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

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

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

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

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

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

As of April 30, ~~2020,~~2021, the registrant had ~~16,485,362~~18,510,415 shares of common stock (par value $0.0001) outstanding.

	Unaudited						Unaudited
	March 31,			December 31,			March 31,			December 31,
	2020			2019			2021			2020
ASSETS
Current assets
Cash and cash equivalents	$	3,038,006		$	5,185,321		$	19,614,315		$	6,316,921
Accounts receivable, net		9,111,679			11,667,157			5,733,675			7,458,383
Inventories, net		8,984,877			7,369,356			9,548,960			9,647,504
Prepaid expenses and other current assets		840,525			453,938			889,043			655,708
Total current assets		21,975,087			24,675,772			35,785,993			24,078,516
Property and equipment, net		3,552,551			3,568,564			3,368,959			3,487,178
Deposits and other		45,133			47,146			45,136			81,709
Deferred tax assets, net		3,459,972			3,019,823			3,638,073			3,698,593
Goodwill		7,120,510			7,120,510			7,120,510			7,120,510
Intangible assets, net		1,171,667			1,346,192			498,357			662,257
	$	37,324,920		$	39,778,007		$	50,457,028		$	39,128,763


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	3,833,791		$	4,115,977		$	2,735,695		$	976,420
Accrued expenses and other liabilities		4,610,506			4,607,432			3,585,102			3,481,444
Current portion of notes payable, net of debt discount of $7,019 and $7,019, respectively (Note 8)		1,016,814			1,377,751
Current portion of related-party notes payable, net of debt discount of $23,060 and $23,060, respectively (Note 8)		575,422			561,441
Current portion of notes payable, net of debt discount of $292 and $2,047, respectively (Note 7)								1,190,065			1,365,204
Current portion of related party notes payable, net of debt discount of $962 and $6,726, respectively (Note 7)								50,685			199,943
Current portion of senior secured convertible note, net of debt discounts of $165,731 and $256,242, respectively (Note 7)								2,288,814			1,789,212
Total current liabilities		10,036,533			10,662,601			9,850,361			7,812,223
Notes payable, net of current portion and debt discount of $292 and $2,047, respectively (Note 8)		15,722			149,301
Related-party notes payable, net of current portion and debt discount of $961 and $6,726 , respectively (Note 8)		50,686			199,943
Senior secured convertible note, net of current portion and debt discounts of $0 and $14,107 (Note 7)								136,364			531,347
Paycheck protection program note payable (Note 7)								1,499,360			1,499,360
Total liabilities		10,102,941			11,011,845			11,486,085			9,842,930
Commitments and contingencies (Notes 10 and 11)
Commitments and contingencies (Note 9)
Stockholders’ equity
Common stock, $.0001 par value; 50,000,000 shares authorized; 16,476,661 and 16,121,747 shares issued and outstanding, respectively		1,647			1,612
Common stock, $.0001 par value; 50,000,000 shares authorized; 18,502,902 and 16,684,424 shares issued and outstanding, respectively								1,850			1,668
Additional paid-in capital		30,144,896			30,537,015			40,652,472			30,758,354
Noncontrolling interest		-			500
Accumulated other comprehensive loss		(73,340	)		(17,773	)
Accumulated other comprehensive income								37,159			287,547
Accumulated deficit		(2,851,224	)		(1,755,192	)		(1,720,538	)		(1,761,736	)
Total stockholders’ equity		27,221,979			28,766,162			38,970,943			29,285,833
	$	37,324,920		$	39,778,007		$	50,457,028		$	39,128,763

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2020			2019			2021			2020
Revenue	$	13,359,637		$	10,057,899		$	13,315,752		$	13,359,637
Cost of revenue		9,963,950			7,646,277			8,882,968			9,963,950
Gross profit		3,395,687			2,411,622			4,432,784			3,395,687
Operating expenses:
General and administrative		2,514,065			2,043,934			2,157,619			2,514,065
Marketing and selling		1,189,351			1,137,932			1,167,901			1,189,351
Research and development		1,203,425			1,261,964			832,233			1,203,425
Total operating expenses		4,906,841			4,443,830			4,157,753			4,906,841
Loss from operations		(1,511,154	)		(2,032,208	)
Other income (expense):
Income (loss) from operations								275,031			(1,511,154	)
Other income (expense), net:
Interest income		24,637			3,107			5,300			24,637
Interest expense		(68,784	)		(6,268	)		(149,982	)		(68,784	)
Other income (expense), net		(8,029	)		(11,271	)		(28,629	)		(8,029	)
Total other income (expense), net		(52,176	)		(14,432	)		(173,311	)		(52,176	)
Loss before income taxes		(1,563,330	)		(2,046,640	)
Benefit for income taxes		(467,298	)		(1,101,911	)
Net loss attributable to common stockholders	$	(1,096,032	)	$	(944,729	)

Net loss per share attributable to common stockholders:
Income (loss) before income taxes								101,720			(1,563,330	)
Provision (benefit) for income taxes								60,522			(467,298	)
Net income (loss)							$	41,198		$	(1,096,032	)
Net income (loss) per share:
Basic	$	(0.07	)	$	(0.07	)	$	0.00		$	(0.07	)
Diluted	$	(0.07	)	$	(0.07	)	$	0.00		$	(0.07	)

Weighted average common shares outstanding:
Basic		16,332,898			14,239,711			17,348,164			16,332,898
Diluted		16,332,898			14,239,711			18,642,061			16,332,898

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2020			2019			2021			2020
Net loss attributable to common stockholders	$	(1,096,032	)	$	(944,729	)
Net income (loss)							$	41,198		$	(1,096,032	)
Other comprehensive loss:
Currency translation adjustment		(55,567	)		(41,869	)		(250,388	)		(55,567	)
Total other comprehensive loss		(55,567	)		(41,869	)		(250,388	)		(55,567	)
Comprehensive loss	$	(1,151,599	)	$	(986,598	)	$	(209,190	)	$	(1,151,599	)

Common Stock

Accumulated
Other

Total

Shares

Amount

Additional
Paid-in-Capital

Noncontrolling
Interest

Comprehensive
loss

Accumulated
Deficit

Stockholders'
Equity

Balance, January 1, 2020

16,121,747

$
1,612

$
30,537,015

$
500

$
(17,773
)
$
(1,755,192
)
$
28,766,162

Stock-based compensation

-

-

207,761

-

-

-

207,761

Exercise of stock options, RSU's and Warrants

354,914

35

56,965

-

-

-

57,000

Return of capital upon dissolution of SkyScale

(500
)

(500
)
Taxes paid on net issuance of employee stock options

-

-

(656,845
)

-

-

-

(656,845
)
Currency translation adjustment

-

-

-

-

(55,567
)

-

(55,567
)
Net loss

-

-

-

(1,096,032
)

(1,096,032
)
Balance, March 31, 2020

16,476,661

$
1,647

$
30,144,896

$
-

$
(73,340
)
$
(2,851,224
)
$
27,221,979

	Common Stock									Accumulated Other						Total
	Shares		Amount		Additional Paid-in-Capital			Noncontrolling Interest		Comprehensive income			Accumulated Deficit			Stockholders' Equity
Balance, January 1, 2021		16,684,424	$	1,668	$	30,758,354		$	-	$	287,547		$	(1,761,736	)	$	29,285,833
Stock-based compensation		-		-		438,394			-		-			-			438,394
Exercise of stock options, RSU's and warrants		321,472		32		278,936			-		-			-			278,968
Proceeds from issuance of stock, net of issuance costs of $778,810		1,497,006		150		9,221,040			-		-			-			9,221,190
Taxes paid on net issuance of employee stock options		-		-		(44,252	)		-		-			-			(44,252	)
Currency translation adjustment		-		-		-			-		(250,388	)		-			(250,388	)
Net Income		-		-		-			-		-			41,198			41,198
Balance, March 31, 2021		18,502,902	$	1,850	$	40,652,472		$	-	$	37,159		$	(1,720,538	)	$	38,970,943

