 2023, the general consensus among economists continued to suggest that a risk of recession will continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations.

We are continuing to experience increased pricing, longer lead-times, unavailability of certain product and limited supplies, protracted delivery dates, changes in minimum order quantities to secure product, and/or shortages of certain parts and supplies that are necessary components for the products and services we offer to our customers. As a result, the Company is continuing to carry increased inventory balances to ensure availability of necessary products and to secure pricing.

These global issues and concerns regarding general economic decline or recession are impacting our business as well as some of our customers, who are experiencing downturns or uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts. During the three and six months ended June 30, 2023, the Company experienced delays and postponements of committed 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 negatively impacted the Company’s results of operations for the three and six months ended June 30, 2023. 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.

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

In March 2023, Silicon Valley Bank and Signature Bank, and most recently on May 1, 2023, First Republic Bank, were closed and taken over by the FDIC, which created significant market disruption and uncertainty for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system in the United States, and in particular with respect to regional banks. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened and such events could have a material adverse effect on our business and financial condition.

As a result of these global issues, as well as other factors discussed in this Quarterly Report, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long-term impacts of the economic and geopolitical issues, inflation, the Federal Reserve interest rate increases and the potential for a recession. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause our stock price to decline.

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 diving and improve company-wide execution.

Components of Results of Operations

Revenue

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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.

Cost of revenue

Cost of revenue primarily consists of costs of materials, costs paid to third-party contract manufacturers (which may include the costs of components), and personnel costs associated with manufacturing and support operations. Personnel costs consist of wages, bonuses, benefits, and stock-based compensation expenses. Cost of revenue also includes freight, allocated overhead costs and inventory write-offs and changes to our inventory and warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect cost of revenue to increase in absolute dollars with 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 and expense consists of miscellaneous income and expense from activities outside of our core business and is inclusive of interest income from investing activities and interest expense incurred by financing activities.

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.

Results of Operations

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The following tables set forth our results of operations for the three and six month periods ended June 30, 2023 and 2022, presented in dollars and as a percentage of revenue, respectively.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022
Revenue	$	17,211,532		$	18,303,343		$	33,993,426		$	35,356,020
Cost of revenue		12,413,594			13,103,025			24,124,726			25,015,047
Gross profit		4,797,938			5,200,318			9,868,700			10,340,973
Operating expenses:
General and administrative		3,072,880			1,821,445			5,357,981			3,596,133
Impairment of goodwill		2,700,000			-			2,700,000			-
Marketing and selling		1,483,965			1,724,913			3,270,646			3,196,633
Research and development		954,650			1,252,037			2,149,978			2,496,152
Total operating expenses		8,211,495			4,798,395			13,478,605			9,288,918
(Loss) income from operations		(3,413,557	)		401,923			(3,609,905	)		1,052,055
Other income (expense), net:
Interest income		104,785			55,507			215,051			106,512
Interest expense		(23,939	)		(44,949	)		(56,644	)		(103,665	)
Employee retention credit (ERC)		1,298,241			-			1,298,241			-
Other income (expense), net		31,837			(4,169	)		11,614			97,952
Total other income (expense), net		1,410,924			6,389			1,468,262			100,799
Income before income taxes		(2,002,633	)		408,312			(2,141,643	)		1,152,854
Provision for income taxes		396,863			85,490			658,365			250,798
Net income (loss)	$	(2,399,496	)	$	322,822		$	(2,800,008	)	$	902,056

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2023	2022	2023	2022
Revenue	100.0%	100.0%	100.0%	100.0%
Cost of revenue	72.1%	71.6%	71.0%	70.8%
Gross profit	27.9%	28.4%	29.0%	29.2%
Operating expenses:
General and administrative	17.9%	10.0%	15.8%	10.2%
Impairment of goodwill	15.7%	0.0%	7.9%	0.0%
Marketing and selling	8.6%	9.4%	9.6%	9.0%
Research and development	5.5%	6.8%	6.3%	7.1%
Total operating expenses	47.7%	26.2%	39.7%	26.3%
(Loss) income from operations	-19.8%	2.2%	-10.6%	2.9%
Other income (expense), net:
Interest income	0.6%	0.3%	0.6%	0.3%
Interest expense	-0.1%	-0.2%	-0.2%	-0.3%
Employee retention credit (ERC)	7.5%	0.0%	3.8%	0.0%
Other (expense) income, net	0.2%	0.0%	0.0%	0.3%
Total other income (expense), net	8.2%	0.0%	4.3%	0.3%
(Loss) income before income taxes	-11.6%	2.2%	-6.3%	3.2%
Provision for income taxes	2.3%	0.5%	1.9%	0.7%
Net income (loss)	-13.9%	1.8%	-8.2%	2.5%

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Comparison of the three and six month periods ended June 30, 2023 and 2022:

The Company operates in two reportable segments: (i) the design and manufacture of high-performance customized computers and flash arrays, in-flight entertainment and& connectivity, which we refer to as “OSS Classic,” and (ii) our subsidiary, OSS Europe, which operates fundamentally as a value-added reseller with minimal product customization with the growing potential to sell OSS Classic type products in their geography. The following tables set forth revenue, cost of revenue and gross profit per reportable segment for the three and six month periods ended June 30, 2023 and 2022, respectively.

Revenue, cost of revenue and gross profit:

	For the Three Months Ended June 30, 2023										For the Three Months Ended June 30, 2022
Entity:	Revenue		Cost of Revenue			Gross Profit		Gross Margin %			Revenue		Cost of Revenue			Gross Profit		Gross Margin %
OSS Classic	$	8,278,096	$	(5,863,974	)	$	2,414,122		29.2	%	$	10,715,361	$	(7,180,343	)	$	3,535,018		33.0	%
OSS Europe		8,933,436		(6,549,620	)		2,383,816		26.7	%		7,587,982		(5,922,682	)		1,665,300		21.9	%
	$	17,211,532	$	(12,413,594	)	$	4,797,938		27.9	%	$	18,303,343	$	(13,103,025	)	$	5,200,318		28.4	%
	For the Six Months Ended June 30, 2023										For the Six Months Ended June 30, 2022
Entity:	Revenue		Cost of Revenue			Gross Margin		Gross Margin %			Revenue		Cost of Revenue			Gross Margin		Gross Margin %
OSS Classic	$	16,908,682	$	(11,365,683	)	$	5,542,999		32.8	%	$	21,297,403	$	(13,982,054	)	$	7,315,349		34.3	%
OSS Europe		17,084,744		(12,759,043	)		4,325,701		25.3	%		14,058,617		(11,032,993	)		3,025,624		21.5	%
	$	33,993,426	$	(24,124,726	)	$	9,868,700		29.0	%	$	35,356,020	$	(25,015,047	)	$	10,340,973		29.2	%

Revenue

For the three months ended June 30, 2023, our total revenue decreased $1,091,811, or 6.0%, as compared to the same period in 2022. OSS Classic saw a decrease in revenue of $2,437,265, or 22.8%, as compared to the same period in 2022. The majority of this decrease is primarily attributable to decreases in shipments to our media customer (we expect minimal to no revenue in the second-half of the year and thereafter for this customer), loss of revenue due to bankruptcy of an autonomous trucking customer and delay in the receipt of certain military orders for our data storage units. OSS Europe experienced an increase of $1,345,454, or 17.7%, as compared to the same period in 2022 as a result of additional project based related business, increases in the number of smaller accounts and having available inventory.

For the six months ended June 30, 2023, our total revenue decreased $1,362,594, or 3.9%, as compared to the same period in 2022. OSS Classic saw a decrease in revenue of $4,388,721, or 20.6%, as compared to the same period in 2022. The majority of this decrease is primarily attributable to decreases in shipments to our media customer (we expect minimal to no revenue in the second-half of the year and thereafter for this customer), loss of revenue due to bankruptcy of an autonomous trucking customer and delay in the receipt of certain military orders for our data storage units. OSS Europe experienced an increase of $3,026,127, or 21.5%, as compared to the same period in 2022 as a result of additional project based related business, increases in the number of smaller accounts and having available inventory.

Cost of revenue and gross profit

Cost of revenue decreased $689,431, or 5.3%, for the three months ended June 30, 2023, as compared to the same period in 2022. OSS Classic saw a decrease in cost of revenue of $1,316,369, or 18.3%, as compared to the same period in 2022. This decrease in cost of revenue is mainly attributable to a decrease in our sales to our media customer and sales of AI Transportable products. OSS Europe’s cost of revenue increased $626,938, or 10.6%, as compared to the same period in 2022, due to additional sales attributable to project based related business, increases in the number of smaller accounts and having available inventory.

The overall gross margin percentage was 27.9% for the 2023 period as compared to 28.4% in the same period in 2022. OSS Classic’s gross margin percentage for the three months ended June 30, 2023, was 29.2%, a decrease of 3.8 percentage points as compared to the prior year period in 2022 of 33.0%, due to the predominance of lower margin sales to our media customer and higher mix of third-party content such as GPUs in our AI Transportable

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type products. OSS Europe contributed gross margin at a rate of 26.7%, as compared to the same period in 2022 of 21.9%, an increase of 4.8 percentage points, resulting from strategic management of inventory and of having sought-after products sold at a premium, product mix and increased sales of OSS classic type products.

Cost of revenue decreased $890,321, or 3.6%, for the six months ended June 30, 2023, as compared to the same period in 2022. OSS Classic saw a decrease in cost of revenue of $2,616,371, or 18.7%, as compared to the same period in 2022. This decrease in cost of revenue is mainly attributable to a decrease in our sales to our media customer and sales of AI transportable products. OSS Europe’s cost of revenue increased $1,726,050, or 15.6%, as compared to the same period in 2022, due to additional sales attributable to project based related business, increases in the number of smaller accounts and having available inventory.

The overall gross margin percentage was 29.0% for the 2023 period as compared to 29.2% in the same period in 2022. OSS Classic’s gross margin percentage for the six months ended June 30, 2023, was 32.8%, a decrease of 1.50 percentage points as compared to the prior year period in 2022 of 34.3%, due to the predominance of lower margin sales to our media customer and higher mix of third-party content such as GPUs in our AI Transportable type products. OSS Europe contributed gross margin at a rate of 25.3%, as compared to the same period in 2022 of 21.5%, an increase of 3.8 percentage points, resulting from strategic management of inventory and of having sought-after products sold at a premium, product mix and increased sales of OSS classic type products.

Operating expenses

General and administrative expense

General and administrative expense increased $1,251,435, or 68.7%, for the three months ended June 30, 2023, as compared to the same period in 2022. OSS Classic experienced an increase of $1,216,766, or 87.5%. Of this increase in general and administrative expense, approximately $1,132,000 is attributable to increased costs associated with our organizational restructuring and outside professional services. Such non-recurring costs included additional equity compensation, wages, legal fees, search firm fees, and additional board compensation attributable to the strategic transition committee. OSS Europe had an increase of $34,669, or 8.1% resulting from increased employee costs attributable to new employees and expenditures for additional computer storage. Overall, total general and administrative expense increased as a percentage of revenue to 17.9% for the three months ended June 30, 2023, as compared to 10.0% during the same period in 2022.

General and administrative expense increased $1,761,848, or 49.0%, for the six months ended June 30, 2023, as compared to the same period in 2022. OSS Classic experienced an increase of $1,687,336, or 61.8%. Of this increase in general and administrative expense, approximately $1,359,000 is attributable to increased non-recurring costs associated with our organizational restructuring and outside professional services. Such costs included additional equity compensation, wages, legal fees, search firm fees, and additional board compensation attributable to the strategic transition committee. OSS Europe had an increase of $74,512, or 8.6% resulting from increased employee wages and new employees and expenditures for additional computer storage. Overall, total general and administrative expense increased as a percentage of revenue to 15.8% for the six months ended June 30, 2023, as compared to 10.2% during the same period in 2022.

Impairment of goodwill

During June 2023, the Company took a write-down of $2,700,000 as a result of the overall financial performance of OSS Classic as compared to plan, the transition of and focus on our product strategy on AI Transportables and the defense industry deferment of certain orders. There was no such impairment charge in 2022.

Marketing and selling expense

Marketing and selling expense decreased $240,948, or 14.0%, for the three months ended June 30, 2023, as compared to the same period in 2022. OSS Classic had a decrease of $242,670, or 18.1%, which was mainly attributable to having the Company participating in fewer tradeshows in the quarter as compared to the prior year and a reduction in employee costs resulting from our organizational restructuring. OSS Europe had an increase of $1,722, or 0.5%, primarily resulting from the addition of new marketing personnel and sales collateral material. Overall, total marketing and selling expense decreased as a percentage of revenue to 8.6% during the three months ended June 30, 2023, as compared to 9.4% during the same period in 2022.

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Marketing and selling expense increased $74,013, or 2.3%, for the six months ended June 30, 2023, as compared to the same period in 2022. OSS Classic had a decrease of $45,232, or 1.8%, which was mainly attributable to a reduction in employee costs resulting from our organizational restructuring. OSS Europe had an increase of $119,245, or 16.9%, primarily resulting from the addition of new marketing personnel and sales collateral material. Overall, total marketing and selling expense increased as a percentage of revenue to 9.6% during the six months ended June 30, 2023, as compared to 9.0% during the same period in 2022.

Research and development expense

Research and development expense decreased $297,387, or 23.8%, for the three months ended June 30, 2023, as compared to the same period in 2022. OSS Classic saw a decrease of $311,140, or 27.2%. The decrease was largely driven by engineering resources being deployed on chargeable projects, which costs are reclassified as a component of costs of sales. OSS Europe experienced an increase of $13,753, or 13.0%. This increase was attributable to increased testing of product to support the increase in revenue. Overall, total research and development expense as a percentage of revenue decreased as a percentage of revenue to 5.5% during the three months ended June 30, 2023, as compared to 6.8% during the same period in 2022.

Research and development expense decreased $346,174, or 13.9%, for the six months ended June 30, 2023, as compared to the same period in 2022. OSS Classic saw a decrease of $369,669, or 16.2%. The decrease was largely driven by engineering resources being deployed on chargeable projects, which costs are reclassified as a component of costs of sales. OSS Europe experienced an increase of $23,495, or 11.0%. This increase was attributable to increased testing of product to support the increase in revenue. Overall, total research and development expense as a percentage of revenue decreased as a percentage of revenue to 6.3% during the six months ended June 30, 2023, as compared to 7.1% during the same period in 2022.

Interest income

Interest income increased $49,278 for the three months ended June 30, 2023, as compared to the same period in 2022. The increase is attributable to higher interest rates on qualified short-term investments that meet Company requirements.

Interest income increased $108,539 for the six months ended June 30, 2023, as compared to the same period in 2022. The increase is attributable to higher interest rates on qualified short-term investments that meet Company requirements.

Interest expense

Interest expense decreased $21,010 for the three months ended June 30, 2023, as compared to the same period in 2022, as a result of the maturity of the senior secured convertible note that matured on April 1, 2022.

Interest expense decreased $47,021 for the six months ended June 30, 2023, as compared to the same period in 2022, as a result of the maturity of the senior secured convertible note that matured on April 1, 2022.

Employee Retention Credit

For the three and six month periods ended June 30, 2023, the Company received a government provided Employee Retention Credit (ERC) for the retention of employees during the COVID-19 pandemic during the years of 2020 and 2021, in the amount of $1,516,034 less commissions of $217,793.

Other income (expense), net

Other income (expense), for the three months ended June 30, 2023, resulted in net other income of $31,837, as compared to net other expense of $4,169, in the same period in 2022, for an improvement of $36,006.

