UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
XX
☐☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
or
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
(State or other jurisdiction of
incorporation or organization)
33-0885351
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.0001 per share
Trading
Symbol(s)
OSS
Name of each exchange
on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No X
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 X 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 X No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
Non-accelerated filer
Emerging growth company
☐
X
X
Accelerated filer
Smaller reporting company
☐
X
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by
the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to
§240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No X
As of June 30, 2022, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $64,769,861, based on the closing
price of the registrant’s common stock on The Nasdaq Capital Market of $3.94 per share on such date. This calculation does not reflect a determination that persons are affiliates for any other purpose.
As of March 20, 2023, the registrant had 20,359,119 shares of common stock (par value $0.0001) outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Auditor Firm Id:
200
Auditor Name:
Haskell & White LLP
Auditor Location:
Irvine, California, U.S.A.
One Stop Systems, Inc.
FORM 10-K
For the Fiscal Year Ended December 31, 2022
Table of Contents
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PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibit and Financial Statement Schedules
Form 10-K Summary
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact contained in this Annual Report, including statements regarding our future operating results, financial position and cash flows,
our business strategy and plans and our objectives for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and
other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or
implied by the forward-looking statements. This Annual Report also contains estimates and other statistical data made by independent parties and by us relating to market size and
growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In
addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree
of uncertainty and risk. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “would,” “could,” “should,” “expect,” “plan,” “anticipate,”
“could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The
forward-looking statements in this Annual Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about
future events and financial trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and
objectives. These forward-looking statements speak only as of the date of this Annual Report and are subject to a number of risks, uncertainties and assumptions, including those
described in Part I, Item 1A, “Risk Factors.” The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ
materially from those projected in the forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors and uncertainties
may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly
update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
One Stop Systems, the One Stop Systems logo, and other trademarks or service marks of One Stop Systems appearing in this Annual Report are the property of One Stop
Systems, Inc. This Annual Report also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, trademarks and
tradenames referred to in this Annual Report appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the
fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and tradenames.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements and other information required by the Securities and Exchange Act of 1934, as amended (the “Exchange
Act”), with the Securities and Exchange Commission (the “SEC”). Our SEC filings are available to the public on the SEC’s internet site at http://www.sec.gov.
On our internet website, http://www.onestopsystems.com, we post the following recent filings as soon as reasonably practicable after they are electronically filed with or
furnished to the SEC: our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act. The information in or accessible through the SEC and our website are not incorporated into, and are not considered part of,
this Annual Report. Further, our references to the URLs for these websites are intended to be inactive textual references only.
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ITEM 1. BUSINESS.
Company History
PART I
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. This rapidly expanding segment of the edge compute and storage market is
what we refer to as AI Transportables. If an application needs AI and/or autonomous capabilities, and it moves, OSS delivers the highest performance solutions that are designed
to survive and enable these challenging applications.
During the year ended December 31, 2015, the Company formed a wholly owned subsidiary in Germany, One Stop Systems, GmbH (“OSS GmbH”). Then, in July 2016, the
Company acquired Mission Technologies Group, Inc. (“Magma”) and its operations.
On August 31, 2018, the Company acquired Concept Development Inc. (“CDI”) located in Irvine, California. CDI 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 stock 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 (“EMEA”).
Our principal executive offices are located at 2235 Enterprise Street, Suite 110, Escondido, California 92029, and our telephone number is (760) 745-9883. Our website address
is www.onestopsystems.com. Information contained in, or accessible through, our website is for reference purposes only.
Business Overview
One Stop Systems, Inc. (“OSS” or the “Company”) designs, manufactures, and markets specialized high-performance compute and storage hardware, software, and
systems, which are designed to target edge AI Transportable deployments. Edge computing is a form of computing that is done on site, near a particular data source or the user
(rather than in the cloud), minimizing the need for data to be processed in a remote data center. This growing trend increases computing performance and security, as the data does
not have to travel to distant data center location. 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.
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The fast-growing edge computing space consists of three major segments. The first segment is comprised of many smaller data centers located near the users (or on the
edge). These typically include compute and storage racks in environmentally controlled buildings, similar to large cloud data centers. Suppliers in this space tend to be the same
large server and storage manufacturers whose products are used at cloud data centers. The second segment includes billions of Internet-of-Things (“IOT”) devices that may reside
in everything from home appliances to the factory production floor. These IOT devices and applications tend not to be challenged on performance and easily communicate up to
the cloud or the data centers on the edge. OSS does not focus on either of the foregoing segments. The third segment is called AI Transportables. These are primarily on land, in
the air or at sea vehicles that need performance without compromise for AI and Autonomous capabilities. This is where OSS’ vision and strategy is aligned, and where we believe
that we offer the greatest unique value to our customers.
Examples of applications that utilize AI Transportables range from industrial autonomous trucks, mining equipment and smart agricultural equipment to military land, sea,
and airborne vehicles. Less mobile applications that utilize AI Transportables include items like medical equipment and mobile command centers. There is currently a growing
demand for AI/autonomous capabilities within the commercial/industrial market, as well as for military use.
The AI and/or autonomous capabilities require these demanding applications to connect to a wide array of data sources and sensors, and to have the ability to quickly
access and store large ever-growing data sets. They must be able to maintain ultra-fast processing power to act on data in real time at the edge location, which is independent of
whether a high-speed network, like 5G, connects the edge application back to the distant central data centers. Standard servers and storage systems available in the market do not
address, and typically will not survive, the AI Transportable requirements. Although the network, if it exists, may transfer data, or be used for updates, the latency is not acceptable
for many of these applications where time is of the essence. This increases the need for data center type performance using the latest generation of products from companies like
NVIDIA, AMD, and Intel. In most of these applications, available space is limited and the number of inputs from sensors and other data sources are significant, thus, requiring high
speed input/output (“I/O”) expansion like the latest in PCI Express, which OSS is known for in the market. In the case of vehicles, fuel efficiency, and particularly, in the case of
aircraft, AI Transportables come into play due to the need for lower weight materials. Additionally, the mobility of these systems creates the need for the equipment to survive
drops, g-forces, vibration, dust, wide temperature swings, and moisture.
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While other edge computing suppliers may serve the needs of the environmentally controlled edge data centers with the latest technology, the deployment of the same
performance level in the AI Transportable space requires unique capabilities and knowhow, which is where we believe that we excel. Many companies that enter this space tend to
offer solutions based on older and lower performance technology, whereas we advance our proprietary state-of-the-art technologies and utilize the latest generation of products to
ensure superior performance. We leverage our proven track-record of delivering first-to-market advanced technologies and technical strength, working with the latest high-speed
networks like PCI Express 5.0 and NVIDIA’s NVLink. This is in addition to our expertise with rugged servers, compute acceleration and high-performance flash array storage
systems. When combined with our execution and knowledge for deploying these systems in challenging environments, we bring the latest commercially available technology and
products to this market. Unlike the edge or cloud data centers in a building, these applications involve various unique requirements, playing to our strength and creating
opportunities for additional barriers of entry.
Although in the past we have also designed and built custom servers with custom connectors and video media outputs for use in the media and entertainment industry, we
are transitioning away from this lower margin business sector in order to concentrate on the AI Transportables sector.
Business Strategy
In March 2021, after reviewing our current business, market trends, the competitive landscape, reflecting on our strengths, as well as listening to feedback from current and
potential customers, we determined that it would be in the best interest of the Company and our shareholders to shift our primary focus to the development and sale of AI
Transportables. At that time, 20% of our business was already in the AI Transportables space. Our AI Transportables business accounts for some of our highest margins, repeat
business, highest closure rate, and most importantly, we believe that it represents our highest value proposition when bringing together all our skills and experience.
Although we are seeing progress, it will take time to pursue, secure, and turn these target opportunities into increased revenue and profits, we believe our focus provides
us with a unique opportunity to drive shareholder value. We are not abandoning current profitable business in the process, but are primarily focusing on this market segment for
future growth. We believe the implementation of the new strategy and vision can drive this portion of our business from approximately 30% of our business today, to over 50% in
the coming years by providing an opportunity for a higher growth rate, margins, and profits. This starts with identifying and closing opportunities in this space. Approximately 75%
of our 2022 major account wins and 60% of our current pipeline of major account prospects, which are not yet closed, fall within the AI Transportables space.
We see opportunities in both the commercial/industrial and military/government segments. Currently, our military business accounts for approximately 25% of our overall
sales, but we anticipate this will grow to 50% over the next few years. Although the overall military budget will likely vary depending on the administration and global tensions,
both of which can impact how many new aircraft carriers or tanks are built, we believe the priority will remain on implementing AI throughout the military theater, and that military
funding in this segment is more likely to grow than decrease as the United States continues to be competitive with China.
A key element of our product strategy is technological product leadership. We believe a first-to-market strategy is key to our ability to continue to win significant original
equipment manufacturer (“OEM”) opportunities. As a result, we continue to develop new state-of-the-art products, providing a unique value proposition for our customers in the
targeted space. In November 2021, we introduced Rigel, the Super Edge Computing platform. We believe that this product is currently the highest performance, most compact
supercomputer that can survive the most demanding next generation military programs available today. It brings to market the latest in Graphics Processing Units (“GPU”), Central
Processing Unit (“CPU”), and memory products in a rugged compact form factor, which targets the military AI Transportable space. In 2022, Rigel was vetted by multiple large
military prime contractors as well as the U.S. Department of Defense directly for key, high visibility programs that we are pursuing. Current engagements for our products in the
military space cover various applications, including for multiple aircraft, drones, ships, helicopters, and land vehicles, as the Pentagon prioritizes incorporating advanced
technologies into their equipment to add autonomous and AI capabilities throughout the military.
In 2022, we introduced the Centauri rugged storage expansion product, which has been deployed now by several autonomous truck companies, two of which are among
our top ten accounts. Additionally, the short depth server (SDS) rugged space optimized server was introduced and has secured major design wins across commercial and military
applications delivering high-performance GPU based AI capability in harsh environments.
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Our ability to drive the leading edge of technology is enabled by our strong relationships with strategic component manufactures, including NVIDIA (for GPUs, ARM
processors and networking), NetList, and Micron (for flash memory), Broadcom (for PCIe switch components), and Intel and AMD (for CPUs). In many cases, we have access to
product roadmaps and other technical information relating to future technology. Access to this information allows us to begin our design process well before the future
components we are designing even exist.
We sell our products worldwide to industry-leading customers. We service over 1,800 customers per year worldwide, with major repeat customers including Raytheon, the
United States Navy, Thales, Liqid, and Alcon/Novartis. OSS Europe has aided in the expansion of our business within the European market. Although, currently OSS Europe
primarily serves as a value-added reseller for the Company, we are also focused on growing the AI Transportable portion of our business through OSS Europe and leveraging its
existing relationships.
We anticipate that the steps we have taken since implementing our new strategy in March 2021 and the fast growing markets that we are pursuing will provide accelerated
revenue and margin growth for the Company over the coming years.
Industry Background and Market Opportunity
The notion of network-based computing dates to the 1960s, but many believe the first use of “cloud computing” in its modern context occurred in 2006 when Google’s
then-CEO, Eric Schmidt, introduced the term during an industry conference. Years later, the explosive growth of IoT connected devices, along with new applications that require
real-time computing power, started to create the drive for edge-computing systems. As the demand for AI on the edge and autonomous vehicles grew, so did the need for high-
performance solutions to operate in harsh environments.
Edge computing is one of the fastest growing markets in the computing space, driven by the need to do more at the edge. The concept of edge computing is simply
deploying compute systems closer to the actual user of the system, rather than communicating with a distant cloud computing facility. According to Gartner, Inc., a leader in
technology research, only 10% of data was gathered and processed at the edge in 2018; however, it is expected that this number will grow to 75% by 2025. This dramatic change is
driving an expected growth of over 38% per year between today and 2028, according to Grand View Research, resulting in an estimated market of $61 billion later this decade.
We currently estimate that the market for the AI Transportable portion of the edge computing industry will grow to approximately $1 billion to $5 billion in the coming years.
OSS’ objective is to be the technology and market leader in the AI Transportable segment of this market.
In addition to the cornerstone high performance rugged server, three technologies are fundamental to the AI Transportable computing space: GPU compute accelerators,
flash memory-based storage, and high-speed data acquisition I/O. These technologies enable systems to ingest, process and store data at significantly higher rates than traditional
systems. By harnessing large quantities of these components, companies can receive necessary data analyses much more quickly and in a more secure manner, and as a result, turn
raw data into actionable intelligence. Industry experts typically divide the high-performance computing market into the following categories:
•Servers – This includes all high-end servers and supercomputers.
•Storage – Flash-based storage devices primarily.
•Middleware – A broad category of software encompassing programming environments, schedulers, and other tools outside the operating system.
•Applications – Specific software applications for high-performance edge computing.
•Services – All services associated with this space.
The AI Transportable markets tend to implement AI, autonomous, and/or semi-autonomous capabilities. We believe markets for these products are large and growing.
Applications deploying these technologies today, or that we expect to do so in the future, include:
•Commercial/Industrial- Trucks, buses, trains, aviation, agriculture, mining, medical, oil & gas, etc.
•Military/Government– Planes, watercraft, mobile command, helicopters, mobile radar, submersibles, vehicles, drones, etc.
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We expect these applications to deploy increasingly faster computing systems to meet industry and competitive goals. Whereas the goal used to be for an edge compute
platform to perform a single application, such as autonomous navigation, now this has been expanded to include five or more AI applications running simultaneously. This
expansion requires much more compute power and data storage than traditional embedded computers can manage while operating in harsh, challenging, and space constrained
environments.
Rugged Edge Servers
While simple AI applications, such as facial recognition to open a door to a secure area, may run on traditional low power embedded processor, the needs of the AI
Transportable applications require datacenter-class server performance brought to a mobile vehicle. The sheer amount and speed of AI data acquisition for operating an
autonomous truck or drone aircraft requires multiple high-speed digitizers, high-performance networking, the fastest flash storage devices, and server-class processors. We enable
the power of the datacenter to be deployed at the edge without compromising performance by employing groundbreaking cooling technologies operating from various vehicle AC
and DC power sources in small spaces.
GPU Compute Acceleration
The capabilities and speed of GPU accelerated computers are driving significant advances in AI and machine learning. Massive amounts of data are collected, stored, and
analyzed by today’s sophisticated algorithms. We are enabling the growth of such AI capability through adding scale with rugged systems that complement the highest
performance rugged servers.
High Density Solid-State Storage
The proliferation of larger and larger data sets used in edge computing, including AI, is feeding the need for higher capacity and higher performance storage devices.
Traditionally, companies have used hard disk drives for their primary storage. Hard disk drive-based systems are being replaced by flash memory-based systems, which offer higher
capacity, performance, reliability, and ruggedness. Flash-based storage systems also consume significantly less power.
High Speed Data Acquisition
At the front-end of AI Transportable systems is high speed data acquisition technology. Depending on the application, the data can be generated from a wide array of
sensors. In the case of an application utilized by autonomous vehicles, data is generated through arrays of video, LIDAR, and radar sensors. In battlefield applications, cameras,
radar, sonar, FLIR (infrared), and RF sensors are deployed to generate data. In Medical applications, MRI or CT sensors are deployed to generate data, and in security applications,
networks of security cameras produce high volumes of video data.
Key Components of Our Business
Product Development
Our systems are built using the latest CPU, GPU and flash storage technologies that draw upon years of expertise in designing and manufacturing semi-custom as well as
standard systems for military and commercial OEMs. We have a history of being first-to-market with many solutions for emerging technologies. Our technological leadership
includes linking the different OSS systems together. When PCIe was introduced in 2005, we were the first company to produce PCIe over cable adapters allowing system-to-system
communication at the same speed as internal I/O expansion reducing latency significantly. Similarly, in 2018, we introduced the first PCIe Gen 4.0 cable adapters, and in 2019, we
introduced the first PCIe Gen 4.0 system building blocks and platforms in which the PCIe Gen 4.0’s ultra-high performance 16.0 GT/s (giga-transfers/second) and signal integrity
challenges limits the number of players in this market and creates barriers to entry. Today, we are one of the largest providers of PCIe adapters and expansion components used
worldwide. In 2022, we introduced the market’s first PCIe Gen 5.0 cable adapters and the initial set of expansion products utilizing PCIe Gen 5.0, which once again doubles
performance to 32.0 GT/s. All of these products maintain the highest performance of communication between our platforms.
When GPU technology and solid-state flash were first introduced, we began designing systems that maximized the effectiveness of these technologies. We now produce
compute-systems with large numbers of GPUs and flash memory that communicate over PCIe and allow faster processing, data storage, and data retrieval. The more GPUs and flash
devices available to a server, the faster that system can process and store data.
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We use leading edge, state-of-the art components from major technology providers to design purpose-built systems that solve customer problems in an efficient, cost-
effective manner. We apply the component technology provided by Intel, AMD, NVIDIA, Micron, Broadcom, and others to deliver solutions to provide true value to our
customers.
Worldwide Sales
We sell our products on a worldwide basis and are supported through a network of direct salespeople, manufacturers’ representatives, resellers, and distribution partners.
Sales in North America and Europe are predominately driven by our direct sales force and manufacturers’ sales representatives, whereas sales in Asia are driven through our
distribution partners.
The acquisition of OSS Europe created a base for us to expand our European operations for sales, marketing, engineering, manufacturing, and support capabilities.
What Sets OSS Apart
Several factors differentiate OSS from other suppliers of high-performance edge computing solutions, including, without limitation the following:
•Our expertise in PCIe expansion and building custom systems, which allows us to design reliable systems using this challenging high-performance technology with a
greater quantity of GPUs and flash storage devices than other suppliers.
•Our strength in PCIe and NVLink switch fabrics for the lowest latency possible.
•We leverage the latest technology available in the marketplace to create the highest performance, most compact systems where we ruggedize and harden our systems to
operate within mobile or harsh environments, including full mil-spec systems.
•We design systems that can meet extreme environmental temperature ranges, while cooling extremely high power, heat generating GPUs and Field Programmable Gate
Arrays (“FPGAs”), and providing options of customized tuned air and liquid cooling.
•We design the software required to operate high-capacity, low-latency storage systems used by defense systems and commercial applications.
•We design systems that can support the wide range of power input sources found in ground, sea, and airborne tactical and industrial vehicles.
•We design systems that both attach to existing servers through high-performance PCIe over cable, leveraging our customers’ existing networks, as well as all-in-one
systems with the server, GPU computing, data acquisition, networking, and flash storage devices all included in a single package.
Our business model consists of developing specialized computing solutions that our customers utilize as a key component of the equipment that they sell to end users. Our
niche is to provide reliable purpose-built platforms with the latest high-performance computing technology that is focused on challenging edge deployments that are mobile.
Business Strategy
We have consistently followed a strategy of being first-to-market in leading edge deployment technologies by designing and developing products that are delivered before
our competitors. This market leadership strategy is accomplished through what we term as the “Catch the Wave” approach to the market. We currently have products spanning the
spectrum of high-performance computing including servers, flash storage, GPU acceleration, networking, and PCIe data acquisition I/O expansion. Within these product areas, the
OSS “Catch the Wave” approach implies that we:
•Anticipate trends in these markets and do not hesitate to share our vision with customers to create thought leadership and deeper engagement;
•Swiftly deploy resources in engineering and sales to bring innovative products to market before our competitors;
•Leverage strategic relationships to get early access to future products and technologies;
•Hunt for early program wins with market leaders and leverage close relationships;
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•Continuously monitor and influence the market for next generation technologies for which a new “Wave” may be forming; and
•Establish leadership in the fast-growing AI Transportable portion of edge computing.
Earnings Growth Strategy
We intend to implement different strategies to continue our revenue growth, while improving earnings. We believe that earnings growth can be accomplished by taking the
following actions:
Revenue growth driven by existing OEM and new design wins:
•Focusing on the fast-growing, higher margin AI Transportable market;
•Demonstrating technology leadership with a clear, ever building value proposition;
•Utilizing a higher percentage of leading edge standard products for scalability;
•Pursuing market leading OEMs in the AI Transportable market;
•Continuing to layer in recurring high margin business;
•Constantly improving and expanding a highly skilled direct sales force complimented by well positioned third party manufacture representatives;
•Expanding worldwide sales efforts and marketing opportunities appropriately; and
•Completing sizable accretive acquisitions.
Higher margins:
•Challenging OSS-designed solutions that leverage our skills;
•Increasing proprietary content, software, stickiness, barriers of entry, and differentiating features;
•Prioritization of the highest return programs/markets;
•Maximizing military and other high value applications and sectors;
•Leveraging economies of scale and lowering material costs;
•Eliminating lower margin products and markets;
•Driving operational efficiencies up through automation, discipline, and process improvements; and
•Layering in additional high margin services.
Optimize expenses:
•Promoting a culture that innovates to minimize spending and drive higher efficiency per employee;
•Utilizing technology and talent on team to increase efficiency;
•Leveraging efficiencies of scale; and
•Welcoming organizational change as business and markets adjust.
Our Opportunity
The worldwide edge computing market is expected to grow at a compounded annual growth rate (“CAGR”) of 38% to $61 billion by 2028 (Grandview research, “Edge
Computing Market Size,” May 2021). Within this market, we are positioned and focused on the AI/autonomous portion at the very edge, which we call AI Transportables, and we
believe that this market could be as large as $5 billion within several years. The products we develop to address this market include high performance compute, storage servers, and
PCIe acceleration systems that can perform in the most challenging environments. If an application needs AI and/or autonomous capabilities, and it moves, OSS strives to deliver
the highest performance solutions that will survive and enable these challenging applications.
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Our Technology
We design and manufacture high performance computing systems for use on the AI Transportable edge, which are designed to increase compute performance while
surviving in harsh environments. Our high-density compute accelerators connect directly to a server’s PCIe bus, delivering substantial compute performance. Our flash storage
arrays support hundreds of terabytes of high-speed storage that can also be accessed by multiple servers.
Technology Drivers for OSS High-Performance Computing Business
We have developed expertise and core competencies in the three fundamental technology drivers within today’s high-performance edge computing market – high-speed
serial interconnect technology, compute acceleration utilizing GPUs, and low latency flash storage. In combination, these three fundamental technologies are changing the
economics of computing, bringing high-performance computing within the grasp of a wide range of new industries and commercial applications on the edge. Simultaneously, the
emergence of massive amounts of data being generated in each of these industries is pushing the requirement for innovative state-of-the-art technology. We are enabling this
technology to be deployed at the edge by merging these fundamental technologies with our expertise in providing system level optimization for meeting requirements for
ruggedization, space, weight, and power (“SWAP”) constraints. Our strategy is to be the disruptive leader in the platforms for AI Transportable applications, and our strategy is
based on our unique ability to design high-quality, high-performance AI workflow compute/storage engines that can be deployed in harsh dynamic environments, which require
unique system level features for vibration, cooling, and power. Our target market, including various types of vehicles that moves on land, in the air or at sea, creates extremely
demanding requirements for compute systems, which must be compact, survive the elements and disruptions like vibration, as well as leverage the higher performance capabilities
in the market. This is what we believe we do well.
We strive to not only provide competitive advantage for companies, but also to address some of the most fundamental challenges in military and industrial applications.
We believe that we are well situated to leverage these major industry forces. By exploiting our unique set of expertise in the underpinning technologies of high-performance
computing, we strive to continue to deliver industry leading solutions, disruptive at times, and to take advantage of the opportunity to capture a growing market share in this
rapidly expanding marketplace.
Switched Serial Interconnect
Switched serial interconnects are the data highways connecting many elements of today’s high-performance computing platforms. At ever increasing speeds, these
pathways move data between system’s processing units, storage, networking, and peripheral elements. For high-performance computing, the primary processing, storage, and
peripheral interconnect is PCIe. PCIe Gen 5.0 has an ability to run up to 16 lanes in parallel, which allows up to 128 gigabytes (full duplex) per second bandwidth between system
elements. We introduced products based on PCIe Gen 5.0 during 2022, which doubles the system bandwidth over PCIe Gen 4.0.
Compute Acceleration with GPUs
GPUs have evolved from graphics display acceleration to becoming general-purpose processing workhorses for high-performance computing systems. Today, the majority
of the fastest supercomputers in the world utilize GPUs as their primary compute engines. GPUs are ideal for high-performance computing workloads including AI training and
inference because of their ability to complete massively parallel processing. While today traditional CPUs may have dozens of processing cores, GPUs have thousands of cores
that are able to execute calculations simultaneously.
NVIDIA, a key supplier of GPUs to the market, lists more than 400 such applications across a broad set of market spaces along with focused teams on specific industries of
high growth potential such as their NVIDIA Drive team for autonomous navigation. Main markets serviced by NVIDIA GPUs include, without limitation:
•Autonomous navigation;
•Computational finance;
•Climate, weather and ocean modeling;
•Computational chemistry and biology;
•Data science and analytics;
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•Deep learning and machine learning;
•Federal defense and intelligence;
•Genomics;
•Manufacturing;
•Media and entertainment;
•Medical imaging;
•Oil and gas; and
•Safety and security.
While NVIDIA is focused on the deployment of their GPUs in data centers and for gaming purposes, we are focused on taking this capability to the AI Transportable edge,
expanding the overall market significantly. Many of these applications also scale performance, based on the number of GPU components utilized. We have designed multi-GPU
systems, including up to 16 GPUs in a single system. Current state-of-the art GPUs (NVIDIA H100) provide over 48 teraflops (FP64) of performance, with future products expected
to dramatically increase overall processing capabilities in the years to come.
GPUs also pose significant system design challenges due to their high-power requirements. High-end GPUs can require 500 – 700 watts of power or more, which generates a
tremendous amount of heat. Sophisticated power distribution and cooling designs are required, especially for large-scale systems with multiple GPUs per chassis. OSS has
significant expertise in addressing these challenges.
PCI Express Flash Storage – NVMe protocol
The use of flash memory technology for system storage has gained traction over the past decade, which we believe to be a result of the continuous decline in the cost per
gigabyte. Flash memory is now becoming the ubiquitous storage technology in high-performance systems.
Combined with the move away from traditional rotating hard drive technology, there has been the trend toward eliminating traditional storage protocols in favor of low
latency flash memory protocols. Newer flash memory modules utilize a protocol known as NVMe, which connects the flash memory directly to the system’s PCIe interconnect. This
direct connection allows for very high bandwidth between the storage and the other system elements, which eliminates the need for protocol translation as data moves from storage
subsystems to and from the compute complex.
Today, flash memory modules with capacities up to 32 terabytes and PCIe Gen 4.0 interfaces are now available. PCIe Gen 5.0 devices are expected to be available for
purchase in 2023. Our flash storage arrays with hundreds of terabytes of capacity are available enabling the scaling of high-speed storage to meet the full range of high-
performance edge application requirements.
OSS leverages the latest technology to build complete storage systems, including all the software to provide the highest density and performance in a compact form factor
ideal for vehicles of all types. This, combined with our hot swappable canisters, has enabled many autonomous truck and military aircraft applications.
Our Core Technical Capabilities
We have developed unique expertise and core competency across the fundamental technologies of today’s rapidly expanding specialized high-performance edge
computing marketplace. These valuable assets are embedded in the leading-edge engineering capabilities of our engineers, the proprietary intellectual property residing in our vast
library of designs, and our brand equity based on our reputation as a high-quality producer of state-of-the-art, custom and standard solutions across a broad array of markets.
High Speed System Interconnect Design
Our electrical engineers are experts in high-speed digital signaling design. They have continually designed at the leading edge of the state-of-the-art signaling speeds, even
as semiconductor technology has driven up the clock rate of digital transmission. We have consistently been among a small handful of companies able to come to market first with
the latest
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technology. In fact, we delivered the industry’s first PCIe over cable solutions for PCIe Gen 1.0, Gen 2.0, Gen 3.0, Gen 4.0, and Gen 5.0, which we deployed in 2022. The expertise
required includes circuit design, PCB (printed circuit board) layout and routing optimizations, all of which focus on achieving the highest levels of signal integrity. In our current
systems, PCIe Gen 5.0 signals are propagated across multiple PCBs, connectors, and copper cabling, while maintaining the ability to recognize digital signal transitions at 32 billion
times per second.
In high-performance computing systems, especially those systems that operate on the edge, the trajectory and need for ever-increasing signaling speeds is continuing;
provided, however, the number of companies that have the capability to design robust, highly reliable systems at speeds that can tolerate the harsh conditions on the edge are
continuing to decline. We believe our core competency in large-scale, high-speed design, and layout will allow us to remain on the forefront of this growing industry.
Complex System Design
In addition to low-level signal integrity design expertise, we have amassed expertise and intellectual property in high-performance system architecture design. This expertise
allows us to develop extremely sophisticated systems with massive scaling, while also meeting customer demands for reliability, cost, and flexibility. To do so, we have developed
deep knowledge for high-capacity input/output systems, operating system adjustments, and required configuration tuning. Due to this development, our engineers are often called
upon to co-design with OEM designers to create the perfect solution to fit the needs of their customers.
For highly scalable systems, a deep understanding and experience with switching topologies and interconnect fabric design is required. We have worked with serial
switching technology, starting with the first generation of PCIe, and have been an innovator in creating unique and flexible topologies to meet the specific needs of customers.
Creating custom solutions for unique customer solutions is a core competency at OSS, and we rely on this deep knowledge of switch capabilities and limitations.
For maximum system performance, design for optimizing data transfer speeds is also an important consideration. We have developed expertise in system design to leverage
peer-to-peer data flows between GPUs and pioneering techniques for optimized data flows between flash storage and GPU compute-engines. Our systems optimize switch and GPU
configuration topologies to optimize GPU-to-GPU communication without requiring latency-inducing data transfer between host dual processors. Our platforms feature RDMA
(remote direct memory access) across compute-nodes, which support data transfer without burdening the host CPU, as well as NVMe over Fabrics for efficient data transfer from
remote storage to compute.
We have pioneered the ability to extend the PCIe bus beyond the confines of a single enclosure, opening the possibility of flexible system expansion options. We believe
we are one of the leading designers and suppliers of PCIe host bus adapters that extend PCIe signals from the host motherboard across copper or optical cables to expansion
enclosures, which provide application acceleration through scale. Our adapters provide both ends of the external cable connection. Our expertise in high-speed signal design in
printed circuit boards, connectors, and cables is essential to successful expansion designs. We also hold expertise in incorporating clustering and rack scale expansion into our
system designs, including 200/400 gigabit Ethernet, 200/400 gigabit InfiniBand, and emerging PCIe top-of-rack switch technology.
Expertise in power, cooling, and mechanical design are required to address the requirements of the high-performance computing customers, especially while meeting the
constrained time requirements of AI Transportable deployments. We have developed leadership design capability in high-power design and distribution within large rack
enclosures as well as edge optimized configurations. High-end GPUs today require 500 watts or above, and in our high-end systems, up to 16 of GPUs can reside in a single chassis.
Thousands of kilowatts of redundant power are required. Power stability and huge thermal loads are some of the critical design issues that must be addressed. Additionally, at the
edge for AI applications, a wide range of input power sources need to be supported from standard 110-220 VAC to 270 and 48 VDC for terrestrial vehicles to three phase 400-800Hz
AC for airborne applications.
We have expertise in power distribution, redundant power, and complex chassis cooling design, including materials selection, airflow simulation, fan technology, and
various liquid cooling options including direct to chip conductive cooling and single and dual phase immersion cooling. We have also developed extensive intellectual property to
help ensure regulatory compliance of our complex high-performance computing system designs that span across emission, shock, vibration, thermal, humidity, and other
environmental requirements that are required for highly reliable and highly available solutions. Our engineers are experts in design for regulatory testing for FCC (Federal
Communications Commission), CE (European Conformity), UL (Underwriters Laboratories), and Mil-STD (Military Standard) standards. Additionally, we have expertise in rapid
prototyping, design for manufacturability, and design for serviceability.
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We have expertise in system management software that provides robust monitoring and management of the functions of complex computer systems. In 2022, we introduced
the U-BMC, or “Unified Baseboard Management Controller,” which is included in our Rigel edge supercomputer and PCIe Gen 5 4UP products. U-BMC will be standard on all
future OSS system-level products. The U-BMC extends the traditional system management paradigm to support GPUs and PCIe switched fabric functions, even if the host is in a
separate enclosure. With U-BMC, we provide “single pane of glass” management of complex systems and an open-source Redfish API for easy integration with industry-standard
management tools. We expect to continue to expand and enhance our software to create additional value, barriers of entry and stickiness with our program wins.
Storage Management Software
Given our hardware design and integration expertise, we believe that our robust software capability allows us to offer more optimized and customized systems. Our Ion
Accelerator™ software design team provides the expertise to deliver full server and storage solutions that produce the highest performance from today’s leading-edge flash storage
devices. The Ion Accelerator software allows flash-based modules to be put into a variety of storage and network configurations which can then be accessed by multiple edge
servers. The Ion Accelerator software can do this cost-effectively, while preserving the low latency and security that is vital for many mission-critical applications, from secure
network boot, database, and transaction processing to massive data collection programs.
Benefits of Technology and Core Capabilities to our Customers
Due to our core capabilities, we can provide our high-performance computing customers with platforms that are highly reliable and cost effective. Such performance allows
our customers to solve larger problems faster, and save the cost and time of highly paid engineers, data scientists, and other human resources. Our technology enhances
innovation by allowing more “what-if” analysis in a finite amount of time. Our price/performance leadership enhances our customers’ competitiveness and lowers capital expense
and total cost of ownership. We work with our OEM customers to develop custom “perfect fit solutions” for their unique requirements when the anticipated return justifies the
investment.
Our Products
Compute Servers
Within the server sector, we have secured a niche position of building purpose-built specialty servers, which the major server suppliers do not supply, as they require
custom tuning and special features that major OEMs cannot easily provide. Our compute servers are designed to provide the highest level of performance that can be deployed in
harsh edge environments. Our extensible operating system (“EOS”) line of servers is optimized for supporting a high number of expansion chassis. Servers in this product family
have a number of slots that are compatible with the PCIe host bus interface cards that we have developed. These cards enable PCIe connection over cable between the host
processor and downstream I/O devices. These servers have custom basic input/output systems (“BIOS”) to ensure they work seamlessly with expansion chassis and support a
high number of downstream I/O devices. Our SDS line supports rugged deployment in space constrained environments providing a maximum depth of 20 inches. We believe that
our “Rigel Edge SuperComputer” (“Rigel”) is the highest performing, most dense, AI-compute platform that is deployable in extreme environments, including on military aircraft.
GPU computing uses hardware components that are optimized to perform mathematical calculations in a rapid fashion. NVIDIA is the market leader in the design and
manufacturing of these components. We work closely with NVIDIA to design and build systems which use multiple GPUs to accelerate applications.
Emerging markets and applications such as AI, image rendering and processing, autonomous vehicles, deep learning, molecular modeling, genomics, advanced
visualization, machine learning, and image processing, all benefit from the ability to use GPUs to accelerate the application. We build specialized compute-servers and accelerators
used in these emerging growth markets. We estimate these markets to be very large and growing. Because our strategy has been to be first-to-market with the fastest and densest
compute appliances, we anticipate our addressable market to be in the hundreds of millions of dollars.
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Storage Servers
We also build standard and custom flash storage arrays utilizing our unique know-how in PCIe device fan-out, packaging, cooling, and PCIe-over-cable. We deliver dense,
high-performance systems that provide customers with high value and utility in the most demanding, data-intensive operations. These OSS Storage Servers complement our
compute servers to provide an end-to-end edge solution for AI workflows.
Through a strategic agreement with Western Digital, we acquired an exclusive software license for Ion Accelerator™ Storage Area Networking ("SAN") source code and
software development rights, as well as hired their core engineering team on July 1, 2017. Since acquiring this software asset, we have extended its capability to align with our AI
Transportable strategy by adding Network Attached Storage ("NAS"), support for NVMe flash drives, NVMe over Fabric expansion capability, and several encryption methods
required for government security applications. We have also implemented a proprietary Follow Me™ capability for removing a bulk pack of NVMe drives that can be easily
transported to another system without rebuilding the data, operating much like a massive capacity USB stick. This provides our flash arrays with a high level of differentiation
relating to storage management, latency, portability, and throughput. We provide standard flash array products and have the in-house hardware and software expertise to provide
customized systems for demanding applications that are not suitable for standard offerings. For example, we provide products to a large military contractor for integration into
military aircraft that requires us to design and manufacture a highly ruggedized mil-spec flash array. The resulting product provides high data density with low weight, a high
degree of portability, and security for data protection. We believe our experience and capability in high speed, low-latency, digital signaling via PCIe gives us an edge in providing
custom designs to OEMs, military programs, and other special purpose applications.
We believe that because our products are positively differentiated by speed, density, and management features for challenging edge applications, our offerings compete
favorably in this market and provide a substantial growth opportunity.
PCIe Expansion and Adaptors
PCIe is the high-speed standard for communications within a computer. This standard defines the signals and connectors (i.e., slots) that are used for computer add-in
cards (such as Ethernet or graphics). Traditionally, communication between computers in the network is completed via Ethernet. Although Ethernet is great for large networks, this
introduces delays and latency challenges. To keep performance at the highest level, PCIe signaling can also be routed over a cable, allowing expansion input/output slots to be
physically located in a separate chassis. This provides for high-performance and low latency, which are essential in this market.
Being able to separate the server from the I/O expansion, by using PCIe over a cable, facilitates disaggregation of server functionality. That is, with PCIe, server I/O
functions no longer need to be contained in the physical server chassis, but instead, can be separated into a separate chassis and continue to operate at full speed. This offers
many advantages over higher latency and power consuming traditional networking communications like Ethernet. From a practical perspective, servers can be connected directly to
larger storage arrays or other peripheral devices, with the resulting group of chassis operating as if they were all in the same physical chassis.
We began developing our first PCIe-over-cable adaptor in 2006 and were one of the early providers of PCIe adaptors. We recognized this space as a prime opportunity to
utilize our core strengths, such as:
•High-speed board design and layout;
•Signal integrity masters;
•Hardware tuning to improve signal integrity;
•Design optimization for low cost;
•Rapid design capability;
•Rugged to survive in harsh AI Transportable applications;
•Custom BIOS to support a high number of connected PCIe I/O devices well beyond what can be supported in off the shelf BIOS; and
•Manufacturing and supply chain management.
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This technology has now become a standard within the computer industry, our customers have used our adaptors to connect their custom input/output chassis and
achieve performance equivalence as if the input/output was integrated into the server box. This gives designers and integrators a degree of flexibility and utility in architecting
computer systems that is unprecedented. We have expanded our PCIe adaptor market in breadth and depth, including making adaptors for many OEM customers.