	Common Stock								Accumulated Other						Total			Common Stock										Accumulated Other						Total
	Shares		Amount		Additional Paid-in-Capital		Noncontrolling Interest		Comprehensive Income (loss)			Accumulated Deficit			Stockholders' Equity			Shares		Amount		Additional Paid-in-Capital			Noncontrolling Interest			Comprehensive loss			Accumulated Deficit			Stockholders' Equity
Balance, January 1, 2019		14,216,328	$	1,422	$	27,424,113	$	500	$	1,142		$	(854,855	)	$	26,572,322
Balance, January 1, 2020																			16,121,747	$	1,612	$	30,537,015		$	500		$	(17,773	)	$	(1,755,192	)	$	28,766,162
Stock-based compensation		-		-		167,474		-					-			167,474			-		-		207,761			-			-			-			207,761
Exercise of stock options, RSU's and Warrants		54,098		5		14,196		-		-			-			14,201
Exercise of stock options																			354,914		35		56,965			-			-			-			57,000
Return of capital upon dissolution of SkyScale																										(500	)								(500	)
Taxes paid on net issuance of employee stock options																			-		-		(656,845	)		-			-			-			(656,845	)
Currency translation adjustment		-		-		-				(41,869	)		-			(41,869	)		-		-		-			-			(55,567	)		-			(55,567	)
Net loss		-		-		-		-		-			(944,729	)		(944,729	)		-		-		-									(1,096,032	)		(1,096,032	)
Balance, March 31, 2019		14,270,426	$	1,427	$	27,605,783	$	500	$	(40,727	)	$	(1,799,584	)	$	25,767,399
Balance, March 31, 2020																			16,476,661	$	1,647	$	30,144,896		$	-		$	(73,340	)	$	(2,851,224	)	$	27,221,979

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2020			2019			2021			2020
Cash flows from operating activities:
Net loss attributable to common stockholders	$	(1,096,032	)	$	(944,729	)
Adjustments to reconcile net loss to net cash used in operating activities:
Net income (loss)							$	41,198		$	(1,096,032	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Deferred benefit for income taxes		(441,282	)		(1,165,219	)		(59,290	)		(441,282	)
(Gain) on disposal of property and equipment		(1,542	)		(1,050	)		-			(1,542	)
Provision for bad debt		(2,405	)		(88	)		(16,590	)		(2,405	)
Warranty reserves		5,075			(3,428	)		13,944			5,075
Amortization of deferred gain		(41,479	)		(16,479	)		-			(41,479	)
Amortization of intangibles		174,525			349,419			163,900			174,525
Depreciation		221,300			115,308			216,878			221,300
Inventory reserves		148,418			57,046			154,335			148,418
Amortization of debt discount		7,520			-			61,210			7,520
Stock-based compensation expense		207,761			167,474			438,394			207,761
Changes in operating assets and liabilities:
Accounts receivable		2,530,072			1,868,297			1,697,901			2,530,072
Inventories		(1,826,564	)		(2,699,867	)		(223,160	)		(1,826,564	)
Prepaid expenses and other current assets		(386,005	)		(185,596	)		(152,561	)		(386,005	)
Accounts payable		(275,428	)		1,467,746			1,795,141			(275,428	)
Accrued expenses and other liabilities		54,293			791,149			159,766			54,293
Net cash used in operating activities		(721,773	)		(200,017	)
Net cash provided by (used in) operating activities								4,291,066			(721,773	)

Cash flows from investing activities:
Purchases of property and equipment, including capitalization of labor costs for test equipment and ERP		(200,049	)		(803,243	)		(121,759	)		(200,049	)
Proceeds from sales of property and equipment		1,542			1,050			-			1,542
Net cash used in investing activities		(198,507	)		(802,193	)		(121,759	)		(198,507	)

Cash flows from financing activities:
Proceeds from issuance of stock and stock options exercised		57,000			14,201
Proceeds from exercise of stock options and warrants								278,968			57,000
Payment of payroll taxes on net issuance of employee stock options		(656,845	)		-			(44,252	)		(656,845	)
Proceeds from issuance of stock								10,000,000			-
Stock issuance costs								(778,810	)		-
Net (repayment) borrowings on bank lines of credit		(430,313	)		140,967			(80,117	)		(430,313	)
Net repayments on related-party notes payable		(141,042	)		-			(155,022	)		(141,042	)
Net repayments on notes payable		(42,919	)		(972,440	)		(47,174	)		(42,919	)
Net cash used in financing activities		(1,214,119	)		(817,272	)
Net cash provided by (used in) financing activities								9,173,593			(1,214,119	)

Net change in cash and cash equivalents		(2,134,399	)		(1,819,482	)		13,342,900			(2,134,399	)
Effect of exchange rates on cash		(12,916	)		2,660			(45,506	)		(12,916	)
Cash and cash equivalents, beginning of period		5,185,321			2,272,256			6,316,921			5,185,321
Cash and cash equivalents, end of period	$	3,038,006		$	455,434		$	19,614,315		$	3,038,006

	For the Three Months Ended March 31,				For the Three Months Ended March 31,
	2020		2019		2021		2020
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	22,369	$	6,268	$	83,392	$	22,369
Cash paid during the period for income taxes	$	-	$	62,349	$	80,629	$	-

For The Three ~~Months~~Month Periods Ended March 31, ~~2020~~2021 and ~~2019~~2020

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 industrial grade computer systems and components that are based on industry standard computer architectures. The Company markets its products to manufacturers of automated equipment used for media and entertainment, ~~telecommunications,~~medical, industrial, and military applications.

During the year ended December 31, 2015, the Company formed a ~~new wholly-owned~~wholly owned subsidiary in Germany, One Stop Systems, GmbH (“OSS GmbH”). During July 2016, the Company acquired Mission Technologies Group, Inc. (“Magma”) and its operations.

In April 2017, the Company and a related entity formed a joint venture named SkyScale, LLC in the State of California (“SkyScale”). In accordance with the Contribution Agreement, each member contributed $750,000 and received a 50% interest in the joint venture. The purpose of SkyScale was to engage in the business of providing high performance computing capabilities as cloud services. As a result of changes in the competitive landscape and downward pressure on pricing from large competitors, the members toof the SkyScale joint venture agreement agreed to dissolve SkyScale and ceased operations as of December 31, 2018.

In May 2017, the Company entered into a Technology and Software License Agreement with Western Digital (“WDT”) for their Ion flash storage software. The agreement provides the Company with the Ion source code and rights to develop and market derivative products. The Company intends to develop and sell Ion flash storage software with its high-density storage arrays, as well as service existing WDT software users.

In July 2017, the Company entered in to a Service Agreement with WDT to service its existing customer base that utilizes Ion flash storage software. The Company also purchased certain equipment from WDT and hired selected employees to assist in the servicing of these existing customers. Management has determined that the activities and assets acquired from WDT comprise a business as defined in ASC 805-10-55-4 through 55. Consideration paid by the Company to WDT pursuant to the arrangements described above was $67,000. In addition, the Company is required to pay prospective royalties to WDT of $2,500 or $5,000 for each sale of the Company’s products that include licensed software. WDT is obligated to pay the Company for services rendered to support existing WDT software users the amount of $1,400,000 in defined declining quarterly amounts over a three year period. Management does not believe this business acquisition meets the significance definition provided in Regulation S-X, Rule 210.1-02(w).

On August 31, 2018, the Company acquired Concept Development Inc. ~~(CDI)~~(“CDI”) located in Irvine, ~~California for cash of $646,759, and common stock valued at $4,194,673 (Note 3).~~California. CDI specializes in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment and networking systems.

CDI has been fully integrated into the core operations of OSS as of June 1, 2020.

On October 31, 2018, ~~the Company’s wholly-owned German subsidiary,~~ OSS GmbH acquired 100% of the outstanding stock of Bressner Technology GmbH, a Germany limited liability company located near Munich, Germany ~~from its principal owners~~(“Bressner”). Bressner provides standard and customized servers, panel PCs, and PCIe expansion systems. Bressner also provides manufacturing, test, and sales and marketing services for ~~cash consideration of €4,725,000 (US$5,374,582) and stock consideration of 106,463 newly-issued restricted shares of the Company’s common stock.~~customers throughout Europe.

Given our ~~recent~~recurring operating losses, the Company’s primary sources of liquidity have been provided by (i) the Company’s February 2018 initial public offering (net proceeds were approximately $16,100,000),; (ii) March 2019 notes payable from members of the Board of Directors and others of ~~$1,500,000,~~$1,500,000; (iii) the July 2019 sale of ~~1,554,832~~1,554,546 shares of the Company’s common stock for net cash proceeds of ~~$2,488,148 and~~$2,488,148; (iv) the April 24, 2020 sale of $3,000,000 of Senior Secured Convertible Promissory Notes issued at a 10% original issue ~~discount.~~

discount; (v) receipt of approximately $1,500,000 on April 28, 2020 of government loan proceeds under the Paycheck Protection Program, and (vi) a receipt of approximately $9,221,000 on March 3, 2021 in a registered direct offering.

As of March 31, ~~2020,~~2021, the Company’s cash and cash equivalents were ~~$3,038,006~~$19,614,315 and working capital was ~~$11,938,554.~~$25,935,632. Cash and cash equivalents held by Bressner totaled ~~$599,511~~$1,263,430 (USD) at March 31, ~~2020, and~~2021. Bressner’s debt covenants do not permit the use of ~~those~~these funds by its parent company.