Other income (expense), for the six months ended June 30, 2023, resulted in net other income of $11,614, as compared to net other income of $97,952, in the same period in 2022, for a net decrease of $86,338. The most significant contributions to the year-over-year change include the sale of a URL for Magma.com in 2022 for $125,000.

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Provision for income taxes

We have recorded an income tax provision of $396,863 and $85,490, respectively, for the three months ended June 30, 2023 and 2022, and $658,365 and $250,798, respectively, for the six months ended June 30, 2023 and 2022. The effective tax rate for the six months ended June 30, 2023 and 2022, differed from the statutory rate mainly due to permanent non-deductible goodwill amortization for OSS Europe and impairment of goodwill attributable to OSS Classic, 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. Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization requirement increases our deferred tax assets and the related valuation allowance and may have an impact on payment of tax liabilities. The effective tax rate for the six months ended June 30, 2023, was 28.86%, as compared to 20.86% in the prior period in 2022.

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 June 30, 2023, we had total cash and cash equivalents of $6,100,317, with short-term investments of $9,321,456, and total working capital of $35,947,245. Cash and cash equivalents held by OSS Europe totaled US$2,448,439 on June 30, 2023. OSS Europe’s debt covenants do not permit the use of those funds by its parent company.

During the year ended December 31, 2022, we had income from operations of $1,568,328, with cash used by operating activities of $7,806,025.

Our sources of liquidity and cash flows are used to fund ongoing operations, fund research and development projects for new products technologies and provide ongoing support services for our customers. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, successfully integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all.

As discussed elsewhere in this Quarterly Report, during the first and second quarters of 2023, the general consensus among economists continued to suggest that a risk of recession will continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations. We intend to continue to monitor the effects of inflation, global supply chain shortages and the economic conditions, and, if appropriate, we may alter our plans to address such concerns as they may arise.

Management’s plans are to focus on acquiring new customer orders to replace lost revenue attributable to our media customer, to continue our efforts towards responding to the changing economic landscape, including inflation, foreign currency exchange rates, a potential recession, increases in the Federal Reserve interest rate, the current instability of the banking system in the United States, supply chain constraints and international conflicts, by continuing to control hiring and operating costs, conserve cash, and continual focus on improving margin.

While management expects these actions and continued diligence towards cost growth and expense containment, our results of operations for the six months ended June 30, 2023 and the year ended December 31, 2022, partially benefited from such actions particularly those resulting from a reduction in force in April 2023. Management is also committed to conserving cash and securing debt and/or equity financing, as required, for liquidity to meet our cash requirements through at least a period of the next twelve months.

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In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 from its bank, which was renewed in April 2023 and renews on an annual basis at the current prime rate. To access this line of credit the Company must maintain cash and investments balances at a minimum of $4,000,000. Although the Company has not drawn down on the line of credit to date, it may choose to do so in the future.

As a result of management’s implementation of our cost reduction plans, our potential sources of liquidity and management’s most recent cash flow forecasts, management believes that we have sufficient liquidity to satisfy our anticipated working capital requirements for our ongoing operations and obligations for at least the next twelve months. However, there can be no assurance that management’s cost reduction efforts will be effective or the forecasted cash flows will be achieved. Furthermore, we will continue to evaluate our capital expenditure needs based upon 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.

The following table summarizes our cash flows for the three month periods ended June 30, 2023 and 2022:

	For the Six Months Ended June 30,
Cash flows:	2023		2022
Net cash provided by (used in) operating activities	$	2,048,934	$	(7,576,355	)
Net cash provided by investing activities	$	503,054	$	2,878,600
Net cash provided by financing activities	$	413,575	$	2,614,463

Operating Activities

During the six month period ended June 30, 2023, we provided $2,048,984 in cash for operating activities, a difference of $9,625,289 when compared to the cash used in operating activities of $7,576,355 during the same period in 2022.

The change in cash provided by operating activities during the six month period ended June 30, 2023, as compared to cash used in operating activities in the same period in 2022, is primarily a result a net increase in the sources of operating cash flow for working capital items of $11,256,362. This increase was offset by a reduction in profitability from net income in 2022 of $902,056, to a net loss of $2,800,008 in the current year, a reduction of $3,702,064.

Additionally, there were net unfavorable adjustments in the current period for non-cash items of $2,070,991, which were comprised of $3,476,436 of favorable non-cash items, inclusive of the write-down for the impairment of goodwill, offset by $107,204 of negative non-cash items that did not affect operating cash flow and exclusion of $1,298,241 for the employee retention credit.

Net working capital sources for the six month period ended June 30, 2023, were $1,184,919, as compared to the prior year period uses of working capital of $10,071,443, a reduction in the use of working capital of $11,256,362. The source of working capital of $17,694,596 was attributable to changes in accounts receivables, inventory levels, and accrued expenses and other liabilities for the comparable period. These sources were offset by uses of working capital of $6,438,234 being applied to changes in prepaid expenses and other current assets and accounts payable.

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Our ability to generate cash from operations in future periods will depend in large part on our profitability, the rate and timing of collections of our accounts receivable, our inventory turns and our ability to manage other areas of working capital, including accounts payable and accrued expenses.

Investing Activities

During the six month period ended June 30, 2023, the Company generated cash of $503,054 in investing activities, as compared to $2,878,000 provided by investing activities during the prior year period in 2022, a net decrease of $2,375,546. The source of investing funds was attributable to the redemption of short-term investments in both years and the sale of the Magma.com URL in the prior year. Additionally, the Company continues to enhance the capabilities of its ERP system, and purchase test equipment for the engineering department. We do not anticipate any significant investments not normally anticipated in the original course of business in the near term.

Financing Activities

Given the current economic, financial, and geopolitical instability, the Company believes it is imperative to maintain opportunities for additional financial resources to ensure financial stability during trying economic times. During the six month period ended June 30, 2023, the Company generated $413,575 resulting from funds received in conjunction with the ERC program offset by debt service payments on OSS Europe borrowings and payment of tax on the net exercise of vested RSUs. During the same period in 2022, the Company generated cash through proceeds for new borrowings for inventory at OSS Europe.

Known Trends or Uncertainties

Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.

We are experiencing delays in funding for customer projects, delays in delivery schedules based upon customer requirements and an extended sales cycle. Additionally, certain of our customers are experiencing downturns or uncertainty in their own business operations and revenue, and as a result there is an increased risk that these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts. During the three and six months ended June 30, 2023, the Company experienced delays and postponements of committed 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 negatively impacted the Company’s results of operations for the three and six months ended June 30, 2023. 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.

As discussed in this Quarterly Report, the world has been affected due to the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine and economic uncertainty, amongst other things. Inflation has risen, Federal Reserve interest rates have increased recently, there is still some concern regarding instability of the banking systems in the United States and the general consensus among economists suggests that we should continue to expect a risk of recession will continue for the foreseeable future. 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.

As of June 30, 2023, the Company has completed and fulfilled substantially all of its orders associated with its long-term media and entertainment customer and does not anticipate any significant business from this customer in the future. This resulted from an acceleration in such 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 is particularly true of their virtual products, which do not require the same level of ruggedization as this system is not typically operated in harsh environments and for which software is being developed to provide a real-time cloud solution. This customer’s transition to cloud solutions had a negative impact on the Company’s results of operations for the three and six months ended June 30, 2023, and is expected to continue to have a negative impact on the Company’s results of operations for the near term.

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As previously disclosed, in 2021, we shifted our primary focus to the development and sale of AI Transportables. Since 2022, we have significantly increased our efforts to penetrate the military and defense sectors in particular that typically have protracted sales cycles, significant contracting requirements, and multi-year deliverables. With the formation of a new strategic advisory board in second quarter 2022 and the recent hiring of a new president and chief executive officer and new vice president of sales, both with 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.

Additionally, in March 2023, Silicon Valley Bank and Signature Bank, and most recently on May 1, 2023, First Republic Bank, were closed and taken over by the FDIC, which has created significant market disruption for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system in the United States, and in particular with respect to regional banks. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened and such events could have a material adverse effect on our business and financial condition.

We believe that the need for improved productivity in the research and development activities directed toward developing new products and/or software will continue to result in increasing adoption of high-performance computers and interconnect technologies such as those we produce. New product and/or software developments in the specialized compute-business segment could result in increased revenues and earnings if they are accepted by our markets; however, there can be no assurances that new products and/or software will result in significant improvements to revenues or earnings. For competitive reasons, we do not disclose all of our new product development activities.

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.

In the first and second quarters of 2023, we implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate our strategy to focus on, the AI Transportables industry and our military business. In furtherance of this strategy and our goals, on June 5, 2023, David Raun, then the Company’s chief executive officer, stepped down from such roles and Michael Knowles was appointed to serve in such roles. Mr. Raun currently continues to serve as a member of the Company’s board of directors. Additionally, subsequent to the quarter ended June 30, 2023, on July 17, 2023, we hired a new vice president of sales with significant relevant experience. Furthermore, on August 8, 2023, Jack Harrison and Sita Lowman tendered their resignations from our board of directors and the relevant committees thereof, effective September 30, 2023. Additionally, on August 8, 2023, the board appointed Michael Knowles, our Chief Executive Officer and President, and retired Admiral Michael Dumont, a member of our advisory board, as directors of the Company, effective September 30, 2023, to fill the vacancies created by the resignations of Mr. Harrison and Ms. Lowman. These changes were part of the first phase of our previously announced plans to reprofile our board of directors to further align with our focus on AI Transportables and our military business. Consistent with previous disclosures, we intend to make additional changes to the composition of our board over the coming year.

Inflation

We experienced some affects due to inflation during the most recent period, including increased product pricing of semiconductor products, increased transportation costs due to increases in the cost of energy and general price increases due to inflation in the economy. Although the Company attempts to pass on increases in raw material, labor, energy and fuel-related costs to our customers, the Company’s ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Company’s products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be fully recovered. These increasing costs are being aggressively managed by the Company and actions are being taken to minimize the impact to the Company, particularly in the purchase of inventories to minimizing price increases. Inflation affects the Company’s manufacturing costs, distribution costs and operating expenses.

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Off balance sheet arrangements

We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity.

We do not have any majority-owned subsidiaries that are not consolidated in the financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose entities.

Stockholder transactions

See Note 9 to the accompanying financial statements for a discussion regarding our stockholder transactions for the relevant periods.

Critical accounting policies and estimates

In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and our historical experience.

Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2022.

We periodically re-evaluate and adjust our critical accounting policies as circumstances change. There were no significant changes to our critical accounting policies during the three month period ended June 30, 2023.

Recently implemented accounting pronouncements

Effective January 1, 2023, the Company implemented ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”). See Note 2 "Significant Accounting Policies" in the accompanying condensed 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. The Federal Reserve interest rates have increased recently and may increase further 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”), of which both provide basic deposit coverage with limits up to $250,000 per owner. As of June 30, 2023, the Company had $250,000 of cash in our accounts that exceeded the insurance limits. The Company has not experienced any losses in these accounts and believes that the financial institutions at which such amounts are held are stable; however, no assurances can be provided. In Germany, the deposit insurance is €100,000 per bank, per customer. OSS Europe has funds on deposit in both Euro and U.S. dollar denominations of €1,898,289 (US$2,072,507) 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 primarily in the United States. Foreign sales of products and services are primarily denominated in U.S. dollars. We also conduct business outside the United States through OSS Europe 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

39

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 OSS Europe in October 2018. The functional currency of OSS GmbH is the Euro. Transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, monetary assets and liabilities are translated using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Consequently, changes in the exchange rates of the currencies may impact the translation of the foreign subsidiaries’ statements of operations into U.S. dollars, which may in turn affect our consolidated statement of 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 using 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.

Non-GAAP Financial Measures

Adjusted EBITDA

We believe that the use of adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, is helpful for an investor to assess the performance of the Company. The Company defines adjusted EBITDA as income (loss) before interest, taxes, depreciation, amortization, acquisition expenses, impairment of long-lived assets, financing costs, fair value adjustments from purchase accounting, stock-based compensation expense and expenses related to discontinued operations.

Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles in the United States, or GAAP. Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company’s non-cash operating expenses, we believe that providing a non-GAAP financial measure that excludes non-cash and non-recurring expenses allows for meaningful comparisons between our core business operating results and those of other companies, as well as providing us with an important tool for financial and operational decision making and for evaluating our own core business operating results over different periods of time.

Our adjusted EBITDA measure may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. Our adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to operating income or as an indication of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider adjusted EBITDA to be a substitute for, or superior to, the information provided by GAAP financial results.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022
Net (loss) income	$	(2,399,496	)	$	322,822		$	(2,800,008	)	$	902,056
Depreciation and amortization		270,255			254,429			542,528			524,220
Stock-based compensation expense		898,008			532,636			1,372,217			915,464
Interest expense		23,939			44,949			56,644			103,665
Interest income		(104,785	)		(55,507	)		(215,051	)		(106,512	)
Impairment of goodwill		2,700,000			-			2,700,000			-
Employee retention credit (ERC)		(1,298,241	)		-			(1,298,241	)		-
Provision for income taxes		396,863			85,490			658,365			250,798
Adjusted EBITDA	$	486,543		$	1,184,819		$	1,016,454		$	2,589,691

40

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.

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

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2023			2022		2023			2022
Net (loss) income	$	(2,399,496	)	$	322,822	$	(2,800,008	)	$	902,056
Amortization of intangibles		15,808			15,807		31,616			31,616
Impairment of goodwill		2,700,000			-		2,700,000			-
Employee retention credit (ERC)		(1,298,241	)		-		(1,298,241	)		-
Stock-based compensation expense		898,008			532,636		1,372,217			915,464
Non-GAAP net (loss) income	$	(83,921	)	$	871,265	$	5,584		$	1,849,136
Non-GAAP net (loss) income per share:
Basic	$	(0.00	)	$	0.04	$	0.00		$	0.10
Diluted	$	(0.00	)	$	0.04	$	0.00		$	0.09
Weighted average common shares outstanding:
Basic		20,397,741			19,940,902		20,325,029			19,416,832
Diluted		20,397,741			21,180,490		20,841,127			20,346,917

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

41

all of our obligations which require cash. The following table reconciles cash provided by or used in operating activities, the most directly comparable GAAP financial measure, to free cash flow:

	For the Six Months Ended June 30,
Cash flow:	2023			2022
Net cash provided by (used in) operating activities	$	2,048,934		$	(7,576,355	)
Capital expenditures		(299,891	)		(141,685	)
Free cash flow	$	1,749,043		$	(7,718,040	)

42

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Limitation on Effectiveness of Controls

The design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals. The inherent limitations in any control system include the realities that judgments related to decision-making can be faulty, and that reduced effectiveness in controls can occur because of simple errors or mistakes. Due to the inherent limitations in a cost-effective control system, misstatements due to error may occur and may not be detected.

Evaluation of Disclosure Controls and Procedures

Management is required to evaluate our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures are controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at a reasonable assurance level as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of our material pending legal proceeding, please see Note 10, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

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, 2022, 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.

On August 8, 2023, Jack Harrison and Sita Lowman tendered their resignations from the Company’s board of directors (the “Board”) and the relevant committees thereof, effective September 30, 2023. Mr. Harrison’s and Ms. Lowman’s decision to resign from their positions as directors on the Company’s Board was consistent with the Company’s previously announced plans to reprofile the Board, and was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

On August 8, 2023, the Board appointed Michael Knowles, the Company’s Chief Executive Officer and President, and retired Admiral Michael Dumont, a member of the Company’s advisory board, as directors of the Company, effective September 30, 2023, to fill the vacancies created by the resignations of Mr. Harrison and Ms. Lowman. Commencing September 30, 2023, Mr. Knowles and Mr. Dumont will hold the director positions until the Company’s next annual meeting of stockholders or until their respective successors are elected and qualified, subject to their earlier death, resignation or removal. The Company has not yet determined which committees of the Board, if any, Mr. Knowles and Mr. Dumont may be appointed to.