With our expertise developed in designing adaptor cards, the logical extension of our capability led us to develop a method for expanding the PCIe bus into an external
chassis containing one or many expansion slots and using this expansion to provide storage and AI application acceleration. This allows a customer to install multiple standard
PCIe boards into a chassis and accelerate their system without having to add additional servers. These are typically GPUs, FPGAs or NVMe drives to create large-scale Compute
and Storage appliances. For example, we have developed a product for deployment in a mobile command center, which aggregates large amounts of high frequency data from
sensors and allows in the field AI algorithms to operate in real time. This is achieved through a cluster of our Compute and Storage products. A user can now connect a multiplicity
of PCIe devices to a single server using a single memory domain, and achieve performance throughput and low latency, which was not possible prior to the introduction of PCIe.
We have been a leader in PCIe acceleration through generations 1.0, 2.0, 3.0, 4.0 and 5.0. We delivered our initial PCIe Gen 5.0 products in 2022, well ahead of any of our
direct competitors. As PCIe evolves through generations 6.0 and beyond, we believe that we are uniquely positioned to continue our leadership role in this market. We have
shipped a full line of PCIe Gen 4.0 products since 2020, and anticipate that we will have a full line of PCIe Gen 5.0 expansion solutions shipping in 2023. We currently offer what we
believe to be the largest PCIe acceleration product line, with chassis and backplanes that offer expansion from one to 64 slots. Due to its greater data throughput and flexibility of
design, we believe this is a growing market, and we intend to maintain our leadership role.
Additional Compute Products
Through OSS Europe, we provide small form factor IoT and high-performance industrial and panel PCs compute-platforms customizable to meet needs in commercial
applications on the edge where space constraint is a fundamental consideration. We also provide ruggedized, mobile tablets and handhelds that meet the specialized requirement
for devices deployed at the edge in a diverse set of environmental conditions for commercial and government applications.
Customers
We serve a global clientele consisting of multinational companies, governmental agencies, military contractors, and leading technology providers. Some of our key
customers are set forth below, illustrating the class of customers we pursue with our sales, product marketing and marketing communications efforts.
Raytheon – We work closely with many of the U.S. Government agencies and prime contractors to bring the latest technologies to mobile edge applications. Raytheon
provides an excellent example of how we adapted high-performance computing elements used in air-conditioned datacenters to the rigorous environment encountered in a U.S.
Navy aircraft. We worked closely with Raytheon to build a customized NVMe storage array, with drives installed in removable canisters for high-speed sensor data acquisition,
encryption, and recording. This massive amount of mission data can then be easily off-loaded upon landing the aircraft and sent to the traditional government data center, which is
a significant development given that satellite network links are too slow to handle transmitting that amount of data. To further enhance the data collected, we embarked on a second
project with Raytheon to build a GPU accelerated “datacenter in the sky” system to enable mission data collected in the flash array to be analyzed and run through AI algorithms in
real time while the mission was in process. This allowed the aircraft and crew to make real time decisions using the same level of processing power available in a ground-based
system. Finally, we enhanced that “datacenter in the sky” with a 3-system cluster to provide large scale resources during missions and to carry out multiple AI tasks in real time.
These applications are great examples of AI transportable end products. We have continued to enhance and refresh the technology for this program while working on
opportunities with other prime contractors, including other mobile applications such as video surveillance, video analytics and autonomous vehicles on land, in the sea and in the
air. OSS is currently expanding its footprint within in the military market with multiple new engagements with other prime contractors and the U.S. Department of Defense (“DOD”)
directly. Much of this activity is focused on our Rigel supercomputer, which addresses the needs of autonomy and AI required in the battlefield. Current applications include land
vehicles, aircraft, drones, ships, and submersibles.
National Instruments – National Instruments is a market leader and multinational company that produces automated test equipment and virtual instrumentation software.
We provide several PCI Express-based interface cards that are branded by National Instruments and used in capturing and controlling sensors that produce AI datasets. We act as
an extension to
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National Instruments’ engineering group, allowing National Instruments to complete their product roadmap in a timely and cost-effective manner.
Alcon – Alcon is a market leader in the production of computer assisted medical equipment. OSS Europe provides several rugged, purpose-built, high-performance
workstations used in performing these AI assisted surgeries. OSS Europe works directly with Alcon engineers to co-design and assist in securing medical certifications for the
products that doctors and patient trust for pinpoint accuracy and speed.
disguise - disguise is the leading provider of hardware and software that allows their customers to produce live events, television broadcasts, theater effects, and special
effects for concert tours. We have worked with disguise to design purpose-built, rugged servers that act as video controllers to create the virtual and visual effects used in these
applications. These edge servers require high performance to create the most demanding effects, but also must be rugged enough to move from venue to venue every night. Events
like the Super Bowl halftime show, sporting events, feature films, music videos, broadcast studio, metaverse experiences and numerous musical concerts rely upon disguise
controllers, designed, and produced by us to deliver a lasting impression on audiences. We are seeing an acceleration in disguise’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 eventually provide a real-time cloud solution. As
a result, we expect that disguise will transition to a lower cost, commodity type equipment solution. Although disguise has been a key customer in the past, in line with our current
business strategy, we are transitioning away from lower margin product, contract-manufacturing type sales, and thus expect a decrease in the demand for our media and
entertainment focused equipment and our expertise in this area in the first half of 2023, and that disguise will no longer be a key customer in the near future.
Sales and Marketing
Our sales and marketing efforts are focused on the identification, engagement, and closure of significant targeted opportunities within the AI Transportables space.
Sales
Our sales efforts consist of five main channels:
•General Sales – OSS and OSS Europe maintain websites, a web store and direct sales teams that sell directly to end-users, primarily in the U.S. and EMEA regions. This
includes e-commerce sales via typical web store functionality, outbound calling and direct interaction with customers and potential customers to provide standard and
unique solutions that fit their needs.
•OEM Focused Sales – Our direct outside sales team, which consists of OSS employees as well as third-party manufacture representatives, is organized to best identify,
target, and develop the top potential commercial OEM and government program customers in the AI Transportable Space. These OEM and government programs form the
largest and fastest growing parts of our business. The OSS direct sales teams interface directly with new potential customers at their facilities, live events, and virtual
industry tradeshows, and present standard solutions and/or proposals for customized solutions (if solid return on investment) to address such customers’ high-
performance AI Transportable needs at the edge.
•Our Commercial Sales Team – Our commercial sales team focuses on OEM customers to whom we sell standard solutions or design and build customer specified systems
based on OSS technology expertise that are branded with the OEM’s name and label. This includes target markets like autonomous semi-trucks, farming, and mining
equipment deploying the latest technology. These companies, many of which are market leaders, then resell the products through their own sales channels. We actively
seek this type of relationship, which is leveraged as a sales multiplier, allowing us to grow sales at a faster rate without adding as many dedicated sales resources. This
tends to be a recurring sales model that lasts several years.
•Our Government Sales Team – Our government sales team focuses on the large and growing portion of our business that provides systems to DOD programs, global
government agencies, and national laboratories. Our government sales team has the knowledge and expertise to identify major program opportunities in the AI
Transportable space and provide the extensive technical and business documentation to take these programs from concept to successful completion. This is a growing part
of our business, one of our primary focuses, and provides a higher contribution of profit margin. Examples include compute and storage systems for aircraft, radar
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systems, and command centers. Our sales team engages with the large military prime contractors as well as the DOD directly.
•Channels – We have dedicated sales resources that manage our worldwide network of resellers and distributors, including those distributors that we utilize throughout
Asia. We sell a large breadth of standard products through these channels, which allow us to achieve global customer touch without requiring a physical presence in all
geographies. The master distributors in several countries have dedicated sales expertise to capture additional OEM business, with both Fortune 500 and second tier OEM
firms extending our international footprint. Through OSS Europe, we have a greater direct presence in Europe, which allows greater access to those markets.
Marketing Communications
Our marketing communications department is responsible for positioning OSS as an expert, thought leader, and visionary in the AI Transportables market. We generate
expert content to support our market leading products, while also building cost effective brand/product awareness in several ways. We use traditional and non-traditional marketing
communications, as well as partnerships and word of mouth, to convey the uniqueness and compelling value of our products and services. The AI Transportable market
applications we target include AI inference applications in autonomous vehicles, medical equipment, commercial aerospace, defense/government, agriculture, and mining. OSS
Europe also targets embedded industrial and IoT customers in the EMEA region. Among the many channels utilized are:
•Trade Shows – OSS participates in several live and virtual tradeshows and events during the year to generate new relationships and foster existing relationships with
customers and partners. These engagements allow us to showcase our standard and custom product expertise to our target customers. The target trade shows include
AUSA (US Army), Sea-Air-Space (Navy/NASA), Advanced Driver Assistance Systems (autonomous vehicle), MOVE America (autonomous vehicle), AFCEA West
(military), DSEI (international military), Supercomputing, Medica (medical), AUVSI (autonomous vehicle) and Embedded World. We evaluate the return on investment
(“ROI”) and costs of each show on an annual basis; accordingly, participation may change from year to year.
•Electronic Media – OSS uses various forms of electronic advertising media to market both the AI Transportable products and capabilities of the Company. Electronic media
includes internal direct email campaigns, such as monthly newsletters and various press releases for new products, technology developments, partnerships and significant
application design wins. In addition, we use media companies relevant to our target markets to disseminate information about the Company to a larger set of potential
customers. The format of the electronic advertising varies, but with the common focus on content advertising demonstrating our market expertise with a secondary focus
on brand awareness. The various electronic media formats that we utilize include, but are not limited to, search engine ads and keyword campaigns, digital ads, display ads,
datasheet emails, customer use cases, e-newsletters, and text ads. Our web site is key at leveraging our leadership content, positioning, and search engine optimization
(“SEO”) capabilities. We will continue to invest on this front.
•Social Media – OSS regularly use Facebook, LinkedIn, and Twitter to instantly alert the Company’s followers to new events, products, services, and customer stories.
•Publications – We periodically publish white papers, customer success stories, and other demand generation technology articles in printed and electronic periodicals and
newsletters, including, but not limited to, Autonomous Vehicle International, Military Embedded Systems, Edge Industry Review, Aerospace and Defense and Auto News.
We also invest in print ads in the EMEA region, with the highest ROI in select industry magazines for brand awareness.
As we grow, it is anticipated our marketing efforts will likewise continue to increase in size and focus on the AI Transportable market.
Competition
Our core business is to provide specialized high-performance edge AI computing platforms to OEMs who incorporate these products into their complete solutions, which
they then sell to end users in the AI Transportable market. Although a fragmented market, due to the nature of our business, there are a number of categories of potential
competitors of our products.
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Customer in-house design resources
Many of our larger target OEM customers have in-house engineering design resources, which could be used as an alternative to engaging with us. Examples of current OSS
customers who have significant in-house resources include National Instruments, Raytheon, and Lockheed Martin. This potential competition is mitigated by the technical
specialization that we have, especially in high-end and large-scale PCI Express switch fabrics and PCI Express acceleration capabilities. OEMs can invest their in-house resources
on value-add capabilities within their specific vertical market and outsource these horizontal technology capabilities to us. We have also developed a trusted partner relationship
with many of these OEMs and have established a market reputation for technical expertise and a responsive and cost-effective engagement model. We win when our customers
realize that together we can produce better products faster, more ruggedly, and more cost-effectively than they can by themselves. This has proven to be particularly evident when
customers require state-of-the-art products that are constructed of commercially available parts but need to be deployed in harsh mobile environments. This has resulted in several
program wins that demonstrate our flexibility and how we can work closely with large OEM and government customers. Interestingly, it appears that when these large companies
cut back on their workforce or have limited funding, such events bolster our position, as we may become these companies’ only option to get their desired product or service
deployed within a reasonable period.
Major Tier 1 & 2 Mainstream Computer, GPU and Storage Vendors
These vendors offer mainstream high-performance computing platforms, including servers and storage systems that can address some applications at the edge in our target
markets. Typically, they do not, however, offer the enhanced value platforms or customization capabilities that we specialize in to meet unique form factor, power, ruggedization or
scale out requirements sought by OEM customers. Generally, these vendors focus on the large, air-conditioned data centers and competing with such vendors based on
price/volume, as differentiation is challenging. Our strategy is specifically designed to avoid head-to-head competition in this part of the market with this class of vendors. In some
scenarios, we can provide a complementary specialized component or building block, which interfaces with one of these vendors’ mainstream products. Examples of companies in
this space include NVIDIA, HP, Dell/EMC, IBM, SuperMicro, Pure Storage, and NetApp.
Vertical High Performance Compute Vendors – Military/Aerospace
In certain vertical markets, there are competitors who focus primarily on the high-performance compute (“HPC”) military and aerospace markets. These vendors often
provide complete solutions, including both hardware and software, and some specialization in terms of form factor and ruggedization. In these markets, we provide unique
capability in terms of scaling of PCI Express components over cable (copper and fiber) that can address unique requirements of specific military or government programs. Many of
these competitors use older technologies or low power processors and components in these more challenging environments. We are able to differentiate ourselves from such
competitors due to the fact that we deploy the latest high-performance technology which enables us to provide superior products to potential customers in this space. We have
also established good relationships with prime contractors or governmental agencies (Raytheon, Lockheed, Boeing, NASA, ONR, L3 and others), which can be important
influencers or decision makers on technology selection. Competitors in this space include companies such as Mercury, Crystal, Curtiss Wright, Kontron, Trenton, Core Systems
and Systel. In the past, we have been able to offer the latest technology to the rugged edge, which is normally only deployed in commercial applications, well before our
competitors by leveraging our “performance, without compromise” strategy.
Manufacturing and Operations
Currently, OSS is certified under AS9100 and OSS Europe is certified under ISO 9001-2015 for “design, manufacture, and supply of industrial computers.” This means we
have demonstrated our ability to consistently provide products that meet both customer requirements and applicable government regulations or statutory requirements. AS9100 is
the pinnacle of quality management systems recognized by government and aerospace companies world-wide. It also indicates that we have programs and processes in place to
ensure a high level of customer satisfaction, as well as continuous improvement and risk mitigation programs that ensure we get better over time.
While OSS primarily utilizes lean principles to drive our manufacturing and assembly process, we recognize the importance of smooth builds and strategic inventory in this
current climate of sustained supply chain shortages. One of the key aspects of utilizing lean principles is our application of just-in-time principles to ensure effective ordering and
utilization of inventory. This also helps optimize cash flow throughout the manufacturing cycle. Within the manufacturing process, our operations encompass three categories of
“builds”:
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•Standard Builds – These are builds of standard products that are sold with little or no customization or non-standard features. These are products that are ready to be
installed or integrated by the customer upon receipt.
•Custom Builds – Custom builds involve a product built to a customer specification at our facilities. Upon receipt, the customer has a unique product that performs all the
functions and has the physical dimensions that match their specifications.
•Engineering Project Builds – We support the product development process by building models and prototypes of products. Developed by our engineering group, the
prototypes can be of standard or custom products. We build these products with the intent of shipping in volume later.
We are dedicated to quality and customer satisfaction. Our continuous improvement efforts require us to review products, services, and processes with the idea that minor
changes can lead to greater outcomes for our customers. Although we serve the high-end of the rugged edge computing space, we are constantly looking for ways to become more
efficient and drive down costs while driving up margins and quality.
Research and Development
Our ability to compete successfully in our industry is heavily dependent upon our ability to ensure a continuous and timely flow of competitive products, services, and
technologies to the marketplace. We continue to develop new products and technologies and to enhance existing products that will further drive commercialization. We may also
expand the range of our product offerings and intellectual property through licensing and/or acquisitions of third-party businesses and technologies.
Our intellectual property research and development is focused on the exploitation of key technologies as they evolve in the marketplace. Our product roadmap reflects new
technologies for CPUs, GPUs, flash storage, and advanced PCIe switches. We design first-to-market, unique implementations targeted at the AI Transportable market utilizing
market leading component technologies. Accordingly, our focus lies not in the capital-intensive development of silicon implementations of technologies (i.e., chips, processors,
GPUs, or storage devices), but rather leverages leading-edge technologies and building first-to-market products that fully exploit those technologies to solve customer problems in
challenging environments.
Our research and development strategy can be summarized as follows: We drive customer program wins by utilizing new key technologies to develop products that are
leading edge and first-to-market and that are designed to solve challenging problems in harsh environments, while working closely with our customers to understand and
address their needs.
Intellectual Property
Our primary intellectual property value emanates from the more than 600 individual design projects that we have undertaken over the decades since our founding,
experience, and knowhow, in addition to trade secrets and copyrights. These designs are archived and cataloged; we rarely begin a new design from scratch, but rather, use our
archived and cataloged designs as a starting point to efficiently provide products to our customers. In general, we maintain intellectual property rights with respect to the
components of the products we design and sell so that we may continue to use them for future sales and development efforts.
Over the years, our team has developed and maintained expertise in high-speed signal design and analysis, electronic and mechanical packaging, PCIe-over-cable, fiber
optics transmission, high-speed/density flash arrays, and integration and deployment of GPUs in compute accelerators and servers. This extensive expertise positions us to expand
and rationalize our product line to meet the growing and ever-changing high-performance computing market. We believe that the expertise of our staff is a considerable asset
closely related to intellectual property, and attracting and retaining highly qualified employees is essential to our business.
Markets, Seasonality, and Major Customers
Our products and services serve a global clientele consisting of multinational companies, governmental agencies, military contractors, and leading technology providers.
Based on recent market experience, it appears there are seasonality factors with deliveries decreasing in January and February each year. At OSS Europe, this is likely a result of
Asia’s holiday season, whereas at OSS in the US, this is more of a result of varied government and commercial customer appropriation cycles and the timing of budgets, which tend
to be larger later in the year; however, we believe these market factors will continue to evolve and our insight into these trends will improve.
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During 2020 2021, in particular, and to an extent in 2022, our business was impacted by the COVID-19 virus. This included reduced demand from some current and potential
customers serving specific markets. The media and entertainment industries experienced delayed or canceled live concerts, other large in-person events, and sporting events
during the height of the pandemic, which resulted in less demand for their products and services, which consequently resulted in a decrease in demand for our products designed
for use in these industries. Fortunately, some of the decrease in demand for our live media and entertainment focused products was offset by growing demand for virtual events,
especially in 2022. The commercial aerospace market was also impacted when air travel dropped significantly due to various COVID-19 related factors, such as stay-at-home orders,
travel restrictions, the fear of being exposed to the virus in an aircraft and later by the shortage of crew members. With aircraft flying at lower capacities or sitting idle, the spending
budgets were cut drastically, which decreased the demand for our commercial aerospace customers’ products resulting in a decrease in demand for our products designed for use in
the industry. As restrictions have lifted and fears have subsided, the impacts of COVID-19 on our business and that of our customers have also decreased significantly. Although,
we cannot currently predict how the pandemic will continue to impact our business in the future, it is not anticipated to have significant impact to our customers and our business
in 2023.
For the years ended December 31, 2022 and 2021, an aggregate of 37.4% and 41.5% of our total consolidated revenues, respectively, were attributable to three customers
(disguise, Raytheon and Navy). As discussed elsewhere in this Annual Report, we expect that demand for our products by, and revenues attributable to, disguise will decrease in
2023 as a result of their investment in cloud technology and drive towards less intelligent compute capability at the edge. A loss or decline in business with either of the other two
customers would have an adverse impact on our business, financial condition, and results of operations.
We typically provide our products under contract supply agreements or purchase orders. We provide our products, software, and services from our offices located in
California, Utah, and Germany.
Materials and Suppliers
Although most components essential to our business are generally available from multiple sources, we believe that a loss or limited availability of certain component
suppliers and manufacturing vendors could have a material adverse effect upon our business and financial condition.
Prior to 2021, we did not experience significant delays in the supply or availability of our key materials or components provided by our suppliers, nor did we experience a
significant price increase for materials or components. However, in 2021, the worldwide supply shortage created many challenges, resulting in the need for our team to implement
different strategies and analyze how we allocate resources. In 2022 and into 2023, we are continuing to experience unavailability of certain critical products and some limited
supplies, protracted delivery dates for components, increasing product costs, and changes in minimum order quantities, which creates limitations on our ability to secure product.
Shortages have ranged from semiconductors to packing materials for shipping. As a result, we are carrying increased inventory balances to ensure availability of necessary
products and to secure pricing. Additionally, products that are in the “work-in-process” stage and the inventory of finished goods have increased due to timing and availability of
certain componentry necessary to complete our products. We have worked with suppliers and customers to provide multiple options, including the alternative sourcing of similar
products. We manage the business carefully to minimize any material impact to financial performance. For more information, see the section titled, “Risk Factors” found in Part I,
Item1A, of this Annual Report.
Human Capital Resources, Employees, and Personnel
We believe that our future success will depend, in part, on our ability to continue to attract, hire, and retain qualified personnel. To achieve this objective, we strive to
provide competitive compensation, benefits, stock participation, and a success driven work environment.
As of December 31, 2022, we had approximately 112 employees, of which 104 were full-time and 8 were part-time employees. Seventy-two of our employees were domestic
and twenty-eight were international. Our employees include highly skilled engineers, technicians, assemblers, and support staff. Despite recent staffing challenges that have
plagued the industry that we operate in, which have generally resulted in greater turnover throughout the industry, we are proud of the low voluntary turnover rate of our
personnel to date, as we endeavor to continue to challenge our team and encourage input and creative thinking by all. Our management team strives to provide transparency to our
employees through regular meetings designed to update employees on current metric driven results and future expectations. None of our employees are covered by
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a collective bargaining agreement or represented by a labor union. We consider our relationship with our employees to be strong.
Environmental Matters
No significant pollution or other types of hazardous emission result from our operations and it is not anticipated that our operations will be materially affected by federal,
state, or local provisions concerning environmental controls. Our costs of complying with environmental, health and safety requirements have not been material.
Furthermore, we do not believe that compliance with existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to
have a material effect in the foreseeable future on our business or markets that we serve, nor on our results of operations, capital expenditures, earnings, competitive position,
financial position, or any of our operations. However, we will continue to monitor emerging developments in this area.
Government Approval and Effect of Government Regulations
Because our core business is to provide specialized high-performance edge computing building blocks and platforms to OEMs who incorporate these products into their
complete solutions, which they sell to end users in specific vertical markets, we do not believe that any government agency approval is required for the products and services that
we provide to our customers.
We believe that our operations are substantially in compliance with all applicable laws and regulations and that we hold all necessary permits to operate our business in
each jurisdiction in which our facilities are located. Our worldwide business activities are subject to various laws, rules, and regulations of the United States as well as of foreign
governments.
Compliance with these laws, rules, and regulations has not historically had a material effect upon our capital expenditures, results of operations, or competitive position.
However, governmental regulations, including but not limited to import and export law, privacy laws, customer, and trade regulations, are subject to change and interpretation and
may affect our business in the future. For more information, see the section titled, “Risk Factors” found in Part I, Item1A, of this Annual Report.
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. Please see the section of this Annual Report entitled “Advisory Board Members,” below, for information regarding each of the members of our advisory board.
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 particular. 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 February
9, 2023, we announced that David Raun, the Company’s chief executive officer, will be stepping down, effective upon the appointment of his successor. Mr. Raun will continue to
serve as a member of the Company’s board of directors. Additionally, in connection with this transition, we also (i) appointed James Ison, our chief marketing and sales officer, as
our chief product officer, (ii) initiated a search for a vice president of sales, (iii) implemented a reduction in force, consisting of 12 employees, in those areas of our business that we
are transitioning our focus away from; and (iv) made certain other internal structural changes.
We have not yet identified a candidate to fill the roles of chief executive officer or a vice president of sales; however, we have retained an internationally recognized search
firm to aid in this effort. Additionally, in February 2023, our board of directors constituted a new committee of the board, the Strategic Transition Committee, to assist in the
identification, transition and retention of a successor chief executive officer, including to work with the engaged search firm to accomplish the foregoing, to provide support to our
management team throughout the transition, and to perform other duties as may be necessary or desirable from time to time in connection with the reorganization of the Company.
Members of the Strategic
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Transition Committee consist of Jack Harrison (chair of the committee), Gioia Messinger and Kenneth Potashner. As compensation for the services that they are expected to
perform as members of the Strategic Transition Committee (i) Mr. Harrison and Ms. Messinger shall be entitled to receive $2,000 per month in cash, commencing January 1, 2023 and
continuing for so long as the Strategic Transition Committee remains in effect, which cash payments shall be paid to each of the relevant members in one lump sum at or about such
time that the Strategic Transition Committee is disbanded, and (ii) Mr. Potashner shall be entitled to receive (A) 3,333 shares of Company common stock per month, commencing
November 1, 2022 and continuing for so long as the Strategic Transition Committee remains in effect, which shares shall be issued to Mr. Potashner in one grant at or about such
time that the Strategic Transition Committee is disbanded, and (B) a one-time cash payment equal to 30% of the total value of the shares issued to Mr. Potashner to cover taxes
payable in connection with the issuance of such shares.
The negative impact of the COVID-19 pandemic and the impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the
ongoing military conflict between Russia and Ukraine, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic
uncertainty, which has negatively affected our operations. Additionally, the general consensus among economists continues to suggest that we should expect a higher recession
risk to 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.
Additionally, in March 2023, Silicon Valley Bank and Signature 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.
With respect to our media and entertainment business, we are seeing an acceleration in our 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 eventually provide a real-time cloud solution. As a result, we expect that
our customer will transition to a lower cost, commodity type equipment solution. We anticipate that we will begin to experience a decrease in the demand for our high-compute,
ruggedized media and entertainment focused equipment and our expertise in this area in the first half of 2023.
Currently, we are continuing to experience increased pricing, longer lead-times, unavailability of product and limited supplies, protracted delivery dates, changes in
minimum order quantities to secure critical product, and/or shortages of certain parts and supplies that are necessary components for the products and services we offer to our
customers. As a result, the Company is carrying increased inventory balances to ensure availability of necessary products and to secure pricing.
These global issues and concerns regarding general economic decline or recession are also impacting some of our customers, who are experiencing downturns or
uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions
or payment extensions, or seek to renegotiate their contracts.
As a result of these global issues, as well as other factors discussed in this Annual Report, it has been difficult to accurately forecast our revenues or financial results,
especially given the near and long-term impacts of the pandemic, geopolitical issues, inflation, the Federal Reserve interest rate increases and the potential for a recession. In
addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and
may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the
future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause
our stock price to decline.
Furthermore, a decrease in orders in a given period, including in connection with our media and entertainment customer’s transition to the cloud, could negatively affect our
revenues in future periods. These global issues and events may also have the effect of heightening many risks associated with our customers and supply chain. We may take
further actions that alter our operations as may be required by federal, state, or local authorities from time to time, or which we determine are in our best interests. In addition, we
may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and
our rate of innovation, either of which could harm our business.
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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 artificial intelligence compute capabilities for military and industrial applications,
autonomous truck diving and improve company-wide execution.
Company Website
We maintain a corporate Internet website at: http://www.onestopsystems.com.
The contents of our website are not incorporated in or otherwise to be regarded as part of this Annual Report. We file reports with the SEC which are available on our
website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, “Section 16” filings on Form 3, Form 4, and
Form 5, and other related filings, each of which is provided on our website as soon as reasonably practical after we electronically file such materials with or furnish them to the SEC.
In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with
the SEC, including the Company.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Annual
Report, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before
deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, operating
results, and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Risk Factors Summary
Below is a summary of the principal factors that make an investment in our securities speculative or risky. This summary does not address all of the risks that we face.
Additional discussion of the risks summarized in this “Risk Factors Summary” section, and other risks that we face, can be found below and should be carefully considered,
together with other information included in this Annual Report.
•Business disruptions could harm our business, lead to a decline in revenues and increase our costs.
•Economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability, could harm our financial condition and results of
operations.
•Volatile or recessionary conditions in the United States or abroad could adversely affect our business and/or our access to capital markets in a material manner.
•Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial
institutions or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations.
•We may be adversely affected by the effects of inflation.
•The market for our products is developing and may not develop as we expect.
•Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below
expectations or our guidance.
•Our products are subject to competition, including competition from the customers to whom we sell, and new entrants and the introduction of other distribution models in
our markets may harm our competitive position.
•Certain members of our senior management team and board of directors may have limited experience in certain sectors of the AI Transportable market that we are targeting.
•Changes in U.S. government defense spending could negatively impact our financial position, results of operations, liquidity and overall business.
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•If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed, and our reputation may be damaged.
•A limited number of customers represent a significant portion of our sales, and the loss of any key customers could cause our sales to decrease significantly.
•We rely on a limited number of parts suppliers to support our manufacturing and design processes.
•Our future success depends on our ability to develop and successfully introduce new and enhanced products that meet the needs of our customers, as well as our ability
to maintain our production schedule.
•Unsuccessful government programs or OEM contracts could lead to reduced revenues.
•Our inventory may rapidly become obsolete.
•We offer an extended product warranty to cover defective products at no cost to the customer. If our products contain significant defects, we could incur significant
expenses to remediate such defects, our reputation could be damaged, and we could lose market share.
•If we fail to achieve design wins for our products, our business will be harmed.
•If we cannot retain, attract, and motivate key personnel, we may be unable to effectively implement our business plan.
•Any future acquisitions could require significant management attention, disrupt our business, result in dilution to our stockholders, deplete our cash reserves, and
adversely affect our financial results.
•The continuing commoditization of HPC hardware and software has resulted in increased pricing pressure.
•If we are unable to protect our proprietary design and intellectual property rights and/or the confidentiality of our trade secrets our competitive position could be harmed,
or we could be required to incur significant expenses to enforce our rights.
•Many of our proprietary designs are in digital form and the breach of our computer systems could result in these designs being stolen.
•Our proprietary designs are susceptible to reverse engineering by our competitors.
•Claims by others that we, our channel partners or our end-customers infringe their intellectual property or trade secret rights could harm our business, including due to the
fact that we are generally obligated to indemnify our channel partners and end-customers for certain expenses and liabilities resulting from intellectual property infringement
claims regarding our products.
•Privacy concerns relating to our products and services could damage our reputation, deter current and potential users from using our products and services, result in
liability, or result in legal or regulatory proceedings.
•Our international operations subject us to a variety of risks and challenges.
•New regulations or standards or changes in existing regulations or standards in the United States or internationally related to our suppliers’ products may result in
unanticipated costs or liabilities, which could have a material adverse effect on our business, operating results and future sales, and could place additional burdens on the
operations of our business.
•We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.
•The price of our common stock may be volatile, and the price could decline if securities or industry analysts issue an adverse opinion regarding our stock or do not publish
research or reports about our company or if there are substantial future sales of shares of our common stock, amongst other things.
•Our directors and principal stockholders own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
•Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of the Company, which may be beneficial to our stockholders, more
difficult and may prevent attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
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•Our inability to raise additional capital on acceptable terms in the future may limit our ability to develop and commercialize new solutions and technologies and expand our
operations.
•We have never paid, and do not expect to pay, any cash dividends to holders of our common stock for the foreseeable future.
•We are an “emerging growth company” and a “smaller reporting company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth
and smaller reporting companies will make our common stock less attractive to investors.
Risks Related to Our Business and Industry
Navigating the demand, supply, and operational challenges associated with the ongoing coronavirus (COVID-19) pandemic and other macroeconomic factors unsuccessfully
may affect our financial condition and results of operations.
COVID-19 spread worldwide commencing in 2021, resulting in shutdowns and continuing interruptions of manufacturing and commerce, which impacted both our business
as well as that of many of our customers. Although many of the impacts of the pandemic that most severely impacted our business have now significantly subsided, the COVID-19
pandemic has increased economic and demand uncertainty. Supply chain disruptions, resulting from factors such as the COVID-19 pandemic, inflation, labor supply, shipping
container shortages and other macroeconomic factors, have impacted, and may continue to impact, us and our customers, vendors, and suppliers. These disruptions have resulted
in longer lead times and, increased product costs and shipping expenses. It is not currently possible to predict how long it will take for these supply chain disruptions to cease. The
Company has experienced protracted timelines and shortages for delivery of our products as a result of such supply chain disruptions.
In addition, while the extent and duration of the COVID-19 pandemic and other macroeconomic factors on the global economy and our business in particular is difficult to
assess or predict, the pandemic and various other factors have resulted in, and may continue to result in, significant disruption of global financial markets, which may reduce our
ability to access capital or our customers’ ability to pay us for past or future purchases, which could negatively affect our liquidity. A recession or financial market correction could
impact overall technology spending, adversely affecting demand for our products, our business and the value of our common stock.
The extent of the impact of the COVID-19 pandemic, global instability and other microeconomic factors on our operational and financial performance, including our ability to
execute our business strategies and initiatives in the expected time frame, will depend on future developments, including, but not limited to, the duration, timing and severity of the
impact on customer spending, including any recession in the U.S. or elsewhere in the world, all of which are uncertain and cannot be predicted. An extended period of global supply
chain and economic disruption could have a material negative impact on our business, results of operations, access to sources of liquidity and financial condition, though the full
extent and duration is uncertain.
Business disruptions could harm our business, lead to a decline in revenues and increase our costs.
Our worldwide operations could be disrupted by earthquakes, telecommunications failures, power or water shortages, outages at cloud service providers, tsunamis, floods,
hurricanes, typhoons, fires, extreme weather conditions, cyber-attacks, terrorist attacks, war or military conflicts (such as the ongoing military conflict between Russia and Ukraine),
medical epidemics or pandemics (including, but not limited to, COVID-19) and other natural or man-made disasters, catastrophic events or climate change. The occurrence of any of
these disruptions could harm our business and result in significant losses, a decline in revenue and an increase in our costs and expenses. Any of these business disruptions could
require substantial expenditures and recovery time in order to fully resume operations.
Our corporate headquarters, and a portion of our research and development activities, are located in California, and other critical business operations, finished goods
inventory, and some of our suppliers are located in Europe and Asia, near major earthquake faults known for seismic activity. The manufacture of product components, the final
assembly of our products and other critical operations are concentrated in certain geographic locations, including California, Germany, and China. Geopolitical change or changes in
government regulations and policies in the United States or abroad may result in changing regulatory requirements, economic sanctions (such as those recently imposed by the
United States and other countries on Russia), trade policies, import duties and economic disruptions that could impact our operating strategies, product demand, access to global
markets, hiring, and profitability. In particular, revisions to laws or regulations or their interpretation and enforcement could result in increased taxation, trade sanctions, the
imposition of import duties or tariffs, restrictions and controls on imports or exports, or other retaliatory actions, which could have an adverse effect on our
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business plans. For example, regulations to implement the Export Control Reform Act of 2018 could have an adverse effect on our business plans.
Catastrophic events can also have an impact on third-party vendors who provide us with critical infrastructure services for IT and research and development systems and
personnel. In addition, geopolitical and domestic political developments, such as existing and potential trade wars, political or social unrest, military conflicts, elections and post-
election developments, and other events beyond our control, can increase levels of political and economic unpredictability globally and increase the volatility of global financial
markets. Political instability or adverse political developments in or around any of the major countries in which we do business would also likely harm our business, financial
condition, and results of operations. Our operations could be harmed if manufacturing, logistics or other operations in these locations are disrupted for any reason, including
natural disasters, high heat events or water shortages, information technology system failures, military actions or economic, business, labor, environmental, public health,
regulatory or political issues. The ultimate impact on us, our third-party vendors and other suppliers and our general infrastructure of being located near major earthquake faults
and being consolidated in certain geographical areas is unknown. In the event a major earthquake or other disaster or catastrophic event affects us or the third-party systems on
which we rely, our business could be harmed as a result of declines in revenue, increases in expenses, substantial expenditures and time spent to fully resume operations. All of
these risks and conditions could materially adversely affect our future sales and operating results.
We are currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability. Our
business, financial condition and results of operations could be materially adversely affected by any negative impact on the global economy and capital markets resulting
from the conflict between Russia and Ukraine or any other geopolitical tensions.
US and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and
Ukraine. On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported, which remains ongoing. Since then, international relations between the U.S.
and Russia, as well as certain other countries, has been strained and may continue to deteriorate further. Although the length and impact of the ongoing military conflict is highly
unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain
interruptions. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.
Additionally, the recent military conflict in Ukraine has led to sanctions and other penalties being levied by the United States, European Union and other countries against
Russia. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the
global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds.
Although our business has not been materially impacted by the ongoing military conflict between Russian and Ukraine or other geopolitical instability to date, it is
impossible to predict the extent to which our operations, or those of our suppliers and manufacturers, will be impacted in the short and long term, or the ways in which the conflict
may impact our business. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial. Any such
disruptions may also magnify the impact of other risks described in this Annual Report.
Volatile or recessionary conditions in the United States or abroad could adversely affect our business or our access to capital markets in a material manner.
Worsening economic and market conditions, downside shocks, or a return to recessionary economic conditions could severely reduce demand for our products and
adversely affect our operating results. These economic conditions may also impact the financial condition of one or more of our key suppliers, which could affect our ability to
secure product to meet our customers’ demand. Our results of operations and the implementation of our business strategy could be adversely affected by general conditions in the
global economy. An economic downturn may cause uncertainty in the capital and credit markets and could have a material adverse effect on us. We could also be adversely
affected by such factors as changes in foreign currency rates, weak economies, and political conditions in each of the countries in which we sell our products.
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Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or
transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations.
Actual events involving reduced or limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the
financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-
wide liquidity problems. For example, in March 2023, Silicon Valley Bank and Signature Bank were closed and taken over by the Federal Deposit Insurance Corporation ("FDIC") as
receiver. Although we did not have any cash or cash equivalent balances on deposit with Silicon Valley Bank or Signature Bank, investor concerns regarding the U.S. or
international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or
systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any decline in available
funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other
obligations, or result in breaches of our financial and/or contractual obligations. Any of these impacts, or any other impacts resulting from the factors described above or other
related or similar factors not described above, could have material adverse impacts on our liquidity and our current and/or projected business operations and financial condition
and results of operations.
We may be adversely affected by the effects of inflation.
Inflation has the potential to adversely affect our liquidity, business, financial condition and results of operations by increasing our overall cost structure, particularly if we
are unable to achieve commensurate increases in the prices we charge our customers. The existence of inflation in the economy has resulted in, and may continue to result in,
higher interest rates and capital costs, shipping costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects. As a result of inflation, we
have experienced and may continue to experience, cost increases. Although we may take measures to mitigate the impact of this inflation, if these measures are not effective our
business, financial condition, results of operations and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the
timing of when these beneficial actions impact our results of operations and when the cost inflation is incurred.
The market for our products is developing and may not develop as we expect.