During the three ~~months~~month period ended March 31, 2021, the Company experienced an operating income of $275,031, with cash generated by operating activities of $4,291,066. During the year ended December 31, 2020, the Company experienced an operating loss of ~~$1,511,154,~~$424,281, with cash used in operating activities of $721,773. Our largest customer, engaged in the media and entertainment industry, is having significant financial hardships attributable to the COVID-19 pandemic and as a result has been slow in paying its outstanding accounts receivables. The Company has formulated a plan whereby extended terms have been made available, and our customer is presently honoring those terms.$250,173.

The Company’s revenue growth ~~inclusive~~during the prior year slowed due to the effects of ~~two acquisitions made~~COVID-19. However, resulting from a reduction in ~~2018,~~force and strict cost containment, the Company has ~~resulted in growth~~been able to mitigate the effects, to some degree, of the ~~Company as a whole, but has been offset by increased spending in all areas~~reduced revenue attributable to the economic impact of ~~operating expenses: general and administrative, marketing and selling, and research and development.~~ COVID-19.

~~The recent outbreak of the novel strain of coronavirus, or COVID-19, which has been declared by~~In March 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic and the United States federal government declared it a national emergency. COVID-19 continues to ~~be a “public health emergency of international concern,” has spread across the globe and is impacting~~impact worldwide economic activity. A public health pandemic, including COVID-19, poses the risk that we or our employees, contractors, customers, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. ~~While it is not possible at this time to estimate~~

More generally, COVID-19 raises the ~~impact that COVID-19~~possibility of an extended global economic downturn, which could ~~have on~~affect demand for our ~~business, the continued spread of COVID-19~~products and ~~the measures taken by the governments of countries affected could disrupt the supply chain~~services, and ~~adversely~~ impact our ~~business,~~results and financial condition ~~or results of operations. The~~even after the pandemic is contained and remediation/restriction measures are lifted. For example, we may be unable to collect receivables from customers that are significantly impacted by COVID-19. Also, a decrease in orders in a given period could negatively affect our revenues in future periods. COVID-19 ~~outbreak and mitigation measures~~ may also have ~~an adverse~~the effect of heightening many of the other risks described in the “Risk Factors” section of our December 31, 2020 Annual Report on Form 10-K filed March 25, 2021, including risks associated with our customers and supply chain. We will continue to evaluate the nature and extent of the impact of COVID-19 to our business.

Presently, it is clear the global economy has been negatively impacted by COVID-19, and demand for some of our products and services have been reduced due to uncertainty and the economic impact of COVID-19. In particular, in the media and entertainment industry, demand for the use of outdoor media equipment has been impacted due to restrictions on ~~global economic conditions which could~~public gatherings. Until such restrictions improve, we expect that demand for certain of our clients’ products and services will be limited, and may not return to prior levels, and thus, may impact our financial results and operations.

Specifically, our business has also begun to be negatively affected by a range of external factors related to COVID-19 that are not within our control. For example, numerous measures have been implemented by governmental authorities across the globe to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, restrictions and limitations of public gatherings, and business limitations and shutdowns. Many of our customers’ businesses have been severely impacted by these measures and some have been required to reduce employee headcount as a result. If a significant number of our customers are unable to continue as a going concern, this would have an adverse ~~effect~~impact on our business and financial condition. ~~The extent~~In addition, many of our customers are working remotely, which may delay the timing of new business and implementations of our services. If COVID-19 continues to ~~which the COVID-19 outbreak impacts~~have a substantial impact on our partners, customers, or suppliers, our results of operations and overall financial performance will ~~depend on future developments that are highly uncertain and cannot~~ be ~~predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.~~harmed.

Though management has been ~~successfully~~proactively managing through the current known impacts, if the situation further deteriorates or the outbreak results in further restriction on ~~both~~ supply and demand factors, our cash flows, financial position and operating results for ~~fiscal~~ year ~~2020~~2021 and beyond will be negatively impacted. Neither the length of time nor the magnitude of the negative impacts can be presently determined.

The longer the COVID-19 pandemic persists, the greater the potential for significant adverse impact to our business operations. Quarantines, travel restrictions, prohibitions on non-essential gatherings, shelter-in-place orders and other similar directives and policies intended to reduce the spread of the disease, may reduce our productivity and that of the third parties on which we rely and may disrupt and delay many aspects of our business.

The Company is complying with state mandated requirements for safety in the workplace to ensure the health, safety and welling-being of our employees. These measures included personal protective equipment, social distancing, and cleanliness of the facilities and daily monitoring of the health of employees in our facilities. We have not developed a specific and comprehensive contingency plan designed to address the challenges and risks presented by the COVID-19 pandemic, even if and when we do develop such a plan, there can be no assurance that such plan will be effective in mitigating the potential adverse effects on our business, financial condition and results of operations.

Management’s plans with respect to the above is to continue its efforts towards responding to ~~restructure~~ the ~~Company with the primary objectives of reducing~~changing economic landscape attributable to COVID-19, to continue to reduce costs, ~~conserving~~conserve cash, ~~strengthening~~strengthen margins, and ~~improving~~improve company-wide execution. Specific actions already implemented by management include ~~the deferral of certain executive and Board compensation payments,~~ a reduction in force, a limited freeze on hiring, ~~and~~reduced work week, minimizing overtime, travel and entertainment, and contractor costs. On April 7, 2020, the Company implemented a cost reduction plan which included the termination of certain employees and elimination of certain costs. ~~Estimated savings~~Savings from this effort are estimated to be $2.5 ~~to $3.0~~ million ~~for the year ending 2020.~~

While management expects these actions to result in prospective cost reductions, management is also committed to securing debt and/or equity financing to ensure that liquidity will be sufficient to meet the Company’s cash requirements through at least a period of the next twelve months. Management believes potential sources of liquidity include at least the following:

As a result of management’s cost reduction plans, the Company’s ~~potential~~ sources of liquidity and management’s most recent cash flow forecasts, management believes that the Company has sufficient liquidity to satisfy its anticipated cash requirements for at least the next twelve months. However, there can be no assurance that management’s cost reduction efforts will be effective, the forecasted cash flows will be achieved, or that external sources of financing, including the issuance of debt and/or equity securities, will be available at times and on terms acceptable to the Company, or at all.

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

The unaudited consolidated financial statements herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities Exchange Commission (“SEC”). The accompanying interim unaudited consolidated financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the latest year ended December 31, ~~2019.~~2020. Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, ~~2019~~2020 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements. The Company evaluated all subsequent events and transactions through the date of filing this report.

~~Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.~~ In the opinion of management, all adjustments considered necessary for a fair presentation have been ~~included.~~included in the accompanying condensed financial statements. Operating results for the three months ended March 31, ~~2020,~~2021, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2020.~~2021. For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, ~~2019~~2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on March ~~26, 2020.~~25, 2021.

The accompanying ~~unaudited~~ consolidated financial statements include the accounts of OSS, which include the ~~results from the Magma acquisition, Ion business combination, and~~ acquisition of Concept Development Inc., ~~since their respective dates of acquisition,~~ its ~~wholly-owned~~wholly owned subsidiary, OSS GmbH, which also includes the acquisition of Bressner Technology ~~GmbH, and the accounts of the joint venture, SkyScale LLC, which was approved for dissolution on December 31, 2018 (collectively referred to as the “Company”).~~GmbH. Intercompany balances and transactions have been eliminated in consolidation.

There have been no changes to our accounting policies disclosed in our audited consolidated financial statements and the related notes for the year ended December 31, 2020.

The preparation of condensed consolidated financial statements in conformity with ~~accounting principles generally accepted in the United States of America~~U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, ~~revenues and expenses, and disclosures~~disclosure of contingent ~~assets,~~ liabilities ~~and expenses~~ at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.

Significant estimates made by management include, among others, the fair value of acquired net assets of CDI in August 2018 with reevaluation in April 2019, and Bressner Technology GmbH in October 2018, the allowance for doubtful accounts, fair value of stock options, recoverability of inventories and long-lived assets, and realizability of deferred tax assets. Actual results could differ from these estimates and assumptions.

On an ongoing basis, our management evaluates these estimates and assumptions, including those ~~estimates.~~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.

At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (“FDIC”), which provides basic deposit coverage with limits up to $250,000 per owner. As of March 31, ~~2020,~~2021, we had approximately $3.6 million in net deferred tax assets (DTAs). These DTAs include approximately $5.1 million related to net operating loss carryforwards that can be used to offset taxable income in future periods and reduce our income taxes payable in those future periods. At this time, we consider it more likely than not that we will have sufficient taxable income in the ~~Company had $2,169,502~~future that will allow us to realize these DTAs. However, it is possible that economic conditions may decrease the likelihood that we will have sufficient taxable income in ~~excess~~the future. Therefore, unless we are able to generate sufficient taxable income from our operations, a substantial valuation allowance to reduce our U.S. DTAs may be required, which would materially increase our expenses in the period the allowance is recognized and materially adversely affect our results of ~~the insurance limits. The Company has not experienced any such losses in these accounts. In Germany, the deposit insurance is €100,000 per bank, per customer. As~~operations and statement of ~~March 31, 2020, Bressner has €443,844 (US$489,275) on deposit with banks in excess of the insurance limits.~~financial condition.