There is no arrangement or understanding between Mr. Knowles or Mr. Dumont and any other person pursuant to which either Mr. Knowles or Mr. Dumont were selected as directors of the Company. Other than pursuant to the employment agreement previously entered into by and between the Company and Mr. Knowles, and in the case of Mr. Dumont, the Company’s formal plan for compensating its non-executive directors for their services, there are no plans, contracts or arrangements or amendments to any plans, contracts or arrangements entered into with Mr. Knowles or Mr. Dumont in connection with their election to the Board, nor were there any equity grants or awards made to either of Mr. Knowles or Mr. Dumont in connection therewith. Neither Mr. Knowles nor Mr. Dumont is a participant in, nor are they to be a participant in, any related-person transaction or proposed related-person transaction required to be disclosed by Item 404(a) of Regulation S-K under the Exchange Act.

44

Item 6. Exhibits.

Exhibit Index

Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
2.1	Agreement and Plan of Merger and Reorganization, dated August 22, 2018, with Concept Development Inc.	8-K	001-38371	2.1	September 6, 2018
2.2	Share Purchase Agreement, dated October 31, 2018, with Bressner Technology GmbH.	8-K	001-38371	2.1	November 6, 2018
3.1	Amended and Restated Certificate of Incorporation (currently in effect).	8-K/A	001-38371	3.1	March 21, 2018
3.2	Bylaws, as amended (currently in effect).	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
4.1	Second Amended and Restated Investors’ Rights Agreement, dated January 2007.	S-1	333-222121	4.2	December 18, 2017
4.2	Common Shareholder Piggyback Registration Rights Agreement, dated July 15, 2016.	S-1	333-222121	4.3	December 18, 2017
10.1	Amended and Restated Employment Agreement between One Stop Systems, Inc. and David Raun, dated April 3, 2023.	8-K	001-38371	10.1	April 7, 2023
10.2	Executive Employment Agreement between One Stop Systems, Inc. and Michael Knowles, executed May 16, 2023.	8-K	001-38371	10.2	May 22, 2023
10.3	Executive Employment Agreement between One Stop Systems, Inc. and John Morrison, executed June 1 2023.	8-K	001-38371	10.1	June 7, 2023
10.4	Executive Employment Agreement between One Stop Systems, Inc. and Jim Ison, executed June 4, 2023.	8-K	001-38371	10.2	June 7, 2023

45

31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X
31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	*
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	*
101 INS	Inline XBRL Instance Document	**
101 SCH	Inline XBRL Taxonomy Extension Schema Document	**
101 CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document	**
101 LAB	Inline XBRL Taxonomy Extension Label Linkbase Document	**
101 PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document	**
101 DEF	Inline XBRL Taxonomy Extension Definition Linkbase 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.

46

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	One Stop Systems, Inc.
Date: August 10, 2023	By:	/s/ Michael Knowles
		Michael Knowles
		President and Chief Executive Officer (Principal Executive Officer)
Date: August 10, 2023	By:	/s/ John W. Morrison Jr.
		John W. Morrison Jr.
		Chief Financial Officer (Principal Financial and Accounting Officer)

47

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael Knowles, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of One Stop Systems, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 10, 2023	By:	/s/ Michael Knowles
		Michael Knowles
		President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John W. Morrison Jr., certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of One Stop Systems, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 10, 2023	By:	/s/ John W. Morrison Jr.
		John W. Morrison Jr.
		Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of One Stop Systems, Inc. (the “Company”) for the period ended June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Knowles, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 10, 2023	By:	/s/ Michael Knowles
		Michael Knowles
		President and Chief Executive Officer (Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of One Stop Systems, Inc. (the “Company”) for the period ended June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John W. Morrison Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 10, 2023	By:	/s/ John W. Morrison Jr.
		John W. Morrison Jr.
		Chief Financial Officer (Principal Accounting and Financial Officer)

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2023	Jul. 31, 2023
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2023
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q2
Trading Symbol	OSS
Title of 12(b) Security	Common Stock, $0.0001 par value per share
Security Exchange Name	NASDAQ
Entity Registrant Name	One Stop Systems, Inc.
Entity Central Index Key	0001394056
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	false
Entity Shell Company	false
Document Quarterly Report	true
Document Transition Report	false
Entity Common Stock, Shares Outstanding		20,543,024
Entity File Number	001-38371
Entity Tax Identification Number	33-0885351
Entity Incorporation, State or Country Code	DE
Entity Address, Address Line One	2235 Enterprise Street #110
Entity Address, City or Town	Escondido
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	92029
City Area Code	760
Local Phone Number	745-9883

XML

CONSOLIDATED BALANCE SHEETS - USD ($)	Jun. 30, 2023	Dec. 31, 2022
Current assets
Cash and cash equivalents	$ 6,100,317	$ 3,112,196
Short-term investments (Note 3)	9,321,456	10,123,535
Accounts receivable, net (Note 4)	9,225,346	11,327,244
Inventories, net (Note 5)	21,463,925	20,775,366
Prepaid expenses and other current assets	1,231,609	502,156
Total current assets	47,342,653	45,840,497
Property and equipment, net	2,432,900	2,570,124
Operating lease right-of use assets	569,296	731,043
Deposits and other	48,093	60,243
Goodwill	4,420,510	7,120,510
Intangible assets, net (Note 6)	10,538	42,154
Total Assets	54,823,990	56,364,571
Current liabilities
Accounts payable	2,811,093	4,592,713
Accrued expenses and other liabilities (Note 7)	4,987,695	3,013,869
Current portion of operating lease obligation (Note 10)	583,675	536,588
Current portion of notes payable (Note 8)	3,012,945	2,952,447
Total current liabilities	11,395,408	11,095,617
Long-term debt, net of current portion (Note 8)		409,294
Deferred tax liability, net	136,746	138,662
Operating lease obligation, net of current portion (Note 10)	148,830	397,249
Total liabilities	11,680,984	12,040,822
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock, $0.0001 par value; 50,000,000 shares authorized; 20,543,024 and 20,084,528 shares issued and outstanding, respectively	2,053	2,008
Additional paid-in capital	46,404,428	45,513,807
Accumulated other comprehensive income	1,239,084	510,485
Accumulated deficit	(4,502,559)	(1,702,551)
Total stockholders’ equity	43,143,006	44,323,749
Total Liabilities and Stockholders' Equity	$ 54,823,990	$ 56,364,571

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Jun. 30, 2023	Dec. 31, 2022
Statement Of Financial Position [Abstract]
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	20,543,024	20,084,528
Common stock, shares outstanding	20,543,024	20,084,528

XML

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Income Statement [Abstract]
Revenue	$ 17,211,532	$ 18,303,343	$ 33,993,426	$ 35,356,020
Cost of revenue	12,413,594	13,103,025	24,124,726	25,015,047
Gross profit	4,797,938	5,200,318	9,868,700	10,340,973
Operating expenses:
General and administrative	3,072,880	1,821,445	5,357,981	3,596,133
Impairment of goodwill	2,700,000		2,700,000
Marketing and selling	1,483,965	1,724,913	3,270,646	3,196,633
Research and development	954,650	1,252,037	2,149,978	2,496,152
Total operating expenses	8,211,495	4,798,395	13,478,605	9,288,918
(Loss) income from operations	(3,413,557)	401,923	(3,609,905)	1,052,055
Other income (expense), net:
Interest income	104,785	55,507	215,051	106,512
Interest expense	(23,939)	(44,949)	(56,644)	(103,665)
Employee retention credit (ERC)	1,298,241		1,298,241
Other income (expense), net	31,837	(4,169)	11,614	97,952
Total other income, net	1,410,924	6,389	1,468,262	100,799
Income before income taxes	(2,002,633)	408,312	(2,141,643)	1,152,854
Provision for income taxes	396,863	85,490	658,365	250,798
Net (loss) income	$ (2,399,496)	$ 322,822	$ (2,800,008)	$ 902,056
Net (loss) income per share:
Basic	$ (0.12)	$ 0.02	$ (0.14)	$ 0.05
Diluted	$ (0.12)	$ 0.02	$ (0.14)	$ 0.04
Weighted average common shares outstanding:
Basic	20,397,741	19,940,902	20,325,029	19,416,832
Diluted	20,397,741	21,180,490	20,325,029	20,346,917

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UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Statement Of Income And Comprehensive Income [Abstract]
Net (loss) income	$ (2,399,496)	$ 322,822	$ (2,800,008)	$ 902,056
Other comprehensive income (loss):
Net unrealized income (loss) on short-term investments	(13,078)	4,577	867	(1,419)
Currency translation adjustment	388,642	(168,384)	727,732	(218,750)
Total other comprehensive income (loss)	375,564	(163,807)	728,599	(220,169)
Comprehensive (loss) income	$ (2,023,932)	$ 159,015	$ (2,071,409)	$ 681,887

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UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - USD ($)	Total	Adjustment	Common Stock	Common Stock Adjustment	Additional Paid-in Capital	Additional Paid-in Capital Adjustment	Accumulated Other Comprehensive Income	Accumulated Other Comprehensive Income Adjustment	Accumulated (Deficit) Earnings	Accumulated (Deficit) Earnings Adjustment
Balance at Dec. 31, 2021	$ 41,958,716	$ 41,914,183	$ 1,877	$ 1,877	$ 41,232,441	$ 41,232,441	$ 153,361	$ 153,361	$ 571,037	$ 526,504
Balance (ASC 842) at Dec. 31, 2021		(44,533)								(44,533)
Balance, Shares at Dec. 31, 2021			18,772,214	18,772,214
Stock-based compensation	382,828				382,828
Exercise of stock options, RSUs and warrants	29,670		$ 10		29,660
Exercise of stock options, RSU's and warrants, Shares			105,969
Taxes paid on net issuance of employee stock options	(20,478)				(20,478)
Conversion of senior secured convertible debt to equity	2,590,909		$ 104		2,590,805
Conversion of senior secured convertible debt to equity, Shares			1,036,365
Currency translation adjustment	(50,366)						(50,366)
Net unrealized gains (losses) on short-term investments	(5,996)						(5,996)
Net (loss) income	579,234								579,234
Balance at Mar. 31, 2022	45,419,984		$ 1,991		44,215,256		96,999		1,105,738
Balance, Shares at Mar. 31, 2022			19,914,548
Balance at Dec. 31, 2021	41,958,716	41,914,183	$ 1,877	$ 1,877	41,232,441	$ 41,232,441	153,361	$ 153,361	571,037	526,504
Balance (ASC 842) at Dec. 31, 2021		$ (44,533)								$ (44,533)
Balance, Shares at Dec. 31, 2021			18,772,214	18,772,214
Net unrealized gains (losses) on short-term investments	(1,419)
Net (loss) income	902,056
Balance at Jun. 30, 2022	45,982,509		$ 2,001		44,618,756		(66,808)		1,428,560
Balance, Shares at Jun. 30, 2022			20,008,885
Balance at Mar. 31, 2022	45,419,984		$ 1,991		44,215,256		96,999		1,105,738
Balance, Shares at Mar. 31, 2022			19,914,548
Stock-based compensation	532,636				532,636
Exercise of stock options, RSUs and warrants	2,558		$ 10		2,548
Exercise of stock options, RSU's and warrants, Shares			94,337
Taxes paid on net issuance of employee stock options	(131,684)				(131,684)
Currency translation adjustment	(168,384)						(168,384)
Net unrealized gains (losses) on short-term investments	4,577						4,577
Net (loss) income	322,822								322,822
Balance at Jun. 30, 2022	45,982,509		$ 2,001		44,618,756		(66,808)		1,428,560
Balance, Shares at Jun. 30, 2022			20,008,885
Balance at Dec. 31, 2022	44,323,749		$ 2,008		45,513,807		510,485		(1,702,551)
Balance, Shares at Dec. 31, 2022			20,084,528
Stock-based compensation	474,209				474,209
Exercise of stock options, RSUs and warrants			$ 27		(27)
Exercise of stock options, RSU's and warrants, Shares			274,591
Taxes paid on net issuance of employee stock options	(326,534)				(326,534)
Currency translation adjustment	339,090						339,090
Net unrealized gains (losses) on short-term investments	13,945						13,945
Net (loss) income	(400,512)								(400,512)
Balance at Mar. 31, 2023	44,423,947		$ 2,035		45,661,455		863,520		(2,103,063)
Balance, Shares at Mar. 31, 2023			20,359,119
Balance at Dec. 31, 2022	44,323,749		$ 2,008		45,513,807		510,485		(1,702,551)
Balance, Shares at Dec. 31, 2022			20,084,528
Net unrealized gains (losses) on short-term investments	867
Net (loss) income	(2,800,008)
Balance at Jun. 30, 2023	43,143,006		$ 2,053		46,404,428		1,239,084		(4,502,559)
Balance, Shares at Jun. 30, 2023			20,543,024
Balance at Mar. 31, 2023	44,423,947		$ 2,035		45,661,455		863,520		(2,103,063)
Balance, Shares at Mar. 31, 2023			20,359,119
Stock-based compensation	898,008				898,008
Exercise of stock options, RSUs and warrants	51,049		$ 18		51,031
Exercise of stock options, RSU's and warrants, Shares			183,905
Taxes paid on net issuance of employee stock options	(206,066)				(206,066)
Currency translation adjustment	388,642						388,642
Net unrealized gains (losses) on short-term investments	(13,078)						(13,078)
Net (loss) income	(2,399,496)								(2,399,496)
Balance at Jun. 30, 2023	$ 43,143,006		$ 2,053		$ 46,404,428		$ 1,239,084		$ (4,502,559)
Balance, Shares at Jun. 30, 2023			20,543,024

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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	6 Months Ended
	Jun. 30, 2023	Jun. 30, 2022
Cash flows from operating activities:
Net (loss) income	$ (2,800,008)	$ 902,056
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Deferred benefit for income taxes		(1,648)
(Gain) loss on disposal of property and equipment	(69,916)	36,064
Provision (recovery) for bad debt	38,653	(5,524)
Impairment of goodwill	2,700,000
Warranty reserves	(8,216)	(35,465)
Amortization of intangibles	31,616	31,616
Depreciation	510,912	492,604
Inventory reserves	386,998	158,697
Amortization of debt discount		1,224
Stock-based compensation expense	1,372,217	915,464
Employee retention credit (ERC)	(1,298,241)
Changes in operating assets and liabilities:
Accounts receivable	2,526,139	(5,041,981)
Inventories	(918,495)	(8,962,525)
Prepaid expenses and other current assets	(711,567)	(508,546)
Accounts payable	(1,806,057)	4,429,156
Accrued expenses and other liabilities	2,094,899	12,453
Net cash provided by (used in) operating activities	2,048,934	(7,576,355)
Cash flows from investing activities:
Redemption of short-term investment grade securities	802,945	2,895,285
Proceeds from sale of intangible assets		125,000
Purchases of property and equipment, including capitalization of labor costs for test equipment and ERP	(299,891)	(141,685)
Net cash provided by investing activities	503,054	2,878,600
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants	51,049	32,228
Payment of payroll taxes on net issuance of employee stock options	(532,600)	(152,162)
Proceed on borrowing of notes payable		3,663,009
Repayments on notes payable	(403,115)	(928,612)
Employee Retention Credit Benefit	1,298,241
Net cash provided by financing activities	413,575	2,614,463
Net change in cash and cash equivalents	2,965,563	(2,083,292)
Effect of exchange rates on cash	22,558	(143,051)
Cash and cash equivalents, beginning of period	3,112,196	5,101,174
Cash and cash equivalents, end of period	6,100,317	2,874,831
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	60,615	13,373
Cash paid during the period for income taxes	$ 93,777	30,821
Supplemental disclosure of non-cash flow transactions:
Right of use assets recorded upon adoption of ASC 842		1,203,580
Lease liabilities recorded upon adoption of ASC 842		1,477,419
Conversion of senior secured convertible debt to common stock		$ 2,590,909

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The Company and Basis of Presentation

6 Months Ended

Jun. 30, 2023

Organization Consolidation And Presentation Of Financial Statements [Abstract]

The Company and Basis of Presentation

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Nature of Operations

One Stop Systems, Inc. (“we,” “our,” “OSS,” or the “Company”) was originally incorporated as a California corporation in 1999, after initially being formed as a California limited liability company in 1998. On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with its initial public offering. The Company designs, manufactures, and markets specialized high-performance compute and storage hardware, software, and systems, which are designed to target edge artificial intelligence (“AI”) Transportable deployments. The Company markets its products to manufacturers of automated equipment used for autonomous vehicle, medical, industrial, and military applications, with special focus on platforms that move, such as trucks, planes, and mobile datacenters.