The market for cutting-edge, high-performance computing products is characterized by rapid advances in technologies. We believe our future success will depend in large
part on our ability to develop products, new business initiatives and creating innovative and custom designs for our customers. The growth of server clusters, specialized or high-
performance applications, and hosted software solutions which require fast and efficient data processing, is crucial to our success. It is difficult to predict the development of the
demand for high-performance computing, supercomputers, and related hardware solutions, the size and growth rate for this market, the entry of competitive products, or the
success of existing competitive products. Any expansion in our market depends on several factors, including the demand, cost, performance, and perceived value associated with
our products. If our products are not adopted or there is a reduction in demand for our products caused by a lack of customer acceptance, a slowdown in demand for computational
power, an overabundance of unused computational power, technological challenges, competing technologies and products, decreases in corporate spending, weakening economic
conditions, or otherwise, it could result in reduced customer orders, early order cancellations, the loss of customers, or decreased sales, any of which would adversely affect our
business, operating results, and financial condition.
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations
or our guidance.
Our quarterly and annual operating results have fluctuated in the past and may fluctuate significantly in the future, which makes it difficult for us to predict our future
operating results. The timing and size of sales of our products are variable and difficult to predict and can result in fluctuations in our net sales from period to period. In addition,
our budgeted expense levels depend in part on our expectation of future sales. Any substantial adjustment to expenses to account for lower levels of sales is difficult and takes
time, thus we may not be able to reduce our costs sufficiently to compensate for a shortfall in net sales, and even a small shortfall in net sales could disproportionately and
adversely affect our operating margin and operating results for a given quarter.
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Our operating results may also fluctuate due to a variety of other factors, many of which are outside of our control, including the changing and volatile local, national, and
international economic environments, any of which may cause our stock price to fluctuate. Besides the other risks in this “Risk Factors” section, factors that may affect our
operations include, without limitation:
•Fluctuations in demand for our products and services;
•The inherent complexity, length, and associated unpredictability of product development windows and product lifecycles;
•Changes in customers’ budgets for technology purchases and delays in their purchasing cycles;
•Changing market conditions;
•Any significant changes in the competitive dynamics of our markets, including new entrants, or further consolidation;
•Our ability to continue to broaden our customer base beyond our traditional customers;
•The timing of product releases or upgrades by us or our competitors; and
•Our ability to develop, introduce, and ship in a timely manner new products and product enhancements and anticipate future market demands that meet our customers’
requirements.
Each of these factors individually, or the cumulative effect of two or more of these factors, could result in large fluctuations in our quarterly and annual operating results.
As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of future performance.
Our products are subject to competition, including competition from the customers to whom we sell.
Servers, computer accelerators, flash storage arrays, PCIe expansion products, and other products that we design, manufacture, and sell or license are subject to
competition. The computer hardware and technology fields are well established with limited, and in many cases no, intellectual property and technological barriers to entry. The
markets in which we operate are competitive and we expect competition to increase in the future from established competitors and new market entrants. The markets are influenced
by, among others, brand awareness and reputation, price, strength and scale of sales and marketing efforts, professional services and customer support, product features, reliability
and performance, scalability of products, and breadth of product offerings. Due to the nature of our products, competition occurs at the design, performance, and sales stages. A
design or sales win by us does not limit further competition and our customers may purchase competitive products from third parties at any time. This competition could result in
increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely seriously
harm our business, operating results, or financial condition. From a cost and control perspective, our products are specialized and thus generally cost more than our competitors’
products. If our ability to design specialized solutions is deemed to be on par or of lesser value than competing solutions, we could lose our customers and prospects.
Many of our customers and competitors, often with substantially more resources or larger economies of scale, produce products that are competitive with our products.
Many of these third parties mass-produce hardware solutions and have not heavily invested in or allocated resources to the smaller scale specialized products and solutions we
design. A decrease in the cost of general mass-produced hardware solutions, which can serve as a substitute for our products, or the entrance or additional allocation of resources
by one of these customers or competitors into the production of specialized systems which compete with our products could create increased pricing pressure, reduced profit
margins, increased sales and marketing expenses, or the loss of market share or expected market share, any of which may significantly harm our business, operating results and
financial condition.
New entrants and the introduction of other distribution models in our markets may harm our competitive position.
The markets for development, distribution, and sale of our high-performance computing solutions are rapidly evolving. New entrants seeking to gain market share by
introducing new technology, new products and new server configurations may make it more difficult for us to sell our products and earn design wins, which could create increased
pricing pressure, reduced profit margins, increased sales and marketing expenses, or the loss of market share or expected market share, any of which may significantly harm our
business, operating results and financial condition.
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Large computer hardware and equipment manufacturers and suppliers have traditionally designed, produced, and sold general purpose servers, and storage arrays and
related products and equipment. Our customers supplement these general-purpose systems by purchasing our specialized or customized systems or supplemental products which
improve the speed, efficiency, or performance of such systems. If the speed, efficiency, or computational power of such general purpose systems increases such that supplemental
or specialized products become unnecessary, or the cost of such general purpose systems declines such that it is more cost effective for prospective customers to add general-
purpose equipment rather than specialized or supplemental equipment, we could experience a significant decline in demand for the products which may significantly harm to our
business, operating results and financial condition.
Our products compete with and supplement general purpose servers, storage systems and related equipment. If the producers of general-purpose equipment implement
proprietary standards, software, interfaces, or other interoperability restrictions, including controls which restrict the equipment’s compatibility with third party systems, we could
experience a significant decline in sales because our products would not be interoperable with such systems, resulting in significant harm to our business, operating results and
financial condition.
In our marketplace, general-purpose equipment is traditionally mass-produced and available to order, while specialized equipment and custom bulk-order equipment is
subject to a bid-based purchase system. If one or more large manufacturers of general or standard server storage arrays, or related products and equipment, provide specialized,
customized, or supplementary equipment on a made-to-order or generally available basis, we could be forced to reduce our prices or change our selling model to remain competitive
which would significantly harm to our business, operating results and financial condition.
Certain members of our senior management team and board of directors may have limited experience certain sectors of the AI Transportable market that we are targeting.
Certain members of our senior management team and board of directors may have limited experience with respect to sectors of the AI Transportable market that we are
targeting, and in particular the military sector, and may have limited experience in other sectors, industries and markets which we may choose to enter in the future. Our management
team relies on the knowledge and talent of our employees as well as members of our advisory board to successfully navigate and obtain project wins in our target markets. Further,
management works closely with our board of directors in order to make strategic decisions, to assess risk and to better ensure that the Company’s actions are aligned with the best
interests of our shareholders. As discussed elsewhere in this Annual Report, we have recently undergone certain organizational changes to better align our structure and human
capital resources with our goals, and have engaged a search firm to help us identify successor chief executive officer and vice president of sales candidates with more significant
experience and high-level contacts in the defense sector. We may not be able to identify, retain, hire or train personnel with relevant experience as quickly or efficiently as we need
or on terms that are acceptable to us, which could negatively impact our ability to scale our opportunities and growth at the rate that we hope to. An inability to efficiently operate
our businesses and execute on our business strategy would have a material adverse effect on our business, financial conditions, results of operations, and prospects.
Changes in U.S. government defense spending could negatively impact our financial position, results of operations, liquidity and overall business.
As we turn our focus to military AI Transportable applications for our products, we expect that sales to prime contractors and U.S. governmental entities will constitute an
increasingly significant portion of our sales. We expect that our U.S. government revenues will largely result from contracts awarded under various U.S. government programs,
primarily defense-related programs with the DOD, and other departments and agencies. Changes in U.S. government defense spending for various reasons, including as a result of
potential changes in policy, administration, or budgetary positions, priorities, and protracted lead times could negatively impact our results of operations, financial condition and
liquidity. The sale of our products to such defense customers are subject to U.S. government policies, budget decisions and appropriation processes, which are driven by
numerous factors that are out of our control, including U.S. domestic and broader geopolitical events, macroeconomic conditions, and the ability of the U.S. government to enact
relevant legislation. In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation, and the U.S.
government has been unable to complete its budget process before the end of its fiscal year, resulting in both governmental shutdowns and continuing resolutions (“CRs”)
providing only enough funds for U.S. government agencies to continue operating at prior-year levels. Further, if the U.S. government debt ceiling is not raised and the national debt
reaches the statutory debt ceiling, the U.S. government could default on its debts. As a result, U.S. government defense spending levels are subject to a wide range of outcomes
and are difficult to predict beyond the near-term due to numerous factors, including the external threat environment, future governmental priorities and the state of governmental
finances. Significant
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changes in U.S. government defense spending or changes in U.S. government priorities, policies and requirements could have a material adverse effect on our current business
strategy and results of operations, financial condition and liquidity.
If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed, and our reputation may be damaged.
We have expanded our operations significantly since inception and anticipate that further significant expansion will be required to achieve our business objectives. The
growth and expansion of our business and product offerings places a continuous and significant strain on our management, operational and financial resources. Any such future
growth would also add complexity to and require effective coordination throughout our organization. To manage any future growth effectively, we must continue to improve and
expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital, and processes
in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient manner, which could result in additional
operating inefficiencies and could cause our costs to increase more than planned. If we do increase our operating expenses in anticipation of the growth of our business and this
growth does not meet our expectations, our operating results may be negatively impacted. If we are unable to manage future expansion, our ability to provide high quality products
and services could be harmed, which could damage our reputation and brand, and may have a material adverse effect on our business, operating results and financial condition.
A limited number of customers represent a significant portion of our sales. If we were to lose any of these customers, our sales could decrease significantly.
In the years ended December 31, 2022 and 2021, approximately 37.4% and 41.5%, respectively, of net sales were attributable to three customers, including disguise,
Raytheon and the Navy. In addition, a few products comprise a significant amount of our sales, and the discontinuation, modification, or obsolescence of such products could
materially and adversely affect our sales and results of operations. As discussed elsewhere in this Annual Report, we expect that disguise will transition to a lower cost, commodity
type equipment solution and anticipate that we will begin to experience a decrease in the demand from disguise for our media and entertainment focused equipment and expertise in
this area in the first half of 2023. Any loss of, or a significant reduction in purchases by, our significant customers, including disguise, or a decrease in the high-performance
applications that drive the use of our products, or the modification, discontinuation, or obsolescence of a device which constitutes a significant portion of our sales could have an
adverse effect on our financial condition and operating results.
Some of our contracts allow our customers to have access to the design drawings for products which we have designed and manufactured for them.
Some of our contracts allow our customers to have access to the design drawings for products that we have designed and manufactured for them. In some cases, these
drawings are included as a deliverable in conjunction with their non-recurring engineering fee, and in other cases, an additional fee is required to obtain the drawings package.
Since these customers have access to the drawings, there is no guarantee that they will continue to purchase the manufactured products from us. This arrangement applies
particularly to disguise. To our knowledge, our current customers have not had any of the OSS-designed products manufactured by anyone other than OSS, but they may have the
capability to do so in the future.
We rely on a limited number of parts suppliers to support our manufacturing and design processes.
We rely on a limited number of suppliers to provide us with the necessary devices, parts, and systems to allow us to build, design and manufacture our products, and the
failure to manage our relationships with these parties successfully, or disruptions to our suppliers’ businesses caused by supply chain constraints, inflation, human capital issues,
and/or other factors, could adversely affect our ability to market and sell our products. In the years ended December 31, 2022 and 2021, suppliers for which purchases represent
greater than 10% of our total parts purchases accounted for approximately 25.0% and 12.6% of materials purchased, respectively. This concentration is with one supplier, Concisys
Inc.
Although we do believe we could locate additional suppliers to fulfill our needs in the event that our relationship with Concisys Inc. or any of our other suppliers
terminated or they are unable to fulfill our manufacturing needs, any significant change in our relationship with these suppliers could have a material adverse effect on our
business, operating results, and financial condition unless and until we are able to find suitable replacements. We make substantially all of our purchases from our contract
suppliers on a purchase order basis. Our suppliers are not required to supply our raw materials for any specific period or in any specific quantity or price.
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Global pandemics or other disasters or public health concerns in regions of the world where we have operations or source material or sell products, such as outbreaks of
COVID-19 or H1N1 flu, could result in the disruption of our business. These or any governmental developments or health concerns in countries in which we operate could result in
social, economic, or labor instability. Any disruption resulting from these or similar events could cause significant delays in shipments of our products until we are able to resume
normalized operations, and this could have a material negative impact on our results of operations and cash flows. We do not yet know the full extent of potential delays or impacts
on our business, operations, or the global economy resulting from COVID-19, economic instability and/or other macroeconomic factors. Currently, we are experiencing
unavailability of certain products and limited supplies, protracted delivery dates for componentry, increasing product costs, and changes in minimum order quantities to secure
product. As a result, we are carrying increased inventory balances to ensure availability of necessary products and to secure pricing.
Our future success depends on our ability to develop and successfully introduce new and enhanced products that meet the needs of our customers.
Our sales depend on our ability to anticipate our existing and prospective customers’ needs and develop products that address those needs. Our future success will
depend on our ability to design new products, anticipate technological improvements and enhancements, and to develop products that are competitive in the rapidly changing
computer hardware and software industry, and in the AI Transportable space in particular. Introduction of new products and product enhancements will require coordination of our
efforts with those of our customers, suppliers, and manufacturers to develop products that offer performance features desired by our customers and performance and functionality
superior or more cost effective than solutions offered by our competitors. If we fail to coordinate these efforts, develop product enhancements, or introduce new products that meet
the needs of our customers as scheduled, our operating results will be materially and adversely affected, and our business and prospects will be harmed. We cannot assure that
product introductions will meet our anticipated release schedules or that our products will be competitive in the market. Furthermore, given the rapidly changing nature of the
computer equipment market, there can be no assurance our products and technology will not be rendered obsolete by alternative or competing technologies.
Delays in our production cycle could result in outdated equipment or decreased purchases of our products.
The design and manufacture of our products can take several months to several years. The length of such process depends on the complexity and purpose of the system or
equipment being designed, and may be affected by factors such as the development and design of unique or specialized systems; the fabrication, availability, and supply of parts;
the customization of parts, as applicable; the manufacture and/or assembly of the units, quality control testing; and the development and incorporation of new technologies. If our
products are outdated upon completion of this process, our sales could materially decline, and it may be necessary to sell products at a loss.
Unsuccessful government programs or OEM contracts could lead to reduced revenues.
We design and manufacture certain products to fit the specifications of government programs or OEM contracts. These programs may take months or years to complete
and involve significant investment of our time, money, and resources. We generally receive upfront fees for these programs, but there is often little or no obligation on the part of
our customer to purchase large volumes of products at the time of final product launch. Unsuccessful product launches could lead to reduced revenues and/or potential returns of
products, which could have a material adverse effect on our financial condition and operating results. We may be forced to sell products at a loss or spend a significant amount of
resources to find additional customers for these products if these programs do not fit the future needs of our intended customers.
Our inventory may rapidly become obsolete.
Sales cycles for some of our products can take several months or longer. In addition, it can take time from the bid to the development and manufacture of the equipment.
We maintain inventory based in large part on our forecasts of the volume and timing of orders. The varying length of the sales cycles makes accurate forecasting difficult. The
delays inherent in our sales cycles raise the risk that the inventory we have on hand will become obsolete or impaired prior to its use or sale. If our forecasted demand does not
materialize into purchase orders, we may be required to write off our inventory balances or reduce the value of our inventory, based on a reduced sales price. A write off of the
inventory, or a reduction in the inventory value due to a sales price reduction, could have an adverse effect on our financial condition and operating results.
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If our products contain significant defects, we could incur significant expenses to remediate such defects, our reputation could be damaged, and we could lose market share.
Our products are complex and may contain defects or security vulnerabilities, or experience failures or unsatisfactory performance due to any number of issues in design,
fabrication, packaging, materials and/or use within a system. These risks may increase as our products are introduced into new devices, markets, technologies and applications, or
as new versions are released. Some errors in our products or services may only be discovered after a product or service has been shipped or used by customers or the end users of
such product. Undiscovered vulnerabilities in our products or services could expose our customers or end users to hackers or other unscrupulous third parties who develop and
deploy viruses, worms and other malicious software programs that could attack our products or services. Failure of our products to perform to specifications, or other product
defects, could lead to substantial damage to the products we sell directly to customers, the end product in which our device has been integrated by OEMs and to the user of such
end product. Any such defect may cause us to incur significant warranty, support and repair or replacement costs, write off the value of related inventory, cause us to lose market
share, and divert the attention of our personnel from our product development efforts to find and correct the issue. In addition, an error or defect in new products or releases or
related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins, harm our relationships with
customers and partners and harm consumers’ perceptions of our brand. Also, we may be required to reimburse our customers, partners or consumers, including costs to repair or
replace products in the field. A product recall, including a recall due to a bug in our products, or a significant number of product returns could be expensive, damage our reputation,
harm our ability to attract new customers, result in the shifting of business to our competitors and result in litigation against us, such as product liability suits. If a product liability
claim is brought against us, the cost of defending the claim could be significant and would divert the efforts of our technical and management personnel, and harm our business.
Further, our business liability insurance may be inadequate or future coverage may be unavailable on acceptable terms, which could adversely impact our financial results.
We offer an extended product warranty to cover defective products at no cost to the customer. An unexpected change in failure rates of our products could have a material
adverse impact on our business.
We offer product warranties that generally extend for one or two years from date of sale that require us to repair or replace defective products returned by the customer
during the warranty period at no cost to the customer. Our product warranties are in addition to warranties we receive from our vendors. Existing and future product guarantees and
warranties place us at the risk of incurring future returns and repair and/or replacement costs.
While we engage in product quality programs and processes, including monitoring and evaluating the quality of our components sourced from our suppliers, our warranty
obligation is affected by actual product defect rates, parts and equipment costs and service labor costs incurred in correcting a product defect. We record an estimate for
anticipated warranty-related costs based on historical and estimated future product return rates and expected repair or replacement costs. Although such costs have historically
been within management’s expectations and our warranty reserves (when coupled with warranty coverage provided by our vendors) have been sufficient to cover such costs, our
reserves set aside to cover warranty returns may be inadequate due to an unanticipated number of customer returns, undetected product defects, unanticipated component failures
or changes in estimates for material, labor and other costs we may incur to replace projected product defects. As a result, if actual customer returns, product defect rates, parts and
equipment costs or service labor costs exceed our estimates, or we experience unexpected changes in failure rates, we could experience a material adverse effect on our business,
financial condition and results of operations.
If we fail to achieve design wins for our products, our business will be harmed.
Achieving design wins is an important success factor for our business. We work closely with OEMs and end users to ensure the customer gets the product they want in
the specific configuration, size and weight required for the application. We have participated in many design wins based upon our ability to interpret technical specifications and
proceed rapidly through prototyping, development, and delivery. This approach and expertise are two of the factors driving our growth. Failure to maintain our expertise and ability
to deliver custom, specific design systems could harm our business. In order to achieve design wins, we must:
•anticipate the features and functionality that OEMs, customers and consumers will demand;
•incorporate those features and functionalities into products that meet the exacting design requirements of our customers; and
•price our products competitively.
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Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers.
Further, if our products are not in compliance with prevailing industry standards, our customers may not incorporate our products into their design strategies.
If we cannot retain, attract, and motivate key personnel, we may be unable to effectively implement our business plan.
Our success depends in large part upon our ability to retain, attract and motivate highly skilled management, development, marketing, sales, and service personnel. The loss
of and failure to replace key technical management and personnel could adversely affect multiple development efforts. As discussed elsewhere in this Annual Report, in connection
with our announcement that David Raun, our current chief executive officer, will be stepping down, we have engaged a search firm to assist in the identification of candidates to fill
the role of chief executive officer of the Company. We have not yet identified a candidate to fill this role. There will be a transition period once a successor chief executive officer is
identified and hired, and there can be no guarantees the candidate who is selected to fill the role will be able to successfully execute on our business strategies.
We have entered into employment agreements with most of our executive officers, though they may terminate employment with us at any time, for any reason and with no
advance notice. We may lose key personnel to other high technology companies or to other larger companies with significantly greater resources than us who may recruit our key
personnel. The replacement of members of our senior management team or other key personnel may involve significant time and costs, and the loss of these employees could
significantly delay or prevent the achievement of our business objectives.
Recruitment and retention of senior management and skilled technical, sales and other personnel is very competitive, and we may not be successful in either attracting or
retaining such personnel. As part of our strategy to attract and retain key personnel, we may offer equity compensation through grants of stock options, restricted stock awards or
restricted stock units. Potential employees, however, may not perceive our equity incentives as attractive enough. In addition, due to the intense competition for qualified
employees, we may be required to, and have had to, increase the level of compensation paid to existing and new employees, which could materially increase our operating expenses.
We have made in the past, and may make in the future, acquisitions which could require significant management attention, disrupt our business, result in dilution to our
stockholders, deplete our cash reserves and adversely affect our financial results.
Acquisitions involve numerous risks, including, without limitation, the following:
•difficulties in successfully integrating the operations, systems, technologies, products, offerings and personnel of the acquired company or companies;
•insufficient revenue to offset increased expenses associated with acquisitions;
•diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from
acquisitions;
•potential difficulties in completing projects associated with in-process research and development intangibles;
•difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
•initial dependence on unfamiliar supply chains or relatively small supply partners; and
•the potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after
announcement of acquisition plans.
Acquisitions may also cause us to:
•use a substantial portion of our cash reserves or incur debt;
•issue equity securities or grant equity incentives to acquired employees that would dilute our current stockholders’ percentage ownership;
•assume liabilities, including potentially unknown liabilities;
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•record goodwill and non-amortizable intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges;
•incur amortization expenses related to certain intangible assets;
•incur large and immediate write-offs and restructuring and other related expenses; or
•become subject to intellectual property litigation or other litigation.
Acquisitions of high-technology companies and assets are inherently risky and subject to many factors outside of our control and no assurance can be given that our
completed or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition. Failure to manage and successfully
integrate acquisitions could materially harm our business and operating results.
The continuing commoditization of HPC hardware and software has resulted in increased pricing pressure and may adversely affect our operating results.
The continuing commoditization of HPC hardware, such as processors, interconnects, flash storage and other infrastructure, and the growing commoditization of software,
including plentiful building blocks and more capable open source software, as well as the potential for integration of differentiated technology into already-commoditized
components, has resulted in, and may result in increased pricing pressure that may cause us to reduce our pricing in order to remain competitive, which can negatively impact our
gross margins and adversely affect our operating results.
Risks Relating to Intellectual Property
If we are unable to protect our proprietary design and intellectual property rights, our competitive position could be harmed, or we could be required to incur significant
expenses to enforce our rights.
Our ability to compete effectively is dependent in part upon our ability to protect our proprietary technology. We rely on patents, trademarks, trade secret laws,
confidentiality procedures and licensing arrangements to protect our intellectual property rights. There can be no assurance these protections will be available in all cases or will be
adequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or products. For example, the laws of
certain countries in which our products are manufactured or licensed do not protect our proprietary rights to the same extent as the laws of the United States. In addition, third
parties may seek to challenge, invalidate, or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. There can be no assurance
that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology or design around our proprietary rights. In each
case, our ability to compete could be significantly impaired.
To prevent substantial unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement and/or misappropriation of our trade
secrets and/or proprietary rights against third parties. Any such action could result in significant costs and diversion of our resources and management’s attention, and there can
be no assurance we will be successful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to
enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our trade
secrets and/or intellectual property.
Many of our proprietary designs are in digital form and the breach of our computer systems could result in these designs being stolen.
If our cybersecurity measures are breached or unauthorized access to private or proprietary data is otherwise obtained, our proprietary designs could be stolen. Because we
hold many of these designs in digital form on our servers, there exists an inherent risk that an unauthorized third party could conduct a cybersecurity breach resulting in the theft of
our proprietary information. While we have taken cybersecurity steps to protect our proprietary information, because techniques used to obtain unauthorized access or sabotage
systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate
preventative measures. Any or all of these issues could negatively impact our competitive edge and our ability to obtain new customers thereby adversely affecting our financial
results.
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Our proprietary designs are susceptible to reverse engineering by our competitors.
Much of the value of our proprietary rights is derived from our vast library of design specifications. While we consider our design specifications to be protected by various
proprietary, trade secret and intellectual property laws, such information is susceptible to reverse engineering by our competitors. We may not be able to prevent our competitors
from developing competing design specifications and the cost of enforcing these rights may be significant. If we are unable to adequately protect our proprietary designs our
financial condition and operating results could suffer.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
We consider trade secrets, including confidential and unpatented know-how and designs important to the maintenance of our competitive position. We protect trade
secrets and confidential and unpatented know-how, in part, by customarily entering into non-disclosure and confidentiality agreements with parties who have access to such
knowledge, such as our employees, outside technical and commercial collaborators, consultants, advisors and other third parties. We also enter into confidentiality and invention
or patent assignment agreements with our employees and consultants that obligate them to maintain confidentiality and assign their inventions to us. Despite these efforts, any of
these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such
breaches.
Claims by others that we infringe their intellectual property or trade secret rights could harm our business.
Our industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in protracted and expensive litigation for many
companies. Third parties may in the future assert claims of infringement of intellectual property rights against us or against our customers or channel partners for which we may be
liable. As the number of products and competitors in our market increases and overlaps occur, infringement claims may increase.
Intellectual property or trade secret claims against us, and any resulting lawsuits, may result in us incurring significant expenses and could subject us to significant liability
for damages and invalidate what we currently believe are our proprietary rights. Our involvement in any patent dispute or other intellectual property dispute or action to protect
trade secrets and know-how could have a material adverse effect on our business. Adverse determinations in any litigation could subject us to significant liabilities to third parties,
require us to seek licenses from third parties and prevent us from manufacturing and selling our products. Any of these situations could have a material adverse effect on our
business. These claims, regardless of their merits or outcome, would likely be time consuming and expensive to resolve and could divert management’s time and attention.
We are generally obligated to indemnify our channel partners and end-customers for certain expenses and liabilities resulting from intellectual property infringement claims
regarding our products, which could force us to incur substantial costs.
We have agreed, and expect to continue to agree, to indemnify our channel partners and end-customers for certain intellectual property infringement claims regarding our
products. As a result, in the case of infringement claims against these channel partners and end-customers, we could be required to indemnify them for losses resulting from such
claims or to refund amounts they have paid to us. Our channel partners and other end-customers in the future may seek indemnification from us in connection with infringement
claims brought against them regarding our products. These claims, regardless of their merits or outcome, would likely be time consuming expensive to resolve, and could divert
management’s time and attention from managing our business.
Privacy concerns relating to our products and services could damage our reputation, deter current and potential users from using our products and services, result in liability,
or result in legal or regulatory proceedings.
Our products and services may provide us with access to sensitive, confidential, or personal data or information that is subject to privacy and security laws and
regulations. Concerns about our practices with regard to the collection, use, retention, security or disclosure of personal information or other privacy-related matters, even if
unfounded, could damage our reputation and adversely affect our operating results. The theft, loss, or misuse of personal data collected, used, stored, or transferred by us to run
our business or by one of our partners could result in significantly increased security costs, damage to our reputation, regulatory proceedings, disruption of our business activities
or increased costs related to defending legal claims.
36
Worldwide regulatory authorities are considering and have approved various legislative proposals concerning data protection, which continue to evolve and apply to our
business. For example, the European Union adopted the General Data Protection Regulation (“GDPR”), which took effect in May 2018 and requires companies to meet requirements
regarding the handling of personal data, including its use, protection, and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to
meet GDPR requirements, to the extent applicable, could result in penalties of up to 4% of worldwide revenue. In addition, the interpretation and application of consumer and data
protection laws in the United States, Europe and elsewhere are often uncertain and fluid, and may be interpreted and applied in a manner that is inconsistent with our data practices.
If so, we may be ordered to change our data practices and/or be fined.
In addition, California enacted the California Consumer Privacy Act (“CCPA”), which took effect on January 1, 2020. The CCPA gives California residents expanded rights
to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The
CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our
compliance costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent state privacy, data protection, and
data security legislation in the U.S., which could increase our potential liability and adversely affect our business. The CCPA was expanded substantially on January 1, 2023, when
the California Privacy Rights Act of 2020 (“CPRA”) became fully operative. The CPRA, among other things, gives California residents the ability to limit use of certain sensitive
personal information, further restricts the use of cross-contextual advertising, establishes restrictions on the retention of personal information, expands the types of data breaches
subject to the CCPA’s private right of action, provides for increased penalties for CPRA violations concerning California residents under the age of 16, and establishes a new
California Privacy Protection Agency to implement and enforce the new law.
Complying with these changing laws has caused, and could continue to cause, us to incur substantial costs, which could have an adverse effect on our business and
results of operations. Further, failure to comply with existing or new rules may result in significant penalties or orders to stop the alleged noncompliant activity.
Risks Related to Our International Operations
Our international sales and operations subject us to additional risks that can adversely affect our operating results and financial condition.
Our international operations subject us to a variety of risks and challenges, including, without limitation, exposure to fluctuations in foreign currency exchange rates,
increased management, travel, infrastructure and legal compliance costs associated with having international operations; reliance on channel partners; increased financial
accounting and reporting burdens and complexities; compliance with foreign laws and regulations, which are subject to change; compliance with U.S. laws and regulations for
foreign operations; conflicts between U.S. laws and regulations and foreign laws and regulations; import and export licensing requirements; and reduced protection for intellectual
property rights in some countries and practical difficulties of enforcing rights abroad. In addition, political and economic changes, including international conflicts (such as the
ongoing conflict between Russia and Ukraine) and terrorist acts, throughout the world may interfere with our, our suppliers’ and/or our customers’ activities in particular locations
and result in a material adverse effect on our business, financial condition, and operating results. Any of these risks could adversely affect our international operations, reduce our
international sales or increase our operating costs, adversely affecting our business, operating results and financial condition and growth prospects.
We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to
liability if we are not in compliance with applicable laws.
Our products are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various
economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our products must be made in compliance
with these laws and regulations. If we violate these laws and regulations, we and certain of our employees, could be subject to substantial civil or criminal penalties, including the
possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible
employees or managers. In addition, if our channel partners, agents, or consultants fail to obtain appropriate import, export or re-export licenses or authorizations, we may also be
adversely affected through reputational harm and penalties. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is
not guaranteed and may result in the delay or loss of sales opportunities. Changes in our products or changes in applicable export or import laws and regulations may also create
delays in the introduction and sale of our products in international markets, prevent our
37
end-customers with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries, governments or
persons altogether. Any change in export or import laws and regulations, shift in the enforcement or scope of existing laws and regulations, or change in the countries,
governments, persons or technologies targeted by such laws and regulations, could also result in decreased use of our products, or in our decreased ability to export or sell our
products to existing or potential end-customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would
likely adversely affect our business, financial condition and operating results.
New regulations or standards or changes in existing regulations or standards in the United States or internationally related to our suppliers’ products may result in
unanticipated costs or liabilities, which could have a material adverse effect on our business, operating results, and future sales, and could place additional burdens on the
operations of our business.
Our suppliers’ products are subject to governmental regulations in many jurisdictions. To achieve and maintain market acceptance, our suppliers’ products must continue
to comply with these regulations and many industry standards. As these regulations and standards evolve, and if new regulations or standards are implemented, our suppliers may
have to modify their products. The failure of their products to comply, or delays in compliance, with the existing and evolving industry regulations and standards could prevent or
delay introduction of our products, which could harm our business. Supplier uncertainty regarding future policies may also affect demand for HPC products, including our
products. Moreover, channel partners or customers may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated
changes in the regulatory environment. Our inability to alter our products to address these requirements and any regulatory changes may have a material adverse effect on our
business, operating results and financial condition.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.
The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to foreign
government officials for the purpose of obtaining or retaining business. Practices in the local business communities of many countries outside the United States have a level of
government corruption that is greater than that found in the developed world. Our policies mandate compliance with these anti-bribery laws and we have established policies and
procedures designed to monitor compliance with these anti-bribery law requirements; however, we cannot assure that our policies and procedures will protect us from potential
reckless or criminal acts committed by individual employees or agents. If we are found to be liable for anti-bribery law violations, we could suffer from criminal or civil penalties or
other sanctions that could have a material adverse effect on our business.
Risks Related to Our Securities
The price of our common stock may be volatile, and you could lose all or part of your investment.
The trading price of our common stock may fluctuate substantially. The trading price of our common stock will depend on several factors, including those described in this
“Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your
investment in our securities if you are unable to sell them at or above the price you paid. Factors that could cause fluctuations in the trading price of our common stock include,
amongst other things:
•price and volume fluctuations in the overall stock market from time to time;
•volatility in the market prices and trading volumes of technology stocks;
•changes in operating performance and stock market valuations of other technology companies generally, or particularly, those companies in our industry;
•sales of shares of our common stock or other securities by us or our stockholders;
•failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow the Company, or our failure to meet these estimates or
the expectations of investors;
•the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
38
•announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships or capital commitments;
•the public’s reaction to our press releases, other public announcements and filings with the SEC;
•rumors and market speculation involving us or other companies in our industry;
•actual or anticipated changes in our operating results or fluctuations in our operating results;
•actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;
•litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
•developments or disputes concerning our intellectual property or other proprietary rights;
•announced or completed acquisitions of businesses or technologies by us or our competitors;
•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•changes in accounting standards, policies, guidelines, interpretations or principles;
•any major change in our management;
•general economic conditions and slow or negative growth of our markets; and
•other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of the relevant companies. Broad market and industry factors, as well as general economic, political and market
conditions, such as recessions or interest rate changes, may seriously affect the market price of our common stock, regardless of our actual operating performance.
In the past, following periods of volatility in the overall market and the market prices of particular companies’ securities, securities class action litigation has often been
instituted against these companies. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Any adverse determination in any such litigation or any amounts paid to settle any such actual or threatened litigation could require that we make significant payments.
Our directors and principal stockholders own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
Our directors, executive officers and significant stockholders have substantial control over the Company and could delay or prevent a change in corporate control. Our
directors, executive officers, and holders of more than 5% of our common stock, together with their affiliates, beneficially own, in the aggregate, 33.4% of our outstanding common
stock, based on the number of shares outstanding as of February 28, 2023. As a result, these stockholders, acting together, would have the ability to exert significant control over
the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets.
In addition, these stockholders, acting together, would have the ability to exert significant control the management and affairs of the Company. Accordingly, this concentration of
ownership might adversely affect the market price of our common stock by:
•delaying, deferring or preventing a change in control of the Company;
•impeding a merger, consolidation, takeover, or other business combination involving the Company; or
•discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company.
If securities or industry analysts issue an adverse opinion regarding our securities or do not publish research or reports about our Company, our stock price and trading
volume could decline.
The trading market for our common stock will depend in part on the research and reports that equity research analysts publish about us and our business. We have no
control over such analysts or the content and opinions in their reports.
39
Securities analysts may elect not to provide research coverage of our Company and such lack of research coverage may adversely affect the market price of our common stock. The
price of our common stock could also decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or
cease publishing reports about us or our business. If one or more equity research analysts cease coverage of our Company, we could lose visibility in the market, which in turn
could cause our stock price to decline.
Substantial future equity issuances and/or sales of shares of our common stock could cause the market price of our common stock to decline.
The market price of shares of our common stock could decline as a result of substantial equity issuances and/or sales of our common stock, particularly sales by our
directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale, or the perception in the market that holders of a
large number of shares intend to sell their shares. As of February 28, 2023, we have 20,343,071 shares of our common stock outstanding. We may issue or sell a significant number
of shares of our common stock or other securities to raise capital in the future or in connection with a strategic transaction, which would result in significant dilution to our current
shareholders. Additionally, historically, a significant portion of the compensation that we pay to our executive officers, employees and directors has been in the form of equity
awards. We believe that this structure incentivizes such individuals to both join and remain with the Company, and also serves to further the growth, development and financial
success of the Company by providing a means by which such persons can personally benefit through the ownership of capital stock of the Company. However, the issuance of
securities to our executive officers, employees and directors also results in dilution to our current shareholders, and substantial sales of such securities could cause the market price
of our securities to decline and/or could depress the growth of the market price of our securities.
We have the right to designate and issue shares of preferred stock. If we were to designate and/or issue additional preferred stock, it is likely to have rights, preferences and
privileges that may adversely affect the common stock.
We are authorized to issue 10,000,000 shares of blank-check preferred stock, with such rights, preferences and privileges as may be determined from time to time by our
board of directors. Our board of directors is empowered, without stockholder approval, to issue preferred stock in one or more series, and to fix for any series the dividend rights,
dissolution or liquidation preferences, redemption prices, conversion rights, voting rights, and other rights, preferences, and privileges for the preferred stock. Currently, we do not
have any series of preferred stock designated or shares of preferred stock issued and outstanding.
The issuance of shares of preferred stock, depending on the rights, preferences, and privileges attributable to the preferred stock, could reduce the voting rights and
powers of the common stock and the portion of our assets allocated for distribution to common stockholders in a liquidation event, and could also result in dilution in the book
value per share of the common stock. The preferred stock could also be utilized, under certain circumstances, as a method for raising additional capital or discouraging, delaying or
preventing a change in control of the Company, to the detriment of the investors in the common stock offered hereby. We cannot assure that we will not, under certain
circumstances, issue shares of our preferred stock.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of the Company, which may be beneficial to our stockholders, more
difficult and may prevent attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our
management. Some of these provisions:
•authorize our board of directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock and up to 50,000,000 shares of
authorized common stock;
•require that any action to be taken by our stockholders be affected at a duly called annual or special meeting, and not by written consent;
•specify that special meetings of our stockholders can be called only by our board of directors, the chairman of the board of directors, the chief executive officer or the
president;
•establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons
for election to our board of directors;
40
•provide that our directors may be removed only for cause; and
•provide that vacancies on our board of directors may, except as otherwise required by law, be filled only by a majority of directors then in office, even if less than a
quorum.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our
outstanding voting stock to merge or combine with us. Furthermore, our certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative
forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. We believe
this provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient
administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the
effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been
challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in
our certificate of incorporation to be inapplicable or unenforceable in such action.
These anti-takeover provisions and other provisions in our certificate of incorporation and amended and restated bylaws make it more difficult for stockholders or potential
acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer
or proxy contest involving our Company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your
choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the
market price of our common stock to decline.
Our inability to raise additional capital on acceptable terms in the future may limit our ability to develop and commercialize new solutions and technologies and expand our
operations.
If our available cash balances and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, due to lower demand for our products as a
result of other risks described in this “Risk Factors” section, we may seek to raise additional capital through equity offerings, debt financings, collaborations or licensing
arrangements. We may also consider raising additional capital in the future to expand our business, pursue strategic investments, take advantage of financing opportunities, or
other reasons.