InOn March 11, 2021, Congress passed, and the ~~three month periods ended March 31, 2020, and 2019,~~President signed into law, the ~~Company has one customer~~American Rescue Plan Act, 2021 (the “ARP”), which ~~represented greater than 10%~~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 2021. We will continue to evaluate the impact of ~~the Company’s revenue. Collectively, this customer represented approximately 27%, and 26%~~new legislation on our financial position, results of ~~revenue, respectively. As of March 31, 2020 and December 31, 2019, one customer accounted for 59% and 45% of net trade accounts receivables, respectively.~~

The Company made purchases from certain suppliers of which each supplier was greater than 10% of the Company’s total vendor purchases on an annual basis. Collectively these vendors represented approximately 17~~% and 30% of purchases for the three month periods ended March 31, 2020, and 2019, respectively.~~

~~Cash~~operations, 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 90 days 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.

Accounts receivable 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 costs 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. At March 31, 2020 and December 31, 2019, the allowance for doubtful accounts was $11,518, and $14,000, respectively.

Revenues earned in excess of related billings are recorded as an asset on the balance sheet as unbilled receivables. Unbilled receivables as of March 31, 2020 and December 31, 2019, were $214 and $25,432, respectively.flows.

~~Inventories~~Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are ~~valued at the lower~~not aware of ~~cost~~any specific event or ~~net realizable value. The Company uses the average cost method for purposes~~circumstance that would require an update to our estimates or assumptions or a revision of ~~determining cost, which approximates the first-in, first-out method.~~

~~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, 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 three 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 income (expense), net.

Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event has occurred. The Company reviews goodwill for impairment annually on December 31. The Company completed its annual assessment for goodwill impairment and determined that goodwill is not impaired as of December 31, 2019 and no adjustment was required.

In April 2019, the Company performed an impairment test of goodwill, as a result of a short-fall in the actual overall financial performance of CDI as compared to plan, a recurring need for working capital, and a decrease in the Company’s stock price. As a result of this interim evaluation, the Company recorded an impairment loss to goodwill of $1,697,394, which was charged to operating expenses during the second quarter of 2019.

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 2019 and determined that there was no impairment as of December 31, 2019. There were no events or circumstances that arose during the three month period ended March 31, 2020, that gave an indication of impairment. 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.

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:

The carrying value of financial instruments including cash and cash equivalents accounts receivable and accounts payable and accrued expenses, lines of credit, and other liabilities approximate fair value due to the short-term nature of these instruments. Assets and liabilities assumed in the acquisition of the Ion software, Concept Development Inc., and Bressner Technology GmbH were recorded at fair value based upon the Company’s market assumptions which approximated carrying value (except for acquired intangible assets – Note 3) due to the short-term nature of the instruments. The carrying amounts of the Company’s notes payable and Bressner’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.

On January 1, 2019, the Company adopted the new accounting standard update ASC 606, Revenue from Contracts with Customers, which superseded nearly all existing revenue recognition guidance under GAAP, to all contracts using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The Company’s performance obligations are satisfied over time as work is performed or at a point in time. The majority of the Company’s revenue is recognized at a point in time when products ship and control is transferred to the customer. The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied.

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.

~~The~~ Company recorded revenue from product sales that are held in vendor managed inventory under these agreements of $3,179,943 and $1,494,078 during the three month periods ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, $1,329,057 and $459,893, respectively, of product sold through those dates were held by the Company in the vendor management program.

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.

~~During the three month periods ended March 31, 2020 and 2019, revenue recognized on a fixed price contractual basis was $73,750 and $43,071, respectively.~~

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.

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. Deferred revenue was $12,359 and $24,718 as of March 31, 2020 and December 31 2019, respectively.

Remaining performance obligations represent the amount of revenue from fixed-fee contracts. As of March 31, 2020 and December 31, 2019, approximately $0, attributable to cancellation of a contract, and $317,718, respectively of revenue from fixed-fee contracts that is expected to be recognized from these remaining performance obligations. We elected to utilize the practical expedient exemption to exclude from this disclosure the amount of revenue from contracts which are not fixed-fee and where we do not have the right to invoice until the services have been performed.

The Company’s operating segment revenues disaggregated by primary geographic market, which is determined based on a customer’s geographic location, for the three months ended March 31, 2020 and 2019 is as follows:

For The Three Month Period
Ended March 31, 2020

For The Three Month Period
Ended March 31, 2019

Entity:

Domestic

International

Total

Domestic

International

Total

Customized computers and flash
   arrays

$
6,207,898

$
1,610,380

$
7,818,278

$
2,042,510

$
3,187,576

$
5,230,086

In-flight entertainment &
   connectivity

529,406

92,540

621,946

296,529

2,925

299,454

Value-added reseller with
   minimal customization

-

4,919,413

4,919,413

-

4,528,359

4,528,359

$
6,737,304

$
6,622,333

$
13,359,637

$
2,339,039

$
7,718,860

$
10,057,899

The Company offers product warranties that extend for one year from the date of sale. Such warranties are considered assurance-type warranties and 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 at the time of sale based on its historical and estimated future product return rates and expected repair or replacement costs (Note 7).

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 amount of warranties sold for the three months ended March 31, 2020 and 2019 were $92,724 and $80,123, respectively.

The revenue that was recognized for the warranties sold for the three months ended March 31, 2020 and 2019 were $69,105 and $106,698, 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. The few that offer greater than a year warranty, the Company may be able to cover 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 March 31, 2020 and December 31, 2019, deferred revenue totaled $388,378 and $394,571, respectively. The Company expects to recognize $388,378 of unearned revenue amounts from 2020 through 2024.

~~The Company's shipping and handling costs are included in cost of goods sold for all periods presented.~~

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 statements of operations. ~~The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive (loss) income in the consolidated balance sheets.~~

We employ derivatives to manage certain market risks through the use of foreign exchange forward contracts. We do not use derivatives for trading or speculative purposes. Our derivatives are designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we enter into foreign exchange contracts to provide currency at a fixed rate. As of March 31, 2020, the Company had no foreign exchange contracts 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 other comprehensive income 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 income (expense) – net” in the consolidated statements of income in each period.

~~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 fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. 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.

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. The expected term of options granted is calculated using the simplified method, which is the weighted average vesting period and the contractual lives of the options.

This calculation is based on a method acceptable 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~~this Quarterly Report 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.

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:

~~While we use our best~~Form 10-Q. These estimates and assumptions may change as ~~part of the purchase price allocation process to accurately value assets acquired~~new events occur and ~~liabilities assumed at the business acquisition date, our estimates and assumptions are inherently uncertain and subject to refinement.~~additional information is obtained. As a result, ~~during the purchase price allocation period, which is generally one year~~actual results could differ materially from ~~the business acquisition date, we may record adjustments to the assets acquired~~these estimates 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 3.

Advertising costs are expensed as incurred and included in marketing and selling expense in the accompanying consolidated statements of operations. Advertising costs for the three month periods ended March 31, 2020 and 2019 were $122,092 and $130,922, respectively.

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.

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 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.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act resulted in two adjustments to our income tax provision for the three months ended March 31, 2020, relating to a projected 2018 NOL utilization and tax benefits from NOL carrybacks. We have recorded a discrete benefit of $100,000 in our income tax provision for the three months ended March 31, 2020 related to the CARES Act.

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.

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 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. assumptions.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s 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. ASU 2016-02 is effective for the Company for fiscal years beginning after December 15, ~~2020,~~2021, and interim periods within fiscal year ~~2022.~~2023. Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements and disclosures. Based on our preliminary analysis, management expects the Company’s assets and liabilities to increase by the present value of the lease ~~payments disclosed in Note 11.~~payments.

In ~~January 2017,~~June 2016, the FASB issued ASU ~~No. 2017-01,~~2016-13, ~~Business Combinations~~Financial Instruments-Credit Losses (Topic ~~805)~~326): ~~Clarifying~~Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the ~~Definition~~guidance on the impairment of ~~a Business~~ (“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 ~~2017-01”). The amendments in this update clarify~~2016-13 was amended by ASU 2019-10 that changed the ~~definition~~effective date of ~~a business~~ASU 2016-13 to fiscal years beginning after December 15, 2022, with early adoption permitted. Further, the ~~objective~~ASU clarifies that operating lease receivables are not within the scope of ~~adding guidance to assist entities with evaluating whether transactions~~ASC Subtopic 326-20 and should instead be accounted for ~~as acquisitions or disposals~~under the new leasing standard, ASC 842. The Company is currently evaluating the impact of ~~assets or businesses.~~adopting ASU ~~2017-01 is effective for the Company for the year ended~~ ~~December 31, 2019~~ ~~and interim reporting periods within 2020. The effect of the adoption of this guidance did not significantly impact the Company’s~~2016-13 on its consolidated financial ~~statements.~~statements and related disclosures.