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 June 1, 2020.

On October 31, 2018, OSS GmbH acquired 100% of the outstanding equity of Bressner Technology GmbH, a limited liability company registered under the laws of Germany and located near Munich, Germany (“OSS Europe”). OSS Europe designs and manufactures standard and customized servers, panel PCs, and PCIe accelerator systems. Although, currently, OSS Europe primarily serves as a value-added reseller for the Company in Europe, we are also focused on growing the AI Transportable portion of our business through OSS Europe and leveraging its existing relationships. OSS Europe also provides manufacturing, test, sales, and marketing services for customers throughout Europe, the Middle East and Africa.

As of June 30, 2023, the Company has completed and fulfilled substantially all of its orders associated with its long-term media and entertainment customer and does not anticipate significant business from this customer in the future. This resulted from an acceleration in such 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 is particularly true of their virtual products, which do not require the same level of ruggedization, as this system is not typically operated in harsh environments and for which software is being developed to provide a real-time cloud solution. This customer’s transition to cloud solutions had a negative impact on the Company’s results of operations for the three and six months ended June 30, 2023, and is expected to continue to have a negative impact on the Company’s results of operations for the near term.

As previously disclosed, in 2021, we shifted our primary focus to the development and sale of AI Transportables. Since 2022, we have significantly increased our efforts to penetrate the military and defense sectors in particular. With the formation of a new strategic advisory board in second quarter 2022, and the recent hiring of a new president and chief executive officer, who 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.

The lingering negative impacts of the COVID-19 pandemic and the impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the ongoing military conflict between Russia and Ukraine, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic uncertainty, which has negatively affected our operations. Additionally, during the first half of 2023, the general consensus among economists continued to suggest that a risk of recession will continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations.

We are continuing to experience increased pricing, longer lead-times, unavailability of certain product and limited supplies, protracted delivery dates, changes in minimum order quantities to secure product, and/or shortages of certain parts and supplies that are necessary components for the products and services we offer to our customers. As a result, the Company is continuing to carry increased inventory balances to ensure availability of necessary products and to secure pricing.

These global issues and concerns regarding general economic decline or recession are impacting our business as well as some of our customers, who are experiencing downturns or uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek to renegotiate their contracts. During the three and six months ended June 30, 2023, the Company experienced delays and postponements of committed 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 negatively impacted the Company’s results of operations for the three and six months ended June 30, 2023. 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.

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

In March 2023, Silicon Valley Bank and Signature Bank, and most recently on May 1, 2023, First Republic Bank, were closed and taken over by the FDIC, which created significant market disruption and uncertainty for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system in the United States, and in particular with respect to regional banks. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened and such events could have a material adverse effect on our business and financial condition.

As a result of these global issues, as well as other factors discussed in this Quarterly Report, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long-term impacts of the economic and geopolitical issues, inflation, the Federal Reserve interest rate increases and the potential for a recession. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause our stock price to decline.

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 diving and improve company-wide execution.

In February 2023, the Company announced that David Raun, the Company’s president and chief executive officer as of such date, would be stepping down, effective upon the appointment of his successor. In connection with the anticipated transition, on April 3, 2023, the Company and Mr. Raun entered into an Amended and Restated Employment Agreement (the “A&R Raun Agreement”), which superseded that certain Employment Agreement between the Company and Mr. Raun, dated June 24, 2020, as amended by that Amendment to Employment Agreement, dated July 15, 2020. The term of the A&R Raun Agreement commenced on April 3, 2023, and was to remain in effect until the earlier of (i) June 24, 2023 and (ii) the first date on which Mr. Raun’s successor commenced his or her employment as the chief executive officer of the Company, unless earlier terminated or extended pursuant to terms of the A&R Raun Agreement.

On May 16, 2023, the Company entered into an employment agreement with Michael Knowles, pursuant to which, effective June 5, 2023, Mr. Knowles began serving as president and chief executive officer and president of the Company. Consistent with prior disclosures and the terms and conditions of the A&R Raun Agreement, Mr. Raun stepped down as president and chief executive officer of the Company on June 5, 2023, and the A&R Raun Agreement automatically terminated pursuant to its terms.

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, 2022. Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, 2022 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements. The Company’s management has evaluated all subsequent events and transactions through the date of filing this Quarterly Report.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. Operating results for the three and six month periods ended June 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2023.

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 OSS Europe. Intercompany balances and transactions have been eliminated in consolidation.

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Significant Accounting Policies

6 Months Ended

Jun. 30, 2023

Accounting Policies [Abstract]

Significant Accounting Policies

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, 2022, except for the adoption of ASU 2016-13, ("Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”) as follows:

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, which sets out the principles for the recognition of measurement of credit losses on financial instruments. This standard provides guidance on the impairment of financial instruments that is based on expected losses rather than probable or incurred losses. Under this new guidance, the Company will recognize, as an allowance, our estimate of expected credit losses based upon historical

and current information, and reasonable and supportable forecasts of future events and circumstances, as well as estimates of prepayments. Under this model, we are required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset.

Accounts receivable have been reduced by an allowance for doubtful accounts. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable after considering current market conditions and supportable forecasts when appropriate. This estimate is a result of management's evaluation of collectability, customer creditworthiness, historical levels of credit losses, and future expectations.

The Company shall recognize an allowance for credit losses rather than a reduction to the carrying value of the asset for debt securities. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee.

Upon adoption of this standard on January 1, 2023, there was no immediate material impact to the Company's consolidated financial position, results of operations or cash flows. On an ongoing basis, the Company will contemplate forward-looking economic conditions in recording lifetime expected credit losses for the Company’s financial assets measured at cost, such as the Company’s trade receivables and certain short-term investments.

Use of Estimates

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

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

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. The Company reviews the impairment of goodwill for impairment annually at yearend. The Company completed its annual assessment for goodwill impairment and determined that goodwill is not impaired as of December 31, 2022 and no adjustment was required.

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

Due to the COVID-19 pandemic, Ukraine war, inflationary pressures, other macroeconomic factors, the loss of our media and entertainment customer (which has historically been one of our largest customers), 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

Management has evaluated recent accounting pronouncements through the date of these consolidated financial statements and believes that the are no recent accounting pronouncements that will have a material impact on the Company's financial statements.

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 provides 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 years 2020 and 2021. For the year 2020, the maximum credit is based upon the lesser of 50% of eligible wages or $5,000 for the year. For the first three quarters only of the year 2021, the maximum quarterly credit is based upon the lesser of 70% of eligible wages or $7,000 per quarter. The total maximum program credit per employee is $26,000.

The Company applied for the ERC program and as of June 30, 2023, has received $1,516,034 in credits, including interest, and paid commissions of $217,793 to a vendor who assisted with the calculations and filing of the application. The net proceeds of $1,298,241 have been reported as other income in the accompanying consolidated statements of operations. Income is recognized when reasonably assured of receipt based upon notice.

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Short-Term Investments

6 Months Ended

Jun. 30, 2023

Investments Debt And Equity Securities [Abstract]

Short-Term Investments

NOTE 3 - SHORT-TERM INVESTMENTS

The Company’s short-term investments by significant investment category as of June 30, 2023, were as follows:

Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	2,431,672	$	25,066	$	-		$	3,268	$	2,460,006
Certificates of deposit		6,806,683		-		(9,244	)		64,011		6,861,450
	$	9,238,355	$	25,066	$	(9,244	)	$	67,279	$	9,321,456

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

The Company’s short-term investments by significant investment category as of December 31, 2022, were as follows:

Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	5,139,940	$	22,646	$	-		$	3,506	$	5,166,092
Certificates of deposit		4,950,527		-		(7,691	)		14,607		4,957,443
	$	10,090,467	$	22,646	$	(7,691	)	$	18,113	$	10,123,535

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

Cash alternatives represents cash balances in savings accounts 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 one issuer. The policy requires investments in fixed income instruments denominated and payable in U.S. dollars only and requires investments to be investment grade, with a primary objective of minimizing the potential risk of principal loss.

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Accounts Receivable

6 Months Ended

Jun. 30, 2023

Accounts Receivable Net Current [Abstract]

Accounts Receivable

NOTE 4 -ACCOUNTS RECEIVABLE

Accounts receivable, net consisted of the following:

	June 30,			December 31,
	2023			2022
Accounts receivable	$	9,310,063		$	11,372,598
Less: allowance for doubtful accounts		(84,717	)		(45,354	)
	$	9,225,346		$	11,327,244

Provision (recovery) for bad debt expense related to accounts receivable was $8,653 and ($5,524) for the three month periods ended June 30, 2023 and 2022, respectively, and $38,653 and ($5,524) for the six month periods ended June 30, 2023 and 2022, respectively.

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Inventories

6 Months Ended

Jun. 30, 2023

Inventory Disclosure [Abstract]

Inventories

NOTE 5 – INVENTORIES

Inventories, net consisted of the following:

	June 30,			December 31,
	2023			2022
Raw materials	$	10,944,553		$	9,370,162
Sub-assemblies		849,968			892,123
Work-in-process		700,935			1,343,239
Finished goods		10,379,886			10,357,452
		22,875,342			21,962,976
Less: allowances for obsolete and slow-moving inventories		(1,411,417	)		(1,187,610	)
	$	21,463,925		$	20,775,366

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Long-Lived Intangible Assets

6 Months Ended

Jun. 30, 2023

Goodwill And Intangible Assets Disclosure [Abstract]

Long-Lived Intangible Assets

NOTE 6 – LONG LIVED INTANGIBLE ASSETS

Definite lived intangible assets related to acquisition were as follows, as of June 30, 2023:

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	2 months	$	2,084,515	$	(2,073,977	)	$	10,538
Drawings and technology	36 months	0 months		760,207		(760,207	)		-
Trade name, trademarks & other	24 to 36 months	0 months		447,274		(447,274	)		-
Non-compete	36 months	0 months		246,797		(246,797	)		-
			$	3,538,793	$	(3,528,255	)	$	10,538

Definite lived intangibles assets related to acquisitions were as follows, as of December 31, 2022:

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	8 months	$	2,084,515	$	(2,042,361	)	$	42,154
Drawings and technology	36 months	0 months		760,207		(760,207	)		-
Trade name, trademarks & other	24 to 36 months	0 months		447,274		(447,274	)		-
Non-compete	36 months	0 months		246,797		(246,797	)		-
			$	3,538,793	$	(3,496,639	)	$	42,154

Amortization expense recognized during the three month periods ended June 30, 2023 and 2022, was $15,808 and $15,807, respectively, and $31,616 and $31,616 for the six month periods ended June 30, 2023 and 2022, respectively.

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Accrued Expenses and Other Liabilities

6 Months Ended

Jun. 30, 2023

Accrued Liabilities And Other Liabilities [Abstract]

Accrued Expenses and Other Liabilities

NOTE 7 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consisted of the following:

	June 30,		December 31,
	2023		2022
Accrued compensation and related liabilities	$	1,383,311	$	989,478
Deferred revenue		286,955		378,952
Customer deposits		270,025		61,696
Warranty reserve		582,636		584,268
Trade and other taxes		1,148,261		225,743
Other accrued expenses		1,316,507		773,732
	$	4,987,695	$	3,013,869

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Debt

6 Months Ended

Jun. 30, 2023

Debt Disclosure [Abstract]

Debt

NOTE 8 – DEBT

Bank Lines of Credit

In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 with Torrey Pines Bank which was renewed in April 2023, and renews on an annual basis at the current prime rate. To access this line of credit the Company must maintain cash and investments balances at a minimum of $4,000,000. No balance was outstanding on June 30, 2023 and December 31, 2022, respectively.

OSS Europe has three revolving lines of credit with German institutions, including Uni Credit Bank AG, Commerzbank AG, and VR Bank, with total availability of up to €2,200,000 (US$2,401,907) as of June 30, 2023. Borrowings under the lines of credit bear interest at a variable rate of Euribor plus a stated rate. The rates as of June 30, 2023, for the lines of credit ranged from 3.1% to 5.62%, with the balances remaining open indefinitely or until occurrence of a defined change of control event. There were no outstanding lines of credit balances as of June 30, 2023 and December 31, 2022, respectively.

Foreign Debt Obligations

OSS Europe had five term loans outstanding as of June 30, 2023, with an aggregate balance outstanding of €2,759,673 (US$3,012,945) as follows:

•On February 1, 2022, OSS Europe converted €500,000 of its line of credit from VR Bank into a note payable. On August 1, 2022, this note was extended through February 1, 2023, with accrued interest having been paid current as of the original maturity date. On February 1, 2023, this note was further extended through July 31, 2023, and the interest rate was increased to 4.76%, with accrued interest having been paid current as of February 1, 2023. The balance outstanding as of June 30, 2023, and December 31, 2022 was €500,000 (US$545,888) and €500,000 (US$536,616), respectively;

•On February 16, 2022, OSS Europe converted €500,000 of its line of credit from UniCredit Bank into a note payable. On August 16, 2022, this note was extended through February 16, 2023, with accrued interest having been paid current as of the original maturity date. On February 16, 2023, this note was further extended through August 16, 2023, and the interest rate was increased to 4.70%, with accrued interest having been paid current as of February 16, 2023. The outstanding balance as of June 30, 2023 and December 31, 2022, was €500,000 (US$545,888) and €500,000 (US$536,616), respectively;

•On April 9, 2021, OSS Europe converted €500,000 of its line of credit from Commerzbank AG into a note payable. The note was due on September 30, 2021, with a payment of principal and interest due upon maturity. This loan was paid in full on September 30, 2021, with proceeds from a new note with similar terms. This new note had an original maturity date of June 30, 2022; however, on September 30, 2022, this note was further extended through March 31, 2023, with accrued interest having been paid current as of the revised maturity date. On March 30, 2023, this note was further extended through September 29, 2023, and the interest rate was increased to 4.60%, with accrued interest having been paid current as of March 30, 2023. The balance outstanding on the new note as of June 30, 2023 and December 31, 2022, was €500,000 (US$545,888), and €500,000 (US$536,616), respectively;

•On June 18, 2021, OSS Europe converted €500,000 of its line of credit from UniCredit Bank into a note payable. The note was originally due December 17, 2021, and subsequently extended through June 17, 2022. On June 17, 2022, this note was further extended through December 19, 2022, with accrued interest having been paid current as of the revised maturity date. On December 19, 2022, this note was further extended through June 19, 2023. However, on June 19, 2023, this note was further extended through December 19, 2023, and the interest rate was increased to 5.8%, with accrued interest having been paid current as of June 19, 2023. The balance outstanding on the new note as of June 30, 2023 and December 31, 2022, was €500,000 (US$545,888) and €500,000 (US$536,616) respectively; and

•On June 30, 2022, OSS Europe borrowed €1,500,000 (US$1,468,173) from Commerzbank AG, which bears interest at 2.55%, is due in June 2024, and is repayable in twenty-four monthly installments, with payments beginning July 31, 2022. The balance outstanding as of June 30, 2023 and December 31, 2022, was €759,673 (US$829,393) and €1,132,356 (US$1,215,279), respectively. This loan is collateralized by accounts receivable attributable to a specific customer.