Additional funding may not be available to us on acceptable terms, or at all. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any
equity securities issued also may provide for rights, preferences, or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings
could impose significant restrictions on our operations. The incurrence of indebtedness or the issuance of certain equity securities could result in increased fixed payment
obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or
license intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our business. In addition, the issuance of additional equity
securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. If we raise additional funds through collaboration and licensing
arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or to grant licenses on terms that are not favorable to us. If we
are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay or reduce the scope of our development programs. We also may have to reduce
marketing, customer support or other resources devoted to our products or cease operations. Any of these actions could harm our business, operating results, and financial
condition.
We have never paid, and do not expect to pay, any cash dividends to holders of our common stock for the foreseeable future.
We have never paid, and do not expect to pay, cash dividends to holders of our common stock at any time in the foreseeable future. Anyone considering investing in
shares of our common stock should not rely on such investment to provide dividend income. Instead, we plan to retain any earnings to establish, maintain and expand our
operations and product offerings. In addition, any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid
on our stock. Accordingly, investors must rely on sales of their shares of common stock after price appreciation, which may never occur, as the only way to realize any return on
their investment.
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We are an “emerging growth company” and a “smaller reporting company,” and the reduced public company reporting and disclosure requirements applicable to emerging
growth companies and smaller reporting companies may make our common stock less attractive to investors.
We currently qualify as an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to
take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, which includes, among
other things:
•being permitted to have only two years of audited financial statements and only two years of management’s discussion and analysis of financial condition and results of
operations disclosure;
•an exemption from the auditor attestation requirements under Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);
•not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm
rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
•reduced disclosure obligations regarding executive compensation, amongst other things, in our periodic reports and proxy statements; and
•exemption from the requirements of holding non-binding stockholder votes on executive compensation arrangements and stockholder approval of any golden parachute
payments not previously approved.
We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary after our initial public offering (December 31, 2023), or until the
earliest of (i) the last day of the fiscal year in which we have annual gross revenue of $1.07 billion or more; (ii) the date on which we have, during the previous three year period,
issued more than $1.07 billion in non-convertible debt; or (iii) the date on which we are deemed to be a large accelerated filer under the federal securities laws. We will qualify as a
large-accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates, and (ii) been public
for at least 12 months. The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter.
In addition, we are currently a “smaller reporting company,” as defined in the Exchange Act, and have elected to take advantage of certain of the scaled disclosures
available to smaller reporting companies. To the extent that we continue to qualify as a “smaller reporting company” as such term is defined in Rule 12b-2 under the Exchange Act,
after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an “emerging growth company” may continue to be available to us as a
“smaller reporting company,” including exemption from compliance with the auditor attestation requirements pursuant to the Sarbanes-Oxley Act and reduced disclosure about our
executive compensation arrangements, amongst other things. We will continue to be a “smaller reporting company” until we have more than $250 million in public float (based on
our common stock) measured as of the last business day of our most recently completed second fiscal quarter or, in the event we have no public float (based on our common
stock), annual revenues of more than $100 million during the most recently completed fiscal year.
As a result of the foregoing, the information we provide may be different than the information that is available with respect to other public companies. We cannot predict if
investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active
trading market for our common stock and our stock price may be more volatile.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Our corporate headquarters are in a leased space comprising of approximately 29,342 square feet in Escondido, California under a lease that expires in August 2024. We also
lease a 3,208 square foot facility in Salt Lake City, Utah that expires in June 2023, that houses our Ion software development team. Additionally, we lease a 1,632 square foot facility
located in Anaheim, California, with the lease expiring in June 2023. OSS Europe leases space comprising of 8,073 square feet on a month-to-month lease.
42
We believe our existing facilities and equipment are in good operating condition and are suitable for the conduct of our business.
ITEM 3. LEGAL PROCEEDINGS.
We are subject to litigation, claims, investigations, and audits arising from time to time in the ordinary course of our business. See footnote No. 12 “Commitments and
Contingencies” in the accompanying consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock, par value $0.0001, per share is publicly traded on The Nasdaq Capital Market under the symbol “OSS”. Below is our quarterly information with respect
to the high and low sale prices for our common stock for such time periods.
PART II
First Quarter (through March 20, 2023)
* On March 20, 2023, the closing price was $2.47 per share.
High
Low
$
3.71
$
2.46 *
Year ended December 31, 2022 and 2021:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
2022
5.19
4.95
4.19
3.40
$
$
$
$
$
$
$
$
Low
High
Low
2021
3.75
3.80
3.13
2.69
$
$
$
$
9.50
6.94
6.66
5.66
$
$
$
$
3.61
4.27
4.78
4.40
As of February 28, 2023, there were 20,343,071, shares of our common stock outstanding held by approximately 60 holders of record of our common stock. This number was
derived from our stockholder records and does not include beneficial holders of our common stock whose shares are held in “street name” with various dealers, clearing agencies,
banks, brokers, and other fiduciaries.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of
our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We may enter into credit agreements or other borrowing
arrangements in the future that will restrict our ability to declare or pay cash dividends on our common stock. Any future determination to declare dividends will be made at the
discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board
of directors may deem relevant.
Equity Compensation Plan Information
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized
for issuance under equity compensation plans.
Unregistered Sales of Equity Securities
During the year ended December 31, 2022, there were no unregistered sales of our securities that were not reported in a Current Report on Form 8-K or our Quarterly
Reports on Form 10-Q.
Issuer Repurchases of Equity Securities
None.
ITEM 6. [RESERVED].
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ITEM 7. 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 Annual 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 Annual Report.
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 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.
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 stock 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 the EMEA.
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. Please see the section of this Annual Report entitled “Advisory Board Members,” below, for information regarding each of the members of our advisory board.
45
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 particular. 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 February
9, 2023, we announced that David Raun, the Company’s chief executive officer, will be stepping down, effective upon the appointment of his successor. Mr. Raun will continue to
serve as a member of the Company’s board of directors. Additionally, in connection with this transition, we also (i) appointed James Ison, our chief marketing and sales officer, as
our chief product officer, (ii) initiated a search for a vice president of sales, (iii) implemented a reduction in force, consisting of 12 employees, in those areas of our business that we
are transitioning our focus away from; and (iv) made certain other internal structural changes.
We have not yet identified a candidate to fill the roles of chief executive officer or a vice president of sales; however, we have retained an internationally recognized search
firm to aid in this effort. Additionally, in February 2023, our board of directors constituted a new committee of the board, the Strategic Transition Committee, to assist in the
identification, transition and retention of a successor chief executive officer, including to work with the engaged search firm to accomplish the foregoing, to provide support to our
management team throughout the transition, and to perform other duties as may be necessary or desirable from time to time in connection with the reorganization of the Company.
Members of the Strategic Transition Committee consist of Jack Harrison (chair of the committee), Gioia Messinger and Kenneth Potashner. As compensation for the services that
they are expected to perform as members of the Strategic Transition Committee (i) Mr. Harrison and Ms. Messinger shall be entitled to receive $2,000 per month in cash,
commencing January 1, 2023 and continuing for so long as the Strategic Transition Committee remains in effect, which cash payments shall be paid to each of the relevant members
in one lump sum at or about such time that the Strategic Transition Committee is disbanded, and (ii) Mr. Potashner shall be entitled to receive (A) 3,333 shares of Company common
stock per month, commencing November 1, 2022 and continuing for so long as the Strategic Transition Committee remains in effect, which shares shall be issued to Mr. Potashner
in one grant at or about such time that the Strategic Transition Committee is disbanded, and (B) a one-time cash payment equal to 30% of the total value of the shares issued to Mr.
Potashner to cover taxes payable in connection with the issuance of such shares.
The negative impact of the COVID-19 pandemic and the impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the
ongoing military conflict between Russia and Ukraine, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic
uncertainty, which has negatively affected our operations. Additionally, the general consensus among economists continues to suggest that we should expect a higher recession
risk to 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.
Additionally, in March 2023, Silicon Valley Bank and Signature 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.
With respect to our media and entertainment business, we are seeing an acceleration in our 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 eventually provide a real-time cloud solution. As a result, we expect that
our customer will transition to a lower cost, commodity type equipment solution. We anticipate that we will begin to experience a decrease in the demand for our high-compute,
ruggedized media and entertainment focused equipment and our expertise in this area in the first half of 2023.
Currently, we are experiencing increased pricing, longer lead-times, unavailability of product and limited supplies, protracted delivery dates, changes in minimum order
quantities to secure product, and/or shortages of certain parts and supplies that are necessary components for the products and services we offer to our customers. As a result,
the Company is carrying increased inventory balances to ensure availability of necessary products and to secure pricing.
These global issues and concerns regarding general economic decline or recession are also impacting some of our customers, who are experiencing downturns or
uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions
or payment extensions, or seek to renegotiate their contracts.
46
As a result of these global issues, as well as other factors discussed in this Annual Report, it has been difficult to accurately forecast our revenues or financial results,
especially given the near and long-term impacts of the pandemic, geopolitical issues, inflation, the Federal Reserve interest rate increases and the potential for a recession. In
addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and
may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the
future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause
our stock price to decline.
Furthermore, a decrease in orders in a given period, including in connection with our media and entertainment customer’s transition to the cloud, could negatively affect our
revenues in future periods. These global issues and events may also have the effect of heightening many risks associated with our customers and supply chain. We may take
further actions that alter our operations as may be required by federal, state, or local authorities from time to time, or which we determine are in our best interests. In addition, we
may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and
our rate of innovation, either of which could harm our business.
Management’s plans with respect to the above 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 the autonomous truck diving and artificial intelligence compute capabilities for
military and industrial applications, and improve company-wide execution.
Components of Results of Operations
Revenue
The Company recognizes revenue under accounting standard ASC 606. Revenue is primarily generated from the sale of computer hardware and engineering services, and,
to a minimal extent, 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 specific point in time. The majority of the Company’s revenue is recognized at that 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, stock-based compensation expenses. Cost of revenue also includes
freight, allocated overhead costs and inventory write-offs and changes to our inventory and warranty reserves. Allocated overhead costs consist of certain facilities and utility
costs. We expect cost of revenue to increase in absolute dollars with an improvement in margin, as product revenue increases.
Operating expenses
Our operating expenses consist of general and administrative, 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.
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.
47
Marketing programs consist of advertising, tradeshows, events, corporate communications, and brand-building activities. We expect marketing and selling expenses to increase in
absolute dollars as we expand our sales force, increase marketing resources, and further develop sales channels.
Research and Development - Research and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation
associated with assets acquired for research and development, third-party engineering, and contractor support costs, as well as allocated overhead. We expect our research and
development expenses to increase in absolute dollars as we continue to invest in new and existing products.
Other Income (Expense), net
Other income consists of miscellaneous income and income received for activities outside of our core business. Other expense includes expenses for activities outside of
our core business.
Provision for Income Taxes
Provision for income taxes consists of estimated income taxes due to the United States and German governments as well as state tax authorities in jurisdictions in which we
conduct business, along with the change in our deferred income tax assets and liabilities.
Results of Operations
The following tables set forth our results of operations for the years ended December 31, 2022 and 2021, respectively, presented in dollars and as a percentage of revenue.
Revenue
Cost of revenue
Gross profit
Operating expenses:
General and administrative
Marketing and selling
Research and development
Total operating expenses
Income from operations
Other income (expense):
Interest income
Interest expense
Gain on forgiveness of Paycheck Protection Program (PPP) loan and interest
Other income (expense), net
Total other income (expense), net
Income before income taxes
Provision for income taxes
Net (loss) income
48
For the Year
Ended December 31,
2022
2021
72,421,345 $
52,023,736
20,397,609
7,279,401
6,806,306
4,743,574
18,829,281
1,568,328
237,751
(162,391)
-
550,854
626,214
2,194,542
4,423,597
(2,229,055) $
61,982,104
42,342,815
19,639,289
7,658,418
6,201,228
4,032,616
17,892,262
1,747,027
244,382
(527,139)
1,514,354
(40,176)
1,191,421
2,938,448
605,675
2,332,773
$
$
Revenue
Cost of revenue
Gross profit
Operating expenses:
General and administrative
Marketing and selling
Research and development
Total operating expenses
Income from operations
Other income (expense):
Interest income
Interest expense
Gain on forgiveness of Paycheck Protection Program (PPP) loan and interest
Other income (expense), net
Total other income (expense), net
Income before income taxes
Provision for income taxes
Net (loss) income
Comparison of the Years Ended December 31, 2022 and 2021:
For the Year
Ended December 31,
2022
2021
100.0%
71.8%
28.2%
10.1%
9.4%
6.5%
26.0%
2.2%
0.3%
-0.2%
0.0%
0.8%
0.9%
3.0%
6.1%
-3.1%
100.0%
68.3%
31.7%
12.4%
10.0%
6.5%
28.9%
2.8%
0.4%
-0.9%
2.4%
-0.1%
1.9%
4.7%
1.0%
3.8%
For The Year Ended December 31, 2022
For The Year Ended December 31, 2021
Revenue
43,286,715
29,134,630
72,421,345
$
$
$
$
Cost of
Revenue
(29,142,852 ) $
(22,880,884 )
(52,023,736 ) $
Gross
Profit
14,143,863
6,253,746
20,397,609
Gross
Margin
%
32.7 % $
21.5 %
28.2 % $
Revenue
38,492,004
23,490,100
61,982,104
$
$
Cost of
Revenue
(24,272,292 ) $
(18,070,523 )
(42,342,815 ) $
Gross
Profit
14,219,712
5,419,577
19,639,289
Gross
Margin
%
36.9 %
23.1 %
31.7 %
Entity:
OSS
OSS Europe
Revenue
For the year ended December 31, 2022, our total revenue increased $10,439,241, or 16.8%, as compared to the same period in 2021. OSS saw an increase in revenue of
$4,794,711, or 12.5%, as compared to the prior year in 2021. The majority of this increase is primarily attributable to an increase in orders and shipments of our AI Transportable
products into the autonomous trucking industry and to our media and entertainment customer. OSS Europe experienced an increase of $5,644,530, or 24.0%, as compared to the
prior year in 2021. This increase is primarily attributable to general economic improvements in Europe resulting from the diminishing impact of the COVID-19 pandemic in the
business environment and procuring large, one-time orders.
Cost of revenue and gross profit
Cost of revenue increased $9,680,921, or 22.9%, for the year ended December 31, 2022, as compared to the prior year in 2021. OSS saw an increase in cost of revenue of
$4,870,560, or 20.1%, as compared to the prior year period in 2021. This increase in cost of revenue is mainly attributable to an increase in our sales of AI Transportable products
into the autonomous trucking industry and to our media and entertainment customer (disguise) and additional allowance for inventory obsolescence related primarily to disguise.
OSS Europe’s cost of revenue increased $4,810,361, or 26.6%, as compared to the prior year in 2021, due to a general economic improvement in Europe resulting from the
diminishing impact of the COVID-19 pandemic in the business environment and procuring large, one-time orders.
The overall gross margin percentage decreased from 31.7% in the prior year to 28.2% in the current year. OSS’ gross margin percentage for the year ended December 31,
2022, was 32.7%, a decrease of 4.2 percentage points as compared to the prior year period in 2021 of 36.9%, due to the predominance of lower margin product sales to our media and
entertainment customer, an overall increase in material costs for the majority of our products, and additional allowance for inventory
49
obsolescence. OSS Europe contributed gross margin at a rate of 21.5%, as compared to the same prior year period in 2021 of 23.1%, a decrease of 1.6 percentage points, which was
attributable to increased costs for materials and transportation costs.
Operating expenses
General and administrative expense
General and administrative expense decreased $379,017, or 4.9%, for the year ended December 31, 2022, as compared to the same prior year period in 2021. OSS experienced
a decrease of $127,251, or 2.3%. OSS Europe had a decrease of $251,766, or 12.3%. The decrease in general and administrative expense is primarily attributable to reductions in
amortization and legal expenses. Overall, total general and administrative expense decreased as a percentage of revenue to 10.1% for the year ended December 31, 2022, as
compared to 12.4% during the same period in 2021.
Marketing and selling expense
Marketing and selling expense increased $605,078, or 9.8%, for the year ended December 31, 2022, as compared to the same prior year period in 2021. OSS had an increase of
$441,302, or 8.9%, which was mainly attributable to a return to a more normalized business environment, which included additional costs for tradeshows, advertising, travel and
personnel. OSS Europe had an increase of $163,776, or 13.0%, primarily resulting from the addition of new marketing personnel and sales collateral material. Generally, both OSS
and OSS Europe experienced additional marketing expenses, as markets have reopened as a result of the reduction in restrictions that were imposed during the height of the COVID-
19 pandemic. Overall, total marketing and selling expense decreased as a percentage of revenue to 9.4% during the year ended December 31, 2022, as compared to 10.0% during the
same period in 2021.
Research and development expense
Research and development expense increased $710,958, or 17.6%, for the year ended December 31, 2022, as compared to the same prior year period in 2021. OSS saw an
increase of $686,757, or 19.0%. The increase was largely driven by engineering resources being deployed for the development of new products for the AI Transportable industry
and development of PCIe gen 5.0 technology. OSS Europe experienced a modest increase of $24,202, or 5.9%. 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 was the same for both years at 6.5%.
Interest income
Interest income decreased $6,631 for the year ended December 31, 2022, as compared to the same prior year period in 2021. The decrease is attributable to reduced
investment balances and return on qualified short-term investments that meet company requirements.
Interest expense
Interest expense decreased $364,748 for the year ended December 31, 2022, as compared to the same period in 2021 as a result of the April 2021 maturity and repayment in
full of certain outstanding promissory notes and related party notes payable. The interest and the professional fees incurred on securing debt were amortized on an effective
interest rate basis to interest expense.
Other income (expense), net
Other income (expense), for the year ended December 31, 2022, resulted in net other income of $550,854, as compared to net other expense of $40,176 in the same prior year
period in 2021, for a net change of $591,030. The most significant contributions to the year-over-year change include the forgiveness of the principal and interest in the amount of
$1,514,354 of the Company’s Paycheck Protection Program (“PPP”) loan in 2021, the sale of a URL for Magma.com in 2022 for $125,000, and $500,320 for reversal of a settlement
accrual for previous contract disputes.
Provision for income taxes
We have recorded an income tax provision of $4,423,597 and $605,675, respectively, for the years ended December 31, 2022 and 2021. The effective tax rate for the years
ended December 31, 2022 and 2021 differed from the statutory rate mainly due to permanent non-deductible goodwill amortization for OSS Europe, deductions related to expenses of
OSS stock options, research and development credits, forgiveness of the PPP loan, and changes in reserves for uncertain tax positions, as well as projecting federal, foreign and
state tax liabilities for the year. Additionally, during 2022 the Company recorded a valuation allowance against its net deferred tax assets due to an assessment of the potential
realization of such asset. Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be
50
capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization requirement increases our deferred tax assets and may have an impact on
payment of tax liabilities. The effective tax rate for the year ended December 31, 2022, is 201.4%, as compared to 20.6% in the prior year 2021 due to the effect of the valuation for
deferred tax assets.
Liquidity and capital resources
On March 3, 2021, we sold and issued 1,497,006 shares of Company common stock to an accredited investor pursuant to a Securities Purchase Agreement through a
registered direct offering, resulting in net proceeds of $9,188,673 to us. On April 1, 2022, we repaid in full the outstanding balance and accrued interest of those Senior Secured
Convertible Promissory Notes that were issued by the Company to an institutional investor through a registered direct offering in April of 2020.
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 December 31, 2022, we had total cash and cash equivalents of $3,112,196, with short-term investments of $10,123,535, and total working capital of $34,744,880. Cash and cash
equivalents held by OSS Europe totaled US$336,359 on December 31, 2022. 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 in operating activities of $7,812,542. During the year ended
December 31, 2021, we had income from operations of $1,747,027, with cash generated by operating activities of $5,622,596.
Our sources of liquidity and cash flows are used to fund ongoing operations, fund research and development projects for new products technologies and provide ongoing
support services for our customers. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth. In addition, as part of our
business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time
for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or
equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, successfully integrate acquired
businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time
frame and on commercially reasonable terms, if at all.
During the fourth quarter of 2022, the general consensus among economists continued to suggest that we should expect a higher recession risk to continue over the next
year, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations. We intend to continue to
monitor the effects of inflation, global supply chain shortages and the economic conditions, and, if appropriate, we may alter our plans to address such concerns as they may arise.
Management’s plans are to continue their efforts towards responding to the changing economic landscape, including inflation, foreign currency exchange rates, a potential
recession, increases in the Federal Reserve interest rate, supply chain constraints and international conflicts, by continuing to control hiring and operating costs, conserve cash,
focus on improving margin.
While management expects these actions and continued diligence towards cost growth and containment will result in a decreased rate of growth in costs as compared to
revenue growth, our results of operations for the year ended December 31, 2022 improved partially as a result of such actions, management is also committed to conserving cash
and securing debt and/or equity financing, as required, for liquidity to meet our cash requirements through at least a period of the next twelve months.
In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 from its bank, which renews on an annual basis at the current prime rate. To access
this line of credit the Company must maintain cash and investments balances at a minimum of $4,000,000. 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
51
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 years ended December 31, 2022 and 2021:
Cash flows:
Net cash (used in) provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Operating Activities
For the Year Ended December 31,
2021
2022
(7,806,025) $
3,908,323 $
1,946,553 $
5,622,596
(15,110,625)
8,430,712
$
$
$
During the year ended December 31, 2022, we used $7,806,025 in cash for operating activities, a difference of $13,428,621 when compared to the cash provided by operating
activities of $5,622,596 during the 2021 year. This significant decrease in operating cash flow is mainly attributable to significant increases in working capital requirements for
accounts receivable and inventories.
The change in cash used in operating activities during the year ended December 31, 2022, as compared to the cash provided by operating activities during the 2021 year, is
primarily a result of a reduction in profitability from net income in 2021 of $2,332,773, which included the PPP loan and interest forgiveness of $1,514,354, to a net loss of $2,229,055
in the current year, a reduction of $4,561,828. Net favorable adjustments in the current period for non-cash items amounted to $5,272,731, which was comprised of $6,077,378 of
favorable non-cash items, offset by $804,647 of negative non-cash items that did not affect operating cash flow. Additionally, there was a net increase in the use of operating cash
flow for working capital items of $14,139,524.
Net working capital use requirements for the year ended December 31, 2022, were $13,317,430, as compared to the prior year period net sources of working capital of
$822,094, an increase in the use of working capital of $14,139,524. The source of working capital of $1,431,046 was attributable to changes in accounts payable for the comparable
period, which was then offset by uses of working capital of $15,570,570 being applied to changes in accounts receivables, increased inventory levels due to supply chain
constraints, prepaid expenses and other current assets, and accrued expenses and other liabilities.
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 year ended December 31, 2022, the Company generated cash of $3,908,323 in investing activities, as compared to $15,110,625 used during the prior year period in
2021, a net change of $19,018,948. The source of investing funds was attributable to the redemption of short-term investments and the sale of the Magma.com URL in 2022.
Additionally, the Company continues to enhance the capabilities of its ERP system, and purchases test equipment for the engineering department. We do not anticipate any
significant investments not normally anticipated in the ordinary course of business in the near term.
52
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 year ended December 31, 2022, the Company generated $1,946,553 in cash, with the majority coming from
borrowing activities for OSS Europe for working capital to finance inventory purchases, as compared to the cash provided by financing activities of $8,430,712 during the year
ended December 31, 2021. The main differences between the comparative periods are new borrowings from OSS Europe, for inventories, and the proceeds received in the prior year
from a registered direct offering for gross proceeds of $10,000,000 that was completed in March 2021.
Contractual obligations and commitments
The following table sets forth our non-cancellable contractual obligations as of December 31, 2022.
Contractual Obligations:
Notes payable
Operating leases
Total
$
$
Total
Less than 1 year
1-3 years
3-5 years
3,361,741 $
933,837
4,295,578 $
2,952,447 $
536,588
3,489,035 $
409,294 $
397,249
806,543 $
More than 5
Years
- $
-
- $
-
-
-
We have made certain indemnities, under which we may be required to make payments to an indemnified party, in relation to certain transactions. We indemnify our
directors, officers, employees, and agents to the maximum extent permitted under the laws of the State of Delaware. In connection with our facilities leases, we indemnify our
lessors for certain claims arising from the use of our 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 we could be obligated to make. Historically, we have not been obligated to make any payments for these obligations and no
liabilities have been recorded for these indemnities.
Known trends or uncertainties
Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry during economic
downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events
could adversely impact our revenues and earnings going forward.
As discussed in this Annual Report on Form 10-K, 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, and the general consensus among economists suggests
that we should continue to expect a higher recession risk to continue over the next year. These factors, amongst other things, could result in further economic uncertainty and
volatility in the capital markets in the near term, and could negatively affect our operations.
Additionally, in March 2023, Silicon Valley Bank and Signature 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.
With respect to our media and entertainment business, we are seeing an acceleration in our 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 eventually provide a real-time cloud solution. As a result, we expect that
our customer will transition to a lower cost, commodity type equipment solution. We anticipate that we will begin to experience a decrease in the demand for our high-compute,
ruggedized media and entertainment focused equipment and our expertise in this area in the first half of 2023.
53
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.
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 particular. In furtherance of this strategy and our goals, on February 9, 2023, we announced that
David Raun, the Company’s chief executive officer, will be stepping down, effective upon the appointment of his successor. Mr. Raun will continue to serve as a member of the
Company’s board of directors.
Also, the potential for growth in new markets is uncertain. We will continue to explore these opportunities until such time as we either generate sales or determine that
resources would be more efficiently used elsewhere.
Inflation
We experienced some affects due to inflation during the most recent period, including increased product pricing due to semiconductor product shortages, increased
transportation costs due to increases in the cost of energy and general price increases due to inflation in the economy. 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.
Off balance sheet arrangements
Other than lease commitments incurred in the normal course of business and certain indemnification provisions, 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 10 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. We periodically re-evaluate and adjust our critical accounting policies as
circumstances change.
Revenue Recognition
54
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company’s performance obligations are satisfied over time
as work is performed or at a point in time. The majority of the Company’s revenue is recognized at a point in time when products ship and control is transferred to the customer. The
Company determines revenue recognition through the following steps: (i) identification of the contract with a customer; (ii) identification of the performance obligations in the
contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when, or
as, a performance obligation is satisfied.
The Company’s contracts are executed through a combination of written agreements along with purchase orders with all customers including certain general terms and
conditions. Generally, purchase orders entail products, quantities and prices, which define the performance obligations of each party and are approved and accepted by the
Company. The Company’s contracts with customers do not include extended payment terms. Payment terms vary by contract type and type of customer and generally range from
30 to 60 days from invoice. Additionally, taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that
are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue.
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer
adjusted for estimated variable consideration, if any. Variable consideration may include discounts, rights of return, refunds, and other similar obligations. The Company allocates
the transaction price to each distinct product and service based on its relative standalone selling price. The standalone selling price for products primarily involves the cost to
produce the deliverable plus the anticipated margin and for services is estimated based on the Company’s approved list price.
In the normal course of business, the Company does not accept product returns unless the items are defective as manufactured. The Company establishes provisions for
estimated returns and warranties. In addition, the Company does not typically provide customers with the right to a refund and does not transact for noncash consideration.
Customer agreements include one vendor managed inventory program. The Company recognizes revenue under this arrangement when all of the following criteria are met:
(i) the goods have been identified separately as belonging to the customer; (ii) the goods are ready for physical shipment to the customer; (iii) the Company does not have the
ability to direct the goods to another customer; and (iv) the arrangement was requested by the customer and that the customer has sufficiently explained a substantial business
purpose for the arrangement. Management also considers whether the customer's custodial risks are insured and whether modifications to the Company's normal billing and credit
terms were required.
Revenues on certain fixed-price contracts where we provide engineering services, prototypes and completed products are recognized based upon percentage of completion
or based upon milestones delivered that are provided during the period and compared to milestone goals to be provided over the entire contract. These services require that we
perform significant, extensive, and complex design, development, modification or implementation of our customers’ systems. Performance will often extend over long periods of
time, and our right to receive future payment depends on our future performance in accordance with the agreement.
The percentage-of-completion methodology involves recognizing probable and reasonably estimable revenue using the percentage of services completed, on a current
cumulative cost to estimated total cost basis, using a reasonably consistent profit margin over the performance period. Due to the long-term nature of these projects, developing
the estimates of costs often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the projects include,
but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed and the impact of delayed performance. If changes
occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, which may result in increases or
decreases in revenues and costs, and such revisions are reflected in earnings in the period in which the revision becomes known.
The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled
receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability is recognized as deferred revenue
when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has
satisfied the related performance obligation.
55
On certain contracts with several of the Company’s significant customers, the Company receives payments in advance of manufacturing. Advanced payments are recorded
as deferred revenue until the revenue recognition criteria described above has been met. Related billings that are in excess of revenue earned are deferred and recorded as a liability
on the consolidated balance sheet until the related services are provided.
Leases
On January 1, 2022, the Company adopted ASC 842 using the Transition method. The reported results for the year ended December 31, 2022, reflect the application of
the guidance of ASC 842 while the reported results for the year ended December 31, 2021, were prepared under the guidance of ASC 840.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for
both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. A lease must be
classified as a finance lease if any of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase
the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or
exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. The Company determines if a contract is or
contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in
exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of
the asset and (b) the right to direct the use of the asset. This classification will determine whether the lease expense is recognized based on an effective interest method or on a
straight-line basis over the term of the lease.
Right-of-use assets and liabilities are initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred,
consisting mainly of brokerage commissions, less any lease incentives received. All right of use assets are reviewed for impairment. The lease liability is initially measured at the
present value of future minimum lease payments over the expected lease term at the commencement date of each lease. The Company measures and records a right-of-use asset and
lease liability based on the discount rate implicit in the lease, if known. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have
access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs.
In these cases where the discount rate implicit in the lease is not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to
the Company's incremental borrowing rate it pays on current debt instruments or would have to pay on a collateralized basis to borrow an amount equal to the lease payments
under similar terms.
The Company and its subsidiary have no leases classified as finance leases. The Company and its subsidiary currently lease plant, office facilities and equipment under
operating leases expiring through August 2024. As of December 31, 2022, the weighted average remaining lease term for our operating leases was 20.2 months. The weighted
average discount rate for our operating leases was 12.8%.
The Company’s lease agreements may include options to extend the lease following the initial term. On a case-by-case basis, the Company’s management determines if it is
reasonably certain to exercise the renewal option; such renewal options were included in determining the initial lease term.
We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2022, and therefore did not reassess (i) whether any expired or
existing contracts are, or contain, leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases. We elected to use hindsight
for transition when considering judgments and estimates such as assessments of lease options to extend, or terminate, a lease, or to purchase the underlying asset. As result of the
adoption of ASC 842, the Company recognized an accumulative adjustment to beginning retained earnings for the 2022 fiscal year of $44,533.
For all asset classes, we elected to (i) not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less and (ii) not separate non-lease
components from lease components, and we have accounted for combined lease and non-lease components as a single lease component. Variable lease payments associated with
the Company’s leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on which those payments are
56
assessed. For those leases that are subsequently modified for terms, such changes may require a remeasurement of the lease liability.
Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis
over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance
leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease
payments are allocated between a reduction of the lease liability and interest expense.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based awards granted to our employees and other service providers, including stock options granted under
the 2017 Plan, 2015 and 2011 Stock Option Plans that were approved in October 2017 (the "2017 Plan"), December 2015 (the “2015 Plan”) and in December 2011 (the “2011 Plan”),
respectively, based on the estimated fair value of the award. We used the Black-Scholes option pricing model to estimate the fair value of stock option awards granted under the
2017 Plan, 2015 Plan and 2011 Plan. We recognize the fair value of stock options granted under the 2017 Plan and 2015 Plan as stock-based compensation on a straight-line basis
over the requisite service period. We record expense net of anticipated forfeitures and adjust the annual expense based upon actual experience.
Compensation cost for stock awards, which include restricted stock units (“RSUs”) is measured at the fair value on the grant date and recognized as expense, net of
estimated forfeitures, over the related service period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of
expected dividends not received during the vesting period.
Our use of the Black-Scholes option pricing model requires the input of highly subjective assumptions, including the expected term of the option, expected volatility of the
price of our common stock, risk-free interest rates and the expected dividend yield of our common stock. The assumptions used in our option pricing model represent management’s
best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-
based compensation expense could be materially different in the future.
These assumptions and estimates are as follows:
•Fair Value of Common Stock. Since the completion of our IPO, we use the closing quoted price of our common stock on the Nasdaq Capital Market on the date of grant.
•Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions were determined
based on the vesting terms and contractual lives of the options, using the simplified method.
•Expected Volatility. We use the volatility of our own share price.
•Risk-Free Interest Rate. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms similar to the expected
term on the options.
•Dividend Rate. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected
dividend yield of zero.
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional
data related to our common stock, we may refine our estimation process, which could materially impact our future stock-based compensation expense.
Inventory Valuation
We value our inventory at the lower of cost or its estimated net realizable value. We use the average cost method for purposes of determining cost, which approximates the
first-in, first-out method. We write down inventory for excess and obsolescence based upon a review of historical usage and assumptions about future demand, product mix and
possible alternative uses. Actual demand, product mix and alternative usage may be lower than those that we project, and this difference could have a material adverse effect on our
gross margin if inventory write-downs beyond those initially recorded become necessary. Alternatively, if actual demand, product mix and alternative usage are more favorable
than those we estimated at the time of such a write-down, our gross margin could be favorably impacted in future periods.
57
Goodwill, Intangible Assets and Long-lived Assets
We evaluate our goodwill, intangible and long-lived assets for impairment when events or circumstances arise that indicate our goodwill, intangible and long-lived assets
may be impaired. Indicators of impairment include, but are not limited to, a significant deterioration in overall economic conditions, a decline in our market capitalization, the loss of
significant business, significant decreases in funding for our contracts, or other significant adverse changes in industry or market conditions. Regardless, goodwill is tested for
potential impairment at least annually.
Income Taxes
The determination of income tax expense requires us to make certain estimates and judgments concerning the calculation of deferred tax assets and liabilities, as well as the
deductions and credits that are available to reduce taxable income. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have
been included in our consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates for the year in which the differences are expected to reverse.
In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, our forecast of future
earnings, future taxable income, and tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment. We record a valuation
allowance against deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. If it becomes more
likely than not that a tax asset will be used for which a reserve has been provided, we reverse the related valuation allowance. If our actual future taxable income by tax jurisdiction
differs from estimates, additional allowances or reversals of reserves may be necessary.
We use a two-step approach to recognize and measure uncertain tax positions. First, the tax position must be evaluated to determine the likelihood that it will be sustained
upon external examination. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the
financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. We
reevaluate our uncertain tax positions on a quarterly basis and any changes to these positions as a result of tax audits, tax laws or other facts and circumstances could result in
additional charges to operations.
Business Combinations
We utilize the acquisition method of accounting for business combinations and allocate the purchase price of an acquisition to the various tangible and intangible assets
acquired and liabilities assumed based on their estimated fair values. We primarily establish fair value using the income approach based upon a discounted cash flow model. The
income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates. Other estimates
include:
•estimated step-ups or write-downs for fixed assets and inventory;
•estimated fair values of intangible assets; and
•estimated income tax assets and liabilities assumed from the target.
While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the
business acquisition date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is
generally no longer than one year from the business acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to
goodwill.
For changes in the valuation of intangible assets between preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs.
Subsequent to the purchase price allocation period any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is
determined. Should we issue shares of our common stock in an acquisition, we will be required to estimate the fair value of the shares issued.
Recent accounting pronouncements
Per the Company’s consolidated financial statements Note 2 – Significant Accounting Policies, we may be implementing certain accounting changes as required by FASB.
See Note 2 for further details.
58
Recently implemented accounting pronouncements
Effective January 1, 2022, the Company implemented ASU No. 2016-02, Leases (“ASU 2016-02”). Under ASU 2016-02, the Company recognized for all leases a lease liability,
which is our obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to
use, or control the use of, a specified asset for the lease term. The Company elected to use the transition method and reflected the cumulative effect of adoption as an adjustment
to beginning retained earnings.
Interest rate risk
Our exposure to interest rate risk is primarily associated with borrowing on revolving lines of credit denominated in both U.S. dollars and Euros. We are exposed to the
impact of interest rate changes primarily through our borrowing activities for our variable rate borrowings. The Federal Reserve interest rates have increased recently and may
increase further in the near term.
Concentration of credit risk
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 December 31, 2022, the Company had
$2,378,546 of cash in our accounts that exceeded the insurance limits. The Company has not experienced any such 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 €145,599 (US$156,261) 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 changes in the exchange rates of local currencies. Foreign currency
transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations.
OSS GmbH operates as an extension of OSS’ domestic operations and acquired Bressner Technology GmbH 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 may employ derivatives to manage certain currency market risks through the use of foreign exchange forward contracts. We do not use derivatives for trading or
speculative purposes. Our derivatives are designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or
liability (cash flow hedge). We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these
transactions, we enter into foreign exchange contracts to provide currency at a fixed rate.
59
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 expense, 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 and 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.
Net (loss) income
Depreciation and amortization
Stock-based compensation expense
Interest income
Interest expense
PPP loan and interest forgiveness
Provision for income taxes
Adjusted EBITDA
Adjusted EPS
For the Year
Ended December 31,
2022
2021
$
$
(2,229,055) $
1,050,299
1,991,117
(237,751)
162,391
-
4,423,597
5,160,598 $
2,332,773
1,480,608
1,695,105
(244,382)
527,139
(1,514,354)
605,675
4,882,564
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, and 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.
60
The following table reconciles net income to adjusted EPS and diluted earnings per share:
Net (loss) income
Amortization of intangibles
Stock-based compensation expense
PPP loan and interest forgiveness
Non-GAAP net (loss) income
Non-GAAP net (loss) income per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Free Cash Flow
$
$
$
$
For the Year Ended December 31,
2021
2022
(2,229,055) $
63,231
1,991,117
-
(174,707) $
(0.01) $
(0.01) $
19,730,698
19,730,698
2,332,773
556,842
1,695,105
(1,514,354)
3,070,366
0.17
0.16
18,305,878
19,503,737
Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures for property and equipment,
which includes capitalized software development costs. We believe free cash flow provides investors with an important perspective on cash available for investments and
acquisitions after making capital investments required to support ongoing business operations and long-term value creation. We believe that trends in our free cash flow can be
valuable indicators of our operating performance and liquidity.
Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP.
This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies.