In September 2018, the FASB issued ASU No. 2018-07, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting, which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. This ASU ~~becomes~~became effective for the year ~~ending~~ended December 31, 2020 (and interim periods in 2021) and early adoption is permitted but no earlier than an entity’s adoption date of Topic 606. Entities will apply the ASU by recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the annual period of adoption. We are currently evaluating the impact that. ASU 2018-07 ~~will have on our condensed~~did not materially impact the Company’s consolidated financial ~~statements.~~

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in FASB Topic 605, Revenue Recognition. ASU 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. This guidance provides a single, comprehensive accounting model for revenue arising from contracts with customers. This guidance supersedes most of the existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that a company expects to be entitled to upon transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer. The new guidance also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flow arising from customer contracts, including significant judgments and changes in judgments. We adopted this standard beginning January 1, 2019 and used the modified retrospective method of adoption. Under the new guidance, based on the nature of our contracts, we continued to recognize revenue in a similar manner as with the former guidance. ~~Additionally, we expect the unit of accounting, that is, the identification of performance obligations, will be consistent with current revenue guidance.~~ Accordingly, the adoption of this standard did not significantly impact our revenues.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company’s adoption of this guideline did not have a material effect on the Company’s consolidated financial statements.

In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Accounting for financial instruments with down rounds features (“ASU 2017-11”), which addressed (i) accounting for certain financial instruments with down round features, and (ii) replacement of the indefinite deferral for mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests with a scope exception. The main provisions of Part I of ASU 2017-11 are to change the classification analysis of certain equity-linked financial instruments and embedded features with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument or embedded conversion option no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Under previous US GAAP, the existence of down round features often result in an accounting conclusion that the evaluated feature or instrument is not indexed to the entity’s own stock, which results in classification as a derivative liability. ASU 2017-11 was adopted early by the Company on April 1, 2020, with no adjustments. The Company’s April 2020 convertible note payable described in Note 7 possesses down round features.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), an amendment to the guidance on income taxes, which is intended to simplify the accounting for income taxes. The amendment eliminates certain exceptions related to the methodology for calculating income taxes on an interim period, the approach for intra-period tax allocation, and the recognition of deferred tax liabilities for outside basis differences. The amendment also clarifies existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. The effective date of the standard is annual periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company elected to early adopt ASU 2019-12 prospectively as of July 1, 2020, which did not have a material impact on the consolidated financial statements, except for the elimination of the rule that limited the interim tax benefit to the tax benefit expected for the year. The early adoption resulted in the Company recording an additional interim tax benefit of $446,099 for the three months ended September 30, 2020. The adoption did not impact the Company’s annual income tax benefit or expense for the year ended December 31, 2020 or the amount of net deferred income tax assets as of March 31, 2021. The Company made the election to early adopt because, consistent with the FASB, it believes that it will reduce the time and cost associated with income tax accounting and reporting, while not adversely altering the information provided to stakeholders on an interim basis.

~~Definite lived intangible assets related to acquisition are as follows, as~~Accounts receivable, net consists of ~~March 31, 2020:~~the following:

Expected
Life

Remaining
Months

Gross
Intangible
Assets

Accumulated
Amortization

Net
Intangible
Assets

Customer lists and relationships

36 to 60 months

19 to 41 months

$
2,084,515

$
(1,226,805
)

$
857,710

Drawings and Technology

36 months

0 months

760,207

(760,207
)

-

Trade name, Trademarks & other

24 to 36 months

5 to 19 months

447,274

(255,655
)

191,619

Non-compete

36 months

19 months

246,797

(124,460
)

122,337

$
3,538,793

$
(2,367,126
)

$
1,171,667

	March 31,			December 31,
	2021			2020
Accounts receivable	$	5,749,660		$	7,491,397
Unbilled receivables		4			106
		5,749,664			7,491,503
Less: allowance for doubtful accounts		(15,989	)		(33,120	)
	$	5,733,675		$	7,458,383

~~Definite lived intangibles assets~~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. Provision for bad debt expense related to ~~acquisitions are as follows, as of December 31, 2019:~~

~~As of March 31, 2020, amortization expense of the definite lived intangible assets~~accounts receivable was ($16,590) and ($2,405) for the ~~years remaining is as follows:~~

~~Amortization expense recognized during the~~ three ~~months~~month periods ended March 31, 2021 and 2020, ~~and 2019 was $174,525 and $349,419,~~ respectively.

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. Recoveries of bad debt expense related to accounts receivable was ($2,405) and ($88) for the three month periods ended March 31, 2020 and 2019, respectively.

~~Property and equipment, net consists~~Definite lived intangible assets related to acquisition are as follows, as of March 31, 2021:

Definite lived intangibles assets related to acquisitions are as follows, as of December 31, 2020:

~~During~~Amortization expense recognized during the three ~~month periods~~months ended March 31, 2021 and 2020 was $163,900 and ~~2019, the Company incurred $221,300 and $115,308, respectively of depreciation and amortization expense related to property and equipment.~~$174,525, respectively.

	March 31,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Accrued compensation and related liabilities	$	1,798,990	$	1,621,177	$	992,810	$	932,988
Deferred revenue and customer deposits		1,410,491		1,260,126		1,281,663		1,096,672
Warranty reserve		422,782		424,011		425,377		425,636
Deferred rent						292,890		312,909
Other accrued expenses		978,243		1,302,118		592,362		713,239
	$	4,610,506	$	4,607,432	$	3,585,102	$	3,481,444

Bressner Technology GmbH has ~~three~~two revolving lines of credit with German institutions totaling ~~€3,600,000~~€2,200,000 (US$~~3,968,492)~~2,578,904). Borrowing under the lines of credit bear interest at a variable ~~rates~~rate of Euribor plus a stated rate. ~~Current~~The current rates for the lines of credit are ~~between 3.75%~~3.89% and ~~7.99%~~4.0%. One million euros of the credit line expires in January 2024, with the remaining balance being open indefinitely or until occurrence of a defined change of control event. There were no outstanding lines of credit balances as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Bressner Technology GmbH has two term loans outstanding as of March 31, 2021 with a total balance outstanding of ~~€763,556~~€1,000,000 (US$~~841,713)~~1,174,343) as follows:

On April 9, 2020, Bressner converted €500,000 of its line of credit from UniCredit Bank to a one-year term loan at 1.9% interest with a balloon payment of principal and interest due upon maturity. The balance outstanding as of March 31, 2021 and December 31, 2020 is €500,000 (US$587,171, $611,406, respectively);

Bressner entered into a note payable in ~~September 2017,~~June 2019 in the amount of ~~€400,000~~€500,000 (US$~~436,272)~~586,189) which bears interest at ~~2.125%~~1.70% and matured on ~~January 31, 2020. As~~June 25, 2020 with a balloon payment of principal and interest. This loan was subsequently extended to June 18, 2021, with an interest rate of 1.87% The amount outstanding as of March 31, ~~2020, this note has been paid in full. Quarterly principal payments of €25,000 (US$28,068) were due in January, April, July~~2021 and ~~November of 2019. The balance outstanding as of~~ December 31, ~~2019~~2020 is ~~€25,000~~€500,000 (US$~~28,068).~~ 587,172, $611,406, respectively);

Bressner entered into a note payable in April 2019 in the amount of €500,000 (US$~~561,350)~~586,189) which bears interest at 2.25% and matures on March 30, 2021 with monthly payments of principal and interest of €22,232 (US$24,960). The balance outstanding as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 is ~~€263,556~~€0 (US$~~290,534)~~0) and ~~€328,525~~€66,446 (US$~~368,835)~~81,251), ~~respectively.~~

Bressner entered into a note payable in June 2019 in the amount of €500,000 (US$551,180) which bears interest at 1.70.% and matures on June 25, 2020 with a balloon payment of principal and interest. The amount outstanding as of March 31, 2020 and December 31, 2019 is €509,544 (US$561,700) and €508,679 (US$571,095), respectively. Bressner is in the process of having this loan’s maturity date extend one year.respectively;

Bressner entered into a note payable in September 2019 in the amount of €300,000 (US$336,810) which ~~bears~~bore interest at ~~1.65.%~~1.65% and matured on March 24, 2020, with a balloon payment of principal and interest. The outstanding balance was paid in full as of March 31, ~~2020. At December~~2020; and

Bressner entered into a note payable in September 2017, in the amount of €400,000 (US$436,272) which bore interest at 2.125% and matured on January 31, ~~2019 the outstanding balance was €301,650 (US$338,663).~~2020 and has been paid in full.