Senior Secured Convertible Note

On April 20, 2020, the Company entered into a Securities Purchase Agreement with an institutional investor, providing for the issuance by the Company of Senior Secured Convertible Promissory Notes with a principal face value of up to $6,000,000. The notes were, subject to certain conditions, convertible into shares of the Company’s common stock, par value $0.0001 per share, at an initial conversion price per share of $2.50. Notes issued under the Securities Purchase Agreement had a 10% original issue discount.

At the initial closing of this offering, the Company issued notes in the principal amount of $3,000,000 with a 10% original issue discount, resulting in an aggregate purchase price of $2,700,000 at the initial closing. The notes bore no interest rate (except upon event of default) and, unless earlier converted or redeemed, were scheduled to mature on April 1, 2022.

Commencing July 1, 2020, the Company made monthly amortization payments equal to 1/22nd of the initial principal, any accrued and unpaid interest, and late charges and any deferred or accelerated amount, of such note, which could be satisfied in cash at a redemption price equal to 105% of such installment amount (110% of such installment amount on notes issued at additional closings). The remaining balance of the notes of $2,590,909 was converted into Company common stock on March 30, 2022; accordingly, the outstanding balance of the notes as of June 30, 2023 and 2022, was $0, respectively.

The original issue discount of 10% on the note was recorded as a debt discount, decreasing the note payable. This debt discount is amortized to interest expense using the effective interest rate method over the term of the loan. For the three month periods ended June 30, 2023 and 2022, total debt discount amortization was $0, respectively, and for the six month periods ended June 30, 2023 and 2022, total debt discount amortization was $0 and $1,161, respectively. Such amounts are included in interest expense in the accompanying consolidated statements of operations.

Debt issuance costs in the amount of $316,274 related to this indebtedness were deducted from the face value of the note. Such costs are amortized to interest expense using the effective interest rate method over the term of the loan. Total debt issuance costs amortized during the three month periods ended June 30, 2023 and 2022, was $0, respectively and for the six month periods ended June 30, 2023 and 2022 was $0 and $1,223, respectively. Such amounts are included in interest expense in the accompanying consolidated statements of operations.

A summary of outstanding debt obligations as of June 30, 2023, was as follows:

Loan Description	Current Interest Rate	Maturity Date	Balance (Euro)		Balance ($)		Current Portion		Long-term Portion
Foreign:
VR Bank	4.760%	July-23	€	500,000	$	545,888	$	545,888	$	-
Uni Credit Bank AG	4.700%	August-23		500,000		545,888		545,888		-
Commerzbank AG	4.600%	September-23		500,000		545,888		545,888		-
Uni Credit Bank AG	5.800%	December-23		500,000		545,888		545,888		-
Commerzbank AG	2.550%	June-24		759,673		829,393		829,393		-
			€	2,759,673	$	3,012,945	$	3,012,945	$	-

Total future principal payments under notes payable as of June 30, 2023, was as follows:

Period Ending June 30,	Foreign			Total
2024	$	3,012,945		$	3,012,945
2025		-			-
Total minimum payments		3,012,945			3,012,945
Current portion of notes payable		(3,012,945	)		(3,012,945	)
Notes payable, net of current portion	$	-		$	-

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Stockholders' Equity

6 Months Ended

Jun. 30, 2023

Stockholders Equity Note [Abstract]

Stockholders' Equity

NOTE 9 – STOCKHOLDERS’ EQUITY

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

2017 Equity Incentive Plan Amendments

On October 10, 2017, the Company’s board of directors approved and adopted the 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, stock bonuses and performance-based awards. An aggregate of 1,500,000 shares of common stock were initially reserved for issuance under the Plan.

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

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

On March 16, 2023, the Company’s board of directors unanimously approved, subject to stockholder approval, an amendment to the 2017 Plan (the “Plan Amendment”), which if approved by our stockholders, would

have resulted in an increase in the number of shares of common stock authorized for issuance thereunder from 3,000,000 to 4,500,000 shares of common stock. The Plan Amendment was presented to stockholders for approval at the Company’s 2023 Annual Meeting of Stockholders; however, the proposal was not approved, and therefor the Plan Amendment was not implemented and the 2017 Plan was not altered.

Executive Employment Agreements

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

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

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

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

Stock Options

A summary of stock option activity under each of the Company’s equity incentive plans during the six month period ended June 30, 2023, was as follows:

	Stock Options Outstanding
	Number of Underlying Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding on January 1, 2023		970,680		$	2.07		5.61	$	864,762
Granted		400,000		$	2.95		9.94		-
Forfeited / Canceled		(1,250	)	$	2.10		-	$	962
Exercised		(20,935	)	$	0.61		-	$	47,233
Outstanding on June 30, 2023		1,348,495		$	2.35		2.24	$	816,567
Exercisable as of June 30, 2023		948,495		$	2.10		2.24	$	816,567
Vested and expected to vest as of June 30, 2023		948,495		$	2.10		2.24	$	816,567

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 no options granted under the Company's 2017 Plan during the six month period ended June 30, 2022. The following table presents the grant date fair value of options vested and the intrinsic value of options exercised:

	For the Six Months Ended June 30,
	2023			2022
Expected term (in years)		6.16			-
Expected volatility		72.73	%		0.00	%
Risk-free interest rate		3.79	%		0.00	%
Weighted average grant date fair value per share	$	2.95		$	-
Grant date fair value of options vested	$	933,399		$	2,005,285
Intrinsic value of options exercised	$	47,233		$	119,927

As of June 30, 2023, the amount of unearned stock-based compensation estimated to be expensed from 2023 through 2027 related to unvested stock options is $782,295, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 2.27 years.

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 Company’s 2017 Plan in connection with the hiring and retention of personnel and are subject to certain conditions. RSUs vest quarterly or semi-annually over a period of one to four years and are typically forfeited if employment is terminated before the RSUs vest. The compensation expense related to the RSUs is calculated as the fair value of the common stock on the grant date and is amortized to expense over the vesting period and is adjusted for estimated forfeitures.

The Company’s RSU activity for the six months ended June 30, 2023, was as follows:

	Restricted Stock Units
	Number of Underlying Shares			Weighted Average Grant Date Fair Value
Unvested on January 1, 2023		907,507		$	4.04
Granted		889,528		$	2.80
Vested		(512,805	)	$	3.79
Canceled		(97,798	)	$	4.32
Unvested on June 30, 2023		1,186,432		$	3.19

As of June 30, 2023, there was $4,177,442 of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.73 years.

Stock-based compensation expense for the three and six month periods ended June 30, 2023 and 2022, was comprised of the following:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Stock-based compensation classified as:	2023		2022		2023		2022
General and administrative	$	651,291	$	300,346	$	945,286	$	502,441
Production		86,528		70,959		153,969		126,415
Marketing and selling		86,516		104,364		146,504		186,544
Research and development		73,674		56,967		126,458		100,064
	$	898,009	$	532,636	$	1,372,217	$	915,464

Warrants

The following table summarizes the Company’s warrant activity during the six months ended June 30, 2023:

	Number of Warrants			Weighted Average Exercise Price
Warrants outstanding – January 1, 2023		451,112		$	5.37
Warrants granted		-		$	-
Warrants expired		(380,000	)	$	6.00
Warrants exercised		(28,090	)	$	1.78
Warrants outstanding – June 30, 2023		43,022		$	2.15

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2023

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Legal

We are subject to litigation, claims, investigations, and audits arising from time to time in the ordinary course of our business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of any such matters as of June 30, 2023 and December 31, 2022, are not expect to have a materially adverse effect on the consolidated financial position or results of operations of the Company.

Guarantees and Indemnities

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

Leases

The Company leases its offices, manufacturing, and warehouse facility in San Diego County under a non-cancelable operating lease. Our corporate headquarters are in a leased space comprising of approximately 29,342 square feet in Escondido, California under a lease that was modified in February 2019 and expires in August 2024. The Company also leases a 3,208 square foot facility in Salt Lake City, Utah that houses our Ion software development team that was scheduled to expire in June 2023 pursuant to its terms, and was extended through June 2025. The Company is the lessee of 1,632 square feet located in Anaheim, California, which was scheduled to expire in June 2023 pursuant to its terms, and was extended through June 2025. OSS Europe leases space comprised of 11,836 square feet on a month-to-month basis.

Other information related to leases as of the three and six month periods ended June 30, 2023 and 2022, was as follows:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Operating lease cost	$	196,538	$	165,785	$	334,107	$	326,695
Total lease cost	$	196,538	$	165,785	$	334,107	$	326,695
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows from operating leases	$	81,843	$	165,785	$	243,185	$	326,695
Right-of-use assets obtained in exchange for new operating lease liabilities		-		-		-		-
Weighted-average remaining lease term - operating leases					16.2 months		25.8 months
Weighted-average discount rate - operating leases					12.1%		12.8%

The following table presents a maturity of the Company’s operating lease liabilities as of June 30, 2023:

Year	Operating Leases
Remaining payments in 2023	$	306,030
2024		446,361
2025		21,061
2026		2,408
Total lease payments	$	775,860
Less: Amount representing interest		(43,355	)
Present value of lease payment		732,505
Less: current portion of operating lease obligation		(583,675	)
Operating lease obligation, net of current portion	$	148,830

Purchase Commitments

In the normal course of business, the Company may enter into purchase commitments for inventory components to be delivered based upon non-cancellable, pre-established, delivery schedules that are over a period that may exceed one year. Total non-cancellable purchase orders as of June 30, 2023, were $10,762,867.

Customer Concentration

During the three month period ended June 30, 2023, the Company had two customers that accounted for (in the aggregate) approximately 29% of revenue, and during the three month period ended June 30, 2022, the Company had one customer that accounted for approximately 35% of revenue, for which each of such customers represented greater than 10% of our consolidated quarterly revenue.

During the six month period ended June 30, 2023, the Company had two customers that accounted for (in the aggregate) approximately 33% of revenue, and during the six month period ended June 30, 2022, the Company had one customer that accounted for approximately 31% of revenue, for which each of such customers represented greater than 10% of our consolidated quarterly revenue.

As of June 30, 2023 and December 31, 2022, the Company had two customers that accounted for (in the aggregate) approximately 29% and 47% of trade accounts receivables, respectively, for which each of such customer’s balances represented greater than 10% of our consolidated trade accounts receivable balance.

During the three month periods ended June 30, 2023 and 2022, the Company had approximately 36% and 23%of purchases, respectively, from vendors/suppliers for which each of such vendors represents greater than 10% of our consolidated purchases.

During the six month periods ended June 30, 2023 and 2022, the Company had approximately 32% and 32% of purchases, respectively, from vendors/suppliers for which each represents greater than 10% of our consolidated purchases.

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Net (Loss) Income Per Share

6 Months Ended

Jun. 30, 2023

Earnings Per Share [Abstract]

Net (Loss) Income Per Share

NOTE 11 – NET (LOSS) INCOME PER SHARE

Basic and diluted net (loss) income per share were calculated as follows for the three and six periods ended June 30, 2023 and 2022:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2023			2022		2023			2022
Basic and diluted net (loss) income per share:
Numerator:
Net (loss) income	$	(2,399,496	)	$	322,822	$	(2,800,008	)	$	902,056
Denominator:
Weighted average common shares outstanding - basic		20,397,741			19,940,902		20,325,029			19,416,832
Effect of dilutive securities		-			1,239,588		-			930,085
Weighted average common shares outstanding - diluted		20,397,741			21,180,490		20,325,029			20,346,917
Net (loss) income per share:
Basic	$	(0.12	)	$	0.02	$	(0.14	)	$	0.05
Diluted	$	(0.12	)	$	0.02	$	(0.14	)	$	0.04

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Revenue, Segment and Geographic Information

6 Months Ended

Jun. 30, 2023

Segment Reporting [Abstract]

Revenue, Segment and Geographic Information

NOTE 12 – REVENUE, SEGMENT AND GEOGRAPHIC INFORMATION

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

Segment details for the three and six month periods ended June 30, 2023 and 2022, were as follows:

	For the Three Months Ended June 30, 2023									For the Three Months Ended June 30, 2022
	OSS Classic			OSS Europe			Total			OSS Classic			OSS Europe			Total
Revenues	$	8,278,096		$	8,933,436		$	17,211,532		$	10,715,361		$	7,587,982		$	18,303,343
Cost of revenues		(5,863,974	)		(6,549,620	)		(12,413,594	)		(7,180,343	)		(5,922,682	)		(13,103,025	)
Gross profit		2,414,122			2,383,816			4,797,938			3,535,018			1,665,300			5,200,318
Gross margin %	29.2%			26.7%			27.9%			33.0%			21.9%			28.4%
Total operating expenses		(7,238,984	)		(972,511	)		(8,211,495	)		(3,876,028	)		(922,367	)		(4,798,395	)
(Loss) income from operations	$	(4,824,862	)	$	1,411,305		$	(3,413,557	)	$	(341,010	)	$	742,933		$	401,923
	For the Six Months Ended June 30, 2023									For the Six Months Ended June 30, 2022
	OSS Classic			OSS Europe			Total			OSS Classic			OSS Europe			Total
Revenues	$	16,908,682		$	17,084,744		$	33,993,426		$	21,297,403		$	14,058,617		$	35,356,020
Cost of revenues		(11,365,683	)		(12,759,043	)		(24,124,726	)		(13,982,054	)		(11,032,993	)		(25,015,047	)
Gross profit		5,542,999			4,325,701			9,868,700			7,315,349			3,025,624			10,340,973
Gross profit %	32.8%			25.3%			29.0%			34.3%			21.5%			29.2%
Total operating expenses		(11,477,078	)		(2,001,527	)		(13,478,605	)		(7,504,643	)		(1,784,275	)		(9,288,918	)
(Loss) income from operations	$	(5,934,079	)	$	2,324,174		$	(3,609,905	)	$	(189,294	)	$	1,241,349		$	1,052,055

Revenue from customers with non-U.S. billing addresses represented approximately 75% and 78% of the Company’s revenue during the three month periods ended June 30, 2023 and 2022, respectively, and 67% and 74% of the Company’s revenue during the six month periods ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, substantially all the Company’s long-lived assets are located in the United States of America, with the exception of assets of $247,781 located in Germany.

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Subsequent Events

6 Months Ended

Jun. 30, 2023

Subsequent Events [Abstract]

Subsequent Events

NOTE 13 – SUBSEQUENT EVENTS

The Company’s management has evaluated subsequent events after the consolidated balance sheet dated as of June 30, 2023, through the date of filing of this Quarterly Report. Based upon the evaluation, management has determined that, other than as disclosed in the accompanying notes, no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto.

On July 17, 2023, the Company received a final payment of ERC funds of $418,430, net of commission paid to a vendor who assisted with the calculations and filing of the application.