We expect to continue to incur expenditures similar to the free cash flow adjustments described above, and investors should not infer from our presentation of this non-
GAAP financial measure that these expenditures reflect all of our obligations which require cash. The following table reconciles cash provided by operating activities, the most
directly comparable GAAP financial measure, to free cash flow:
Cash flow:
Cash (used in) provided by operating activities
Capital expenditures
Free cash flow
For the Year Ended December 31,
2021
2022
$
$
(7,806,025) $
(529,908)
(8,335,933) $
5,622,596
(563,815)
5,058,781
61
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the financial statements included elsewhere in this Annual Report beginning at page F-1, which are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure 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. In
designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can
provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also 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 under all potential future
conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this
Annual Report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures
were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f)
of the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on our financial statements. Because of its inherent limitations, internal controls over financial reporting may not prevent or detect all misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. We have
conducted an evaluation of the effectiveness of our internal control over financial reporting. Based on our evaluation, management has concluded that our internal control over
financial reporting was effective as of December 31, 2022.
Attestation Report of the Independent Registered Public Accounting Firm
This Annual Report does not include an attestation report of our independent registered public accounting firm due to an exemption established by the JOBS Act for
“emerging growth companies.”
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Changes in Internal Control over Financial Reporting
There has been no material change in our internal controls over financial reporting during the year ended December 31, 2022, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Management’s goal is to continue to improve upon our internal control environment as we refine our processes and procedures to address our growing business and
operations in other geographies. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may determine to take additional actions to
address control deficiencies or determine to modify our plan based upon changes in our internal control environment.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
63
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive Officers and Directors
PART III
The following table sets forth the names, ages, and positions of our executive officers and directors as of February 28, 2023. There are no arrangements, agreements or
understandings between non-management security holders and management under which non-management security holders may directly or indirectly participate in or influence the
management of our affairs. There are no arrangements or understandings between any director and any other person pursuant to which any director or executive officer was or is to
be selected as a director or executive officer, as applicable. There currently are no legal proceedings, and during the past ten years there have been no legal proceedings that are
material to the evaluation of the ability or integrity of any of our directors or director nominees.
Name
Executive Officers:
David Raun
John W. Morrison, Jr.
Jim Ison
Non-Employee Directors:
Kenneth Potashner
(1)(3)(4)
Jack Harrison
Kimberly Sentovich
Sita Lowman
Gioia Messinger
Greg Matz
(2)(3)(4)
(2)(4)
(1)(2)
(1)(4)
(1)(2)(3)
Age
Position
61
65
53
President, Chief Executive Officer and Director
Chief Financial Officer, Treasurer and Secretary
Chief Product Officer and Chief Sales & Marketing Officer
65
67
55
58
60
63
Chairman
Director
Director
Director
Director
Director
(1)Member of the Nominating and Corporate Governance Committee.
(2)Member of the Compensation Committee.
(3)Member of the Strategic Transition Committee.
(4)Member of the Audit and Risk Committee
Executive Officers
David Raun served as our interim chief executive officer from February 15, 2020 until June 24, 2020, when he was appointed as the Company’s president and chief executive
officer. Mr. Raun formerly served as the audit chair on the OSS board of directors and serves as a director. Mr. Raun was with PLX Technology, Inc. (“PLX”), a company that used
to be publicly traded on Nasdaq, from 2004-2014, where he eventually became president, chief executive officer and a director. In this role, he led the company to an acquisition by
Avago (now Broadcom) after driving the company to large PCI Express market share, record revenues and profits. This PCIe switch leadership position at PLX makes him very
familiar with the OSS markets and the components he defined and marketed to many of OSS products. Mr. Raun also served as chief operations officer at Home Bay Technologies
(“Home Bay”), an on-line technology based real estate company in 2019. Prior to joining Home Bay, he was the president, COO and interim chief financial officer at ASSIA, Inc.
(“ASSIA”), a Silicon Valley-based SaaS provider from 2016-2018. While there, he led a turnaround effort, driving ASSIA to record revenues and sizable operating margins. Prior to
these roles, he held multiple VP of marketing, business development, corporate development, and sales roles. He served as chairman of the board at Kilopass, a semiconductor IP
supplier, until they were acquired by Synopsys in 2019. Mr. Raun holds a B.S. in computer and electrical engineering from University of California, Santa Barbara. Mr. Raun has
more than 25 years of experience at senior management and board levels in public and private companies including over 10 M&A/fund raising events.
John W. Morrison, Jr. has served as our chief financial officer since September 1, 2017. Mr. Morrison is a CPA with more than three decades of experience in public
accounting and all aspects of financial reporting and financing. From June 2014 to September 2017, he served as the chief financial and operations officer for the Carol Cole
Company (“Carole Cole”). Prior to joining Carol Cole, he served as a consultant to various private companies regarding their financial and operational affairs. From January 2013 to
September 2013, he served as the chief financial officer of Gen-E, an information technology and services company. Mr. Morrison also served as the executive vice president and
chief financial officer for the Kelley Blue Book Company for 11 years. He began his career working 15 years for the public accounting firm
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PricewaterhouseCoopers (now PwC) both in the U.S. and Asia. Mr. Morrison holds a B.S. in accounting and business management and MACC in Accounting from Brigham Young
University.
Jim Ison, has been with OSS since 2004, and currently serves as the chief product officer and chief sales and marketing officer. Mr. Ison has nearly three decades of
combined sales, product management and marketing management experience in leading-edge large-scale electronic systems using breakthrough technologies. His expertise covers
government, communications and HPC markets with particular focus on AI applications in unique environments. Prior to joining OSS, Mr. Ison held senior sales and marketing
positions for Ziatech and Rittal. During the 17 years he has served in a management role at OSS, he has led the technological evolution. Mr. Ison holds a bachelor's degree in
Aeronautical Engineering from CalPoly SLO and an MBA from University of Florida.
Board of Directors
Kenneth Potashner has served as Chairman of our board of directors since May 2019. Mr. Potashner has extensive board experience in high growth, high technology
global organizations. He served as Chairman of Newport Corporation, where he provided 18 years of service culminating in the sale of Newport in 2016 for $980 million. Mr.
Potashner served as Chairman of the board of Maxwell Technologies and directed it through a period of rapid expansion. He has also served on the board of California Micro
Devices, SonicBlue Inc, and Singapore Technologies, all publicly traded companies. Mr. Potashner is currently serving as the Executive Chairman of Generation Esports and on the
board of directors of Launch Factory and Prologue Mobile. He has also served on the board of many private companies as well, including DynaOptics, MyOffice.com,
Underground Elephant, Home Bay, Lumedyne, Events.com, and several others. Several of the private companies that Mr. Potashner has had affiliations with have achieved
successful exits or significant financings. Mr. Potashner has a BSEE from Lafayette College and an MSEE from SMU, Executive certifications from Columbia and INSEAD in
Lausanne, Switzerland. He also has an Advanced Professional Director certification from American Board of Directors.
Jack Harrison has served on our board of directors since December 2016. He founded, and served as president and chief executive officer of, Aspen Integrated
Technologies, a world-class development engineering and manufacturing center of advanced microelectronics, which he grew through organic reinvestment and acquisition and
which had a successful exit in 2011. The companies that he has founded and/or worked for previously have been responsible for the assembly development and manufacture of
microfluidic semiconductor DNA gene sequencing devices, next-gen military RF radar, missile guidance systems, miniaturization of neuro-modulation sensors and transmitters,
medical implant devices, and more. Customers for such companies included major medical and technology companies, government prime contractors, NASA, DARPA, and others.
Mr. Harrison is currently the president of Integrity Energy and serves as the chairman of the board of Reach Beyond, a non-profit charitable organization with which he has been
affiliated for more than two decades. Mr. Harrison is an angel investor in several technology start-up companies and holds a BME degree from Wheaton College. He brings decades
of experience in the microelectronics space and his business and technical expertise represent important assets to OSS.
Kimberly Sentovich joined our board of directors in February 2019, and is a seasoned merchandising, operations, IT, and supply chain executive with three decades of
experience with multi-billion-dollar profit and loss responsibility. Ms. Sentovich currently serves as the CEO of Rachio, a smart irrigation controller IoT device B-corp company
focused on water efficiency. Before joining Rachio, she consulted for venture and private equity companies. Ms. Sentovich served in senior operations roles at Torrid and was
Executive Vice President of Stores and Logistics at Gymboree, where she was responsible for 1,300 company-owned stores in North America from 2015-2018. Ms. Sentovich
previously worked seven years (2008-2015) at Walmart, rising from Regional Vice President of Operations – California to Divisional Senior Vice President of Operations – Pacific
Division and fifteen years at The Home Depot (1993-2008), rising to the level of Regional Vice President of Operations. Ms. Sentovich obtained her MBA from The Paul Merage
School of Business, University of California, Irvine, and her B.A. in Philosophy and Political Science with a Minor in Economics from Bryn Mawr College. Ms. Sentovich’s
extensive executive and operations experience, as well as her independence, judgment, and exceptional leadership experience, make her a valuable addition to our board.
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Sita Lowman joined our board of directors in July 2020, and is a Fortune 500 executive with business transformation and technology expertise. Her expertise identifying
market trends, organizing multi-national diverse teams to quickly react to these trends, and leveraging partnerships to expand globally make her frequently called upon to lead new
business ventures and to turn around struggling businesses. From 2017 to 2021, Ms. Lowman served as Vice President and General Manager for the Platform Services business of
DXC Technologies, a multi-billion-dollar IT services Fortune 500 Company. At DXC, she actively engaged in strategic partnerships with the world’s largest public cloud providers
and Enterprise application providers, with responsibilities including P&L financial management, GTM and operations activities. Prior to that, Ms. Lowman served as Senior Director,
Enterprise Solutions on Demand Service Offering Management, Workload and Cloud for Hewlett Packard Enterprise. She has also held General Manager roles at Nortel Networks
and Texas Instruments (TI) Defense Group (acquired by Raytheon). Ms. Lowman serves on the board of Mortgage Guaranty Insurance Corporation (NYSE: MTC) and serves on
their Business Transformation and Technology Committee. Ms. Lowman is currently an advisor with the San Diego start-up community through her involvement with San Diego
based Launch Factory, UC San Diego Rady School of Management, and USD Knauss School of Business. Ms. Lowman holds a BSS of Electrical Engineering from Auburn
University. Ms. Lowman’s extensive Fortune 500 P&L and GTM experience in the Technology sector servicing defense, automotive and other large commercial industries make her
well suited to serve on our board.
Gioia Messinger, joined our board of directors in July 2020. Since 2012, Ms. Messinger has served as founder and principal of LinkedObjects, Inc., a strategic advisory
services business focused on digital transformation brought about by AI and the IoT. From 2004 to 2012, Ms. Messinger served as founder and chief executive officer of Avaak,
Inc., now Arlo Technologies (NYSE:ARLO), a leading home security systems company. From 1989 to 2004, Ms. Messinger served as founder and president of SUMMIT Design
Technologies, Inc., an engineering services firm with customers in the commercial, defense and healthcare sectors. Ms. Messinger currently serves on the board of directors of
Guild Holdings Company (NYSE:GHLD), a nationally recognized residential mortgage lender, Indyme Solutions, LLC, a provider of AI solutions for the world’s largest retailers, and
CARI Health, Inc., a developer of innovative personalized healthcare solutions. She previously served on the board of Vicon Industries (NYSE:VCON). Ms. Messinger is a member
of the dean’s council of advisors at the University of California San Diego, Jacobs School of Engineering, and is a member of the Latino Corporate Directors Association. Ms.
Messinger obtained her master of business administration degree from the Paul Merage School of Business at the University of California, Irvine and bachelor of science in
Computer Engineering from the University of California, San Diego. She has a certificate in Cyber Risk Governance for US Public Companies. Ms. Messinger’s business,
operations and management experience, coupled with her technology thought leadership and industry relationships, make her an invaluable asset to our board.
Greg Matz, CPA, joined our board of directors in July 2020, and is an experienced financial executive, having served in controller, Vice President and CFO roles for over two
decades. Now retired, Mr. Matz is currently serving as a member of the board of directors and audit committee chair for Dare Bioscience, Inc. (NASDAQ: DARE), a public clinical-
stage biopharmaceutical company. Mr. Matz also chairs the Dean’s Council for the University of San Francisco’s School of Management. From 2011 to 2016, he worked for The
Cooper Companies, Inc. (NYSE: COO), holding roles as the Senior Vice President and Chief Financial Officer and Chief Risk Officer. From 2010 to 2011, Mr. Matz was the Chief
Financial Officer for CooperVision, a business unit of The Cooper Companies, Inc. Prior to joining The Cooper Companies, Inc., he held key management roles in finance and
marketing at Agilent Technologies and Hewlett Packard. He began his career at KPMG and is a CPA with an active certification. Mr. Matz graduated from the University of San
Francisco with a B.S. in Business Administration and completed the University of Pennsylvania, The Wharton School’s Advanced Management Program. Mr. Matz is also a
National Association of Corporate Directors (“NACD”) Board Leadership Fellow and has earned the NACD Directorship Certification credential. Our board of directors believes
Mr. Matz’s experience as a chief financial officer and chief risk officer of a public company and his corporate experience in financial functions, risk management, capital markets and
corporate strategy qualify him to serve as a member of our board of directors.
Advisory Board
As discussed elsewhere in this Annual Report, in the second quarter of 2022, we formed an advisory board consisting of retired high-ranking military officials and corporate
executives in order to aid in the acceleration of our pursuit of the AI Transportables market, and the military sector in particular. Members of the advisory board are not employees
or directors of the Company, and have no decision-making authority over our activities. However, we value their guidance and intend to consider their input, as appropriate, when
making strategic decisions in areas of our business that members of the advisory board have experience in. In addition, our advisors may have arrangements with other companies
to assist those companies in developing products or technologies that may compete with ours. Our advisors may be affiliated with other entities, and devote only a small portion of
their time to us. During the year ended December 31, 2022, we issued each member of our
66
advisory board 1,000 restricted stock units as compensation for services provided in their role as advisory board members, which restricted stock units cliff vested six months from
the date of grant.
Each of the members of our advisory board, as well as a brief summary of their relevant experience, is identified below.
Kieran Carroll is a technology executive with deep experience building and delivering artificial intelligence-enabled products to commercial and government clients.
Currently, he serves as chief of staff and head of government affairs for ZeroEyes, Inc., the industry’s leading AI Based video analytics weapons detection platform. Mr. Carroll
came to ZeroEyes from PricewaterhouseCoopers, where he worked with clients in telecommunications, financial services, and healthcare. Previously, he served as a naval officer at
Special Operations Forces and Intelligence Community organizations and deployed to Afghanistan, Africa, and the Middle East. He currently serves on the board of directors for
the Data Ethics Consortium for Security (DECS) and sits on advisory boards of several technology companies, including BreachBits, Advisar AI, and DroneHQ. Mr. Carroll is a
graduate of the United States Naval Academy and received an MBA from Cornell University’s Johnson Graduate School of Management.
Mike Dumont brings expertise in government, aerospace and defense, risk management and organizational leadership. He is a retired three-star admiral, and his career
includes having served as the deputy commander of U.S. Northern Command and vice commander of North American Aerospace Defense Command. He oversaw military
responses to border security, natural disasters, and the COVID-19 pandemic in the United States, where AI solutions were deployed to meet operational demands. He also led teams
in providing aerospace warning, aerospace control, missile defense and maritime warning, and generating globally integrated effects using information enabled by AI. Adm.
Dumont serves on the board of directors of the Marines’ Memorial Association, the board of advisors of Dataminr, Inc., and the national security advisory council of the U.S.
Global Leadership Coalition. He holds a B.A. degree from the University of Southern Maine and a J.D. degree from Suffolk University Law School.
Robin Fontes is a retired U.S. Army Major General who brings extensive experience in government, defense, and diplomacy. She most recently served as the Deputy
Commanding General of U.S. Army Cyber Command synchronizing cyberspace operations in pursuit of Department of Defense and Army strategic priorities. During her nearly 35-
year career, she also commanded three multi-national units in Afghanistan, and oversaw some of the nation’s largest programs providing military equipment and services to foreign
partners and allies. Robin currently serves on the board of directors of the Marines’ Memorial Foundation, the board of advisors for the Center for Cyber Security Innovations at
the City University of Seattle, and the board of advisors for Kronos Fusion Energy Defense Systems. She is a graduate of the United States Military Academy at West Point (BS),
the University of Washington (MA), and the National War College (MS).
Christopher Lever has spent his 32-year career in the technology sector, including AI, leading functional organizations in finance, product management and sales. His
M&A experience includes 12 transactions valued at over $2 billion in the aggregate. For the past 21 years, Mr. Lever has worked in executive leadership roles within embedded
computing. At General Electric (“GE”), he was director, global sales, and then general manager, embedded where he had full profit and loss responsibility for the $200 million
embedded business. Mr. Lever led the team for the successful sale in 2015 of GE’s embedded business to Veritas Capital for $515 million. Then, with Abaco Systems, Mr. Lever
served as executive vice president, corporate development. In addition to completing two M&A transactions, he forged a partnership with NVIDIA for exclusive access to
components used for Abaco’s AI/autonomous product line. In 2021, Mr. Lever led the company’s M&A process, leading to the sale of Abaco to AMETEK, Inc. for $1.35 billion.
Mr. Lever brings significant depth in many of our target markets in the AI Transportables space.
Scott Orton has an extensive background in DoD acquisition, system development, and successful program execution. In his prior role as vice president and general
manager of Edge Processing for Mercury Systems, Mr. Orton had full responsibility for Mercury’s Edge and Secure computing businesses. He has extensive knowledge of
computing systems design, computing product life cycles, global supply chain dependencies, commercial military sales, and security needs for advanced AI/ML computing at the
edge. In addition to Mercury Systems, Mr. Orton held positions including technical director, capture manager, and program director at Raytheon, as well as multiple positions
within DoD Acquisition. Mr. Orton has a Master’s degree in Systems Engineering from Johns Hopkins University, and a Bachelor’s degree in Mechanical Engineering from the
University of Florida. His successful focus on the DOD throughout his career, including his senior role at Mercury Systems, considered to be the one-thousand pound gorilla in the
fragmented competitive landscape, along with his years at Raytheon, one of our largest customers, is expected to provide great insight and value for us.
Roger Stanton is a retired Naval Aviator and Test Pilot with over 22 years of experience in the design, development, and fielding of advanced aerospace systems, including
AI. He is an expert in the application of cutting-edge technology to
67
complex maritime military operations, and a thought-leader on the organizational and business implications of AI. Mr. Stanton is currently a strategic account executive at
DataRobot, an enterprise AI company helping customers rapidly derive business value from machine learning. He holds a BS in Materials Science and Engineering from Carnegie
Mellon University, an MS in Systems Engineering from the Naval Postgraduate School, an MS in Operations Research from Southern Methodist University, and an MBA from the
Darden School of Business.
Lex Turner currently serves as vice president of remote operations for Phantom Auto, an innovative company enabling people to remotely operate vehicles across sites
from thousands of miles away. In this capacity, Mr. Turner is responsible for a business unit providing Remote Operations as A Service focused on the logistics industry in effort
to help solve the global supply chain crisis plagued with labor shortages by detaching labor from location. From 2011 to 2021, Mr. Turner served in C-level and director positions
with private and publicly traded Fortune 500 companies focused on providing Big Data, Analytics, and Digital Transformation solutions to the Intelligence Community, where he
continues to consult. He began his career as a US Navy Fighter Pilot, TOPGUN graduate and Desert Storm Veteran. After 9/11, he transitioned to the US Air Force, where he flew
Predator and Reaper Remotely Operated Aircraft. Mr. Turner held Squadron and Group Command positions serving extensively in Iraq and Afghanistan. He culminated his military
service at the Pentagon on the Air Staff as Deputy Director for Air Operations with oversight of $42B of Air Force programs and 32,000 officers and enlisted Aircrew, retiring as a
Colonel. Mr. Turner maintains a TS/SCI clearance with Polygraph and holds a Bachelor’s degree in Industrial Management and an MBA from the University of Alabama,
Manderson Graduate School of Business. In his spare time, he flies the A320 Airbus for United Airlines.
Board Composition and Election of Directors
Director Independence
Our board of directors currently consists of seven members. Our board of directors has determined that Kenneth Potashner, Jack Harrison, Kim Sentovich, Sita Lowman,
Gioia Messinger and Greg Matz are all independent directors in accordance with the listing requirements of The Nasdaq Capital Market. The Nasdaq independence definition
includes a series of objective tests, including that the director is not, and has not been for at least three years, one of our employees, and that neither the director nor any of his or
her family members have engaged in various types of business dealings with us. In addition, as required by Nasdaq rules, our board of directors has made a subjective
determination as to each independent director that no relationships exist, which, in the opinion of our board of directors, would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with
regard to each director’s business and personal activities and relationships as they may relate to us and our management.
Board Committees and Independence
Our board of directors has established three standing committees – audit and risk, compensation and nominating and corporate governance – each of which operates under
a charter that has been approved by our board of directors. Additionally, in February 2023 our board of directors constituted a new committee of the board, the Strategic Transition
Committee.
Audit and Risk Committee
The audit and risk committee’s main function is to oversee our accounting and financial reporting processes and the audits of our financial statements. This committee’s
responsibilities include, among other things:
1.Managing our independent registered public accounting firm, including:
•selection and retention (subject to input by the Company’s stockholders), evaluation and termination when appropriate;
•setting their compensation;
•overseeing their work and pre-approving all audit services they provide;
•approving all permitted non-audit services they perform;
•establishing policies and procedures for their engagement to provide permitted audit and non-audit services;
•at least annually, receiving and reviewing a report by the independent registered public accounting firm describing their internal quality- control procedures and any
material issues raised by the most recent internal
68
quality-control review, peer review or Public Company Accounting Oversight Board (“PCAOB”) review, of the independent auditing firm, or by any inquiry or investigation
by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal
with any such issues; and other required reports from the independent registered public accounting firm; and
•at least annually, considering their independence, including whether their provision of permitted non-audit services is compatible with independence, and obtaining and
reviewing a report describing all the relationships between them and the Company.
2.Reviewing the audit scope and plan of independent auditors, and effective use of audit resources.
3.Reviewing with management and our independent auditors the Company’s annual (Form 10-K) and quarterly (Form 10-Q) financial statements and related footnotes, the auditor’s
judgments about the quality of the Company’s accounting principles as applied in its financial reporting, and significant changes in their audit plan and serious difficulties or
disputes with management encountered during the audit, and matters required by PCOAB AS1301 (Communication with Audit committees).
4.Reviewing with management and the independent auditors their significant audit findings, and assessing the steps that management has taken or proposes to take to minimize
significant financial risks or exposures facing the Company, and periodically reviewing compliance with such steps.
5.Reviewing management’s annual internal control report, which acknowledges management’s responsibility for establishing and maintaining an adequate internal control structure
and procedures for financial reporting, and contains an assessment of the effectiveness of the internal control structure.
6.Discussing with management and the independent auditor, at least semi-annually, policies and programs with respect to enterprise risks, including the risk management process,
risk assessments, and significant areas of risk or exposure for the Company.
7.Assisting our board of directors and overseeing and monitoring the Company’s senior management with carrying out its responsibilities, such as identifying and assessing the
material risks the company faces; establishing a risk management, crisis management and emergency response plans; overseeing financial, strategic and market risks as well as
other risks the Company may face, and approving the Company's enterprise wide risk management framework in conjunction with the board of directors.
8.Establishing procedures for the Company’s confidential and anonymous receipt, retention, and treatment of complaints regarding the Company’s accounting, internal controls
and auditing matters, as well as for the confidential, anonymous submissions by Company employees of concerns regarding questionable accounting or auditing matters.
9.Obtaining the advice and assistance, as appropriate, of independent counsel and other advisors as necessary to fulfill the responsibilities of the audit and risk committee, and
receiving appropriate funding from the Company, as determined by the audit and risk committee, for the payment of compensation to any such advisors.
10.Conducting an annual performance evaluation of the audit and risk committee and annually evaluating the adequacy of its charter.
The members of our audit and risk committee are Mr. Matz, Ms. Lowman, Ms. Messinger, and Mr. Harrison. Mr. Matz serves as the chairperson of the committee. All
members of our audit and risk committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and The Nasdaq Capital Market. Our
board of directors has determined that Mr. Matz qualifies as an “audit committee financial expert” as defined by applicable SEC rules and has the requisite financial sophistication
as defined under the applicable Nasdaq rules and regulations. Our board of directors has determined that Mr. Matz, Ms. Lowman, Ms. Messinger, and Mr. Harrison are
independent under the applicable rules of the SEC and The Nasdaq Capital Market.
We are currently in compliance with Nasdaq rules and Rule 10A-3 since all members of our audit and risk committee have been deemed independent by our board of
directors. The audit and risk committee operates under a written charter that satisfies the applicable standards of the SEC and The Nasdaq Capital Market. In February 2021, this
committee added enterprise risk assessment and management to their charter and changed the name of the committee from the audit committee to the audit and risk committee.
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Compensation Committee
Our compensation committee approves, or recommends to our board of directors, policies relating to compensation and benefits of our officers and employees. The
compensation committee approves, or recommends to our board of directors, annual and long-term corporate goals and objectives relevant to the compensation of our chief
executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives and approves, or recommends to our board of
directors, the compensation of these officers based on such evaluations. The compensation committee also approves, or recommends to our board of directors, the issuance of
stock options and other awards under our equity incentive plans. The compensation committee will review and evaluate, at least annually, the performance of the compensation
committee and its members, including compliance by the compensation committee with its charter.
The members of our compensation committee are Ms. Sentovich, Mr. Potashner, Ms. Lowman, and Ms. Messinger. Ms. Sentovich serves as the chairperson of the
committee. Our board of directors has determined that Ms. Sentovich, Mr. Potashner, Ms. Lowman, and Ms. Messinger are all independent under the applicable rules and
regulations of The Nasdaq Capital Market and all current members qualify as a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act. Our board of
directors has determined that each of the members of our compensation committee is an “outside director,” as that term is defined in Section 162(m) of the U.S. Internal Revenue
Code of 1986, as amended, or Section 162(m). We are currently in compliance with Nasdaq rules since all members of our compensation committee have been deemed independent
by our board of directors. The compensation committee operates under a written charter, which the compensation committee will review and evaluate at least annually.
Nominating and Corporate Governance Committee
The nominating and corporate governance committee is responsible for assisting our board of directors in discharging the board of directors’ responsibilities regarding the
identification of qualified candidates to become board members, the selection of nominees for election as directors at our annual meetings of stockholders (or special meetings of
stockholders at which directors are to be elected), and the selection of candidates to fill any vacancies on our board of directors and any committees thereof. In addition, the
nominating and corporate governance committee is responsible for overseeing our corporate governance policies, reporting and making recommendations to our board of directors
concerning governance matters and oversight of the evaluation of our board of directors.
The members of our nominating and corporate governance committee are Mr. Harrison, Mr. Potashner, Ms. Sentovich, and Mr. Matz. Mr. Harrison serves as the chairman
of the committee. Our board of directors has determined that Mr. Harrison, Mr. Potashner, Ms. Sentovich and Mr. Matz are all independent under the applicable rules and
regulations of The Nasdaq Capital Market relating to nominating and corporate governance committee independence. We are currently in compliance with Nasdaq rules due to the
fact that all members of our nominating and corporate governance committee have been deemed independent by our board of directors. The nominating and corporate governance
committee operates under a written charter, which the nominating and corporate governance committee will review and evaluate at least annually.
Strategic Transition Committee
As discussed elsewhere in this Annual Report, in February 2023, our board of directors constituted a new committee of the board, the strategic transition committee, to
assist in the identification, transition and retention of a successor chief executive officer, including to work with the engaged search firm to accomplish the foregoing, to provide
support to our management team throughout the transition, and to perform other duties as may be necessary or desirable from time to time in connection with the reorganization of
the Company. We currently expect that the strategic transition committee will be disbanded shortly after the appointment of a successor chief executive officer is appointed.
The members of our strategic transition committee are Mr. Harrison, Mr. Potashner, and Ms. Messinger. Mr. Harrison serves as the chairperson of the committee.
Board Diversity
Our nominating and corporate governance committee is responsible for reviewing with the board of directors, on an annual basis, the appropriate characteristics, skills, and
experience required for the board of directors as a whole and its individual members. In evaluating the suitability of individual candidates (both new candidates and current
members), the nominating and corporate governance committee, in recommending candidates for election, and the board of directors, in approving (and, in the case of vacancies,
appointing) such candidates, will consider many factors, including the following:
•personal and professional integrity, ethics and values;
70
•experience in corporate management, such as serving as an officer or former officer of a publicly-held company;
•experience as a board member or executive officer of another publicly-held company;
•strong finance experience;
•diversity of expertise and experience in substantive matters pertaining to our business relative to other board members;
•diversity of background and perspective, including, but not limited to, with respect to age, gender, race, place of residence and specialized experience;
•experience relevant to our business industry and with relevant social policy concerns; and
•relevant academic expertise or other proficiency in an area of our business operations.
Currently, our board of directors evaluates each individual in the context of the board of directors as a whole, with the objective of assembling a group that can best
maximize the success of the business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas. The board
values diversity and supports having directors of diverse gender, race, and ethnicity, along with varied skills and experiences. Information regarding the diversity of our board
members is outlined in the below table:
OSS Board Diversity Matrix (January 1, 2023)
Total Number of Directors
Part 1: Gender Identity
Directors
Part II: Demographic Background
Hispanic or Latinx
White
Did Not Disclose Demographic Background
Female
Male
3
2
1
4
0
4
7
0
Non-Binary
Gender Not
Disclosed
0
0
0
0
0
0
Family Relationships
There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director, executive officer, or employee: (i) any
bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to
that time; (ii) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (iii) being subject to
any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending
or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (iv) being found by a court of competent jurisdiction (in a civil action), the
SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or
vacated.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to our directors, officers, and employees, including our principal executive officer, principal
financial and accounting officer, controller, or persons performing similar functions. Our code of business conduct and ethics is available under the Investors – Corporate
Governance section of our website at www.onestopsystems.com. In addition, we post on our website all disclosures that are required by law or the listing standards of The Nasdaq
Capital Market concerning any amendments to, or waivers from, any provision of the code. The reference to our website address does not constitute incorporation by reference of
the information contained at or available through our website, and should not consider it to be a part of this Annual Report.
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Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Exchange Act, directors, executive officers, and beneficial owners of 10% or more of our common stock, or reporting persons, are required to
report to the SEC on a timely basis the initiation of their status as a reporting person and any changes with respect to their beneficial ownership of our common stock. Based solely
on our review of copies of such forms that we have received, or written representations from reporting persons, we believe that during the fiscal year ended December 31, 2022, all
executive officers, directors and greater than 10% stockholders complied with all applicable filing requirements, other than (i) Gioia Messinger, who filed one late report, and (ii)
Steve Cooper, who filed one late report. There were no known failures to file a required form.
ITEM 11. EXECUTIVE COMPENSATION.
This section discusses the material components of the executive compensation program for our executive officers who are named in the “Summary Compensation Table”
below. In 2022, our “named executive officers” and their positions were as follows:
•David Raun, president and chief executive officer;
•Jim Ison, chief sales and marketing officer; and
•John W. Morrison Jr., chief financial officer, treasurer and secretary
As discussed elsewhere in this Annual Report, in February 2023, (i) we announced that Mr. Raun will step down from his role as chief executive officer of the Company at
such time as his successor is appointed to such role, and (ii) Mr. Ison was appointed as chief product officer of the Company.
This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations, and determinations regarding future
compensation programs. Actual compensation programs that we adopt in the future may differ materially from the currently planned programs summarized in this discussion.
Summary Compensation Table
The following table provides information regarding the total compensation for services rendered in all capacities that was earned by each individual who served (i) as our
principal executive officer at any time during 2022, and (ii) our two most highly compensated executive officers other than our principal executive officer who were serving as
executive officers as of December 31, 2022. Officers were named officers for both 2022 and 2021.
Name and Principal Position
David Raun
President and Chief Executive Officer
(3)
Jim Ison
Chief Sales and Marketing Officer
John W. Morrison Jr.
Chief Financial Officer
Salary ($)
Bonus ($)
Stock Awards
($) (1)
All Other
Compensation
($) (2)
$
$
$
$
$
$
355,231
345,000
$
$
283,039
269,618
$
$
298,477
285,962
$
$
293,360
77,625
$
$
115,299
55,939
$
$
172,108
95,675
$
$
783,900 $
- $
220,080 $
317,350 $
251,520 $
346,200 $
27,166 $
30,730 $
31,765 $
33,980 $
31,648 $
33,415 $
Total ($)
1,459,657
453,355
650,182
676,887
753,753
761,252
Year
2022
2021
2022
2021
2022
2021
(1)Amounts reflect the full grant-date fair value of stock awards, consisting of restricted stock units, granted during the relevant fiscal year computed in accordance with ASC
Topic 718, rather than the amounts paid to or realized by the named individual. We provide information regarding the assumptions used to calculate the value of all stock awards
made to our officers in Note 10 to the audited consolidated financial statements for the year ended December 31, 2022, contained elsewhere in this Annual Report.
(2)Represents payment of health insurance premiums and 401(k) contributions.
(3)After the year ended December 31, 2022, in February 2023, Mr. Ison was appointed as chief product officer of the Company.
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Narrative Disclosure to Compensation Tables
Employment Agreements
Executive Employment Agreement with David Raun
During the year ended December 31, 2022, Mr. Raun was entitled to a base salary of $358,800 per annum, subject to annual increases as determined by the compensation
committee, and an annual bonus (paid out quarterly if targets are met) in the amount of 50% of his then annual base salary. The bonus is based on Mr. Raun’s performance, as
determined by the board of directors in its sole discretion, against fundamental corporate and/or individual objectives to be determined by the board of directors. Mr. Raun is
eligible to participate in our 2017 Plan, subject to the discretion of the board of directors, if and when, the board of directors determines to make a grant to him.
Under the terms of the employment agreement with Mr. Raun, if we terminate his employment for other than good cause, or if Mr. Raun resigns for good reason, Mr. Raun is
entitled to the following payments and benefits: (i) his fully earned but unpaid base salary through the date of termination at the rate then in effect, and any unreimbursed expenses
incurred in accordance with Company policy; (ii) severance payments in an aggregate amount up to twelve months of Mr. Raun’s then-current Base Salary (iii) the continuation of
Mr. Raun’s group health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”) at OSS’ expense for a period of twelve months
following the termination date, and (iv) unvested RSUs shall accelerate so that an additional twelve months of RSUs shall vest from the termination date. Mr. Raun must provide a
release and waiver to OSS as a condition of receiving benefits (ii)-(iv) set forth in this paragraph.
Executive Employment Agreement with John Morrison
During the year ended December 31, 2022, Mr. Morrison was entitled to a base salary of $301,000 per annum, subject to annual increases as determined by the
compensation committee, and a target quarterly bonus in the amount of 35% of his quarterly base salary. The target quarterly bonus is based on Mr. Morrison’s performance, as
determined by the board of directors in its sole discretion, against fundamental corporate and/or individual objectives to be determined by the board of directors. Mr. Morrison is
eligible to participate in our 2017 Plan, subject to the discretion of the board of directors, if and when, the board of directors determines to make a grant to him. On March 16, 2023,
Mr. Morrison’s base salary for fiscal 2023 was increased to $310,648 and he was granted 94,000 RSUs, as approved by the compensation committee and our board of directors on
such date.
Under the terms of the employment agreement with Mr. Morrison, if we terminate his employment without cause (as defined below) or he resigns for good reason (as
defined below) at any time other than within three months immediately preceding or twelve months immediately following the effective date of a change in control (as defined
below), he is entitled to the following payments and benefits: (i) his fully earned but unpaid base salary through the date of termination at the rate then in effect, plus all other
amounts under any compensation plan or practice to which he is entitled; (ii) severance payments in an aggregate amount up to six months of Mr. Morrison’s then-current Base
Salary, paid to Mr. Morrison on OSS’ regular paydays until the earlier of (a) the date that is six months following his termination or (b) the date as of which he commences
employment with another employer, subject to standard payroll deductions and withholdings; (iii) a lump sum payment equal to Mr. Morrison’s then-current target bonus; and (iv)
the continuation of Mr. Morrison’s group health continuation coverage under COBRA at OSS’ expense for a period of six months following the termination date, provided,
however, that in the event Mr. Morrison becomes eligible for comparable group insurance coverage in connection with new employment, such COBRA premium payments by OSS
shall terminate immediately. Mr. Morrison must provide a release and waiver to OSS as a condition of receiving benefits (ii)-(v) set forth in this paragraph.
In the event Mr. Morrison’s termination without cause or resignation for good reason occurs within the three months immediately preceding or twelve months immediately
following a change in control, he is entitled to the following payments and benefits: (i) a single lump-sum payment in an amount equal to six months of Mr. Morrison’s then-current
base salary, subject to standard payroll deductions and withholdings, payable within ten business days of the date the release and waiver becomes effective; and (ii) provided that
Mr. Morrison timely elects such coverage, the continuation of Mr. Morrison’s group health continuation coverage under COBRA at OSS’ expense for a period of six months
following the termination date; provided, however, that in the event Mr. Morrison becomes eligible for comparable group insurance coverage in connection with new employment,
such COBRA premium payments by OSS shall terminate immediately; and (ii) the vesting of the shares subject to each of Mr. Morrison’s equity awards and stock options shall be
accelerated such that one hundred percent (100%) of said shares shall be deemed fully-vested and, if applicable, immediately exercisable effective as of the date of such termination.
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If Mr. Morrison’s employment is terminated as a result of his death or following his permanent disability, Mr. Morrison or his estate, as applicable, is entitled to the
following payments and benefits: (i) his fully earned but unpaid base salary through the date of termination at the rate then in effect, plus all other amounts under any
compensation plan, expense reimbursement or practice to which he is entitled; and (ii) a lump sum cash payment in an amount equal to his “earned” bonus for the calendar quarter
during which his date of termination occurs calculated as of the date of termination (wherein “earned” means that he has met the applicable bonus metrics as of date of such
termination, as determined by the board of directors), prorated for such portion of the calendar quarter during which such termination occurs that has elapsed through the date of
termination.
Executive Employment Agreement with Jim Ison
During the year ended December 31, 2022, Mr. Ison was entitled to a base salary of $286,000 per annum, subject to annual increases as determined by the compensation
committee, and a target quarterly bonus in the amount of 25% of his quarterly base salary. The target quarterly bonus is based on Mr. Ison’s performance, as determined by the
board of directors in its sole discretion, against fundamental corporate and/or individual objectives to be determined by the board of directors. Mr. Ison is eligible to participate in
our 2017 Plan, subject to the discretion of the board of directors if and when the board of directors determines to make a grant to him. On March 16, 2023, Mr. Ison’s base salary for
fiscal 2023 was increased to $294,580 and he was granted 76,000 RSUs, as approved by the compensation committee and our board of directors on such date.