In April 2019, the Company borrowed $350,000 from three individuals for a ~~two year~~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 are 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 equal to 10% of the original principal at a price per share equal to $2.15 per share. Accordingly, the Company issued to the noteholders warrants to purchase 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. The balance outstanding as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 is ~~$198,134~~$16,014 and ~~$241,054,~~$63,188, respectively.

In April 2019, the Company borrowed $1,150,000 from three individuals who serve on the Company’s board of directors for a ~~two year~~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 are 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 equal to 10% of the original principal at a price per share equal to $2.15 per share. Accordingly, the Company issued to the noteholders warrants to purchase 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. The balance outstanding as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 is ~~$650,129~~$51,647 and ~~$791,170,~~$206,669, respectively.

On April 28, 2020, One Stop Systems, Inc. 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”).

The PPP Loan, which took the form of a two-year promissory note (the “PPP Note”), matures on April 28, 2022 and bears 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 provides 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 may prepay the principal of the PPP Loan at any time without incurring any prepayment charges.

Under the original rules, all or a portion of the PPP Loan may be forgiven by the SBA and lender upon application by the Company beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities during the eight-week period beginning on the date of loan approval. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 25% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal.

However, the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), enacted on June 5, 2020, amended the original rules governing loans granted under the PPP, among others, as follows: (i) the time period to spend the received funds was extended from the original eight weeks to twenty-four weeks from the date the PPP Loan was originated, during which PPP funds need to be expended in order to be forgiven; (ii) at least 60% of PPP funds must be spent on payroll costs, with the remaining 40% available to spend on other eligible expenses; (iii) payments are deferred until the date on which the amount of forgiveness determined is remitted to the lender, and if a borrower fails to seek forgiveness within 10 months after the last day of its covered period, then payments will begin on the date that is 10 months after the last day of the covered period; and (iv) the PPP Flexibility Act modified the CARES Act by increasing the maturity date for loans made after the effective date from two years to a minimum maturity of five years from the date on which the borrower applies for loan forgiveness. Existing PPP loans made before the new legislation retain their original two-year term, but may be renegotiated between a lender and a borrower to match the 5-year term permitted under the PPP Flexibility Act.

The Company has 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. Because the Company expects the PPP loan to be forgiven in full, all related amounts have been presented as noncurrent liabilities (See Note 13).

On April 20, 2020, the Company entered into a Securities Purchase Agreement with an institutional investor, providing for the issuance of the Company’s Senior Secured Convertible Promissory Notes with a principal face amount of up to $6,000,000. The notes are, 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. The notes will be issued with a 10% original issue discount.

At the initial closing of this offering, the Company issued notes of $3,000,000, and can consummate additional closings of up to $3,000,000, subject to the prior satisfaction of certain closing conditions which have been satisfied. The initial investor purchased the notes for an aggregate purchase price of $2,700,000 at the initial closing. The notes bear no interest rate (except upon event of default) and, unless earlier converted or redeemed, will mature on April 1, 2022.

The Notes are convertible at any time, in whole or in part, at the option of the investors, into shares of common stock at the initial conversion price of $2.50 per share. The conversion price is subject to adjustment for issuances of securities below the conversion price then in effect and for stock splits, combinations or similar events. If immediately following the close of business on the six month anniversary of the issuance date of each note, the conversion price then in effect exceeds 135% of the volume weighted average price VWAP (the “Market Price”), the initial conversion price under any such note will be automatically lowered to the Market Price.

Commencing July 1, 2020, the Company has 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 may 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). As of March 31, 2021, the holder has elected to defer receipt of three installment payments as allowed per the agreement.

Subject to the satisfaction of certain equity conditions set forth in the notes, installment amounts may 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 will 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 will be cash settled on the applicable installment date.

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, in part due to the Company’s adoption of ASC 2017-11 on April 1, 2020, which allowed management to disregard the down round provisions of the conversion feature, management determined that a scope exception to derivative accounting existed by satisfying the additional conditions necessary for equity classification specified by ASC 815-10-15-74 and ASC 815-40-25. As a result of management’s analysis, the conversion feature was not accounted for separately from the debt instrument and the Company will recognize the contingent beneficial conversion feature when, or if, such is triggered.

The original issue discount of 10% on the Senior Secured Convertible Note was recorded as a debt discount, decreasing the note payable. This debt discount is amortized to interest expense using the effective interest rate method over the term of the loan. For the three months ended March 31, 2021, total debt discount amortization was $50,928, and such amount is included in interest expense in the accompanying consolidated statements of operations.

Debt issuance costs in the amount of $316,274 related to this indebtedness were deducted from the face value of the note. Such costs are amortized to interest expense using the effective interest rate method over the term of the loan. Total debt issuance costs amortized during the three months ended March 31, 2021 was $53,690, and such amount is included in interest expense in the accompanying consolidated statements of operations.

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.

For the three month periods ended March 31, ~~2020~~2021 and ~~2019,~~2020, total debt discount amortization was ~~$7,520~~$7,519 and ~~$0,~~$7,520, respectively, and such amounts are included in interest expense in the accompanying consolidated statements of operations.

Loan Description	Current Interest Rate	Maturity Date	Balance (Euro)		Balance ($)		Current Portion		Long-term Portion
Domestic:
Notes payable - third party	9.50%	April-21	€	-	$	16,014	$	16,014	$	-
Related party notes payable	9.50%	April-21		-		51,647		51,647		-
Convertible senior secured note	10% OID	April-22		-		2,590,909		2,454,545		136,364
PPP loan	1.00%	April-22		-		1,499,360		-		1,499,360
			€	-	$	4,157,930	$	2,522,206	$	1,635,724
Foreign:
Uni Credit Bank AG	1.87%	June-21	€	500,000	$	587,171	$	587,171	$	-
Uni Credit Bank AG	1.90%	April-21		500,000		587,172		587,172		-
			€	1,000,000	$	1,174,343	$	1,174,343	$	-
					$	5,332,273	$	3,696,549	$	1,635,724

Period Ended March 31, 2021	Related Parties			Third Parties			Convertible Note			PPP Loan		Foreign		Total
Current portion:
Principal	$	51,647		$	16,014		$	2,454,545		$	-	$	1,174,343	$	3,696,549
Less discount		(962	)		(292	)		(80,677	)		-		-		(81,931	)
Less loan origination costs		-			-			(85,054	)		-		-		(85,054	)
Net liability	$	50,685		$	15,722		$	2,288,814		$	-	$	1,174,343	$	3,529,564

Long-term portion:
Principal	$	-		$	-		$	136,364		$	1,499,360	$	-	$	1,635,724
Less discount		-			-			-			-		-		-
Less loan origination costs		-			-			-			-		-		-
Net liability	$	-		$	-		$	136,364		$	1,499,360	$	-	$	1,635,724

Total:
Principal	$	51,647		$	16,014		$	2,590,909		$	1,499,360	$	1,174,343	$	5,332,273
Less discount		(962	)		(292	)		(80,677	)		-		-		(81,931	)
Less loan origination costs		-			-			(85,054	)		-		-		(85,054	)
Net liability	$	50,685		$	15,722		$	2,425,178		$	1,499,360	$	1,174,343	$	5,165,288

Total future principal payments under notes payable and ~~related-party~~related party notes payable as of March 31, ~~2020~~2021 are as follows:

Period Ending March 31,

Related
Parties

Third
Parties

Foreign

Total

Discount

2020

$
598,482

$
182,120

$
841,713

$
1,622,315

$
(30,079
)
2021

51,647

16,014

-

67,661

(1,253
)
Total minimum payments

650,129

198,134

841,713

1,689,976

(31,332
)
Current portion of notes payable

(598,482
)

(182,120
)

(841,713
)

(1,622,315
)

30,079

Notes payable, net of current portion

$
51,647

$
16,014

$
-

$
67,661

$
(1,253
)

Period Ending March 31,	Related Parties			Third Parties			Convertible Note			PPP Loan		Foreign			Total			Discount / Loan Original Costs
2022	$	51,647		$	16,014		$	2,454,545		$	-	$	1,174,343		$	3,696,549		$	(166,985	)
2023		-			-			136,364			1,499,360		-			1,635,724			-
Total minimum payments		51,647			16,014			2,590,909			1,499,360		1,174,343			5,332,273			(166,985	)
Current portion of notes payable		(51,647	)		(16,014	)		(2,454,545	)		-		(1,174,343	)		(3,696,549	)		166,985
Notes payable, net of current portion	$	-		$	-		$	136,364		$	1,499,360	$	-		$	1,635,724		$	-

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.