On July 17, 2023, the Company entered into an employee agreement with its newly hired vice president of sales, pursuant to which, as a material inducement to his entering into employment with the Company, the Company granted him 35,715 RSUs, valued at $100,000. The RSUs vest over a three year period as follows: 33 1/3% will vest on the one-year anniversary of the date of the grant, and the remaining 66 2/3% will vest in four 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 continued employment by the Company. The RSUs were granted as inducement grants outside of the Company’s equity incentive plans in accordance with the employment inducement exemption provided under the Nasdaq Listing Rule 5635(c)(4).

On July 14, 2023, the board of directors of the Company disbanded the Strategic Transition Committee that was formed on February 2, 2023, for purpose of assisting in the transition and retention of a successor chief executive officer. All remuneration payable to the members of the Strategic Transition Committee through June 5, 2023, the date that the chief executive officer transition was completed, was paid in full.

On July 31, 2023, OSS Europe paid in full their promissory note that matured on July 31, 2023, in the amount of €500,000 (US$550,947).

On August 8, 2023, Jack Harrison and Sita Lowman tendered their resignations from the Company’s board of directors (the “Board”) and the relevant committees thereof, effective September 30, 2023.

On August 8, 2023, the Board appointed Michael Knowles, the Company’s Chief Executive Officer and President, and retired Admiral Michael Dumont, a member of the Company’s advisory board, as directors of the Company, effective September 30, 2023, to fill the vacancies created by the resignations of Mr. Harrison and Ms. Lowman. Commencing September 30, 2023, Mr. Knowles and Mr. Dumont will hold the director positions until the Company’s next annual meeting of stockholders or until their respective successors are elected and qualified, subject to their earlier death, resignation or removal.

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Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2023

Accounting Policies [Abstract]

Basis of Presentation

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, 2022. Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, 2022 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements. The Company’s management has evaluated all subsequent events and transactions through the date of filing this Quarterly Report.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. Operating results for the three and six month periods ended June 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2023.

Principles of Consolidation

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 OSS Europe. Intercompany balances and transactions have been eliminated in consolidation.

Measurement of Credit Losses on Financial Instruments

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, which sets out the principles for the recognition of measurement of credit losses on financial instruments. This standard provides guidance on the impairment of financial instruments that is based on expected losses rather than probable or incurred losses. Under this new guidance, the Company will recognize, as an allowance, our estimate of expected credit losses based upon historical

and current information, and reasonable and supportable forecasts of future events and circumstances, as well as estimates of prepayments. Under this model, we are required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset.

Accounts receivable have been reduced by an allowance for doubtful accounts. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable after considering current market conditions and supportable forecasts when appropriate. This estimate is a result of management's evaluation of collectability, customer creditworthiness, historical levels of credit losses, and future expectations.

The Company shall recognize an allowance for credit losses rather than a reduction to the carrying value of the asset for debt securities. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee.

Upon adoption of this standard on January 1, 2023, there was no immediate material impact to the Company's consolidated financial position, results of operations or cash flows. On an ongoing basis, the Company will contemplate forward-looking economic conditions in recording lifetime expected credit losses for the Company’s financial assets measured at cost, such as the Company’s trade receivables and certain short-term investments.

Use of Estimates

Use of Estimates

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

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

Goodwill

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. The Company reviews the impairment of goodwill for impairment annually at yearend. The Company completed its annual assessment for goodwill impairment and determined that goodwill is not impaired as of December 31, 2022 and no adjustment was required.

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

Due to the COVID-19 pandemic, Ukraine war, inflationary pressures, other macroeconomic factors, the loss of our media and entertainment customer (which has historically been one of our largest customers), 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

Recent Accounting Pronouncements

Management has evaluated recent accounting pronouncements through the date of these consolidated financial statements and believes that the are no recent accounting pronouncements that will have a material impact on the Company's financial statements.

Employee Retention Credit

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 provides 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 years 2020 and 2021. For the year 2020, the maximum credit is based upon the lesser of 50% of eligible wages or $5,000 for the year. For the first three quarters only of the year 2021, the maximum quarterly credit is based upon the lesser of 70% of eligible wages or $7,000 per quarter. The total maximum program credit per employee is $26,000.

The Company applied for the ERC program and as of June 30, 2023, has received $1,516,034 in credits, including interest, and paid commissions of $217,793 to a vendor who assisted with the calculations and filing of the application. The net proceeds of $1,298,241 have been reported as other income in the accompanying consolidated statements of operations. Income is recognized when reasonably assured of receipt based upon notice.

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Short-Term Investments (Tables)

6 Months Ended

Jun. 30, 2023

Investments Debt And Equity Securities [Abstract]

Summary of Short-Term Investments by Significant Investment Category

The Company’s short-term investments by significant investment category as of June 30, 2023, were as follows:

Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	2,431,672	$	25,066	$	-		$	3,268	$	2,460,006
Certificates of deposit		6,806,683		-		(9,244	)		64,011		6,861,450
	$	9,238,355	$	25,066	$	(9,244	)	$	67,279	$	9,321,456

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

The Company’s short-term investments by significant investment category as of December 31, 2022, were as follows:

Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	5,139,940	$	22,646	$	-		$	3,506	$	5,166,092
Certificates of deposit		4,950,527		-		(7,691	)		14,607		4,957,443
	$	10,090,467	$	22,646	$	(7,691	)	$	18,113	$	10,123,535

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

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Accounts Receivable (Tables)

6 Months Ended

Jun. 30, 2023

Accounts Receivable Net Current [Abstract]

Schedule of Accounts Receivable, Net

Accounts receivable, net consisted of the following:

	June 30,			December 31,
	2023			2022
Accounts receivable	$	9,310,063		$	11,372,598
Less: allowance for doubtful accounts		(84,717	)		(45,354	)
	$	9,225,346		$	11,327,244

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Inventories (Tables)

6 Months Ended

Jun. 30, 2023

Inventory Disclosure [Abstract]

Summary of Inventories, Net

Inventories, net consisted of the following:

	June 30,			December 31,
	2023			2022
Raw materials	$	10,944,553		$	9,370,162
Sub-assemblies		849,968			892,123
Work-in-process		700,935			1,343,239
Finished goods		10,379,886			10,357,452
		22,875,342			21,962,976
Less: allowances for obsolete and slow-moving inventories		(1,411,417	)		(1,187,610	)
	$	21,463,925		$	20,775,366

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Long-Lived Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2023

Goodwill And Intangible Assets Disclosure [Abstract]

Schedule of Definite Lived Intangible Assets

Definite lived intangible assets related to acquisition were as follows, as of June 30, 2023:

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	2 months	$	2,084,515	$	(2,073,977	)	$	10,538
Drawings and technology	36 months	0 months		760,207		(760,207	)		-
Trade name, trademarks & other	24 to 36 months	0 months		447,274		(447,274	)		-
Non-compete	36 months	0 months		246,797		(246,797	)		-
			$	3,538,793	$	(3,528,255	)	$	10,538

Definite lived intangibles assets related to acquisitions were as follows, as of December 31, 2022:

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	8 months	$	2,084,515	$	(2,042,361	)	$	42,154
Drawings and technology	36 months	0 months		760,207		(760,207	)		-
Trade name, trademarks & other	24 to 36 months	0 months		447,274		(447,274	)		-
Non-compete	36 months	0 months		246,797		(246,797	)		-
			$	3,538,793	$	(3,496,639	)	$	42,154

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Accrued Expenses and Other Liabilities (Tables)

6 Months Ended

Jun. 30, 2023

Accrued Liabilities And Other Liabilities [Abstract]

Schedule of Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following:

	June 30,		December 31,
	2023		2022
Accrued compensation and related liabilities	$	1,383,311	$	989,478
Deferred revenue		286,955		378,952
Customer deposits		270,025		61,696
Warranty reserve		582,636		584,268
Trade and other taxes		1,148,261		225,743
Other accrued expenses		1,316,507		773,732
	$	4,987,695	$	3,013,869

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Debt (Tables)

6 Months Ended

Jun. 30, 2023

Debt Disclosure [Abstract]

Summary of Outstanding Debt Obligations

A summary of outstanding debt obligations as of June 30, 2023, was as follows:

Loan Description	Current Interest Rate	Maturity Date	Balance (Euro)		Balance ($)		Current Portion		Long-term Portion
Foreign:
VR Bank	4.760%	July-23	€	500,000	$	545,888	$	545,888	$	-
Uni Credit Bank AG	4.700%	August-23		500,000		545,888		545,888		-
Commerzbank AG	4.600%	September-23		500,000		545,888		545,888		-
Uni Credit Bank AG	5.800%	December-23		500,000		545,888		545,888		-
Commerzbank AG	2.550%	June-24		759,673		829,393		829,393		-
			€	2,759,673	$	3,012,945	$	3,012,945	$	-

Schedule of Total Future Principal Payments under Notes Payable

Total future principal payments under notes payable as of June 30, 2023, was as follows:

Period Ending June 30,	Foreign			Total
2024	$	3,012,945		$	3,012,945
2025		-			-
Total minimum payments		3,012,945			3,012,945
Current portion of notes payable		(3,012,945	)		(3,012,945	)
Notes payable, net of current portion	$	-		$	-

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Stockholders' Equity (Tables)

6 Months Ended

Jun. 30, 2023

Stockholders Equity Note [Abstract]

Summary of Stock Option Activity

A summary of stock option activity under each of the Company’s equity incentive plans during the six month period ended June 30, 2023, was as follows:

	Stock Options Outstanding
	Number of Underlying Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding on January 1, 2023		970,680		$	2.07		5.61	$	864,762
Granted		400,000		$	2.95		9.94		-
Forfeited / Canceled		(1,250	)	$	2.10		-	$	962
Exercised		(20,935	)	$	0.61		-	$	47,233
Outstanding on June 30, 2023		1,348,495		$	2.35		2.24	$	816,567
Exercisable as of June 30, 2023		948,495		$	2.10		2.24	$	816,567
Vested and expected to vest as of June 30, 2023		948,495		$	2.10		2.24	$	816,567

Schedule of Assumption to Calculate Weighted Average Grant Date Fair Value of Options Grant

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 no options granted under the Company's 2017 Plan during the six month period ended June 30, 2022. The following table presents the grant date fair value of options vested and the intrinsic value of options exercised:

	For the Six Months Ended June 30,
	2023			2022
Expected term (in years)		6.16			-
Expected volatility		72.73	%		0.00	%
Risk-free interest rate		3.79	%		0.00	%
Weighted average grant date fair value per share	$	2.95		$	-
Grant date fair value of options vested	$	933,399		$	2,005,285
Intrinsic value of options exercised	$	47,233		$	119,927

Schedule of RSU Activity

The Company’s RSU activity for the six months ended June 30, 2023, was as follows:

	Restricted Stock Units
	Number of Underlying Shares			Weighted Average Grant Date Fair Value
Unvested on January 1, 2023		907,507		$	4.04
Granted		889,528		$	2.80
Vested		(512,805	)	$	3.79
Canceled		(97,798	)	$	4.32
Unvested on June 30, 2023		1,186,432		$	3.19

Summary of Stock-Based Compensation Expense

Stock-based compensation expense for the three and six month periods ended June 30, 2023 and 2022, was comprised of the following:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Stock-based compensation classified as:	2023		2022		2023		2022
General and administrative	$	651,291	$	300,346	$	945,286	$	502,441
Production		86,528		70,959		153,969		126,415
Marketing and selling		86,516		104,364		146,504		186,544
Research and development		73,674		56,967		126,458		100,064
	$	898,009	$	532,636	$	1,372,217	$	915,464

Schedule of Warrant Activity

The following table summarizes the Company’s warrant activity during the six months ended June 30, 2023:

	Number of Warrants			Weighted Average Exercise Price
Warrants outstanding – January 1, 2023		451,112		$	5.37
Warrants granted		-		$	-
Warrants expired		(380,000	)	$	6.00
Warrants exercised		(28,090	)	$	1.78
Warrants outstanding – June 30, 2023		43,022		$	2.15

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Commitments and Contingencies (Tables)

6 Months Ended

Jun. 30, 2023

Commitments And Contingencies Disclosure [Abstract]

Schedule of Other information Related to Leases

Other information related to leases as of the three and six month periods ended June 30, 2023 and 2022, was as follows:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Operating lease cost	$	196,538	$	165,785	$	334,107	$	326,695
Total lease cost	$	196,538	$	165,785	$	334,107	$	326,695
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows from operating leases	$	81,843	$	165,785	$	243,185	$	326,695
Right-of-use assets obtained in exchange for new operating lease liabilities		-		-		-		-
Weighted-average remaining lease term - operating leases					16.2 months		25.8 months
Weighted-average discount rate - operating leases					12.1%		12.8%

Summary of Maturity of Operating Lease Liabilities

The following table presents a maturity of the Company’s operating lease liabilities as of June 30, 2023:

Year	Operating Leases
Remaining payments in 2023	$	306,030
2024		446,361
2025		21,061
2026		2,408
Total lease payments	$	775,860
Less: Amount representing interest		(43,355	)
Present value of lease payment		732,505
Less: current portion of operating lease obligation		(583,675	)
Operating lease obligation, net of current portion	$	148,830

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Net (Loss) Income Per Share (Tables)

6 Months Ended

Jun. 30, 2023

Earnings Per Share [Abstract]

Summary of Basic and Diluted Net (Loss) Income Per Share

Basic and diluted net (loss) income per share were calculated as follows for the three and six periods ended June 30, 2023 and 2022:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2023			2022		2023			2022
Basic and diluted net (loss) income per share:
Numerator:
Net (loss) income	$	(2,399,496	)	$	322,822	$	(2,800,008	)	$	902,056
Denominator:
Weighted average common shares outstanding - basic		20,397,741			19,940,902		20,325,029			19,416,832
Effect of dilutive securities		-			1,239,588		-			930,085
Weighted average common shares outstanding - diluted		20,397,741			21,180,490		20,325,029			20,346,917
Net (loss) income per share:
Basic	$	(0.12	)	$	0.02	$	(0.14	)	$	0.05
Diluted	$	(0.12	)	$	0.02	$	(0.14	)	$	0.04

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Revenue, Segment and Geographic Information (Tables)

6 Months Ended

Jun. 30, 2023

Segment Reporting [Abstract]

Schedule of (Loss) Income from Operations by Reporting Segments

Segment details for the three and six month periods ended June 30, 2023 and 2022, were as follows:

	For the Three Months Ended June 30, 2023									For the Three Months Ended June 30, 2022
	OSS Classic			OSS Europe			Total			OSS Classic			OSS Europe			Total
Revenues	$	8,278,096		$	8,933,436		$	17,211,532		$	10,715,361		$	7,587,982		$	18,303,343
Cost of revenues		(5,863,974	)		(6,549,620	)		(12,413,594	)		(7,180,343	)		(5,922,682	)		(13,103,025	)
Gross profit		2,414,122			2,383,816			4,797,938			3,535,018			1,665,300			5,200,318
Gross margin %	29.2%			26.7%			27.9%			33.0%			21.9%			28.4%
Total operating expenses		(7,238,984	)		(972,511	)		(8,211,495	)		(3,876,028	)		(922,367	)		(4,798,395	)
(Loss) income from operations	$	(4,824,862	)	$	1,411,305		$	(3,413,557	)	$	(341,010	)	$	742,933		$	401,923
	For the Six Months Ended June 30, 2023									For the Six Months Ended June 30, 2022
	OSS Classic			OSS Europe			Total			OSS Classic			OSS Europe			Total
Revenues	$	16,908,682		$	17,084,744		$	33,993,426		$	21,297,403		$	14,058,617		$	35,356,020
Cost of revenues		(11,365,683	)		(12,759,043	)		(24,124,726	)		(13,982,054	)		(11,032,993	)		(25,015,047	)
Gross profit		5,542,999			4,325,701			9,868,700			7,315,349			3,025,624			10,340,973
Gross profit %	32.8%			25.3%			29.0%			34.3%			21.5%			29.2%
Total operating expenses		(11,477,078	)		(2,001,527	)		(13,478,605	)		(7,504,643	)		(1,784,275	)		(9,288,918	)
(Loss) income from operations	$	(5,934,079	)	$	2,324,174		$	(3,609,905	)	$	(189,294	)	$	1,241,349		$	1,052,055