Under the terms of the employment agreement with Mr. Ison, if we terminate his employment without cause (as defined below) or he resigns for good reason (as defined
below) at any time other than within three months immediately preceding or twelve months immediately following the effective date of a change in control (as defined below), he is
entitled to the following payments and benefits: (i) his fully earned but unpaid base salary through the date of termination at the rate then in effect, plus all other amounts under any
compensation plan or practice to which he is entitled; (ii) severance payments in an aggregate amount up to six months of Mr. Ison’s then-current base salary, paid to Mr. Ison on
OSS’ regular paydays until the earlier of (a) the date that is six months following his termination or (b) the date as of which he commences employment with another employer,
subject to standard payroll deductions and withholdings; (ii) a lump sum payment equal to Mr. Ison’s then-current target bonus; and (iv) the continuation of Mr. Ison’s group
health continuation coverage under COBRA at OSS’ expense for a period of six months following the termination date; provided, however, that in the event Mr. Ison becomes
eligible for comparable group insurance coverage in connection with new employment, such COBRA premium payments by OSS shall terminate immediately. Mr. Ison must provide
a release and waiver to OSS as a condition of receiving benefits (ii)-(v) set forth in this paragraph.
In the event Mr. Ison’s termination without cause or resignation for good reason occurs within the three months immediately preceding or twelve months immediately
following a change in control, he is entitled to the following payments and benefits: (i) a single lump-sum payment in an amount equal to six months of Mr. Ison’s then-current base
salary, subject to standard payroll deductions and withholdings, payable within ten business days of the date the release and waiver becomes effective; and (ii) provided that Mr.
Ison timely elects such coverage, the continuation of Mr. Ison’s group health continuation coverage under COBRA at OSS’ expense for a period of six months following the
termination date; provided, however, that in the event Mr. Ison becomes eligible for comparable group insurance coverage in connection with new employment, such COBRA
premium payments by OSS shall terminate immediately; and (ii) the vesting of the shares subject to each of Mr. Ison’s equity awards and stock options shall be accelerated such
that one hundred percent (100%) of said shares shall be deemed fully-vested and, if applicable, immediately exercisable effective as of the date of such termination.
If Mr. Ison’s employment is terminated as a result of his death or following his permanent disability, Mr. Ison or his estate, as applicable, is entitled to the following
payments and benefits: (i) his fully earned but unpaid base salary through the date of termination at the rate then in effect, plus all other amounts under any compensation plan,
expense reimbursement or practice to which he is entitled; and (ii) a lump sum cash payment in an amount equal to his “earned” bonus for the calendar quarter during which his
date of termination occurs calculated as of the date of termination (wherein “earned” means that he has met the applicable bonus metrics as of date of such termination, as
determined by the board of directors), prorated for such portion of the calendar quarter during which such termination occurs that has elapsed through the date of termination.
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Defined Terms Applicable to Executive Employment Agreements
For purposes of executive employment agreements, “change in control” shall mean:
(i) The direct or indirect sale or transfer, in a single transaction or a series of related transactions, by the stockholders of the Company of voting securities, in which the
holders of the outstanding voting securities of the Company immediately prior to such transaction or series of transactions hold, as a result of holding Company securities prior to
such transaction, in the aggregate, securities possessing less than fifty percent (50%) of the total combined voting power all outstanding voting securities of the Company or of the
acquiring entity immediately after such transaction or series of related transactions;
(ii) A merger or consolidation in which the Company is not the surviving entity, except for a transaction in which the holders of the outstanding voting securities of the
Company immediately prior to such merger or consolidation hold as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing more
than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the surviving entity (or the parent of the surviving entity) immediately after such
merger or consolidation;
(iii) A reverse merger in which the Company is the surviving entity but in which the holders of the outstanding voting securities of the Company immediately prior to such
merger hold as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing less than fifty percent (50%) of the total combined voting
power of all outstanding voting securities of the Company or of the acquiring entity immediately after such merger;
(iv) The sale, transfer or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, except for a
transaction in which the holders of the outstanding voting securities of the Company immediately prior to such transaction(s) receive as a distribution with respect to securities of
the Company, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the acquiring entity
immediately after such transaction(s); or
(v) Any time individuals who, on the date this Plan is adopted by the board of directors, are members of the board of directors (the “Incumbent Board”) cease for any
reason to constitute at least a majority of the members of the input/output; provided, however, that if the appointment or election (or nomination for election) of any new board
member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be
considered as a member of the incumbent board.
For purposes of the executive employment agreements, “cause” means as determined in the sole discretion of the board of directors following written notice of the
condition(s) believed to constitute cause, which notice shall briefly describe such condition(s), one or more of the following condition(s): (i) Executive’s failure to substantially
perform Executive’s job duties (other than any such failure resulting from Executive’s incapacity due to physical or mental illness or any such actual or anticipated failure after his
issuance of written notice of the occurrence of an event alleged by Executive to constitute good reason); (ii) Executive’s failure to comply with all material applicable laws in
performing Executive’s job duties or in directing the conduct of OSS’ business; (iii) Executive’s commission of any felony or intentionally fraudulent acts against OSS, its affiliates,
executives, agents or customers; (iv) Executive’s participation in any activity that is directly competitive with or intentionally injurious to OSS or any of its affiliates or which
violates the terms of Executive’s proprietary information and inventions agreement; (iv) Executive’s material breach of the terms of Executive’s proprietary information and
inventions agreement; (v) Executive’s commission of any act of fraud, embezzlement or dishonesty against OSS or any of its affiliates, or use or intentional appropriation for
Executive’s personal use or benefit of any funds or material properties of OSS or any of its affiliates not authorized by the board of directors to be so used or appropriated; (vi)
Executive’s breach of any material provision of the employment agreement; and (vii) Executive’s gross negligence, insubordination or material violation of any duty of loyalty to
OSS or any other demonstrable material misconduct on the part of Executive; provided, however, that, termination by OSS under subsections (i) or (vi) of this Section 3.8(c), shall
only be deemed for “cause” pursuant to the foregoing definition if Executive fails to remedy such condition(s) within thirty (30) days following delivery of the notice of termination
for cause.
75
For purposes of the executive employment agreements, “good reason” means the occurrence of any of the following events without Executive’s consent: (i) a material
adverse change in Executive’s duties, authority or responsibilities relative to the duties, authority or responsibilities in effect immediately prior to such reduction, or, as it relates to
Mr. Cooper, the removal of Executive as chief executive officer of OSS; provided, however, that a reduction in duties, position or responsibilities solely by virtue of OSS being
acquired and made part of a larger entity (as, for example, when Executive retains a similar position with a subsidiary of the acquiring entity following a change in control, but
Executive does not hold the same position in the acquiring entity) shall not constitute “good reason;” and, provided, further that Executive’s removal from the board of directors
shall not constitute “good reason;” (ii) a material diminution in Executive’s base compensation; or (iii) a material breach by OSS of its obligations under this Agreement; provided,
however, that, such termination by Executive shall only be deemed for “good reason” pursuant to the foregoing definition if: (A) Executive gives OSS written notice of Executive’s
intent to terminate for good reason within sixty (60) days following the first occurrence of the condition(s) that Executive believes constitute(s) good reason, which notice shall
describe such condition(s); (B) OSS fails to remedy such condition(s) within thirty (30) days following receipt of the written notice (the “Cure Period”); and (C) Executive
voluntarily terminates Executive’s employment within sixty (60) days following the end of the Cure Period.
Annual Cash Bonus
For 2022 and 2021, Mr. Raun, Mr. Ison, and Mr. Morrison were eligible for bonuses. The executives’ bonuses for 2022 and 2021 were determined at the discretion of our
board of directors based on its assessment of our corporate performance. Typically, a substantial portion of the bonus earned in a given year is paid at the beginning of the
subsequent year after the review of the annual financial statements. Based on this assessment, Mr. Raun received cash bonuses of $293,360 and $77,625, representing 82.6% and
22.5% of his paid salary for 2022 and 2021, respectively. Mr. Ison received bonuses of $115,299 and $55,939, representing 40.7% and 20.8% of his paid salary for 2022 and 2021,
respectively. Mr. Morrison received bonuses of $172,108 and $95,675, representing 57.7% and 33.5% of his paid salary for 2022 and 2021, respectively.
Equity Compensation
We primarily offer stock options and/or RSUs to our named executive officers as the long-term incentive component of our compensation program. Our stock options allow
employees to purchase shares of our common stock at a price per share equal to the fair market value of our common stock on the date of grant and may or may not be intended to
qualify as “incentive stock options” for U.S. federal income tax purposes. Prior to completion of our IPO, our board of directors determined the fair market value of our common
stock based upon inputs including valuation reports prepared by third-party valuation firms from time to time. Since we completed our IPO, we have determined the fair market value
of our common stock based on the closing price of our common stock on the Nasdaq Capital Market. Generally, the stock options we grant vest over three years, subject to the
employee’s continued employment with us on the vesting date.
On June 24, 2020, the Company entered into an employment agreement with Mr. Raun to serve as the Company’s president and chief executive officer. Pursuant to the
terms of the employment agreement, Mr. Raun was granted (i) 412,125 RSUs, which shall vest over three years, with one third of the RSUs vesting following the one-year
anniversary of the date of grant, and the remaining RSUs vesting 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; and (ii) 412,125 Incentive Stock Options (“ISOs”) pursuant to the Company’s 2017 Equity Plan, which ISOs have and exercise price of $2.14 per
share (the fair market value of the Company’s common stock at the date of grant). As of December 31, 2022, Mr. Raun’s ISOs were fully vested, but not exercised, based upon
achievement of the specified performance objectives (discussed below).
The ISOs were subject to the following vesting conditions: the ISOs were schedule to vest at the end of each the second and fourth quarters based on the price of the
Company’s common stock during the applicable period. The price of the Company’s common stock as of the end of quarter two or quarter four, as applicable, shall be determined
using the ten-day trailing volume weighted average price (“VWAP”) after reporting of quarter two and quarter four earnings, as applicable. The date of each such determination
shall be referred to as a “Determination Date.” If on any Determination Date the Company’s stock price has increased from the prior Determination Date, then a portion of the ISOs
shall become vested. The number of ISOs that shall become vested on a Determinate Date is determined as follows: ((Price at Determination Date – Price at prior Determination
Date) x 100) * 1,177.52 = Vested ISOs. If on any Determination Date the Company’s stock price is above $5.50 per share, all ISOs shall immediately become vested.
In the event, that Mr. Raun’s employment agreement is terminated for a reason other than “good cause” or for “good reason,” upon Mr. Raun’s execution of an effective
waiver and release of claims, unvested RSUs shall accelerate so that an additional twelve months of RSUs shall vest from the termination date.
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On March 17, 2022, Mr. Raun received an RSU grant of 201,000 shares of our common stock. The RSUs vest over a three year period beginning one year after the date of
grant with equal semi-annual installments over a period of three years, subject to his continued employment with us on each vesting date.
On February 2, 2022, Mr. Ison received an RSU grant of 56,000 shares of our common stock. The RSUs vest over three year period beginning one year after the date of
grant with equal semi-annual installments over a period of three years, subject to his continued employment with us on each vesting date.
On May 19, 2021, Mr. Ison received an RSU grant of 40,000 shares of common stock. The RSUs vest over a three year period beginning November 9, 2020, with equal semi-
annual installments over a period of three years, subject to his continued employment with us on each vesting date.
On May 19, 2021, Mr. Ison received an RSU grant of 15,000 shares of our common stock. The RSUs vest over three year period beginning one year after the date of grant
with equal semi-annual installments over a period of three years, subject to his continued employment with us on each vesting date.
On February 2, 2022, Mr. Morrison received an RSU grant of 64,000 shares of our common stock. The RSUs vest over three year period beginning one year after the date of
grant with equal semi-annual installments over a period of three years, subject to his continued employment with us on each vesting date.
On May 19, 2021, Mr. Morrison received an RSU grant of 40,000 shares of common stock. The RSUs vest over a three year period beginning November 9, 2020, with equal
semi-annual installments over a period of three years, subject to his continued employment with us on each vesting date.
On May 19, 2021, Mr. Morrison received an RSU grant of 20,000 shares of our common stock. The RSUs vest over three year period beginning one year after the date of
grant with equal semi-annual installments over a period of three years, subject to his continued employment with us on each vesting date.
Stock awards granted to our named executive officers may be subject to accelerated vesting in certain circumstances. For additional discussion, please see “Employment
Agreements” above and “Change in Control Benefits” below.
Prior to our initial public offering, we adopted our 2017 Plan, in order to facilitate the grant of cash and equity incentives to directors, employees (including our named
executive officers) and consultants of our Company and certain of its affiliates to enable our company and certain of its affiliates to obtain and retain services of these individuals,
which is essential to our long-term success. For additional information about the 2017 Plan, please see the section entitled “Incentive Award Plans” below.
Other Elements of Compensation
Retirement Plans
We have a 401(k) retirement plan. Under the terms of the plan, eligible employees may defer up to 20% of their pre-tax earnings, subject to the Internal Revenue Service
annual contribution limit. Additionally, the plan allows for discretionary matching contributions by us. In 2022 and 2021, the matching contribution was 100% of the employee’s
contribution up to a maximum of 5% of the employee’s annual compensation. However, matching contributions to the 401(k) plan were suspended in May 2020, as a component of
the Company’s cost containment efforts and subsequent reinstated in April 2021.
Employee Benefits and Perquisites
Our named executive officers are eligible to participate in our health and welfare plans which include health, vision, dental, disability, flex-spending, life insurance and 401(k)
plan.
Change in Control Benefits
Our named executive officers may become entitled to certain benefits or enhanced benefits in connection with a change in control of our company. Each of our named
executive officers’ employment agreements entitles them to accelerated vesting of all outstanding equity awards, as well as certain other benefits, upon a change in control of our
company. For additional discussion, please see “Employment Agreements” above.
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Outstanding Equity Awards at Fiscal Year End
The following table summarizes the number of shares of common stock underlying outstanding equity incentive plan awards for each named executive officer as of
December 31, 2022.
Option Awards
Stock Awards
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of
securities
underlying
unexercised
options (#)
unexercisable
10,000
412,125
32,848
25,000
20,000
Equity
Incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options
(#)
Option
Exercise
Price
($)
$
$
$
$
$
1.95
2.14
0.46
1.08
1.95
Option
expiration
date
4/17/2027
6/23/2030
7/15/2024
4/1/2026
4/17/2027
Equity
Incentive
plan
awards:
Number of
unearned
shares,
units or
other rights
that have
not
vested (#)
Equity
Incentive
plan
awards:
Market or
payout
value of
unearned
share,
units or
other right
that have
not
vested ($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Number
of shares
or units of
stock that
have not
vested (#)
Market
value
of shares
of units
of stock
that have
not
vested ($)
68,688
201,000
$
$
206,751
605,010
2,500
7,500
13,334
56,000
2,500
10,000
13,334
64,000
$
$
$
$
$
$
$
$
7,525
22,575
40,135
168,560
7,525
30,100
40,135
192,640
Grant
Date
4/18/2017
6/24/2020
6/23/2020
3/17/2022
7/16/2014
4/2/2016
4/18/2017
2/10/2020
5/19/2021
5/19/2021
2/3/2022
2/10/2020
5/19/2021
5/19/2021
2/3/2022
Name
David Raun
Jim Ison
John W. Morrison Jr.
Directors Compensation
The following table sets forth information for the year ended December 31, 2022, regarding the compensation awarded to, earned by, or paid to our non-employee directors
who served on our board of directors during 2022.
Name
Ken Potashner
Jack Harrison
Kimberly Sentovich
Sita Lowman
Gioia Messinger
Greg Matz
Fees
earned
or paid in
cash ($)
$
$
$
$
$
$
47,840 $
41,860 $
41,860 $
35,880 $
35,880 $
41,860 $
Stock
awards ($)
RSU
awards ($)
Non-equity
incentive
plan
compensation ($)
Nonqualified
deferred
compensation
earnings ($)
All other
compensation
($)
Total ($)
- $
- $
- $
- $
- $
- $
51,090 $
51,090 $
51,090 $
51,090 $
51,090 $
51,090 $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
98,930
92,950
92,950
86,970
86,970
92,950
On March 16, 2023, the RSU awards remuneration to our non-employee directors for the 2023 fiscal year was increased by 3.0%; directors will be entitled to $51,500 of RSUs
per annum. Cash remuneration to our non-employee directors remains unchanged.
Additionally, in February 2023, our board of directors constituted a new committee of the board, the Strategic Transition Committee, to assist in the identification, transition
and retention of a successor chief executive officer, including to work with the engaged search firm to accomplish the foregoing, to provide support to our management team
throughout the transition, and to perform other duties as may be necessary or desirable from time to time in connection with the reorganization of the Company.
Members of the Strategic Transition Committee consist of Jack Harrison (chair of the committee), Gioia Messinger and Kenneth Potashner. As compensation for the
services that they are expected to perform as members of the Strategic Transition Committee (i) Mr. Harrison and Ms. Messinger shall be entitled to receive $2,000 per month in
cash, commencing
78
January 1, 2023 and continuing for so long as the Strategic Transition Committee remains in effect, which cash payments shall be paid to each of the relevant members in one lump
sum at or about such time that the Strategic Transition Committee is disbanded, and (ii) Mr. Potashner shall be entitled to receive (A) 3,333 shares of Company common stock per
month, commencing November 1, 2022 and continuing for so long as the Strategic Transition Committee remains in effect, which shares shall be issued to Mr. Potashner in one
grant at or about such time that the Strategic Transition Committee is disbanded, and (B) a one-time cash payment equal to 30% of the total value of the shares issued to Mr.
Potashner to cover taxes payable in connection with the issuance of such shares.
Stock Option Plans
2017 Equity Incentive Plan
Our board of directors adopted our 2017 Plan on October 10, 2017. Our 2017 Plan allows for the grant of a variety of equity vehicles to provide flexibility in implementing
equity awards, including incentive stock options, non-qualified stock options, restricted stock grants, unrestricted stock grants and restricted stock units.
Amendments to 2017 Plan
On June 24, 2020, the Company amended the 2017 Plan to increase the maximum limitation of the number of shares of common stock with respect to one or more Stock
Awards (as defined in the 2017 Plan) that may be granted to any one participant under the 2017 Plan during any calendar year from 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.
Authorized Shares. A total of 3,000,000 shares of common stock were authorized under the 2017 Plan.
Plan Administration. As permitted by the terms of the 2017 Plan, the board of directors has delegated administration of the 2017 Plan to the compensation committee. As
used herein with respect to the 2017 Plan, the “Board of Directors” refers to any committee the board of directors appoints as well as to the board of directors itself. Subject to the
provisions of the 2017 Plan, the board of directors has the power to construe and interpret the 2017 Plan and awards granted under it and to determine the persons to whom and the
dates on which awards will be granted, the number of shares of common stock to be subject to each award, the time or times during the term of each award within which all or a
portion of such award may be exercised, the exercise price, the type of consideration and other terms of the award. Subject to the limitations set forth below, the board of directors
will also determine the exercise price of options granted under the 2017 Plan and, with the consent of any adversely affected option holder, may reduce the exercise price of any
outstanding option, cancel an outstanding option in exchange for a new option covering the same or a different number of shares of common stock or another equity award or cash
or other consideration, or any other action that is treated as a repricing under generally accepted accounting principles. All decisions, determinations, and interpretations by the
board of directors regarding the 2017 Plan shall be final and binding on all participants or other persons claiming rights under the 2017 Plan or any award.
Options. Options granted under the 2017 Plan may become exercisable in cumulative increments (“vest”) as determined by the board of directors. Such increments may be
based on continued service to the Company over a certain period of time, the occurrence of certain performance milestones, or other criteria. Options granted under the 2017 Plan
may be subject to different vesting terms. The board of directors has the power to accelerate the time during which an option may vest or be exercised. In addition, options granted
under the 2017 Plan may permit exercise prior to vesting, but in such event the participant may be required to enter into an early exercise stock purchase agreement that allows the
Company to repurchase unvested shares, generally at their exercise price, should the participant’s service terminate before vesting. To the extent provided by the terms of an
option, a participant may satisfy any federal, state or local tax withholding obligation relating to the exercise of such option by a cash payment upon exercise, by authorizing the
Company to withhold a portion of the stock otherwise issuable to the participant, or by such other method as may be set forth in the option agreement. The maximum term of
options under the 2017 Plan is 10 years, except that in certain cases the maximum term of certain incentive stock options is five years. Options under the 2017 Plan generally
terminate three months after termination of the participant’s service. Incentive stock options are not transferable except by will or by the laws of descent and distribution, provided
that a participant may designate a beneficiary who may exercise an option following the participant’s death. Non-statutory stock options are transferable to the extent provided in
the option agreement.
79
Stock Bonuses and Restricted Stock Awards. Subject to certain limitations, the consideration, if any, for restricted stock unit awards must be at least the par value of our
common stock. The consideration for a stock unit award may be payable in any form acceptable to the board of directors and permitted under applicable law. The board of directors
may impose any restrictions or conditions upon the vesting of restricted stock unit awards, or that delay the delivery of the consideration after the vesting of stock unit awards,
that it deems appropriate. Restricted stock unit awards are settled in shares of the Company’s common stock. Dividend equivalents may be credited in respect of shares covered by
a restricted stock unit award, as determined by the board of directors. At the discretion of the board of directors, such dividend equivalents may be converted into additional shares
covered by the restricted stock unit award. If a restricted stock unit award recipient’s service relationship with the Company terminates, any unvested portion of the restricted stock
unit award is forfeited upon the recipient’s termination of service.
Certain Adjustments. Transactions not involving receipt of consideration by the Company, such as a merger, consolidation, reorganization, recapitalization,
reincorporation, reclassification, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, or a change in
corporate structure may change the type(s), class(es) and number of shares of common stock subject to the 2017 Plan and outstanding awards. In that event, the 2017 Plan will be
appropriately adjusted as to the type(s), class(es) and the maximum number of shares of common stock subject to the 2017 Plan and the Section 162(m) Limitation, and outstanding
awards will be adjusted as to the type(s), class(es), number of shares and price per share of common stock subject to such awards.
2015 Stock Option Plan
Our board of directors adopted, and our stockholders approved, our 2015 Plan in December 2015. Our 2015 Plan allows for the grant of incentive stock options, within the
meaning of Section 422 of the Code, to our employees and our parent and subsidiary corporations’ employees, and for the grant of non-statutory stock options to our employees,
directors and consultants and our parent and subsidiary corporations’ employees, directors and consultants.
Authorized Shares. A total of 1,500,000 shares of common stock were authorized for grant under the 2015 Plan. Our 2015 Plan was terminated by the board of directors on
October 10, 2017, and accordingly, no shares are available for issuance under the 2015 Plan. Our 2015 Plan will continue to govern outstanding awards granted thereunder.
Plan Administration. Our board of directors or a committee of our board (the administrator) administers our 2015 Plan. Subject to the provisions of the 2015 Plan, the
administrator has the full authority and discretion to take any actions it deems necessary or advisable for the administration of the 2015 Plan. The administrator has the power to
construe and interpret the terms of our 2015 Plan and awards granted under it, to prescribe, amend and rescind rules relating to our 2015 Plan, including rules and regulations
relating to sub-plans, and to determine the terms and conditions of the awards, including the exercise price, the number of shares of our common stock subject to each such award,
any vesting acceleration or waiver of forfeiture restrictions, and any restrictions or limitations regarding awards or the shares relating thereto. All decisions, interpretations and
other actions of the administrator are final and binding on all participants in the 2015 Plan.
Options. Stock options may be granted under our 2015 Plan. The exercise price per share of all options must equal at least 100% of the fair market value per share of our
common stock on the date of grant, as determined by the administrator. The term of a stock option may not exceed 10 years. With respect to any participant who owns 10% of the
voting power of all classes of our outstanding stock as of the grant date, the term of an incentive stock option granted to such participant must not exceed five years and the
exercise price per share of such incentive stock option must equal at least 110% of the fair market value per share of our common stock on the date of grant, as determined by the
administrator.
After termination of an employee, director, or consultant, he or she may exercise his or her option for the period of time as specified in the applicable option agreement. If
termination is due to death or disability, the option generally will remain exercisable for at least twelve months. In all other cases, the option will generally remain exercisable for at
least 90 days. However, an option generally may not be exercised later than the expiration of its term.
Transferability of Options. Unless our administrator provides otherwise, our 2015 Plan generally does not allow for the transfer or assignment of options, except by will or
by the laws of descent and distribution.
Certain Adjustments. In the event of certain changes in our capitalization, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be
made available under the 2015 Plan, the administrator will adjust the number and class of shares that may be delivered under our 2015 Plan and/or the number, class and price of
shares covered by each outstanding award.
80
2011 Stock Option Plan
Our board of directors adopted, and our stockholders approved, our 2011 Stock Option Plan in December 2011 (the “2011 Plan”). Our 2011 Plan allows for the grant of
incentive stock options, within the meaning of Section 422 of the Code, to our employees and our parent and subsidiary corporations’ employees, and for the grant of non-
statutory stock options to our employees, directors and consultants and our parent and subsidiary corporations’ employees, directors, and consultants.
Authorized Shares. A total of 1,500,000 shares of common stock were authorized for grant under the 2011 Plan. Our 2011 Plan was terminated by the board of directors on
October 10, 2017, and accordingly, no shares are available for issuance under the 2011 Plan. Our 2011 Plan will continue to govern outstanding awards granted thereunder.
Plan Administration. Our board of directors administers our 2011 Plan. Subject to the provisions of the 2011 Plan, the board of directors has the full authority and
discretion to take any actions it deems necessary or advisable for the administration of the 2011 Plan. The board of directors has the power to construe and interpret the terms of
our 2011 Plan and awards granted under it, to prescribe, amend and rescind rules relating to our 2011 Plan, including rules and regulations relating to sub-plans, and to determine
the terms and conditions of the awards, including the exercise price, the number of shares of our common stock subject to each such award, any vesting acceleration or waiver of
forfeiture restrictions, and any restrictions or limitations regarding awards or the shares relating thereto. All decisions, interpretations and other actions of the board of directors are
final and binding on all participants in the 2011 Plan.
Options. Stock options may be granted under our 2011 Plan. The exercise price per share of all options must equal at least 100% of the fair market value per share of our
common stock on the date of grant, as determined by the board of directors. The term of a stock option may not exceed 10 years. With respect to any participant who owns 10% of
the voting power of all classes of our outstanding stock as of the grant date, the term of an incentive stock option granted to such participant must not exceed five years and the
exercise price per share of such incentive stock option must equal at least 110% of the fair market value per share of our common stock on the date of grant, as determined by the
board of directors.
After termination of an employee, director, or consultant, he or she may exercise his or her option for the period of time as specified in the applicable option agreement. If
termination is due to death or disability, the option generally will remain exercisable for at least twelve months. In all other cases, the option will generally remain exercisable for at
least 90 days. However, an option generally may not be exercised later than the expiration of its term.
Transferability of Options. Unless our board of directors provides otherwise, our 2011 Plan generally does not allow for the transfer or assignment of options, except by
will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the board of directors, in its discretion, a non-statutory option shall be
assignable or transferable subject to the applicable limitations, if any, described in Rule 701 under the Securities Act.
Certain Adjustments. In the event of certain changes in our capitalization, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be
made available under the 2011 Plan, the board of directors will adjust the number and class of shares that may be delivered under our 2011 Plan and/or the number, class and price of
shares covered by each outstanding award.
S-8 Registration Statement:
On June 21, 2021, the Company filed a Form S-8 Registration Statement relating to 3,543,114 shares of the Company’s common stock, par value $0.0001 per share, issuable to
the employees, officers, directors, consultants and advisors of the Company under the Company’s 2017 Plan, 2015 Plan, and 2011 Plan.
81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding beneficial ownership of our common stock, as of February 28, 2023, by:
•each person, or group of affiliated persons, known by us to be the beneficial owner of more than 5% of our common stock;
•each of our named executive officers;
•each of our directors; and,
•all of our executive officers and directors as a group.
We have determined beneficial ownership in accordance with SEC rules. The information does not necessarily indicate beneficial ownership for any other purpose. Under
these rules, the number of shares of common stock deemed outstanding includes shares issuable upon exercise of stock options or warrants held by the respective person or group
that may be exercised or converted within 60 days after February 28, 2023. For purposes of calculating each person’s or group’s percentage ownership, stock options and warrants
exercisable within 60 days after February 28, 2023, are included for that person or group but not for any other person or group.
Applicable percentage ownership is based on 20,343,071 shares of common stock outstanding on February 28, 2023.
Unless otherwise indicated and subject to applicable community property laws, to our knowledge, each stockholder named in the following table possesses sole voting and
investment power over the shares listed. Unless otherwise noted below, the address of each person listed on the table is c/o One Stop Systems, Inc., 2235 Enterprise Street, #110,
Escondido, CA 92029.
Name and Address of Beneficial Owner
5% or greater stockholders:
(11)
Steve Cooper
Lynrock Lake
Bard & Associates, Inc.
(12)
(13)
Named Executive Officer and Directors:
(1)
(4)
(2)
(5)
David Raun
Ken Potashner
(3)
Jack Harrison
Kimberly Sentovich
Sita Lowman
Gioia Messinger
Greg Matz
(8)
Jim Ison
John Morrison
All executive officers and directors as a group (9 persons)
(9)
(7)
(6)
(10)
Number of Shares of
Common Stock
Beneficially
Owned
Percent of
Common Stock
Beneficially
Owned
2,536,794
1,782,528
1,045,333
747,966
381,336
81,984
39,266
29,930
28,690
30,430
206,615
113,816
1,660,033
12.5%
8.8%
5.1%
3.6%
1.9%
*
*
*
*
*
1.0%
*
7.9%
* Less than 1%.
(1)Consists of (i) 311,888 shares of common stock held by Mr. Raun; (ii) 422,125 shares of common stock Mr. Raun has the right to acquire from us within 60 days of February 28,
2023, pursuant to the exercise of stock options, (iii) 13,953 shares of common stock that Mr. Raun has the right to exercise within 60 days of February 28, 2023, pursuant to common
stock warrants. Mr. Raun is our president and chief executive officer.
(2)Consists of (i) 263,479 shares of common stock held by Mr. Potashner; (ii) 47,857 shares of common stock that Kenco, Inc. has the right to exercise within 60 days of February 28,
2023 (pursuant to common stock warrants), (iii) 70,000 shares of common stock that Mr. Potashner has the right to acquire from us within 60 days of February 28, 2023,
82
pursuant to the exercise of stock options. Mr. Potashner has sole voting and investment control over Kenco, Inc. Mr. Potashner is the chairman of the board of directors.
(3)Consists of (i) 71,984 shares of common stock held by Mr. Harrison, and (ii) 10,000 shares of common stock that Mr. Harrison has the right to acquire from us within 60 days of
February 28, 2023, pursuant to the exercise of stock options. Mr. Harrison is a member of the board of directors.
(4)Consists of 39,266 shares of common stock held by Ms. Sentovich. Ms. Sentovich is a member of the board of directors,
(5)Consists of 29,930 shares of common stock held by Ms. Lowman. Ms. Lowman is a member of the board of directors.
(6)Consists of 28,690 shares of common stock held by Ms. Messinger. Ms. Messinger is a member of the board of directors.
(7)Consists of 30,430 shares of common stock held by Mr. Matz. Mr. Matz is a member of the board of directors.
(8)Consists of (i) 128,767 shares of common stock held by Mr. Ison, and (ii) 77,848 shares of common stock, issuable pursuant to the exercise of stock options that Mr. Ison has the
right to acquire from us within 60 days of February 28, 2023. Mr. Ison is the chief product officer and sales and marketing officer of the Company.
(9)Consists of (i) 113,816 shares of common stock held by Mr. Morrison. Mr. Morrison is the chief financial officer of the Company.
(10)Includes (i) 1,018,250 shares beneficially owned by our current named executive officers and directors, and (ii) 641,783 shares subject to options, warrants or convertible
securities, that are either exercisable or such person has a right to receive within 60 days of February 28, 2023, as set forth in the foregoing footnotes.
(11)Consists of 2,536,794 shares of common stock held by The Cooper Revocable Trust dated April 25, 2001. Mr. Cooper shares joint voting and investment control of The Cooper
Revocable Trust dated April 25, 2001, with his wife Lori Cooper. The share information is based on information provided by Mr. Cooper in that Form 4 filed with the SEC on
December 20, 2022. Mr. Cooper served as our chief executive officer and president until February 15, 2020.
(12)Based on information provided by Lynrock Lake on Schedule 13G/A, filed with the SEC on February 14, 2023.
(13)Based on information provided by Bard & Associates, Inc on Schedule 13G/A, filed with the SEC on February 6, 2023.
Equity Compensation Plan Information:
The following table provides information as of December 31, 2022, regarding our equity compensation plans:
Plan Category
2017 Stock Option Plan
2015 Stock Option Plan
2011 Stock Option Plan
Warrants
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
1,467,228
334,611
72,848
451,112
$
$
$
$
83
Number of securities
remaining available
for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
0.94
1.77
0.46
5.37
429,911
-
-
-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
We describe below the transactions and series of similar transactions, since January 1, 2021, to which we were a party or will be a party, in which:
•the amounts involved exceeded or will exceed $120,000; and
•any of our directors, executive officers, holders of more than 5% of our capital stock or any member of their immediate family had or will have a direct or indirect material
interest, other than equity and other compensation, termination, change in control and other arrangements with directors and executive officers, which are described where
required under the section above titled “Executive Compensation.”
Executive Compensation and Employment Arrangements
Please see “Item 11 Executive Compensation” for information on compensation arrangements with our executive officers and agreements with our executive officers
containing compensation and termination provisions, among others.
Director and Officer Indemnification and Insurance
We have entered into indemnification agreements with each of our directors and executive officers, and we maintain directors’ and officers’ liability insurance. These
agreements, among other things, require us to indemnify each director and executive officer to the fullest extent permitted by Delaware law, including indemnification of expenses
such as attorneys’ fees, judgments, fines and settlement amounts incurred by the director or executive officer in any action or proceeding, including any action or proceeding by or
in right of us, arising out of the person’s services as a director or executive officer.
Our certificate of incorporation and our amended and restated bylaws provide that we will indemnify each of our directors and officers to the fullest extent permitted by the
Delaware General Corporation Law. Further, we have entered into indemnification agreements with each of our directors and officers, and we have purchased a policy of directors’
and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement, or payment of a judgment under certain circumstances.
Board Committees and Independence
Our board of directors has established three standing committees – audit and risk, compensation, and nominating and corporate governance – each of which operates
under a charter that has been approved by our board of directors. Additionally, in February 2023, our board of directors constituted a new committee of the board, the strategic
transition committee.
Policies and Procedures Regarding Related Party Transactions
Our board of directors has adopted a written related person transaction policy setting forth the policies and procedures for the review and approval or ratification of related-
person transactions. This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or
any series of similar transactions, arrangements or relationships in which we were or are to be a participant, where the amount involved exceeds $120,000 and a related person had or
will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a
material interest, indebtedness, guarantees of indebtedness and employment by us of a related person. In reviewing and approving any such transactions, our audit and risk
committee is tasked to consider all relevant facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in
an arm’s length transaction and the extent of the related person’s interest in the transaction.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The audit and risk committee of our board of directors has selected Haskell & White LLP (“H&W”) as our independent registered public accounting firm for the fiscal year
ended December 31, 2022. H&W audited our consolidated financial statements for the years ended December 31, 2022 and 2021.
84
Principal Accountant Fees and Services
The aggregate fees for professional services rendered to us by H&W, our independent registered public accounting firm which performed our audits for the years ended
December 31, 2022 and 2021, and for other services were as follows:
(1)
Audit fees
Audit-Related fees
Tax fees
Other fees
(2)
Total fees
For the Year Ended December 31,
2022
2021
$
$
220,100
-
-
-
220,100
$
$
194,250
3,100
-
-
197,350
(1)Includes fees for (i) audits of our consolidated financial statements for the fiscal years ended December 31, 2022 and 2021, and (ii) reviews of our interim period financial
statements for fiscal year 2022 and 2021.
(2)Preparation of a consent dated June 21, 2021.
Pre-Approval Policies and Procedures
Our audit and risk committee pre-approves all auditing services and the terms of non-audit services provided by our independent registered public accounting firm, but
only to the extent that the non-audit services are not prohibited under applicable law and the committee determines that the non-audit services do not impair the independence of
the independent registered public accounting firm.
In situations where it is impractical to wait until the next regularly scheduled quarterly meeting, the chairman of the committee has been delegated authority to approve audit
and non-audit services to be provided by our independent registered public accounting firm. Fees payable to our independent registered public accounting firm for any specific,
individual service approved by the chairman pursuant to the above-described delegation of authority may not exceed $25,000, and the chairman is required to report any such
approvals to the full committee at its next scheduled meeting. In addition, our audit and risk committee has pre-approved a list of acceptable services and fees payable to H&W in
an aggregate amount of up to $12,500 per quarter for such services, including without limitation audit and allowable non-audit and tax consulting. This pre-approval is for small
projects needing quick reaction and judged by our audit and risk committee not to raise any independence issues with H&W. Such projects and fees are required to be presented in
detail at the next audit and risk committee meeting. Fees that were incurred in 2022 and 2021were pre-approved by our audit and risk committee.
Our audit and risk committee has considered and determined that the provision of the non-audit services described is compatible with maintaining the independence of our
registered public accounting firm.
85
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES.
1.Financial Statements.
PART IV
The financial statements of One Stop Systems, Inc., together with the report thereon of Haskell & White LLP, an independent registered public accounting firm, are
included in this Annual Report on Form 10-K.
2.Financial Statement Schedules.
All schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto.
3.Exhibits
A list of exhibits is set forth on the Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
86
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations for the Years ended December 31, 2022 and 2021
Consolidated Statements of Comprehensive (Loss) Income for the Years ended December 31, 2022 and 2021
Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the Years ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
One Stop Systems, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of One Stop Systems, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements
of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively, the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31,
2022 and 2021, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2017.