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. Options

OnEffective June 26, 2019, the Company filed a prospectus supplement relating to its common stock, par value $0.0001 per share, whereby under the prospectus supplement, the Company may offer and sell common stock having an aggregate offering price of up to $10,000,000 through Noble Capital Markets, Inc., (“Noble”) acting as the Company’s agent. As such,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 restricted stock units (“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 ~~Distribution Agreement with Noble dated~~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 of the second and fourth quarters, the price of the Company’s common stock as of ~~June 26, 2019. In July 2019,~~ the ~~Company sold 1,554,832 shares~~end of ~~common stock through this offering for total gross proceeds~~quarter two or quarter four, as applicable, shall be determined using the ten-day trailing volume weighted average price (“VWAP”) after reporting of ~~$2,700,714, which resulted in net proceeds~~quarter two and quarter four earnings, as applicable. The date of each such determination shall be referred to ~~us of $2,488,148, after deducting compensation payable to Noble of $55,127 and other expenses of $157,439. The Equity Distribution Agreement with Noble was terminated on August 26, 2019.~~

During the three months ended March 31, 2020, the Company issued 354,914 shares of common stock for proceeds of $57,000 in cash related to the exercise of stock options and warrants. Of the total shares issued, 279,914 shares of common stock were issued as a ~~cashless exercise of~~“Determination Date.” If on any Determination Date the Company’s stock ~~options.~~

~~During~~price has increased from the three months ended March 31, 2019, the Company issued 54,098 shares of common stock for proceeds of $14,201 in cash related to the exercise of stock options and warrants. Of the total shares issued, 17,598 shares of common stock were issued asprior Determination Date, then a ~~cashless exercise of 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. Since February 1, 2018, there has been no outstanding preferred stock.

~~Regarding unissued preferred stock, the Board of Directors is authorized to determine or alter any or all~~portion of the ~~rights, preferences, privileges and restrictions granted to or imposed upon wholly unissued series of preferred stock, and to fix or alter the~~ISOs shall become vested. The number of ~~shares comprising~~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 ~~such series~~Determination Date the Company’s stock price is $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”, 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 ~~designation thereof, or any of them, and to provide for rights and terms of redemption or conversion of the shares of any such series.~~

A summary of stock option activity under each of the Company’s stock option plans during the three month period ended March 31, ~~2020:~~2021:

Stock Options Outstanding

Number of
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life (in years)

Aggregate
Intrinsic
Value

Outstanding at January 1, 2020

1,686,444

$
1.32

4.84

$
1,416,279

Granted

20,000

$
2.70

Forfeited / Cancelled

(6,500
)

$
2.12

Exercised

(686,250
)

$
0.79

Outstanding at March 31, 2020

1,013,694

$
1.69

5.08

$
287,953

Exercisable at March 31, 2020

866,837

$
1.49

5.08

$
287,953

Vested and expected to vest at March 31, 2020

1,009,288

$
1.69

5.55

$
287,953

	Stock Options Outstanding
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding at January 1, 2021		1,320,267		$	1.81		6.43	$	2,889,274
Granted		-			-		-		-
Forfeited / Cancelled		1,113		$	1.95		6.28	$	4,886
Exercised		(198,891	)	$	1.08		3.17	$	1,047,002
Outstanding at March 31, 2021		1,122,489		$	1.95		6.72	$	4,932,363
Exercisable at March 31, 2021		663,265		$	1.75		5.08	$	3,044,253
Vested and expected to vest at March 31, 2021		1,108,712		$	1.94		6.69	$	4,875,720

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:~~Company. There were no options granted during the three month period ended March 31, 2021:

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2020			2019			2021			2020
Expected term (in years)	5.87			4.65 - 5.87			0			5.87
Expected volatility	43.5 - 47.8%			43.7 - 44.4%				0.00	%	43. - 47.8%
Risk-free interest rate		1.41	%		3.00	%		0.00	%		1.41	%
Weighted average grant date fair value per share	$	2.70		$	1.09		$	-		$	2.70
Grant date fair value of options vested	$	720,095		$	1,441,371		$	1,160,847		$	720,095
Intrinsic value of options exercised	$	463,800		$	56,369		$	1,047,002		$	463,800

As of March 31, ~~2020,~~2021, the amount of unearned stock-based compensation estimated to be expensed from ~~2020~~2021 through ~~2029~~2025 related to unvested common stock options is ~~$158,871,~~$49,012, net of estimated forfeitures. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is ~~1.57~~0.93 years.

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

Restricted stock units may be granted at the discretion of the compensation committee of the Board of Directors under the Company’s 2017 Equity Incentive Plan that was adopted on October 10, 2017 (the “2017 Plan”) in connection with the hiring and retention of personnel and are subject to certain conditions. Restricted stock units generally vest quarterly or semi-annually over a period of one to 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.

The Company’s restricted stock unit activity for the three ~~months~~month period ended March 31, ~~2020~~2021 is as follows:

	Restricted Stock Units					Restricted Stock Units
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Unvested at January 1, 2020		216,670		$	3.02
Unvested at January 1, 2021							575,922		$	2.65
Granted		80,000		$	2.31		-		$	-
Vested		(91,669	)	$	2.94		(93,793	)	$	2.37
Cancelled		(12,500	)	$	2.43		-		$	2.70
Unvested at March 31, 2020		192,501		$	2.80
Unvested at March 31, 2021							482,129		$	2.70

As of March 31, ~~2020,~~2021, there was ~~$423,077~~$786,901 of unrecognized compensation cost related to unvested restricted stock units which is expected to be recognized over a weighted average period of ~~1.51~~2.07 years.

Stock-based compensation expense for the three month periods ended March 31, ~~2020~~2021 and ~~2019~~2020 was comprised of the following:

	For the Three Months Ended March 31,				For the Three Months Ended March 31,
Stock-based compensation classified as:	2020		2019		2021		2020
General and administrative	$	159,680	$	125,206	$	401,000	$	159,680
Production		17,969		14,898		14,659		17,969
Marketing and selling		17,292		14,393		15,397		17,292
Research and development		12,820		12,977		7,338		12,820
	$	207,761	$	167,474	$	438,394	$	207,761

The following table summarizes the Company’s warrant activity during the three ~~months~~month period ended March 31, ~~2020:~~2021:

	Number of Warrants		Weighted Average Exercise Price		Number of Warrants			Weighted Average Exercise Price
Warrants outstanding – January 1, 2020		630,947	$	4.16
Warrants outstanding – January 1, 2021						505,946		$	5.00
Warrants granted		-	$	-		-		$	-
Warrants exercised		-	$	-		(35,067	)	$	1.85
Warrants outstanding – March 31, 2020		630,947	$	4.16
Warrants outstanding – March 31, 2021						470,879		$	5.23

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. In the three month periods ended March 31, 2020 and 2019, the matching contributions were 100% of the employee's contribution up to a maximum of 5% of the employee’s annual compensation. During the three month periods ended March 31, 2020 and 2019, the Company contributed $116,527 and $91,371, respectively, to the 401(k) Plan.

~~From~~We are subject to litigation, claims, investigations, and audits arising from time to time ~~the Company is subject to various legal claims and proceedings arising~~ in the ordinary course of our business. In

On September 29, 2020, the ~~opinion~~Company’s former Chief Executive Officer, Stephen D. Cooper, commenced an action entitled Stephen D. Cooper v. One Stop Systems, Inc. et al, in San Diego County Superior Court, Case No. 37-2020-00034492-CU-BC-CTL. Mr. Cooper alleges claims for (1) breach of ~~management, after consultation~~written contract and (2) violation of California Labor Code Sections 201 and 203 in connection with ~~legal counsel,~~ the ~~ultimate disposition~~Company’s alleged failure to pay unpaid wages and an earned bonus following the Company’s termination of ~~any such matters as~~Mr. Cooper’s employment with the Company in February 2020. Mr. Cooper seeks unspecified compensatory damages and statutory penalties.

The Company has denied Mr. Cooper’s allegations. On December 8, 2020, the Company filed a cross-complaint (“Cross Complaint”) against Mr. Cooper for (1) breach of ~~March 31, 2020~~contract (in connection with a binding commitment letter and ~~December 31, 2019, will not have a materially adverse effect on~~Mr. Cooper’s employment agreement), (2) intentional misrepresentation, (3) negligent misrepresentation, and (4) breach of fiduciary duty. The Company is seeking compensatory damages, punitive damages, pre-judgment interest, attorneys’ fees, and the ~~consolidated financial position or results~~cost of ~~operations of~~suit incurred in connection with Mr. Cooper’s complaint and the ~~Company.~~Cross Complaint. The Company intends to vigorously defend all allegations.