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The Company and Basis of Presentation - Additional Information (Details)	Oct. 31, 2018
OSS Europe
Organization Consolidation And Presentation Of Financial Statements [Line Items]
Percentage of shares acquired	100.00%

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Significant Accounting Policies - Additional Information (Details) - USD ($)	3 Months Ended	6 Months Ended	9 Months Ended	12 Months Ended
	Jun. 30, 2023	Jun. 30, 2023	Sep. 30, 2021	Dec. 31, 2020
Significant Accounting Policies [Line Items]
Employee retention credit maximum percentage of eligible wages			70.00%	50.00%
Employee retention credit annual wages			$ 7,000	$ 5,000
Maximum program credit per employee		$ 26,000
Employee retention credit recieved		1,516,034
Employee retention credit commission paid		217,793
Employee retention credit (ERC)		(1,298,241)
Impairment loss to goodwill	$ 2,700,000	2,700,000
Other Income
Significant Accounting Policies [Line Items]
Employee retention credit (ERC)		$ 1,298,241
ASU 2016-13
Significant Accounting Policies [Line Items]
Change in accounting principle, ASU, adopted	true	true

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Short-Term Investments - Summary of Short-Term Investments by Significant Investment Category (Details) - Level 1 - USD ($)	Jun. 30, 2023		Dec. 31, 2022
Schedule Of Available For Sale Securities [Line Items]
Amortized Cost	$ 9,238,355	[1]	$ 10,090,467	[2]
Gross Unrealized Gains	25,066	[1]	22,646	[2]
Gross Unrealized Losses	$ (9,244)	[1]	$ (7,691)	[2]
Debt Securities, Available-for-Sale, Accrued Interest, after Allowance for Credit Loss, Current, Statement of Financial Position [Extensible Enumeration]	Short-term investments (Note 3)		Short-term investments (Note 3)
Accrued Interest	$ 67,279	[1]	$ 18,113	[2]
Estimated Fair Value	9,321,456	[1]	10,123,535	[2]
Cash Alternatives
Schedule Of Available For Sale Securities [Line Items]
Amortized Cost	2,431,672	[1]	5,139,940	[2]
Gross Unrealized Gains	25,066	[1]	22,646	[2]
Accrued Interest	3,268	[1]	3,506	[2]
Estimated Fair Value	2,460,006	[1]	5,166,092	[2]
Certificates of Deposit
Schedule Of Available For Sale Securities [Line Items]
Amortized Cost	6,806,683	[1]	4,950,527	[2]
Gross Unrealized Losses	(9,244)	[1]	(7,691)	[2]
Accrued Interest	64,011	[1]	14,607	[2]
Estimated Fair Value	$ 6,861,450	[1]	$ 4,957,443	[2]

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

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

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Short-Term Investments - Additional Information (Details)	6 Months Ended
	Jun. 30, 2023 Issuer
Maximum
Schedule Of Available For Sale Securities [Line Items]
Number of issuer, investment policy limits the amount of credit exposure	1

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Accounts Receivable - Schedule of Accounts Receivable, Net (Details) - USD ($)	Jun. 30, 2023	Dec. 31, 2022
Accounts Receivable Net Current [Abstract]
Accounts receivable	$ 9,310,063	$ 11,372,598
Less: allowance for doubtful accounts	(84,717)	(45,354)
Accounts receivable, total	$ 9,225,346	$ 11,327,244

XML

Accounts Receivable - Additional Information (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Accounts Receivable Net Current [Abstract]
Provision (recovery) for bad debt expense	$ 8,653	$ (5,524)	$ 38,653	$ (5,524)

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Inventories - Summary of Inventories, Net (Details) - USD ($)	Jun. 30, 2023	Dec. 31, 2022
Inventory Disclosure [Abstract]
Raw materials	$ 10,944,553	$ 9,370,162
Sub-assemblies	849,968	892,123
Work-in-process	700,935	1,343,239
Finished goods	10,379,886	10,357,452
Inventory gross	22,875,342	21,962,976
Less: allowances for obsolete and slow-moving inventories	(1,411,417)	(1,187,610)
Inventory net	$ 21,463,925	$ 20,775,366

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Long-Lived Intangible Assets - Schedule of Definite Lived Intangible Assets (Details) - USD ($)	6 Months Ended	12 Months Ended
	Jun. 30, 2023	Dec. 31, 2022
Finite Lived Intangible Assets [Line Items]
Definite lived intangible assets, Gross	$ 3,538,793	$ 3,538,793
Definite lived intangible assets, Accumulated Amortization	(3,528,255)	(3,496,639)
Definite lived intangible assets, Net	$ 10,538	$ 42,154
Customer Lists and Relationships
Finite Lived Intangible Assets [Line Items]
Definite lived intangible assets, Remaining Months	2 months	8 months
Definite lived intangible assets, Gross	$ 2,084,515	$ 2,084,515
Definite lived intangible assets, Accumulated Amortization	(2,073,977)	(2,042,361)
Definite lived intangible assets, Net	$ 10,538	$ 42,154
Customer Lists and Relationships | Minimum
Finite Lived Intangible Assets [Line Items]
Definite lived intangible assets, Expected Life	36 months	36 months
Customer Lists and Relationships | Maximum
Finite Lived Intangible Assets [Line Items]
Definite lived intangible assets, Expected Life	60 months	60 months
Drawings and Technology
Finite Lived Intangible Assets [Line Items]
Definite lived intangible assets, Expected Life	36 months	36 months
Definite lived intangible assets, Remaining Months	0 months	0 months
Definite lived intangible assets, Gross	$ 760,207	$ 760,207
Definite lived intangible assets, Accumulated Amortization	$ (760,207)	$ (760,207)
Trade name, Trademarks & other
Finite Lived Intangible Assets [Line Items]
Definite lived intangible assets, Remaining Months	0 months	0 months
Definite lived intangible assets, Gross	$ 447,274	$ 447,274
Definite lived intangible assets, Accumulated Amortization	$ (447,274)	$ (447,274)
Trade name, Trademarks & other | Minimum
Finite Lived Intangible Assets [Line Items]
Definite lived intangible assets, Expected Life	24 months	24 months
Trade name, Trademarks & other | Maximum
Finite Lived Intangible Assets [Line Items]
Definite lived intangible assets, Expected Life	36 months	36 months
Non-Compete
Finite Lived Intangible Assets [Line Items]
Definite lived intangible assets, Expected Life	36 months	36 months
Definite lived intangible assets, Remaining Months	0 months	0 months
Definite lived intangible assets, Gross	$ 246,797	$ 246,797
Definite lived intangible assets, Accumulated Amortization	$ (246,797)	$ (246,797)

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Long-Lived Intangible Assets - Additional Information (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Goodwill And Intangible Assets Disclosure [Abstract]
Amortization expense	$ 15,808	$ 15,807	$ 31,616	$ 31,616

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Accrued Expenses and Other Liabilities - Schedule of Accrued Expenses and Other Liabilities (Details) - USD ($)	Jun. 30, 2023	Dec. 31, 2022
Accrued Liabilities And Other Liabilities [Abstract]
Accrued compensation and related liabilities	$ 1,383,311	$ 989,478
Deferred revenue	286,955	378,952
Customer deposits	270,025	61,696
Warranty reserve	582,636	584,268
Trade and other taxes	1,148,261	225,743
Other accrued expenses	1,316,507	773,732
Accrued expenses and other liabilities	$ 4,987,695	$ 3,013,869

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Debt - Additional Information (Details)									3 Months Ended		6 Months Ended
	Dec. 19, 2022	Jun. 30, 2022 USD ($)	Jun. 07, 2022	Jun. 18, 2021 EUR (€)	Apr. 09, 2021 EUR (€)	Jul. 01, 2020	Apr. 24, 2020 USD ($)	Apr. 20, 2020 USD ($) $ / shares	Jun. 30, 2023 USD ($) TermLoan LineofCredit $ / shares	Jun. 30, 2022 USD ($)	Jun. 30, 2023 USD ($) TermLoan LineofCredit $ / shares	Jun. 30, 2022 USD ($)	Jun. 30, 2023 EUR (€) TermLoan LineofCredit	Jun. 19, 2023	Mar. 30, 2023	Feb. 16, 2023	Feb. 01, 2023	Dec. 31, 2022 USD ($) $ / shares	Dec. 31, 2022 EUR (€)	Jun. 30, 2022 EUR (€)	Apr. 30, 2022 USD ($)	Feb. 16, 2022 EUR (€)	Feb. 01, 2022 EUR (€)
Debt Instrument [Line Items]
Debt discount amortization												$ 1,224
Proceeds from loan												3,663,009
Common stock, par value | $ / shares									$ 0.0001		$ 0.0001							$ 0.0001
Senior Secured Convertible Promissory Notes | Securities Purchase Agreement
Debt Instrument [Line Items]
Aggregate balance outstanding		$ 0							$ 0	$ 0	$ 0	0
Debt instrument, interest rate							0.00%
Debt instrument, maturity date								Apr. 01, 2022
Non-interest bearing convertible note							$ 3,000,000	$ 6,000,000
Common stock, par value | $ / shares								$ 0.0001
Debt instrument, initial conversion price per share | $ / shares								$ 2.50
Remaining balance of convertible notes									2,590,909		$ 2,590,909
Original issue discount rate								10.00%
Debt instrument, aggregate purchase price								$ 2,700,000
Monthly amortization payments percentage of initial principal						4.545%
Debt instrument, redemption price percentage						105.00%					110.00%
Debt discount amortization									0	0	$ 0	1,161
Original issue discount rate								$ 316,274
Debt issuance costs amortized									$ 0	0	$ 0	1,223
OSS Europe
Debt Instrument [Line Items]
Number of term loans outstanding | TermLoan									5		5		5
Debt instrument, modified interest rate														5.80%
Debt instrument, face amount | €				€ 500,000	€ 500,000																	€ 500,000	€ 500,000
Commerzbank AG
Debt Instrument [Line Items]
Aggregate balance outstanding									$ 829,393		$ 829,393		€ 759,673					$ 1,215,279	€ 1,132,356
Debt instrument, face amount		$ 1,468,173								$ 1,468,173		$ 1,468,173								€ 1,500,000
Debt installment term		24 months
Debt installments payment beginning date		Jul. 31, 2022
Term Loans | OSS Europe
Debt Instrument [Line Items]
Aggregate balance outstanding									$ 3,012,945		$ 3,012,945		€ 2,759,673
Debt instrument, maturity date				Dec. 17, 2021	Sep. 30, 2021
Debt instrument, extended maturity date	Jun. 19, 2023		Dec. 19, 2022	Jun. 17, 2022
Debt instrument, modified interest rate															4.60%	4.70%	4.76%
Term Loans | Commerzbank AG
Debt Instrument [Line Items]
Debt instrument, interest rate		2.55%								2.55%		2.55%								2.55%
German Institutions | Revolving Credit Facility | Bressner Technology GmbH
Debt Instrument [Line Items]
Number of lines of credit | LineofCredit									3		3		3
Total outstanding balance									$ 0		$ 0							0
German Institutions | Revolving Credit Facility | Bressner Technology GmbH | Minimum
Debt Instrument [Line Items]
Line of credit current rate											3.10%
German Institutions | Revolving Credit Facility | Bressner Technology GmbH | Maximum
Debt Instrument [Line Items]
Line of credit facility, maximum borrowing capacity									2,401,907		$ 2,401,907		€ 2,200,000
Line of credit current rate											5.62%
Torrey Pines Bank
Debt Instrument [Line Items]
Total outstanding balance									0		$ 0							0
Torrey Pines Bank | Revolving Credit Facility | Minimum
Debt Instrument [Line Items]
Cash and investments balances maintained									4,000,000		4,000,000
Torrey Pines Bank | Revolving Credit Facility | Maximum
Debt Instrument [Line Items]
Line of credit facility, maximum borrowing capacity																					$ 2,000,000
Line of Credit from UniCredit Bank | Term Loans
Debt Instrument [Line Items]
Aggregate balance outstanding									545,888		545,888		500,000					536,616	500,000
Line of Credit from UniCredit Bank | Term Loans | OSS Europe
Debt Instrument [Line Items]
Aggregate balance outstanding									545,888		545,888		500,000					536,616	500,000
Line Of Credit From V R Bank | Term Loans | OSS Europe
Debt Instrument [Line Items]
Aggregate balance outstanding									545,888		545,888		500,000					536,616	500,000
Line of Credit from Commerzbank AG | Term Loans | OSS Europe
Debt Instrument [Line Items]
Aggregate balance outstanding									$ 545,888		$ 545,888		€ 500,000					$ 536,616	€ 500,000

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Debt - Summary of Outstanding Debt Obligations (Details)	6 Months Ended
	Jun. 30, 2023 USD ($)	Jun. 30, 2023 EUR (€)	Dec. 31, 2022 USD ($)
Debt Instrument [Line Items]
Current Portion	$ 3,012,945
Long-term debt, net of current portion (Note 8)			$ 409,294
Foreign
Debt Instrument [Line Items]
Balance	3,012,945	€ 2,759,673
Current Portion	$ 3,012,945
Foreign | VR Bank | Note Payable Maturing on July 31, 2023
Debt Instrument [Line Items]
Current Interest Rate	4.76%	4.76%
Maturity Date	Jul. 31, 2023
Balance	$ 545,888	€ 500,000
Current Portion	$ 545,888
Foreign | Uni Credit Bank AG | Note Payable Maturing on August 31, 2023
Debt Instrument [Line Items]
Current Interest Rate	4.70%	4.70%
Maturity Date	Aug. 31, 2023
Balance	$ 545,888	€ 500,000
Current Portion	$ 545,888
Foreign | Uni Credit Bank AG | Note Payable Maturing on December 31, 2023
Debt Instrument [Line Items]
Current Interest Rate	5.80%	5.80%
Maturity Date	Dec. 31, 2023
Balance	$ 545,888	€ 500,000
Current Portion	$ 545,888
Foreign | Commerzbank AG | Note Payable Maturing on September 30, 2023
Debt Instrument [Line Items]
Current Interest Rate	4.60%	4.60%
Maturity Date	Sep. 30, 2023
Balance	$ 545,888	€ 500,000
Current Portion	$ 545,888
Foreign | Commerzbank AG | Note Payable Maturing on June 30, 2024
Debt Instrument [Line Items]
Current Interest Rate	2.55%	2.55%
Maturity Date	Jun. 30, 2024
Balance	$ 829,393	€ 759,673
Current Portion	$ 829,393

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Debt - Schedule of Total Future Principal Payments under Notes Payable (Details) - USD ($)	Jun. 30, 2023	Dec. 31, 2022
Debt Instrument [Line Items]
2024	$ 3,012,945
Total minimum payments	3,012,945
Current portion of notes payable	(3,012,945)
Notes payable, net of current portion		$ 409,294
Foreign
Debt Instrument [Line Items]
2024	3,012,945
Total minimum payments	3,012,945
Current portion of notes payable	$ (3,012,945)