Irvine, California
March 23, 2023
/s/ Haskell & White LLP
HASKELL & WHITE LLP
F-2
ONE STOP SYSTEMS, INC. (OSS)
CONSOLIDATED BALANCE SHEETS
December 31,
2022
December 31,
2021
ASSETS
Current assets
Cash and cash equivalents
Short-term investments (Note 3)
Accounts receivable, net (Note 4)
Inventories, net (Note 5)
Prepaid expenses and other current assets
Total current assets
Property and equipment, net (Note 6)
Operating lease right-of use assets
Deposits and other
Deferred tax assets, net
Goodwill
Intangible assets, net (Note 7)
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
Accrued expenses and other liabilities (Note 8)
Current portion of operating lease obligation (Note 12)
Current portion of notes payable (Note 9)
Current portion of senior secured convertible note, net of debt discounts of $0 and $2,384 (Note 9)
Total current liabilities
Long-term debt, net of current portion (Note 9)
Deferred tax liability, net
Operating lease obligation, net of current portion (Note 12 & 13)
Total liabilities
Commitments and contingencies (Note 12 )
Stockholders’ equity
Common stock, $.0001 par value; 50,000,000 shares authorized;
20,084,528 and 18,772,214 shares issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated (deficit) earnings
Total stockholders’ equity
Total Liabilities and Stockholders' Equity
$
$
$
$
3,112,196 $
10,123,535
11,327,244
20,775,366
502,156
45,840,497
2,570,124
731,043
60,243
-
7,120,510
42,154
56,364,571 $
4,592,713 $
3,013,869
536,588
2,952,447
-
11,095,617
409,294
138,662
397,249
12,040,822
2,008
45,513,807
510,485
(1,702,551)
44,323,749
56,364,571 $
5,101,174
14,535,750
5,089,804
12,277,873
580,651
37,585,252
3,091,415
-
46,845
3,641,032
7,120,510
105,385
51,590,439
2,059,059
3,846,488
-
1,137,651
2,588,525
9,631,723
-
-
-
9,631,723
1,877
41,232,441
153,361
571,037
41,958,716
51,590,439
See accompanying notes to consolidated financial statements.
F-3
ONE STOP SYSTEMS, INC. (OSS)
CONSOLIDATED STATEMENTS OF OPERATIONS
`
Revenue
Cost of revenue
Gross profit
Operating expenses:
General and administrative
Marketing and selling
Research and development
Total operating expenses
Income from operations
Other income (expense):
Interest income
Interest expense
Gain on forgiveness of Paycheck Protection Program (PPP) loan and interest
Other income (expense), net
Total other income (expense), net
Income before income taxes
Provision for income taxes
Net (loss) income
Net (loss) income per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
$
$
$
For the Year Ended December 31,
2022
2021
$
72,421,345
52,023,736
20,397,609
7,279,401
6,806,306
4,743,574
18,829,281
1,568,328
237,751
(162,391)
-
550,854
626,214
2,194,542
4,423,597
(2,229,055)
(0.11)
(0.11)
19,730,698
19,730,698
$
$
$
61,982,104
42,342,815
19,639,289
7,658,418
6,201,228
4,032,616
17,892,262
1,747,027
244,382
(527,139)
1,514,354
(40,176)
1,191,421
2,938,448
605,675
2,332,773
0.13
0.12
18,305,878
19,503,737
See accompanying notes to consolidated financial statements.
F-4
ONE STOP SYSTEMS, INC. (OSS)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Net (loss) income
Other comprehensive income (loss):
Net unrealized income (loss) on short-term investments
Currency translation adjustment
Total other comprehensive income (loss)
Comprehensive (loss) income
For the Year Ended December 31,
2022
2021
(2,229,055) $
2,332,773
26,015
331,109
357,124
(1,871,931) $
(11,060)
(123,126)
(134,186)
2,198,587
$
$
See accompanying notes to consolidated financial statements.
F-5
ONE STOP SYSTEMS, INC. (OSS)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Year Ended December 31, 2022
Common Stock
Shares
18,772,214
$
Amount
Additional
Paid-in-Capital
Accumulated
Other
Comprehensive
income
Accumulated
Earnings (deficit)
1,877
$
41,232,441
$
153,361 $
571,037 $
-
18,772,214
-
275,949
-
1,036,365
-
-
-
20,084,528
$
$
-
1,877
-
27
-
104
-
-
-
2,008
$
$
$
-
41,232,441
1,991,117
42,135
(342,691 )
2,590,805
-
-
-
45,513,807
$
-
153,361 $
-
-
-
-
331,109
26,015
-
510,485 $
(44,533 )
526,504 $
-
-
-
-
-
-
(2,229,055 )
(1,702,551 ) $
Balance, January 1, 2022
Adjustment to beginning accumulated earnings for adoption
of lease accounting (ASC842)
Adjusted beginning balance, January 1, 2022
Stock-based compensation
Exercise of stock options, RSUs and warrants
Taxes paid on net issuance of employee stock options
Conversion of senior secured convertible debt to equity
Currency translation adjustment
Net unrealized gain on short-term investments
Net loss
Balance, December 31, 2022
See accompanying notes to consolidated financial statements.
ONE STOP SYSTEMS, INC. (OSS)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - CONTINUED
For the Year Ended December 31, 2021
Balance, January 1, 2021
Stock-based compensation
Exercise of stock options, RSUs and warrants
Proceeds from issuance of stock, net of issuance
costs of $811,327
Taxes paid on net issuance of employee stock options
Currency translation adjustment
Net unrealized loss on short-term investments
Net income
Balance, December 31, 2021
Common Stock
Shares
16,684,424
-
590,784
$
1,497,006
-
-
-
-
18,772,214
$
Amount
1,668
-
59
150
-
-
-
-
1,877
$
Additional
Paid-in-Capital
30,758,354
1,695,105
401,838
9,188,523
(811,379 )
-
-
-
41,232,441
$
Accumulated
Other
Comprehensive
income
Accumulated
Earnings / Deficit
$
287,547 $
(1,761,736 ) $
-
-
-
-
(123,126 )
(11,060 )
-
-
-
-
-
-
-
2,332,773
$
153,361 $
571,037 $
Total
Stockholders'
Equity
41,958,716
(44,533 )
41,914,183
1,991,117
42,162
(342,691 )
2,590,909
331,109
26,015
(2,229,055 )
44,323,749
Total
Stockholders'
Equity
29,285,833
1,695,105
401,897
9,188,673
(811,379 )
(123,126 )
(11,060 )
2,332,773
41,958,716
See accompanying notes to consolidated financial statements.
F-6
ONE STOP SYSTEMS, INC. (OSS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
For the Year Ended December 31,
2021
2022
$
(2,229,055) $
2,332,773
Deferred benefit (provision) for income taxes
Loss on disposal of property and equipment
Provision (recovery) for bad debt
Warranty reserves
Amortization of intangibles
Depreciation
Inventory reserves
Amortization of debt discount
Stock-based compensation expense
Gain on forgiveness of Paycheck Protection Program (PPP) loan and interest
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Redemption of short-term investment grade securities
Proceeds from sales of intangible assets
Purchases of property and equipment, including capitalization of labor
costs for test equipment and ERP
Investment in short-term investment grade securities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants
Payment of payroll taxes on net issuance of employee stock options
Proceeds from notes payable
Repayments on notes payable
Proceeds from issuance of stock
Stock issuance costs
Repayments on related-party notes payable
Net cash provided by financing activities
Net change in cash and cash equivalents
Effect of exchange rates on cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
3,781,704
54,377
29,154
33,796
63,231
987,068
798,789
1,224
1,991,117
-
(6,253,003)
(9,547,390)
38,080
2,515,000
(70,117)
(7,806,025)
4,313,231
125,000
(529,908)
-
3,908,323
42,162
(342,691)
2,500,000
(252,918)
-
-
-
1,946,553
(1,951,149)
(37,829)
5,101,174
3,112,196 $
$
(63,578)
80,846
(17,013)
173,262
556,873
923,735
486,559
146,294
1,695,105
(1,514,354)
2,327,470
(3,456,394)
243,437
1,083,954
623,627
5,622,596
-
-
(563,815)
(14,546,810)
(15,110,625)
401,897
(811,379)
2,307,818
(2,449,628)
10,000,000
(811,327)
(206,669)
8,430,712
(1,057,317)
(158,430)
6,316,921
5,101,174
See accompanying notes to consolidated financial statements.
F-7
ONE STOP SYSTEMS, INC. (OSS)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Supplemental disclosure of cash flow information:
Cash paid during the year for interest
Cash paid during the year for income taxes
Supplemental disclosure of non-cash transactions:
Right of use assets recorded upon adoption of ASC 842
Lease Liabilities recorded upon adoption of ASC 842
Conversion of senior secured convertible debt to common stock
Reclassification of inventories to property and equipment
For the Year Ended December 31,
2021
2022
$
$
$
$
$
$
54,403 $
107,061 $
1,203,580 $
1,477,419 $
2,590,909 $
143,492 $
120,434
174,656
-
-
-
194,013
See accompanying notes to consolidated financial statements.
F-8
ONE STOP SYSTEMS, INC. (OSS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2022 and 2021
NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION
Nature of Operations
One Stop Systems, Inc. (“we,” “our,” “OSS,” or the “Company”) was originally incorporated as a California corporation in 1999, after initially being formed as a California
limited liability company in 1998. On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with its initial public offering. The Company
designs, manufactures, and markets specialized high-performance 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.
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 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 stock 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
Bressner and leveraging its existing relationships. OSS Europe also provides manufacturing, test, sales, and marketing services for customers throughout Europe, the Middle East
and Africa.
The negative impact of the COVID-19 pandemic and the impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the
ongoing military conflict between Russia and Ukraine, including inflation and Federal Reserve interest rate increases, have contributed to global supply chain issues and economic
uncertainty, which has negatively affected our operations. Additionally, during the fourth quarter of 2022, the general consensus among economists continued to suggest that we
should expect a higher recession risk to 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.
Additionally, in March 2023, Silicon Valley Bank and Signature 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.
With respect to our media and entertainment business, we are seeing an acceleration in our 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 eventually provide a real-time cloud solution. As a result, we expect that
our customer will transition to a lower cost, commodity type equipment solution. We anticipate that we will begin to experience a decrease in the demand for our high-compute,
ruggedized media and entertainment focused equipment and our expertise in this area in the first half of 2023.
Currently, we are experiencing increased pricing, longer lead-times, unavailability of product and limited supplies, protracted delivery dates, changes in minimum order
quantities to secure product, and/or shortages of certain parts and supplies that are necessary components for the products and services we offer to our customers. As a result,
the Company is carrying increased inventory balances to ensure availability of necessary products and to secure pricing.
F-9
These global issues and concerns regarding general economic decline or recession are also impacting some of our customers, who are experiencing downturns or
uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, request pricing concessions
or payment extensions, or seek to renegotiate their contracts.
As a result of these global issues, as well as other factors discussed in this Annual Report, it has been difficult to accurately forecast our revenues or financial results,
especially given the near and long-term impacts of the pandemic, geopolitical issues, inflation, the Federal Reserve interest rate increases and the potential for a recession. In
addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and
may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the
future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause
our stock price to decline.
Furthermore, a decrease in orders in a given period, including in connection with our media and entertainment customer’s transition to the cloud, could negatively affect our
revenues in future periods. These global issues and events may also have the effect of heightening many risks associated with our customers and supply chain. We may take
further actions that alter our operations as may be required by federal, state, or local authorities from time to time, or which we determine are in our best interests. In addition, we
may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and
our rate of innovation, either of which could harm our business.
Management’s plans with respect to the above 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 artificial intelligence compute capabilities for military and industrial applications,
autonomous truck diving and improve company-wide execution.
Basis of Presentation
The accompanying 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”).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of OSS, which include the acquisition of CDI, and its wholly owned subsidiary, OSS GmbH,
which also includes the acquisition of OSS Europe. Intercompany balances and transactions have been eliminated in consolidation.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of 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 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.
Due to the COVID-19 pandemic, Ukraine war, inflationary pressures, other macroeconomic factors and reduced revenue opportunities with our largest customer there has
been uncertainty and disruption in the global economy, financial markets and our ongoing operations. We are not aware of any specific event or circumstance that would require an
update to our estimates or assumptions or a revision of the carrying value of our assets or liabilities that has not been properly reflected
F-10
in the consolidated financial statements. 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.
Concentration Risks
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 December 31, 2022, the Company had
$2,378,546 of cash in our accounts that exceeded the insurance limits. The Company has not experienced any such 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 €145,599 (US$156,261) with banks in excess of the insurance limits.
In the years ended December 31, 2022 and 2021, approximately 26%, representing one customer and 36%, representing two customers, respectively, of net sales represent
customers which are each greater than 10% of our consolidated annual revenue.
As of December 31, 2022 and 2021, approximately 49% and 56%, respectively, of net trade accounts receivables represent two customer balances which are each greater
than 10% of our consolidated trade accounts receivable balance.
The Company made purchases from a certain supplier which represented greater than 10% of the Company’s vendor purchases on an annual basis. This vendor
represented approximately 25% and 12.6% of purchases for the years ended December 31, 2022, and 2021, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit and money market accounts. The Company considers all highly liquid temporary cash investments with an initial
maturity of three months or less when acquired to be cash equivalents. Management believes that the carrying amounts of cash equivalents approximate their fair value because of
the short maturity period.
Short-term Investments
Short-term investments consist predominantly of commercial paper, corporate debt securities, U.S. Treasury securities, and asset-backed securities. The Company
classifies short-term investments based on the facts and circumstances surrounding the investments at the time of purchase and evaluates such classification as of each
balance sheet date. On December 31, 2022, all short-term investments were classified as available-for-sale.
Short-term investments are recorded at fair value with unrealized gains and losses included in accumulated other comprehensive income - a component of stockholders’
equity. Realized gains and losses are determined using the specific identification method and are included in other income (expense) in the consolidated statement of
operations. The Company evaluates its investments to determine whether those with unrealized loss positions are other than temporarily impaired. Impairments are considered
to be other than temporary if they are related to deterioration in credit risk or if it is likely that the Company will sell the securities before recovery of their cost basis.
Accounts Receivable
Accounts receivables are presented at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated
on the trade accounts receivable and unbilled receivables. Unbilled receivables include cost and gross profit earned in excess of billings. The allowance for doubtful accounts is
an estimate to cover the losses resulting from the inability of customers to make payments on their outstanding balances and unbilled receivables. In estimating the required
allowance, management considers the overall quality and aging of the accounts receivable, specific customer circumstances, current economic trends, and historical experience with
collections. On December 31, 2022 and 2021, the allowance for doubtful accounts is $45,354 and $15,622, respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value. The Company uses the average cost method for purposes of determining cost, which approximates the
first-in, first-out method.
F-11
The Company establishes reserves on its inventories to write-down the carrying value of its estimated obsolete or excess inventories to estimated net realizable value based
upon observations of historical usage and assumptions about future demand and market conditions. In addition, the Company considers changes in the market value of
components in determining the net realizable value of its inventory. Inventory reserves are not typically reversed until the specific inventories are sold or otherwise disposed.
Actual demand, product mix and alternative usage may be lower than those that we project, and this difference could have a material adverse effect on our gross margin if
inventory write-downs beyond those initially recorded become necessary. Alternatively, if actual demand, product mix and alternative usage are more favorable than those we
estimated at the time of such a write-down, our gross margin could be favorably impacted in future periods.
Property and Equipment
Property and equipment, other than leasehold improvements, are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the
assets, generally from two to seven years. Leasehold improvements are recorded at cost and are amortized using the straight-line method over the shorter of the remaining lease
term or the estimated useful life of the related asset. Tooling and test equipment includes capitalized labor costs associated with the development of the related tooling and test
equipment. Costs incurred for maintenance and repairs are expensed as incurred, and expenditures for major replacements and improvements are capitalized. Upon retirement or
sale, the cost and related accumulated depreciation and amortization of disposed assets are removed from the accounts and any resulting gain or loss is included in other (expense)
income, net.
Leases
In February 2016, the FASB issued ASU No. 2016-02, “Leases” which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for
both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. A lease must be
classified as a finance lease if any of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase
the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or
exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. The Company determines if a contract is or
contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in
exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of
the asset and (b) the right to direct the use of the asset. This classification will determine whether the lease expense is recognized based on an effective interest method or on a
straight-line basis over the term of the lease.
Right-of-use assets and liabilities are initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred,
consisting mainly of brokerage commissions, less any lease incentives received. All right of use assets are reviewed for impairment. The lease liability is initially measured at the
present value of future minimum lease payments over the expected lease term at the commencement date of each lease. The Company measures and records a right-of-use asset and
lease liability based on the discount rate implicit in the lease, if known. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have
access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs.
In these cases where the discount rate implicit in the lease is not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to
the Company's incremental borrowing rate it pays on current debt instruments or would have to pay on a collateralized basis to borrow an amount equal to the lease payments
under similar terms.
The Company and its subsidiary have no leases classified as finance leases. The Company and its subsidiary currently lease plant, office facilities and equipment under
operating leases expiring through August 2024. As of December 31, 2022, the weighted average remaining lease term for our operating leases was 20.2 months. The weighted
average discount rate for our operating leases was 12.8%.
The Company’s lease agreements may include options to extend the lease following the initial term. On a case-by-case basis, the Company’s management determines if it is
reasonably certain to exercise the renewal option; such renewal options were included in determining the initial lease term.
F-12
We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2022, and therefore did not reassess (i) whether any expired or
existing contracts are, or contain, leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases. We elected to use hindsight
for transition when considering judgments and estimates such as assessments of lease options to extend, or terminate, a lease, or to purchase the underlying asset. As result of the
adoption of ASC 842, the Company recognized an accumulative adjustment to beginning retained earnings for the 2022 fiscal year of $44,533.
For all asset classes, we elected to (i) not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less and (ii) not separate non-lease
components from lease components, and we have accounted for combined lease and non-lease components as a single lease component. Variable lease payments associated with
the Company’s leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on which those payments are assessed. For those leases that
are subsequently modified for terms, such changes may require a remeasurement of the lease liability.
Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis
over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance
leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease
payments are allocated between a reduction of the lease liability and interest expense.
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 and when we deem that a triggering event has occurred. The Company reviews goodwill for impairment annually on December 31st. The Company
completed its annual assessment for goodwill impairment and determined that goodwill was not impaired as of December 31, 2022, and no adjustment was required.
Intangible Assets and Long-lived Assets
We evaluate our intangible and long-lived assets for impairment when events or circumstances arise that indicate our intangible and long-lived assets may be impaired.
Indicators of impairment include, but are not limited to, a significant deterioration in overall economic conditions, a decline in our market capitalization, the loss of significant
business, significant decreases in funding for our contracts, or other significant adverse changes in industry or market conditions. The Company completed its qualitative
assessment for impairment in December 2022, and determined that there was no impairment as of December 31, 2022. Though there were indicators of impairment that directly
impacted our business, as a result of the Company's market valuation, raising cash, management’s continued cost containment efforts, and focus on profitability, there is no
impairment of its intangible and long-lived assets. There can be no assurance; however, that market conditions will not change or demand for the Company’s products will
continue, which could result in an impairment of intangible and long-lived assets in the future.
Fair Value Measurements
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and
liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. These tiers include:
•Level 1, defined as quoted market prices in active markets for identical assets or liabilities;
•Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets
that are not active, model-based valuation techniques for which all significant assumptions are observable in the market, or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3, defined as unobservable inputs that are not corroborated by market data.
F-13
The carrying value of financial instruments including cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses, and other liabilities
approximate fair value due to the short-term nature of these instruments. The carrying amounts of the Company’s short-term investments, notes payable and OSS Europe’s
existing lines of credit and notes payable approximate their fair values at the stated interest rates and are reflective of the prevailing market rates.
Revenue Recognition
The Company’s revenues are recognized in accordance with ASC 606, Revenue from Contracts with Customers for which the Company’s performance obligations are
satisfied over time as work is performed or at a point in time. The majority of the Company’s revenue is recognized at a point in time when products ship and control is transferred to
the customer. The Company determines revenue recognition through the following steps: (i) identification of the contract with a customer; (ii) identification of the performance
obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of
revenue when, or as, a performance obligation is satisfied.
The Company’s contracts are executed through a combination of written agreements along with purchase orders with all customers including certain general terms and
conditions. Generally, purchase orders entail products, quantities and prices, which define the performance obligations of each party and are approved and accepted by the
Company. The Company’s contracts with customers typically do not include extended payment terms. Payment terms vary by contract type and type of customer and generally
range from 30 to 60 days from invoice. Additionally, taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing
transaction, that are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue.
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer
adjusted for estimated variable consideration, if any. Variable consideration may include discounts, rights of return, refunds, and other similar obligations. The Company allocates
the transaction price to each distinct product and service based on its relative standalone selling price. The standalone selling price for products primarily involves the cost to
produce the deliverable plus the anticipated margin and for services is estimated based on the Company’s approved list price.
In the normal course of business, the Company does not accept product returns unless the items are defective as manufactured. The Company establishes provisions for
estimated returns and warranties. In addition, the Company does not typically provide customers with the right to a refund and does not transact for noncash consideration.
Customer agreements include one vendor managed inventory program. The Company recognizes revenue under this arrangement when all of the following criteria are met:
(i) the goods have been identified separately as belonging to the customer; (ii) the goods are ready for physical shipment to the customer; (iii) the Company does not have the
ability to direct the goods to another customer; and (iv) the arrangement was requested by the customer and that the customer has sufficiently explained a substantial business
purpose for the arrangement. Management also considers whether the customer's custodial risks are insured and whether modifications to the Company's normal billing and credit
terms were required.
The Company recorded revenue from product sales that are held in vendor managed inventory under this agreement of $18,504,677 and $12,544,422 for the years ended
December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, $3,446,474 and $1,128,033, respectively, of products sold through those dates were held by the
Company in the vendor management program.
F-14
Revenues on certain fixed-price contracts where we provide engineering services, prototypes and completed products are recognized over time based upon the output
method as milestones are met and value is delivered to the customer, which depicts the Company’s progress toward fulfilling its performance obligations. These services require
that we perform significant, extensive, and complex design, development, modification or implementation of our customers’ systems. Performance will often extend over long
periods of time, and our right to receive future payment depends on our future performance in accordance with the agreement. If changes occur in delivery, productivity or other
factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, which may result in increases or decreases in revenues and costs, and
such revisions are reflected in earnings in the period in which the revision becomes known. There were no significant unbilled or incomplete milestone projects as of December 31,
2022 and 2021.
The Company’s operating segment revenues, disaggregated by primary geographic market, which is determined based on a customer’s geographic location, for the years
ended December 31, 2022 and 2021, are as follows:
Entity:
Customized computers and flash arrays
Value-added reseller with minimal
customization
$
$
Warranty Reserve
Domestic
22,506,650
For the Year Ended December 31, 2022
International
$
20,780,065
$
-
22,506,650
$
29,134,630
49,914,695
$
Total
43,286,715
29,134,630
72,421,345
$
$
Domestic
For the Year Ended December 31, 2021
International
20,685,839
$
17,806,165
$
10,113
20,695,952
$
23,479,987
41,286,152
$
Total
38,492,004
23,490,100
61,982,104
The Company offers product warranties that extend for one or two years from the date of sale. Such warranties are considered assurance-type warranties; therefore, they
would not be deemed to be a separate performance obligation under ASC 606. Such warranties require the Company to repair or replace defective product returned to the Company
during the warranty period at no cost to the customer. The Company records an estimate for warranty‑related costs based on its historical and estimated future product return rates
and expected repair or replacement costs (Note 8).
While such costs have historically been within management’s expectations and the provisions established, unexpected changes in failure rates could have a material
adverse impact on the Company, requiring additional warranty reserves and could adversely affect the Company’s gross profit and gross margins.
The Company offers customers extended warranties beyond the standard one-year warranty on the product. The extended warranties are considered service-type
warranties and would be considered as a separate performance obligation under ASC 606. The Company is the primary obligor and revenue is recognized on a gross basis ratably
over the term of the extended warranty. The customer can purchase extended warranties from one to five years, in the bronze, silver or gold categories. This entails hardware repair
or replacement, shipping methods on how the warranties will be returned/delivered, response times and hours of operations to receive support. The value of warranties sold for
years ended December 31, 2022 and 2021, were $302,422 and $76,502, respectively.
The revenue that was recognized for the warranties sold for the years ended December 31, 2022 and 2021, were $233,010 and $306,373, respectively. The Company does
have recourse with some of its suppliers that offer more than a one-year guarantee on parts, but this is not standard. For the few that offer greater than a year warranty, the
Company may be able to recover the cost of the part from the manufacturer for the failed part. The amounts of these costs vary in a wide range, but are not material, due to the
infrequency of failure. As of December 31, 2022 and 2021, deferred revenue totaled $191,952 and $177,898, respectively. The Company expects to recognize approximately $191,952
of unearned revenue amounts from 2023 through 2025.
F-15
Shipping and Handling Costs
The Company's shipping and handling costs are included in cost of goods sold for all periods presented.
Foreign Currency
We operate primarily in the United States. Foreign sales of products and services are primarily denominated in U.S. dollars. We also conduct business outside the United
States through our foreign subsidiary in Germany, where business is largely transacted in non-U.S. dollar currencies particularly the Euro, which is subject to fluctuations due to
changes in foreign currency exchange rates. Accordingly, we are subject to exposure from changes in the exchange rates of local currencies. Foreign currency transaction gains
and losses are recorded in other income (expense), net in the consolidated statements of operations.
OSS GmbH operates as an extension of OSS’ domestic operations. 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 remeasured 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
(loss) in the consolidated balance sheets.
Derivative Financial Instruments
We may employ derivatives to manage certain currency market risks through the use of foreign exchange forward contracts. We do not use derivatives for trading or
speculative purposes. Our derivatives are designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or
liability (cash flow hedge). We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these
transactions, we enter into foreign exchange contracts to provide currency at a fixed rate. As of December 31, 2022 and 2021, OSS Europe had no foreign exchange contract
outstanding.
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges
are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until
reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as “Other (expense) income,
net” in the consolidated statements of operations in each period.
Stock-Based Compensation
The Company accounts for employee and director share-based compensation in accordance with the provisions of ASC Topic 718 “Compensation – Stock
Compensation”. Under ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense
over the employee’s requisite service period (generally the vesting period of the equity grant).
All transactions in which goods or services are the consideration received for the issuance of equity instruments to non-employees are accounted for based on the
equivalent fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable on the grant date. The measurement date
used to determine the estimated fair value of the equity instrument issued is the earlier of the date on which the third-party performance is complete or the date on which it is
probable that performance will occur.
Employee and director stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is
ultimately expected to vest during the period. Given that stock-based compensation expense recognized in the accompanying consolidated statements of operations is based on
awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company’s estimated average forfeiture rates are based on historical forfeiture experience and
estimated future forfeitures.
F-16
Compensation cost for stock awards, which include restricted stock units (“RSUs”), is measured at the fair value on the grant date and recognized as expense, net of
estimated forfeitures, over the related service period. The fair value of stock awards is based on the quoted price of our common stock on the grant date.
The estimated fair value of common stock option awards is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective
assumptions regarding future stock price volatility and expected time to exercise, along with assumptions about the risk-free interest rate and expected dividends, all of which affect
the estimated fair values of the Company’s common stock option awards. Given a lack of historical stock option exercises, the expected term of options granted is calculated as the
average of the weighted vesting period and the contractual expiration date of the option. This calculation is based on a method permitted by the Securities and Exchange
Commission in instances where the vesting and exercise terms of options granted meet certain conditions and where limited historical exercise data is available. The expected
volatility is based on the historical volatility of the common stock of comparable public companies that operate in similar industries as the Company.
The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the expected term of the grant effective as of the date of the
grant. The expected dividend assumption is based on the Company’s history and management’s expectation regarding dividend payouts. Compensation expense for common stock
option awards with graded vesting schedules is recognized on a straight-line basis over the requisite service period for the last separately vesting portion of the award, provided
that the accumulated cost recognized as of any date at least equals the value of the vested portion of the award.
If there are any modifications or cancellations of the underlying vested or unvested stock-based awards, the Company may be required to accelerate, increase or cancel any
remaining unearned stock-based compensation expense, or record additional expense for vested stock-based awards. Future stock-based compensation expense and unearned
stock- based compensation may increase to the extent that the Company grants additional common stock options or other stock-based awards.
Business Combinations
We utilize the acquisition method of accounting for business combinations and allocate the purchase price of an acquisition to the various tangible and intangible assets
acquired and liabilities assumed based on their estimated fair values. We primarily establish fair value using the income approach based upon a discounted cash flow model. The
income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates. Other estimates
include:
•estimated step-ups or write-downs for fixed assets and inventory;
•estimated fair values of intangible assets; and
•estimated income tax assets and liabilities assumed from the target.
While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the
business acquisition date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is
generally one year from the business acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.
For changes in the valuation of intangible assets between preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs.
Subsequent to the purchase price allocation period any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is
determined. Should we issue shares of our common stock in an acquisition, we will be required to estimate the fair value of the shares issued. See Note 7.
Debt Discounts
Debt discounts, which originate from the relative fair value of warrants issued in connection with notes payable and related-party notes payable, are recorded against the
notes payable and related-party notes payable in the accompanying consolidated balance sheets.
F-17
Amortization of the debt discounts are calculated using the straight-line method over the term of the applicable notes which approximates the effective interest method and
are recorded in interest expense in the accompanying consolidated statements of operations.
Advertising Costs
Advertising costs are expensed as incurred and included in marketing and selling expense in the accompanying consolidated statements of operations. Advertising costs
for the years ended December 31, 2022 and 2021, were $510,676 and $356,874, respectively.
Research and Development Expenses
Research and development expenditures are expensed in the period incurred. Research and development expenses primarily consist of salaries, benefits and stock-based
compensation, as well as consulting expenses and allocated facilities and other overhead costs. Research and development activities include the development of new technologies,
features and functionality in support of the Company’s products and customer needs.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the
difference between the consolidated financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Under ASC Topic 740, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally,
ASC Topic 740 provides requirements for derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company’s policy is to
recognize interest and/or penalties related to income tax matters in income tax expense.
The Company files income tax returns in the U.S. federal jurisdiction, California and various other state jurisdictions, and Germany. The Company has elected to treat the
tax effect of Global Intangible Low Tax Income (“GILTI”) as a current-period expense when occurred. The Company does not foresee material changes to its gross liability of
uncertain tax positions within the next twelve months.
On August 16, 2022, Congress passed, and the President signed into law, the Inflation Reduction Act, 2022 (“the “IRA”), which includes certain business tax provisions.
The Company does not expect the IRA to have a material impact on the Company’s effective tax rate or income tax provision for the year ending December 31, 2022.
On March 11, 2021, Congress passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which includes certain business tax provisions.
At this point, we do not believe that these changes will have a material impact on our income tax provision for 2022. We will continue to evaluate the impact of new legislation on
our financial position, results of operations, and cash flows.
The U.S. Tax Cuts and Jobs Act (“TCJA”) was signed into law on December 22, 2017. Guidance continues to be issued clarifying the application of this legislation and
recent proposed legislation known as Build Back Better is under consideration within both houses of U.S. Congress. Significant business and international provisions have been
proposed in various versions of the framework of the bill that could increase our total tax expense. We cannot predict the overall impact that the additional guidance and proposed
changes may have on our business. Some jurisdictions have raised tax rates and it is reasonable to expect that other global taxing authorities will be reviewing current legislation for
potential modifications in reaction to the implementation of U.S. tax legislation, current economic conditions, and COVID-19 response costs.
F-18
Due to the COVID-19 pandemic, economic uncertainty, inflation, increases in interest rates, capital markets disruption, which has been significantly impacted by geopolitical
instability due to the ongoing military conflict between Russia and Ukraine, and supply chain issues, our business, financial condition and results of operations could be materially
adversely affected by any negative impact from these events. We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions
or a revision of the carrying value of our assets or liabilities as of December 31, 2022. 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.
Interest Expense
Interest expense consists primarily of interest associated with the Company’s issued debt including the amortization of debt discounts. The Company recognizes the
amortization of debt discounts and the amortization of interest costs using a straight-line method which approximates the effective interest method.
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average common shares outstanding during the period. Diluted net income
(loss) per share is calculated by dividing the net income (loss) by the weighted-average shares and dilutive potential common shares outstanding during the period. Dilutive
potential shares consist of dilutive shares issuable and the exercise or vesting of outstanding stock options, restricted stock units and warrants, respectively, computed using the
treasury stock method. During a period where a net loss is incurred, dilutive potential shares are excluded from the computation of dilutive net loss per share, as inclusion is anti-
dilutive.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13
amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on
expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. In November 2019, ASU 2016-13
was amended by ASU 2019-10 that changed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, with early adoption permitted. Further, the ASU
clarifies that operating lease receivables are not within the scope of ASC Subtopic 326-20 and should instead be accounted for under the new leasing standard, ASC 842. The
Company does not expect any material change from adopting ASU 2016-13 on its consolidated financial statements and related disclosures.
NOTE 3 - SHORT-TERM INVESTMENTS
The Company’s short-term investments by significant investment category as of December 31, 2022, were as follows:
Description
Level 1: (1)
Cash alternatives
Certificates of deposit
Corporate bonds and notes
Municipal Securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Accrued
Interest
Estimated
Fair Value
$
$
5,139,940 $
4,950,527
-
-
10,090,467 $
22,646 $
-
-
-
22,646 $
- $
(7,691)
-
-
(7,691) $
3,506 $
14,607
-
-
18,113 $
5,166,092
4,957,443
-
-
10,123,535
(1)Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
F-19
The Company’s short-term investments by significant investment category as of December 31, 2021, are as follows:
Description
Level 1: (1)
Cash alternatives
Certificates of deposit
Corporate bonds and notes
Municipal Securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Accrued
Interest
Estimated
Fair Value
$
$
2,172,853 $
591,968
4,293,722
7,411,043
14,469,586 $
- $
-
-
-
- $
- $
(3,294)
(5,432)
(2,334)
(11,060) $
- $
1,222
46,820
29,182
77,224 $
2,172,853
589,896
4,335,110
7,437,891
14,535,750
(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 which 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 on December 31:
Accounts receivable
Less: allowance for doubtful accounts
December 31,
2022
December 31,
2021
$
$
11,372,598
(45,354)
11,327,244
$
$
5,105,426
(15,622)
5,089,804
Unbilled receivables include amounts associated with percentage of completion and milestone billing accounting, which includes cost and gross profit earned in excess of
billing, not currently billable due to contractual provisions. The provision and recovery for bad debt expense related to accounts receivable was $29,154 and $(17,013) for the years
ended December 31, 2022 and 2021, respectively.
NOTE 5 – INVENTORIES
Inventories, net consisted of the following on December 31:
Raw materials
Sub-assemblies
Work-in-process
Finished goods
Less: allowances for obsolete and slow-moving inventories
December 31,
2022
December 31,
2021
9,370,162
892,123
1,343,239
10,357,452
21,962,976
(1,187,610)
20,775,366
$
$
5,603,868
495,320
518,838
6,228,892
12,846,918
(569,045)
12,277,873
$
$
F-20
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following on December 31:
Computers and computer equipment
Furniture and office equipment
Manufacturing equipment and engineering tools
ERP Financial System
Leasehold improvements
Vehicles
Less: accumulated depreciation and amortization
December 31,
2022
December 31,
2021
825,086
469,060
2,713,137
2,585,357
1,036,947
9,745
7,639,332
(5,069,208)
2,570,124
$
$
743,807
435,342
2,622,059
2,404,967
976,967
4,012
7,187,154
(4,095,739)
3,091,415
$
$
During the years ended December 31, 2022 and 2021, the Company incurred $987,068 and $923,735 of depreciation and amortization expense related to property and
equipment, respectively.
NOTE 7 – LONG LIVED INTANGIBLE ASSETS
Definite lived intangible assets related to acquisitions were as follows as of December 31, 2022:
Customer lists and relationships
Drawings and technology
Trade name, trademarks & other
Non-compete
Expected
Life
36 to 60 months
36 months
24 to 36 months
36 months
Remaining
Months
8 months
0 months
0 months
0 months
Definite lived intangible assets related to acquisitions were as follows as of December 31, 2021:
Customer lists and relationships
Drawings and technology
Trade name
Non-compete
Expected
Life
60 months
36 months
24 months
36 months
Remaining
Months
20 months
0 months
0 months
0 months
Gross
Intangible
Assets
Accumulated
Amortization
Net
Intangible
Assets
2,084,515 $
760,207
447,274
246,797
3,538,793 $
(2,042,361) $
(760,207)
(447,274)
(246,797)
(3,496,639) $
42,154
-
-
-
42,154
Gross
Intangible
Assets
Accumulated
Amortization
Net
Intangible
Assets
2,084,515
760,207
447,274
246,797
3,538,793
$
$
$
(1,979,130.00) $
(760,207.00)
(447,274.00)
(246,797.00)
(3,433,408) $
105,385
-
-
105,385
$
$
$
$
The amortization expense of the definite lived intangible assets for the years remaining is as follows:
2023
Total
$
42,154
$
42,154
Amortization expense recognized during the years ended December 31, 2022 and 2021, was $63,231 and $556,873, respectively.
F-21
NOTE 8 – ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following on December 31:
Accrued compensation and related liabilities
Deferred revenue
Customer deposits
Warranty reserve
Trade and other taxes
Deferred rent
Other accrued expenses
NOTE 9 – DEBT
Bank Lines of Credit
December 31,
2022
December 31,
2021
989,478
378,952
61,696
584,268
225,743
-
773,732
3,013,869
$
$
1,372,342
177,898
666,183
571,903
242,767
512,211
303,184
3,846,488
$
$
The Company obtained a domestic revolving line of credit of $2,000,000 with Torrey Pines Bank in April 2022, which renews on an annual basis at the current prime rate. To
access this line of credit the Company must maintain cash and investments balances at a minimum of $4,000,000. No balance was outstanding on December 31, 2022.
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$2,361,108) as of December 31, 2022. Borrowings under the lines of credit bear interest at a variable rate of Euribor plus a stated rate. The rates as of December 31,
2022, for the lines of credit ranged from 3.1% to 5.6%, 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 December 31, 2022 and 2021.