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Stockholders' Equity - Additional Information (Details) - USD ($)			3 Months Ended	6 Months Ended
	Jun. 05, 2023	Jun. 24, 2020	Jun. 30, 2023	Jun. 30, 2023	Mar. 16, 2023	Mar. 15, 2023	Dec. 31, 2022	May 19, 2021	May 18, 2021	Jun. 23, 2020	Dec. 18, 2017
Class Of Stock [Line Items]
Preferred stock, shares authorized			10,000,000	10,000,000
Common stock, shares authorized			50,000,000	50,000,000			50,000,000
Unvested common stock options, net of estimated forfeitures			$ 782,295	$ 782,295
Unearned stock-based compensation expected to be recognized				2 years 3 months 7 days
Restricted Stock Units
Class Of Stock [Line Items]
Number of Shares Underlying, Granted				889,528
Unvested RSUs being forfeited				97,798
Inducement options and grants, shares				889,528
Weighted average exercise price				$ 2.80
Unvested common stock options, net of estimated forfeitures			$ 4,177,442	$ 4,177,442
Unearned stock-based compensation expected to be recognized				1 year 8 months 23 days
Mike Knowles | Restricted Stock Units
Class Of Stock [Line Items]
Vesting percentage		33.33%
David Raun | Restricted Stock Units
Class Of Stock [Line Items]
RSUs that received accelerated vesting	150,556
Unvested RSUs being forfeited	52,132
2017 Plan
Class Of Stock [Line Items]
Number of shares granted			0	0
2017 Equity Incentive Plan | Restricted Stock Units | Minimum
Class Of Stock [Line Items]
Vesting period				1 year
2017 Equity Incentive Plan | Restricted Stock Units | Maximum
Class Of Stock [Line Items]
Vesting period				4 years
2017 Equity Incentive Plan Amendments | Common Stock
Class Of Stock [Line Items]
Common stock, reserved for future issuance											1,500,000
Shares authorized for issuance								3,000,000	1,500,000
Amendment to 2017 Equity Incentive Plan | Common Stock
Class Of Stock [Line Items]
Shares authorized for issuance		1,000,000			4,500,000	3,000,000				500,000
Inducement Options | Mike Knowles
Class Of Stock [Line Items]
Number of Shares Underlying, Granted	400,000
Exercise price	2.95%
Inducement options and grants, shares	400,000
Inducement Grants | Mike Knowles | Restricted Stock Units
Class Of Stock [Line Items]
Number of Shares Underlying, Granted	400,000
Inducement options and grants, shares	400,000
Inducement Options and Inducement Grants | Mike Knowles | One-Year Anniversary of Date of Grant
Class Of Stock [Line Items]
Vesting percentage	25.00%
Inducement Options and Inducement Grants | Mike Knowles | Six Months after One-Year Anniversary of Date of Grant
Class Of Stock [Line Items]
Vesting percentage	75.00%

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Stockholders' Equity - Summary of Stock Option Activity (Details) - Stock Options	6 Months Ended	12 Months Ended
	Jun. 30, 2023 USD ($) $ / shares shares	Dec. 31, 2022 USD ($) $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of Underlying Shares, Outstanding beginning balance | shares	970,680
Number of Underlying Shares, Granted | shares	400,000
Number of Underlying Shares, Forfeited / Canceled | shares	(1,250)
Number of Underlying Shares, Exercised | shares	(20,935)
Number of Shares Underlying, Outstanding ending balance | shares	1,348,495	970,680
Number of Shares Underlying, Exercisable ending balance | shares	948,495
Number of Shares Underlying, Vested and expected to vest ending balance | shares	948,495
Weighted Average Exercise Price, Outstanding beginning balance | $ / shares	$ 2.07
Weighted Average Exercise Price, Granted | $ / shares	2.95
Weighted Average Exercise Price, Forfeited / Cancelled | $ / shares	2.10
Weighted Average Exercise Price, Exercised | $ / shares	0.61
Weighted Average Exercise Price, Outstanding ending balance | $ / shares	2.35	$ 2.07
Weighted Average Exercise Price, Exercisable ending balance | $ / shares	2.10
Weighted Average Exercise Price, Vested and expected to vest ending balance | $ / shares	$ 2.10
Weighted Average Remaining Contractual Life (in years), Outstanding balance	2 years 2 months 26 days	5 years 7 months 9 days
Weighted Average Remaining Contractual Life (in years), Granted	9 years 11 months 8 days
Weighted Average Remaining Contractual Life (in years), Exercisable balance	2 years 2 months 26 days
Weighted Average Remaining Contractual Life (in years), Vested and expected to vest balance	2 years 2 months 26 days
Aggregate Intrinsic Value, Outstanding balance | $	$ 816,567	$ 864,762
Aggregate Intrinsic Value, Forfeited / Cancelled balance | $	962
Aggregate Intrinsic Value, Exercised balance | $	47,233
Aggregate Intrinsic Value, Exercisable balance | $	816,567
Aggregate Intrinsic Value, Vested and expected to vest balance | $	$ 816,567

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Stockholders' Equity - Schedule of Assumption to Calculate Weighted Average Grant Date Fair Value of Options Grant (Details) - Common Stock - USD ($)	6 Months Ended
	Jun. 30, 2023	Jun. 30, 2022
Class Of Stock [Line Items]
Expected term (in years)	6 years 1 month 28 days
Expected volatility	72.73%	0.00%
Risk-free interest rate	3.79%	0.00%
Weighted average grant date fair value per share	$ 2.95
Grant date fair value of options vested	$ 933,399	$ 2,005,285
Intrinsic value of options exercised	$ 47,233	$ 119,927

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Stockholders' Equity - Summary of RSU Activity (Details) - Restricted Stock Units	6 Months Ended
	Jun. 30, 2023 $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of Shares Underlying, Outstanding beginning balance | shares	907,507
Number of Shares Underlying, Granted | shares	889,528
Number of shares Underlying, Vested | shares	(512,805)
Number of Shares Underlying, Canceled | shares	(97,798)
Number of Shares Underlying, Outstanding ending balance | shares	1,186,432
Weighted Average Grant Date Fair Value, Outstanding beginning balance | $ / shares	$ 4.04
Weighted Average Grant Date Fair Value, Granted | $ / shares	2.80
Weighted Average Grant Date Fair Value, Vested | $ / shares	3.79
Weighted Average Grant Date Fair Value, Canceled | $ / shares	4.32
Weighted Average Grant Date Fair Value / Exercise Price, Outstanding ending balance | $ / shares	$ 3.19

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Stockholders' Equity - Summary of Stock-Based Compensation Expense (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 898,009	$ 532,636	$ 1,372,217	$ 915,464
General and Administrative
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	651,291	300,346	945,286	502,441
Production
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	86,528	70,959	153,969	126,415
Marketing and Selling
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	86,516	104,364	146,504	186,544
Research and Development
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 73,674	$ 56,967	$ 126,458	$ 100,064

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Stockholders' Equity - Schedule of Warrant Activity (Details) - Warrants - $ / shares	3 Months Ended	6 Months Ended
	Mar. 31, 2023	Jun. 30, 2023
Class Of Stock [Line Items]
Number of Shares, Beginning Warrants outstanding	451,112	451,112
Number of Shares, Warrants expired	(380,000)
Number of Shares, Warrants exercised		(28,090)
Number of Shares, Ending Warrants outstanding		43,022
Weighted Average Grant Date Fair Value, Outstanding beginning balance	$ 5.37	$ 5.37
Weighted Average Exercise Price, Warrant expired		6.00
Weighted Average Exercise Price, Warrant exercised		1.78
Weighted Average Grant Date Fair Value / Exercise Price, Outstanding ending balance		$ 2.15

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Commitments and Contingencies - Additional Information (Details)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2023 ft² Customer	Jun. 30, 2022 Customer	Jun. 30, 2023 USD ($) ft² Customer	Jun. 30, 2022 Customer	Dec. 31, 2022 Customer
Operating Leased Assets [Line Items]
Weighted average remaining lease term for operating leases	16 months 6 days	25 years 9 months 18 days	16 months 6 days	25 years 9 months 18 days
Weighted average discount rate for operating leases	12.10%	12.80%	12.10%	12.80%
Purchase commitments description			In the normal course of business, the Company may enter into purchase commitments for inventory components to be delivered based upon non-cancellable, pre-established, delivery schedules that are over a period that may exceed one year.
Non-cancellable purchase commitments | $			$ 10,762,867
Number of customer's more than10% of revenue | Customer	2	1	2	1
Number of customers more than 10% of net trade accounts receivable | Customer	2		2		2
Revenue | Customer Concentration Risk | Significant Customers
Operating Leased Assets [Line Items]
Customers accounted for 10% or more of quarterly revenues	29.00%	35.00%	33.00%	31.00%
Trade Accounts Receivable | Customer Concentration Risk | Significant Customers
Operating Leased Assets [Line Items]
Customers accounted for 10% or more of quarterly revenues			29.00%		47.00%
Net Purchases | Customer Concentration Risk | Significant Customers
Operating Leased Assets [Line Items]
Customers accounted for 10% or more of quarterly revenues	36.00%	23.00%	32.00%	32.00%
Offices, Manufacturing and Warehouse Facility | Bressner Technology GmbH
Operating Leased Assets [Line Items]
Operating lease, area	11,836		11,836
Offices, Manufacturing and Warehouse Facility | Escondido, California
Operating Leased Assets [Line Items]
Operating lease, area	29,342		29,342
Operating lease modified date			2019-02
Operating lease, expiration date			Aug. 31, 2024
Offices, Manufacturing and Warehouse Facility | Salt Lake City, Utah
Operating Leased Assets [Line Items]
Operating lease, area	3,208		3,208
Operating lease, expiration date			Jun. 30, 2023
Offices, Manufacturing and Warehouse Facility | Irvine, California
Operating Leased Assets [Line Items]
Operating lease, area	1,632		1,632
Operating lease, expiration date			Jun. 30, 2023

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Commitments and Contingencies - Schedule of Other information Related to Leases (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Leases [Abstract]
Operating lease cost	$ 196,538	$ 165,785	$ 334,107	$ 326,695
Total lease cost	196,538	165,785	334,107	326,695
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows from operating leases	$ 81,843	$ 165,785	$ 243,185	326,695
Right-of-use assets obtained in exchange for new operating lease liabilities				$ 1,203,580
Weighted-average remaining lease term - operating leases	16 months 6 days	25 years 9 months 18 days	16 months 6 days	25 years 9 months 18 days
Weighted-average discount rate - operating leases	12.10%	12.80%	12.10%	12.80%

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Commitments and Contingencies - Summary of Maturity of Operating Lease Liabilities (Details) - USD ($)	Jun. 30, 2023	Dec. 31, 2022
Operating Lease Liabilities Payments Due [Abstract]
Remainder of 2023	$ 306,030
2024	446,361
2025	21,061
2026	2,408
Total lease payments	775,860
Less: Amount representing interest	(43,355)
Present value of lease payment	732,505
Less: current portion of operating lease obligation	(583,675)	$ (536,588)
Operating lease obligation, net of current portion	$ 148,830	$ 397,249

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Net (Loss) Income Per Share - Summary of Basic and Diluted Net (Loss) Income Per Share (Details) - USD ($)	3 Months Ended				6 Months Ended
	Jun. 30, 2023	Mar. 31, 2023	Jun. 30, 2022	Mar. 31, 2022	Jun. 30, 2023	Jun. 30, 2022
Numerator:
Net (loss) income	$ (2,399,496)	$ (400,512)	$ 322,822	$ 579,234	$ (2,800,008)	$ 902,056
Denominator:
Weighted average common shares outstanding - basic	20,397,741		19,940,902		20,325,029	19,416,832
Effect of dilutive securities			1,239,588			930,085
Weighted average common shares outstanding - diluted	20,397,741		21,180,490		20,325,029	20,346,917
Net (loss) income per share:
Basic	$ (0.12)		$ 0.02		$ (0.14)	$ 0.05
Diluted	$ (0.12)		$ 0.02		$ (0.14)	$ 0.04

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Revenue, Segment and Geographic Information - Additional Information (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Germany
Segment Reporting Reconciling Item For Operating Profit Loss From Segment To Consolidated [Line Items]
Exception of Long-Lived Assets	$ 247,781		$ 247,781
Revenue | Customer Concentration Risk | Non-U.S.
Segment Reporting Reconciling Item For Operating Profit Loss From Segment To Consolidated [Line Items]
Concentration risk, percentage	75.00%	78.00%	67.00%	74.00%

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Revenue, Segment and Geographic Information - Schedule of (Loss) Income from Operations by Reporting Segments (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Segment Reporting Reconciling Item For Operating Profit Loss From Segment To Consolidated [Line Items]
Revenue	$ 17,211,532	$ 18,303,343	$ 33,993,426	$ 35,356,020
Cost of revenues	(12,413,594)	(13,103,025)	(24,124,726)	(25,015,047)
Gross profit	$ 4,797,938	$ 5,200,318	$ 9,868,700	$ 10,340,973
Gross margin %	27.90%	28.40%	29.00%	29.20%
Total operating expenses	$ (8,211,495)	$ (4,798,395)	$ (13,478,605)	$ (9,288,918)
(Loss) income from operations	(3,413,557)	401,923	(3,609,905)	1,052,055
OSS Classic
Segment Reporting Reconciling Item For Operating Profit Loss From Segment To Consolidated [Line Items]
Revenue	8,278,096	10,715,361	16,908,682	21,297,403
Cost of revenues	(5,863,974)	(7,180,343)	(11,365,683)	(13,982,054)
Gross profit	$ 2,414,122	$ 3,535,018	$ 5,542,999	$ 7,315,349
Gross margin %	29.20%	33.00%	32.80%	34.30%
Total operating expenses	$ (7,238,984)	$ (3,876,028)	$ (11,477,078)	$ (7,504,643)
(Loss) income from operations	(4,824,862)	(341,010)	(5,934,079)	(189,294)
OSS Europe
Segment Reporting Reconciling Item For Operating Profit Loss From Segment To Consolidated [Line Items]
Revenue	8,933,436	7,587,982	17,084,744	14,058,617
Cost of revenues	(6,549,620)	(5,922,682)	(12,759,043)	(11,032,993)
Gross profit	$ 2,383,816	$ 1,665,300	$ 4,325,701	$ 3,025,624
Gross margin %	26.70%	21.90%	25.30%	21.50%
Total operating expenses	$ (972,511)	$ (922,367)	$ (2,001,527)	$ (1,784,275)
(Loss) income from operations	$ 1,411,305	$ 742,933	$ 2,324,174	$ 1,241,349

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Subsequent Events - Additional Information (Details)		1 Months Ended		6 Months Ended
	Jul. 17, 2023 USD ($) shares	Jul. 31, 2023 USD ($)	Jul. 31, 2023 EUR (€)	Jun. 30, 2023 USD ($) shares
Subsequent Event [Line Items]
Employee retention credit net of commission paid				$ 217,793
Restricted Stock Units
Subsequent Event [Line Items]
Inducement options and grants, shares | shares				889,528
Award vesting, description				The RSUs vest over a three year period as follows: 33 1/3% will vest on the one-year anniversary of the date of the grant, and the remaining 66 2/3% will vest in four 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 continued employment by the Company.
Subsequent Event
Subsequent Event [Line Items]
Employee retention credit net of commission paid	$ 418,430
Subsequent Event | OSS Europe
Subsequent Event [Line Items]
Repayment of notes payable		$ 550,947	€ 500,000
Subsequent Event | Restricted Stock Units
Subsequent Event [Line Items]
Inducement options and grants, shares | shares	35,715
Inducement grant, amount	$ 100,000
Vesting period	3 years