Foreign Debt Obligations
OSS Europe had five term loans outstanding as of December 31, 2022, with an aggregate balance outstanding of €3,132,356 (US$3,361,741) as follows:
•On February 1, 2022, OSS Europe converted €500,000 of its line of credit from VR Bank into a note payable, which bears interest at 1.95% with interest only payments to be
paid on a quarterly basis. The note was originally due on August 1, 2022. On August 1, 2022, this note was extended through February 1, 2023, (see Note 18) and the
interest rate was increased to 2.19% with accrued interest having been paid current as of the original maturity date. The balance outstanding as of December 31, 2022, was
€500,000 (US$536,616);
•On February 16, 2022, OSS Europe converted €500,000 of its line of credit from UniCredit Bank into a note payable, which bears interest at 1.580% with interest only
payments to be paid on a quarterly basis. The note was originally due on August 16, 2022. On August 16, 2022, this note was extended through February 16, 2023, (see
Note 18) and the interest rate was increased to 2.875% with accrued interest having been paid current as of the original maturity date. The outstanding balance as of
December 31, 2022, was €500,000 (US$536,616);
•On April 9, 2021, OSS Europe converted €500,000 of its line of credit from Commerzbank AG into a note payable, which bore interest at 1.60% with interest only payments
to be paid on a quarterly basis. 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 that bears interest at 1.685% with similar terms. This new note had an original maturity date of June 30, 2022; however,
this note was renewed and extended to September 30, 2022. On September 30, 2022, this note was further extended through March 31, 2023, and the interest rate was
increased to 3.875% with accrued interest having been paid current as of the original maturity date. The balance outstanding on the new note as of December 31, 2022 and
2021, was €500,000 (US$536,616), and (US$568,825), respectively;
F-22
•On June 18, 2021, OSS Europe converted €500,000 of its line of credit from UniCredit Bank into a note payable, which bore interest at 1.487% with interest only payments to
be paid on a quarterly basis. The note was due December 17, 2021, and subsequently extended through June 17, 2022. On June 17, 2022, this note was further extended
through December 19, 2022, and the interest rate was increased to 2.45%, with accrued interest having been paid current as of the original maturity date. On December 19,
2022, this note was further extended through June 19, 2023, and the interest rate was increased to 4.70%, with accrued interest having been paid current as of the original
maturity date. The balance outstanding on the new note as of December 31, 2022 and 2021, was €500,000 (US$536,616) and (US$568,825) respectively;
•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 December 31, 2022, was €1,132,356 (US$1,215,279). This loan is
collateralized by accounts receivable attributable to a specific customer; and
In April 2019, the Company borrowed an aggregate of $350,000 from three individuals for a two-year period at an interest rate of 9.5%, which requires the Company to make
monthly principal and interest payments of $16,100 per month. These loans were secured by the assets of the Company. In connection with these loans, the Company issued to
the noteholders warrants to purchase shares of the Company’s common stock in an amount equal to 10% of the original principal at a price per share equal to $2.15. Accordingly,
the Company issued to the noteholders warrants to purchase an aggregate of 16,276 shares of the Company’s common stock at an exercise price of $2.15 per share. The relative fair
value of each warrant was $0.90. The relative fair value of warrants was estimated using Black-Scholes with the following weighted-average assumptions: fair value of the
Company’s common stock at issuance of $2.15 per share; five year contractual term; 44.60% volatility; 0.0% dividend rate; and a risk-free interest rate of 2.307%. The total relative
fair value of the warrants issued is $14,037. These loans have matured, and all balances have been paid in full. As such, the balances outstanding as of December 31, 2022 and 2021
were $0.
Notes Payable – Related Parties
In April 2019, the Company borrowed an aggregate of $1,150,000 from certain members of the Company’s board of directors for a two-year period at an interest rate of 9.5%,
which requires the Company to make monthly principal and interest payments of $52,900 per month. These loans were secured by the assets of the Company. In connection with
these loans, the Company issued to the noteholders warrants to purchase shares of the Company’s common stock in an amount equal to 10% of the original principal at a price per
share equal to $2.15. Accordingly, the Company issued to the noteholders warrants to purchase an aggregate 53,490 shares of the Company’s common stock at an exercise price of
$2.15 per share. The relative fair value of each warrant was $0.90. The relative fair value of warrants was estimated using Black-Scholes with the following weighted-average
assumptions: fair value of the Company’s common stock at issuance of $2.15 per share; five year contractual term; 42.60% volatility; 0.0% dividend rate; and a risk-free interest rate
of 2.3067%. The relative fair value of warrants issued is $46,121. These loans have matured, and all balances have been paid in full, as such, the balances outstanding as of
December 31, 2022 and 2021, were $0.
Debt Discount
The relative fair value of warrants issued in connection with the notes payable described above were recorded as debt discount, decreasing notes payable and related-party
notes payable and increasing additional paid-in-capital on the accompanying consolidated balance sheets. The debt discounts are being amortized to interest expense over the
term of the corresponding notes payable using the straight-line method which approximates the effective interest method. Amortization of debt discounts of $0 and $7,077, were
recognized as interest expense for the years ended December 31, 2022 and 2021, respectively.
Paycheck Protection Program Loan
On April 28, 2020, the Company received authorization pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act
(the “CARES Act”) as administered by the U.S. Small Business Administration (the “SBA”) for a PPP loan. On May 11, 2020, the loan was funded, and the Company received
proceeds in the amount of $1,499,360 (the “PPP Loan”).
F-23
The PPP Loan, which took the form of a two-year promissory note (the “PPP Note”), was scheduled to mature on April 28, 2022, and bore interest at a rate of 1.0% per
annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), was initially to commence on October 28, 2020. The Company did
not provide any collateral or guarantees for the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The PPP Note provided for customary events of
default, including, among others, those relating to failure to make payment, breaches of any term, obligation, covenant, or condition contained in the PPP Note and payment of
unauthorized expenses or use of proceeds contrary to CARES Act rules.
The Company submitted an application with the lender to forgive the PPP Loan, in accordance with SBA Procedural Notice, Control No. 5000-20057, effective as of October
2, 2020. On May 3, 2021, the Company received notification from the SBA that its PPP Loan of $1,499,360, plus accrued interest of $14,994, had been fully forgiven and such amount
has been recognized as other income in the consolidated statement of income.
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.
Pursuant to the Securities Purchase Agreement, the Company had the right to consummate additional closings of up to an additional $3,000,000, subject to the prior
satisfaction of certain closing conditions. This right expired effective April 20, 2021, and the Company may no longer consummate additional closings under the Securities Purchase
Agreement.
The notes were convertible at any time, in whole or in part, at the option of the investors, into shares of Company common stock at the initial conversion price of $2.50 per
share. The conversion price was subject to adjustment for the issuances of securities at a price below the conversion price then in effect and for stock splits, combinations or
similar events. If immediately following the close of business on the nine month anniversary of the issuance date of each note, the conversion price then in effect exceeded 135% of
the volume weighted average price VWAP (the “Market Price”), the initial conversion price under any such note would be automatically lowered to the Market Price.
Subject to the satisfaction of certain equity conditions set forth in the notes, installment amounts could be satisfied in shares of our common stock, with such installment
conversion at a conversion price equal to the lower of (i) the conversion price then in effect; and (ii) the greater of (x) the floor price of $1.00 (80% of the Nasdaq market price at date
of purchase agreement) and (y) the lower of (I) 82.5% the volume weighted average price of our common stock on the trading day immediately before the applicable installment date
and (II) 82.5% of the quotient of (A) the sum of the volume weighted average price of our common stock for each of the three (3) trading days with the lowest volume weighted
average price of our common stock during the twenty (20) consecutive trading day period ending and including the trading day immediately prior to the applicable installment date,
divided by (B) three (3). Shares of our common stock to be issued with respect to any such installment would be pre-delivered on the second trading day after the applicable
installment notice date (as defined in the notes) with a true-up on the applicable installment date. The market value of any installment amount below the floor price would be cash
settled on the applicable installment date.
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 December 31, 2022 was $0.
Management evaluated the embedded conversion feature to determine whether bifurcation was required as a separate derivative liability. Management first determined that
the conversion feature was not within the scope of ASC 480. It then determined that the embedded derivative should be separated from the host instrument and accounted for as a
derivative instrument because it met the criteria of ASC 815-15-25-1, primarily because the contract provides for delivery of an asset that puts the recipient in substantially the same
position as net settlement. However, due in part to the Company’s adoption of ASC 2017-11 on April 1, 2020, which allowed management to disregard the down round provisions
of the conversion
F-24
feature, management determined that a scope exception to derivative accounting existed by satisfying the additional conditions necessary for equity classification specified by
ASC 815-10-15-74 and ASC 815-40-25. As a result of management’s analysis, the conversion feature was not accounted for separately from the debt instrument and the Company
will recognize the contingent beneficial conversion feature when, or if, such is triggered.
The original issue discount of 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 year ended December 31, 2022 and 2021, total debt discount amortization was $0 and $139,217, respectively. Such
amounts are included in interest expense in the accompanying consolidated statements of income.
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. Debt issuance costs amortized during the year ended December 31, 2022 and 2021, was $0 and $137,521,
respectively. Such amounts are included in interest expense in the accompanying consolidated statements of income.
A summary of outstanding debt obligations as of December 31, 2022, are as follows:
Loan Description
Foreign:
VR Bank
Uni Credit Bank AG
Commerzbank AG
Uni Credit Bank AG
Commerzbank AG
Current
Interest Rate
2.190%
2.875%
3.875%
4.700%
2.550%
Maturity
Date
February-23
February-23
March-23
June-23
June-24
Balance
(Euro)
Balance ($)
Current
Portion
Long-term
Portion
€
€
500,000 $
500,000
500,000
500,000
1,132,356
3,132,356 $
536,616 $
536,616
536,616
536,616
1,215,279
3,361,741 $
536,616 $
536,616
536,616
536,616
805,985
2,952,447 $
-
-
-
-
409,294
409,294
Outstanding debt obligations as of December 31, 2022, consisted of the following:
Foreign
Total
Period Ended December 31, 2022
Current portion:
Principal
Less discount
Less loan origination costs
Net liability
Long-term portion:
Principal
Less discount
Less loan origination costs
Net liability
Total:
Principal
Less discount
Less loan origination costs
Net liability
$
$
$
$
$
$
2,952,447
-
-
2,952,447
409,294
-
-
409,294
3,361,741
-
-
3,361,741
$
$
$
$
$
$
$
$
2,952,447
-
-
2,952,447
409,294
-
-
409,294
3,361,741
-
-
3,361,741
Total
2,952,447
409,294
3,361,741
(2,952,447)
409,294
Total future payments under the notes payable described above as of December 31, 2022, were as follows:
Period Ending December 31,
Foreign
2023
2024
Total minimum payments
Current portion of notes payable
Notes payable, net of current portion
2,952,447
409,294
3,361,741
(2,952,447)
409,294
$
$
F-25
NOTE 10 – 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.
Common Stock
The voting, dividend and liquidation rights of the holders of the common stock are subject to rights of preferred stockholders, if any, as designated by the board of
directors. Common stockholders have voting rights at all meetings of stockholders and are entitled to one vote for each share held subject to certain limitations otherwise required
by law. Dividends may be declared and paid on the common stock as and when determined by the board of directors subject to any preferential dividend or other rights of
preferred stockholders. The Company does not anticipate declaring any dividends in the foreseeable future. Upon the dissolution or liquidation of the Company, common
stockholders are entitled to receive all assets of the Company, subject to any preferential or other rights of preferred stockholders.
Preferred Stock
Preferred Stock may be issued from time to time in one or more series, each of these series to have such terms as stated or expressed in resolutions providing for the issue
of such series adopted by the board of directors. There is no outstanding preferred stock.
Regarding unissued preferred stock, the board of directors is authorized to determine or alter any or all of the rights, preferences, privileges and restrictions granted to or
imposed upon wholly unissued series of preferred stock, and to fix or alter the number of shares comprising any such series and the designation thereof, or any of them, and to
provide for rights and terms of redemption or conversion of the shares of any such series.
Stock Options
In December 2011, the Company adopted a stock option plan (“2011 Plan”) under which the Company may issue up to 1,500,000 shares of the Company’s common stock
and, as of December 31, 2022, the Company had 240,000 shares of common stock remaining unissued under the 2011 Plan. The 2011 Plan was terminated by the board of directors on
October 10, 2017, and accordingly, no shares are available for issuance under the 2011 Plan. The 2011 Plan will continue to govern outstanding awards granted thereunder.
In December 2015, the Company adopted a stock option plan (“2015 Plan”) under which the Company may issue up to 1,500,000 shares of the Company’s common stock
and, as of December 31, 2022, the Company had 840,084 shares of common stock remaining unissued under the 2015 Plan. The 2015 Plan was terminated by the board of directors on
October 10, 2017, and accordingly, no shares are available for issuance under the 2015 Plan. The 2015 Plan will continue to govern outstanding awards granted thereunder.
The terms of the 2011 Plan and 2015 Plan provided for the grant of incentive options to employees and non-statutory options to employees, directors and consultants of
the Company.
The board of directors adopted the 2017 Equity Incentive Plan on October 10, 2017 (the “2017 Plan”). The 2017 Plan allows for the grant of a variety of equity vehicles to
provide flexibility in implementing equity awards, including incentive stock options, non-qualified stock options, restricted stock grants, unrestricted stock grants and restricted
stock units and stock bonuses and performance-based awards. On December 18, 2017, the Company stockholders approved the 2017 Plan, under which the Company was initially
permitted to issue up to 1,500,000 shares of the Company’s common stock.
On June 24, 2020, the Company amended the 2017 Plan to increase the maximum number of shares of common stock with respect to one or more Stock Awards (as defined in
the 2017 Plan) that may be granted to any one participant under the 2017 Plan during any calendar year from 500,000 shares to 1,000,000 shares. The amendment did not increase the
total number of shares of common stock authorized for issuance under the 2017 Plan, and did not require stockholder approval.
F-26
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. As of December 31, 2022, the Company has 429,911 shares of common stock remaining for issuance under the 2017 Plan.
The exercise price per share for options under the 2011 Plan, 2015 Plan and 2017 Plan is determined by the Company’s board of directors, provided that for incentive stock
options the exercise price shall not be less than the fair market value of the Company's common stock on the date of grant, except that for incentive options granted to an
owner/employee with a greater than 10% ownership interest in the Company, the exercise price shall not be less than 110% of the fair market value of the Company's common stock
on the date of grant.
Options under the plans expire no more than ten years after the date of grant, or within five years after the date of the grant for incentive options granted to an
owner/employee with a greater than 10% ownership interest in the Company.
Effective June 24, 2020, the Company entered into an employment agreement with Mr. Raun to serve as the Company’s president and chief executive officer. Pursuant to the
terms of the employment agreement, Mr. Raun is entitled to receive 412,125 RSUs that shall vest over three years, with one third of the RSUs vesting following the one-year
anniversary of the date of grant, and the remaining RSUs vesting 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; and 412,125 Incentive Stock Options (“ISOs”) pursuant to the Company’s 2017 Equity Incentive Plan, whereby the exercise price for the ISOs
shall be no less than the fair market value of the Company’s common stock at the date of grant ($2.14).
The ISOs shall vest at the end of each the second and fourth quarters, the price of the Company’s common stock as of the end of quarter two or quarter four, as applicable,
shall be determined using the ten-day trailing volume weighted average price (“VWAP”) after reporting of quarter two and quarter four earnings, as applicable. The date of each
such determination shall be referred to as a “Determination Date.” If on any Determination Date the Company’s stock price has increased from the prior Determination Date, then a
portion of the ISOs shall become vested. The number of ISOs that shall become vested on a Determinate Date is determined as follows: ((Price at Determination Date – Price at prior
Determination Date) x 100) * 1,177.52 = Vested ISOs. If on any Determination Date the Company’s stock price is $5.50 per share, all ISOs shall immediately become vested. As of
December 31, 2021, Mr. Raun’s ISOs are fully vested, but not exercised, based upon achievement of the specified performance objectives.
In the event, that Mr. Raun’s employment agreement is terminated for a reason other than “good cause” or for “good reason” Mr. Raun, upon executing an effective waiver
and release of claims, unvested RSUs shall accelerate so that an additional twelve (12) months of RSUs shall vest from the termination date.
A summary of stock option activity under the plans during the years ended December 31, 2022 and 2021, are as follows:
Outstanding on January 1, 2021
Granted
Forfeited / Canceled
Exercised
Outstanding on December 31, 2021
Granted
Forfeited / Canceled
Exercised
Outstanding on December 31, 2022
Exercisable on December 31, 2022
Vested and expected to vest on December 31, 2022
Stock Options Outstanding
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(in years)
1,320,267 $
- $
(13,772) $
(280,996) $
1,025,499 $
- $
(1,000) $
(53,819) $
970,680 $
969,010 $
970,680 $
1.81
-
2.66
1.05
2.01
-
2.43
0.78
2.07
2.07
2.07
6.43 $
$
$
$
6.35 $
- $
$
$
5.61 $
5.61 $
5.61 $
Aggregate
Intrinsic
Value
2,889,274
-
(28,359)
(1,096,540)
3,014,448
-
(580)
(119,833)
988,197
987,679
988,197
F-27
The following table summarizes information about common stock options outstanding as of December 31, 2022:
Plan
2011
2015
2017
Exercise Price
Range
$0.46-$0.80
$1.08-$1.95
$2.14-$4.09
Stock Options Outstanding
Weighted
Average
Remaining
Contractual
Life
(in years)
Number of
Shares
Outstanding
Weighted
Average
Exercise
Price
Number of
Shares
Exercisable
Stock Options Exercisable
Weighted
Average
Remaining
Contractual
Life
(in years)
Weighted
Average
Exercise
Price
72,848
334,611
563,221
970,680
1.54 $
4.04 $
7.06 $
0.46
1.77
2.45
72,848
334,611
561,551
969,010
1.54 $
4.04 $
7.06 $
0.46
1.77
2.45
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 during the year ended December 31, 2022.
Expected term (in years)
Expected volatility
Risk-free interest rate
Weighted average grant date fair value per share
Grant date fair value of options vested
Intrinsic value of options exercised
For the Year Ended December 31,
2022
2021
-
0.00%
0.00%
-
839,409
119,833
$
$
$
-
0.00%
0.00%
-
185,818
1,096,540
$
$
$
As of December 31, 2022, the amount of unearned stock-based compensation estimated to be expensed through 2023 related to unvested common stock options is $849, net
of estimated forfeitures. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 0.11 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.
Exercise of Stock Options
During the year ended December 31, 2022, the Company issued 53,819 shares of common stock for proceeds of $42,162 in cash related to the exercise of employee and
director stock options.
During the year ended December 31, 2021, the Company issued 280,996 shares of common stock for proceeds of $294,390 in cash related to the exercise of stock options.
Restricted Stock Units
Restricted stock units may be granted at the discretion of the compensation committee of the board of directors under the 2017 Plan in connection with the hiring and
retention of personnel and are subject to certain conditions. Restricted stock units generally vest quarterly over a period of three years and are typically forfeited if employment is
terminated before the restricted stock unit vest. The compensation expense related to the restricted stock units 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.
F-28
The Company’s restricted stock unit activity for the years ended December 31, 2022 and 2021, was as follows:
Unvested on January 1, 2021
Granted
Vested
Canceled
Unvested on December 31, 2021
Granted
Vested
Canceled
Unvested on December 31, 2022
Restricted Stock Units
Number of
Shares
Weighted
Average Grant
Date Fair Value
575,922 $
432,196 $
(398,193) $
(5,125) $
604,800 $
684,300 $
(379,657) $
(1,936) $
907,507 $
2.65
5.76
3.18
5.88
4.49
3.92
4.15
4.57
4.07
During the years ended December 31, 2022 and 2021, the Company issued 222,130 and 254,954 restricted stocks units, net of 88,838 and 143,239 units, respectively, which
were retained for income tax purposes. As of December 31, 2022, there was $2,657,469 of unrecognized compensation cost related to unvested restricted stock units which is
expected to be recognized over a weighted average period of 1.09 years.
Stock-based compensation expense for the years ended December 31, 2022 and 2021, was comprised of the following:
Stock-based compensation classified as:
General and administrative
Production
Marketing and selling
Research and development
Warrants
For the Year Ended December 31,
2021
2022
$
$
1,111,129 $
269,079
396,187
214,722
1,991,117 $
1,094,036
190,330
270,311
140,428
1,695,105
In connection with the issuance of notes payable and related notes payable in April 2019, the Company issued warrants to purchase shares of common stock at an exercise
price of $2.15 per share to the debt holders. See Note 9.
The following table summarizes the Company’s warrant activity during the years ended December 31, 2022 and 2021:
Warrants outstanding on December 31, 2020
Warrants granted
Warrants exercised
Warrants outstanding on December 31, 2021
Warrants granted
Warrants exercised
Warrants outstanding on December 31, 2022
F-29
Number of
Warrants
Weighted
Average
Exercise Price
505,946 $
- $
(54,834) $
451,112 $
- $
- $
451,112 $
5.00
-
1.96
5.37
-
-
5.37
S-8 Registration Statement
On June 21, 2021, the Company filed a Form S-8 Registration Statement relating to 3,543,114 shares of the Company’s common stock, par value $0.0001 per share, issuable to
the employees, officers, directors, consultants and advisors of the Company under the Company’s 2017 Plan, One Stop Systems, Inc. 2015 Stock Option Plan, and One Stop
Systems, Inc. 2011 Stock Option Plan.
NOTE 11 – EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement plan. Under the terms of the plan, eligible employees may defer up to 20% of their pre-tax earnings, subject to the Internal Revenue
Service annual contribution limit. Additionally, the plan allows for discretionary matching contributions by the Company. Typically, the matching contributions are 100% of the
employee's contribution up to a maximum of 5% of the employee’s annual compensation. During the years ended December 31, 2022 and 2021, the Company contributed $367,124
and $253,148, respectively to the 401(k) Plan. As of May 2020, the Company suspended matching contributions to the 401(k) as part of its cost containment program; however, the
program was reinstated in April 2021.
In 2021, OSS Europe instituted an occupational retirement provision for their employees in Germany, which supplements the statutory pension insurance. Currently, this
program allows employees to contribute at a maximum 564 Euros per month with the employer match of up to 50% to the employees’ insurance retirement fund. During the years
ended December 31, 2022 and 2021, the Company contributed $57,605 and $56,741, respectively.
NOTE 12 – 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.
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. Also, in connection with the terms of OSS Europe’s credit agreements (Note 9), OSS Europe alone
has agreed to indemnify its lenders and others related to the use of the proceeds and other matters. 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.
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 open purchase orders as of December 31, 2022, were approximately
$15,722,323.
The following table presents minimum rental commitments under all non-cancellable operating leases with initial lease terms in excess of one year are as follows as of
December 31, 2022:
2023
2024
Total lease payments
Less: Amount representing interest
Present value of lease payment
Less: current portion of operating lease obligation
Operating lease obligation, net of current portion
Year
Operating Leases
$
$
606,274
412,771
1,019,045
(85,208)
933,837
(536,588)
397,249
F-30
N0TE 13 LEASES
Leases
The Company leases its offices, manufacturing, and warehouse facility in San Diego County under a non-cancellable 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 expiring in June 2023, that houses our Ion software development team. Additionally, we lease a 1,632 square foot
facility located in Anaheim, California, with the lease expiring in June 2023. OSS Europe leases space comprising of 8,073 square feet on a month-to-month basis. For the years
ended December 31, 2022 and 2021, rent expense was $684,224 and $773,157, respectively.
In addition to leases for physical facilities the Company also leases certain office equipment and vehicles. For the years ended December 31, 2022 and 2021, lease expenses,
excluding office leases, was $59,846 and $64,936, respectively.
Other information related to leases as of the year ended December 31, 2022 are as follows:
Operating lease cost
Total lease cost
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows from operating leases
Right-of-use assets obtained in exchange for new operating lease liabilities
Weighted-average remaining lease term - operating leases
Weighted-average discount rate - operating leases
$
$
$
$
For the Year Ended
December 31, 2022
644,120
644,120
636,990
-
20.2 months
12.8%
NOTE 14 – RELATED PARTY TRANSACTIONS
In April 2019, certain members of the Company’s Board of Directors executed definitive agreements to commit funds of up to $4,000,000 as a credit facility. The Company
initially borrowed an aggregate of $1,150,000 from members of the Board of Directors and an aggregated of $350,000 from other shareholders for a two-year period at an interest rate
of 9.5% which required the Company to make monthly principal and interest payment of $69,000 per month. In connection with these loans, the Company issued to these note
holders, warrants to purchase shares of the Company’s common stock equal to 10% of the original principal at a price per share equal to $2.15. Accordingly, the Company issued to
these note holders warrants to purchase an aggregate of 69,766 shares of the Company’s common stock. The relative fair value of the warrants issued was $60,158. The remaining
unfunded commitments expired as of April 1, 2020, and the Company has not received any additional funding commitments from members of the Board of Directors. Interest
expense on all related-party notes payable for the years ended December 31, 2022 and 2021, totaled $0 and $4,095, respectively.
The Company has appointed certain stockholders to the Board of Directors. Director fees paid by the Company, including stock-based compensation, for the years ended
December 31, 2022 and 2021, totaled $528,146 and $535,768, respectively, and are included in general and administrative expenses in the accompanying consolidated statements of
operations.
F-31
NOTE 15 – INCOME TAXES
For the years ended December 31, 2022 and 2021, pre-tax (loss) income was attributed to the following jurisdictions:
Domestic operations
Foreign operations
The components of the tax provision for income taxes is as follows:
Current:
Federal
State
International
Deferred:
Federal
State
International
Total provision for income taxes
$
$
$
$
For the Year Ended December 31,
2021
2022
(292,325) $
2,486,867
2,194,542 $
1,248,943
1,689,505
2,938,448
For the Year Ended December 31,
2021
2022
- $
29,695
612,198
641,893
2,345,612
1,436,092
-
3,781,704
4,423,597 $
Taxes on income vary from the statutory federal income tax rate applied to earnings before tax on income as follows:
Provision at federal statutory rates (21% applied to earnings before income
taxes)
State income taxes, net of federal benefit
Other permanent items
PPP loan forgiveness
Stock based compensation
Research and development credits
Amortization of intangibles
Change in reserve for uncertain tax positions
Change in valuation allowance
Other
F-32
For the Year Ended December 31,
2021
2022
$
$
461,219 $
21,044
(78,847)
-
31,815
60,734
7,410
(26,307)
3,805,149
141,380
4,423,597 $
-
2,763
548,062
550,825
(81,341)
136,191
-
54,850
605,675
617,074
(105)
(60,997)
(318,014)
(399,635)
(247,264)
112,007
771,672
-
130,937
605,675
Deferred income tax assets and liabilities arising from differences accounting for financial statement purposes and tax purposes, less valuation reserves at yearend are as
follows:
Deferred tax assets:
Reserves
Deferred compensation
Stock compensation
Deferred revenue
Inventories
Credits and loss carryforward
Capitalized research and experimental expenditures
Lease liabilities
Total deferred tax assets before valuation allowance
Deferred tax liabilities:
Property and equipment
Intangible assets
Other
ROU assets
Total deferred tax liabilities
Net deferred tax assets before valuation allowance
Valuation allowance
Net deferred tax (liabilities) assets
For the Year Ended December 31,
2021
2022
58,789 $
150,681
395,198
109,361
221,323
3,412,820
700,920
181,177
5,230,269
(338,739)
(641,493)
(308,047)
(126,016)
(1,414,295)
3,815,974
(3,954,636)
(138,662) $
51,147
246,542
238,310
64,232
184,802
4,202,769
-
-
4,987,802
(300,758)
(593,254)
(303,271)
-
(1,197,283)
3,790,519
(149,487)
3,641,032
$
$
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those differences become deductible.
Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As of the year
ended December 31, 2022, Management believes that it is not more likely than not that the Company will realize the benefits of the net deferred tax assets and has recorded a
valuation allowance against its US deferred tax assets.
The Company files income tax returns in the U.S. federal jurisdiction, Arizona, Arkansas, California, Idaho, Massachusetts, Texas, and Utah and Germany and has open tax
statutes for U.S. federal taxes for the years ended December 31, 2019 through 2022. For California, the open tax statutes are for years December 31, 2018 through 2022, and for
Germany, the open years include December 31, 2020 through 2021.
The Company had Federal net operating loss ("NOL") carryforwards as of December 31, 2022, of approximately $4,399,000. The Company may use these NOL carryforwards
indefinitely to offset 80% of Federal taxable income in future years. In addition, the Company has state NOL carryforwards of $4,115,000. State NOLs will carryforward through at
least 2040 and may be used to offset future state taxable income.
As of December 31, 2022 and 2021, the Company had $1,619,000 and $1,804,000 respectively, of federal tax credit carryforwards which begin to expire in 2026 and state credit
carryforwards of $1,700,000 and $1,668,000, respectively, which carryforward indefinitely.
As of December 31, 2022, unrecognized tax benefits associated with uncertain tax positions was $1,218,396, of which $20,200 is included in other accrued expenses and
other liabilities, while $1,188,744 is included as a direct reduction on the net deferred tax assets on the accompanying consolidated balance sheets. If recognized, this would affect
the Company’s effective tax rate.
F-33
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Unrecognized tax benefits balance on December 31, 2020
Gross increases for tax positions of the prior year
Gross increases for tax positions of the current year
Unrecognized tax benefits balance on December 31, 2021
Gross increases for tax positions of the prior year
Gross decrease for tax positions of the current year
Gross increases for tax positions of the current year
Unrecognized tax benefits balance on December 31, 2022
NOTE 16 –NET (LOSS) INCOME PER SHARE
Basic and diluted net (loss) income per share was calculated as follows for the years ended December 31, 2022 and 2021:
Basic and diluted net (loss) income per share:
Numerator:
Net (loss) income
Denominator:
Weighted average common shares outstanding - basic
Effect of dilutive securities
Weighted average common shares outstanding - diluted
Net (loss) income per common share:
Basic
Diluted
$
$
371,688
762,124
108,905
1,242,717
-
(49,479)
25,158
1,218,396
For the Year Ended December 31,
2021
2022
$
$
$
(2,229,055) $
2,332,773
19,730,698
-
19,730,698
(0.11) $
(0.11) $
18,305,878
1,197,859
19,503,737
0.13
0.12
In 2022 and 2021, there were 380,000 warrants that are convertible to common stock that were excluded as these were antidilutive.
F-34
NOTE 17 – SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in two reportable segments: the design and manufacture of high-performance customized computers and flash arrays, in-flight entertainment &
connectivity, and value-added reseller with minimal customization. The Company evaluates financial performance on a Company-wide basis.
Segment detail for the years ended December 31, 2022 and 2021, is as follows:
Revenues
Cost of revenues
Gross profit
Gross profit %
$
Total operating expenses
(Loss) income from operations
$
For the Year Ended December 31, 2022
OSS Europe
Total
OSS
For the Year Ended December 31, 2021
OSS Europe
Total
OSS
43,286,715 $
(29,142,852)
14,143,863
32.7%
(15,182,546)
(1,038,683) $
29,134,630 $
(22,880,884)
6,253,746
21.5%
(3,646,735)
2,607,011 $
72,421,345 $
(52,023,736)
20,397,609
28.2%
(18,829,281)
1,568,328 $
38,492,004 $
(24,272,292)
14,219,712
36.9%
(14,181,739)
37,973 $
23,490,100 $
(18,070,523)
5,419,577
23.1%
(3,710,523)
1,709,054 $
61,982,104
(42,342,815)
19,639,289
31.7%
(17,892,262)
1,747,027
Revenue from customers with non-U.S. billing addresses represented approximately 69%% and 67% of the Company’s revenue for the years ended December 31, 2022 and
2021, respectively.
As of December 31, 2022, substantially all the Company’s long-lived assets were located in the United States of America, with the exception of assets of $206,980 located in
Germany.
NOTE 18 – SUBSEQUENT EVENTS
In February 2023, the Company’s board of directors constituted a new committee of the board, the Strategic Transition Committee, to assist in the identification, transition
and retention of a successor chief executive officer, including to work with the engaged search firm to accomplish the foregoing, to provide support to our management team
throughout the transition, and to perform other duties as may be necessary or desirable from time to time in connection with the reorganization of the Company. Members of the
Strategic Transition Committee consist of Jack Harrison (chair of the committee), Gioia Messinger and Kenneth Potashner. As compensation for the services that they are expected
to perform as members of the Strategic Transition Committee (i) Mr. Harrison and Ms. Messinger shall be entitled to receive $2,000 per month in cash, commencing January 1, 2023
and continuing for so long as the Strategic Transition Committee remains in effect, which cash payments shall be paid to each of the relevant members in one lump sum at or about
such time that the Strategic Transition Committee is disbanded, and (ii) Mr. Potashner shall be entitled to receive (A) 3,333 shares of Company common stock per month,
commencing November 1, 2022 and continuing for so long as the Strategic Transition Committee remains in effect, which shares shall be issued to Mr. Potashner in one grant at or
about such time that the Strategic Transition Committee is disbanded, and (B) a one-time cash payment equal to 30% of the total value of the shares issued to Mr. Potashner to
cover taxes payable in connection with the issuance of such shares.
The €500,000 note payable to VR Bank due February 1, 2023, was extended to July 31, 2023, and the interest rate was increased to 4.76%.
The €500,000 note payable to UniCredit Bank due February 16, 2023, was extended to August 16, 2023, and the interest rate was increased to 4.70%.
F-35
Exhibit
Number
2.1
2.2
3.1
3.2
4.1
4.2
4.3
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8
10.9
10.10
Exhibit Description
Agreement and Plan of Merger and Reorganization, dated August 22,
2018, with Concept Development Inc.
Form
8-K
File No.
001-38371
Exhibit
2.1
Filing Date
September 6, 2018
Filed
Herewith
Exhibit Index
Share Purchase Agreement, dated October 31, 2018, with Bressner
Technology GmbH.
8-K
001-38371
Amended and Restated Certificate of Incorporation (currently in
effect).
8-K/A
001-38371
Bylaws, as amended (currently in effect).
Description of Capital Stock
Second Amended and Restated Investors’ Rights Agreement, dated
January 2007.
Common Shareholder Piggyback Registration Rights Agreement,
dated July 15, 2016.
8-K
001-38371
10-K
001-38371
S-1
S-1
333-222121
333-222121
2.1
3.1
3.2
4.1
4.2
4.3
November 6, 2018
March 21, 2018
February 6, 2018
March 24, 2022
December 18, 2017
December 18, 2017
Form of Indemnification Agreement between One Stop Systems, Inc.
and each its directors and executive officers.
S-1/A
333-222121
10.1
January 16, 2018
One Stop Systems, Inc. 2000 Stock Option Plan and related form
agreements.
One Stop Systems, Inc. 2011 Stock Option Plan and related form
agreements.
One Stop Systems, Inc. 2015 Stock Option Plan and related form
agreements.
One Stop Systems, Inc. 2017 Stock Equity Incentive Plan and related
form agreements.
S-1
S-1
S-1
S-1
333-222121
10.2
December 18, 2017
333-222121
10.3
December 18, 2017
333-222121
10.4
December 18, 2017
333-222121
10.5
December 18, 2017
Amendment No. 1 to the 2017 Stock Equity Incentive Plan.
8-K
001-38371
Amendment No. 2 to the 2017 Stock Equity Incentive Plan.
10-Q
001-38371
Lease Agreement dated October 21, 2004, as amended.
S-1/A
333-222121
Piggyback Registration Rights Agreement by and between One Stop
Systems, Inc. and James M. Reardon, dated August 31, 2018.
Employment Agreement between One Stop Systems, Inc., and David
Raun, dated June 24, 2020.
8-K
8-K
81
10.2
10.7
10.9
10.1
June 25, 2020
August 12, 2021
January 16, 2018
September 6, 2018
001-38371
001-38371
10.1
June 25, 2020
10.11
10.12
10.13
10.14
10.15
10.16
Form of Senior Secured Convertible Promissory Note.
Form of Securities Purchase Agreement, dated April 20, 2020, by and
between the Company and the investors.
Form of Security Agreement, dated April 20, 2020, by and between
the Company, certain of its subsidiaries and the investors.
Form of Intercreditor Agreement, dated April 20, 2020, by and
between the Company, the investors and certain secured parties.
Senior Secured Convertible Promissory Note, dated April 24, 2020, by
and between the Company and the investor.
Promissory Note, dated as of April 28, 2020, by and between One
Stop Systems, Inc., as Borrower, and Cache Valley Bank, as Lender.
10.17
Form of Securities Purchase Agreement.
8-K
8-K
8-K
8-K
8-K
8-K
8-K
001-38371
001-38371
4.1
10.1
April 21, 2020
April 21, 2020
001-38371
10.2
April 21, 2020
001-38371
10.3
April 21, 2020
001-38371
4.2
April 24, 2020
001-38371
10.1
May 15, 2020
001-38371
10.1
March 3, 2021
21.1
23.1
31.1
31.2
32.1
32.2
Company Organizational Structure
Haskell & White Consent
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.
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.
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.
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
82
X
X
X
X
*
*
**
**
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.
+ Indicates management contract or compensatory plan.
83
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 23, 2023
ONE STOP SYSTEMS, INC.
By:
/s/ David Raun
David Raun
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Name
Title
/s/ David Raun
David Raun
/s/ John W. Morrison Jr.
John W. Morrison Jr.
/s/ Kenneth Potashner
Kenneth Potashner
/s/ Kimberly Sentovich
Kimberly Sentovich
/s/ Sita Lowman
Sita Lowman
/s/ Jack Harrison
Jack Harrison
/s/ Gioia Messinger
Gioia Messinger
/s/ Greg Matz
Greg Matz
President and Chief Executive Officer (Principal Executive Officer) and
Director
Chief Financial Officer
(Principal Accounting and Financial Officer)
Chairman
Director
Director
Director
Director
Director
84
Date
March 23, 2023
March 23, 2023
March 23, 2023
March 23, 2023
March 23, 2023
March 23, 2023
March 23, 2023
March 23, 2023
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-227671) and the Registration Statement on Form S-8
(File No. 333-257219) of One Stop Systems, Inc. (the “Company”) of our report dated March 23, 2023, relating to the Company’s consolidated financial
statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022
/s/ Haskell & White LLP
HASKELL & WHITE LLP
Exhibit 23.1
Irvine, California
March 23, 2023
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
Exhibit 31.1
I, David Raun, certify that:
1.I have reviewed this Annual Report on Form 10-K 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: March 23, 2023
By:
/s/ David Raun
David Raun
President and Chief Executive Officer
(Principal Executive Officer)
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
Exhibit 31.2
I, John W. Morrison Jr., certify that:
1.I have reviewed this Annual Report on Form 10-K 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: March 23, 2023
By:
/s/ John W. Morrison Jr.
John W. Morrison Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
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
Exhibit 32.1
In connection with the Annual Report on Form 10-K of One Stop Systems, Inc. (the “Company”) for the year ended December 31, 2022, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, David Raun, 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: March 23, 2023
By:
/s/ David Raun
David Raun
President and Chief Executive Officer
(Principal Executive Officer)
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
Exhibit 32.2
In connection with the Annual Report on Form 10-K of One Stop Systems, Inc. (the “Company”) for the year ended December 31, 2022, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, John W. Morrison Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant
to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 23, 2023
By:
/s/ John W. Morrison Jr.
John W. Morrison Jr.
Chief Financial Officer
(Principal Accounting and Financial Officer)