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 its Credit Agreement, ~~(Note 8),~~ the Company has agreed to indemnify its lender 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.

The Company leases its offices, manufacturing, and warehouse facility in San Diego County under a non-cancelable operating lease. Our corporate headquarters are in a leased space comprising of approximately 29,342 square feet in Escondido, California under a lease that was ~~renewed~~modified in ~~August 2018~~February 2019 and expires in August 2024. The Company also leases a 3,208 square foot facility in Salt Lake City, Utah that houses our Ion software development team. The Company is the lessee of a leased space comprising approximately ~~12,000~~12,880 square feet located in Irvine, California with the lease expiring in ~~March~~June 2021. Bressner Technology GmbH, leases space comprising of 8,073 square feet on a ~~month to month~~month-to-month basis.

For the three month periods ended March 31, ~~2020~~2021 and ~~2019,~~2020, rent expense was ~~$189,417~~$251,130 and ~~$171,145,~~$189,417, respectively.

In the normal course of business, the Company enters into purchase commitments for inventory components to be delivered based upon pre-established delivery schedules over a period that may exceed one year.

During the three month periods ended March 31, 2021 and 2020, the Company had two customers and in 2020, one customer that had approximately 38%, and 27%, respectively of revenue for which each represented greater than 10% of our consolidated annual revenue.

As of March 31, 2021, the Company had three customers and as of December 31, 2020, one customers that had approximately 58% and 41%, respectively of trade accounts receivables for which each customer’s balances represented greater than 10% of our consolidated trade accounts receivable balance.

During the three month periods ended March 31, 2021 and 2020, the Company had approximately 22%, and 18%, respectively of purchases from vendors/suppliers for which each represents greater than 10% of our consolidated purchases.

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 $1,150,000 from members of the Board of Directors and $350,000 from other shareholders for a ~~two year~~two-year period at an interest rate of 9.5% which requires 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 per share. Accordingly, the Company issued to these note holders warrants to purchase 69,766 ~~share~~shares of the Company’s common stock. The relative fair value of the warrants issued was $60,158. Interest expense on all related-party notes payable for the three months ended March 31, 2021 and 2020 totaled $3,678 and $17,156, respectively. The remaining unfunded commitments expired as of April 1, 2020, and ~~2019 totaled $17,156 and $0, respectively.~~

~~The~~the Company has ~~engaged an advertising firm whose president is a former member~~not received any additional funding commitments from members of the Board of Directors as of the ~~Company. Amounts paid to this company are included in marketing and selling expense in the accompanying consolidated statements~~date of ~~operations and for the three months ended March 31, 2020 and 2019, totaled $6,000 and $9,000, respectively.~~

The Company has appointed certain stockholders to the Board of Directors. Director fees paid by the Company, including stock-based compensation, for the three months ended March 31, 2020 and 2019 totaled $50,505 and $82,836, respectively, and are included in general and administrative expenses in the accompanying consolidated statements of operations.

The Company has engaged a related-party law firm (a principal of that firm owns shares in the Company) to provide legal services. Legal fees paid to this firm are included in general and administrative expenses in the accompanying consolidated statements of operations for the three months periods ended March 31, 2020 and 2019 and totaled $9,000 and $9,000, respectively.

~~The Company has engaged an IT network support firm whose owner is an employee~~filing of the Company. Fees paid to this firm are included in general and administrative expense in the accompanying consolidated statements of operations for the three months ended March 31, 2020 and 2019 totaled $356 and $660, respectively.Quarterly Report on Form 10-Q.

Basic and diluted net loss per share was calculated as follows for the three month periods ended March 31, ~~2020~~2021 and ~~2019:~~2020:

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2020			2019			2021		2020
Basic and diluted net loss per share attributable to common stockholders:
Basic and diluted net income (loss) per share:
Numerator:
Net loss attributable to common stockholders	$	(1,096,032	)	$	(944,729	)
Net income (loss)							$	41,198	$	(1,096,032	)
Denominator:
Weighted average common shares outstanding - basic		16,332,898			14,239,711			17,348,164		16,332,898
Effect of dilutive securities		-			-			1,293,897		-
Weighted average common shares outstanding - diluted		16,332,898			14,239,711			18,642,061		16,332,898
Net loss per common share attributable to common stockholders:
Net income (loss) per common share:
Basic	$	(0.07	)	$	(0.07	)	$	0.00	$	(0.07	)
Diluted	$	(0.07	)	$	(0.07	)	$	0.00	$	(0.07	)

The Company operates in ~~three~~two reportable segments: the design and manufacture of high-performance customized computers and flash arrays, which is inclusive of in-flight entertainment & connectivity, and value-added reseller with minimal customization. The Company evaluates financial performance on a company-wide basis. As of June 1, 2020, CDI’s operations became fully integrated and combined with the operation of OSS’ core business operations located in Escondido, California. It is the Company’s intention to dissolve CDI as a standalone entity upon resolution of certain outstanding items.

Segment detail for the three month periods ended March 31, ~~2020~~2021 and ~~2019~~2020 is as follows:

	For The Three Month Period Ended March 31, 2020												For The Three Month Period Ended March 31, 2019												For the Three Months Ended March 31, 2021									For the Three Months Ended March 31, 2020
	OSS			CDI			Bressner			Total			OSS			CDI			Bressner			Total			OSS			Bressner			Total			OSS			Bressner			Total
Revenues	$	7,818,278		$	621,946		$	4,919,413		$	13,359,637		$	5,230,086		$	299,454		$	4,528,359		$	10,057,899		$	8,601,971		$	4,713,781		$	13,315,752		$	8,440,224		$	4,919,413		$	13,359,637
Cost of revenues		(5,621,751	)		(499,158	)		(3,843,041	)		(9,963,950	)		(3,729,173	)		(345,727	)		(3,571,377	)		(7,646,277	)		(5,341,362	)		(3,541,606	)		(8,882,968	)		(6,120,909	)		(3,843,041	)		(9,963,950	)
Gross profit		2,196,527			122,788			1,076,372			3,395,687			1,500,913			(46,273	)		956,982			2,411,622			3,260,609			1,172,175			4,432,784			2,319,315			1,076,372			3,395,687
Gross margin %	28.1%			19.7%			21.9%			25.4%			28.7%			-15.5%			21.1%			24.0%				37.9	%		24.9	%		33.3	%		27.5	%		21.9	%		25.4	%
Total operating expenses		3,530,278			455,931			920,632			4,906,841			3,137,869			312,977			992,984			4,443,830			(3,251,785	)		(905,968	)		(4,157,753	)		(3,986,209	)		(920,632	)		(4,906,841	)
(Loss) income from operations	$	(1,333,751	)	$	(333,143	)	$	155,740		$	(1,511,154	)	$	(1,636,956	)	$	(359,250	)	$	(36,002	)	$	(2,032,208	)
Income from operations																									$	8,824		$	266,207		$	275,031		$	(1,666,894	)	$	155,740		$	(1,511,154	)

Revenue from customers with non-U.S. billing addresses represented approximately ~~50%~~66% and ~~72%~~50%, of the Company’s revenue during the three month periods ended March 31, 2021 and 2020, ~~and 2019,~~ respectively.

As of March 31, ~~2020,~~2021, substantially all the Company’s long-lived assets were located in the United States of America with the exception of assets of ~~$223,000~~$215,961 located in Germany.

On April 5, 2020, the Board of Directors approved workforce reductions as part of the Company’s cost cutting measures implemented in response to the negative financial and operational impacts resulting from the rapidly evolving novel coronavirus (“COVID-19”) pandemic. Approximately 19% of the Company’s 115 employees are impacted through workforce reductions as well as some reduced-hour work weeks.

On April 7, 2020, the Company implemented a cost reduction plan which included the termination of certain employees and elimination of certain costs. Estimated savings from this effort are expected to be $2.5 to $3.0 million for the year ending 2020.

~~On April 9, 2020, Bressner converted €500,000 of their line of credit from UniCredit Bank to a one year term loan at 1.9% interest with principal and interest due upon maturity.~~

On April 20, 2020, the Company entered into a Securities Purchase Agreement providing for the issuance of the Company’s Senior Secured Convertible Promissory Notes with a principal face amount of up to 6,000,000. The Notes are, 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. Pursuant to the Purchase Agreement, the Notes will be issued with a 10% original issue discount.

On April 24, 2020, the Company consummated the initial closing of the offering (the “Initial Closing”) under the Purchase Agreement and issued a Senior Secured Convertible Promissory Note with an aggregate of $3,000,000 to an institutional investor (“Initial Note”). The investors purchased the Initial Note for an aggregate purchase price of $2,700,000, at the Initial Closing after a 10% original issue discount. The Initial Note bears no interest rate (except upon event of default) and, unless earlier converted or redeemed, will mature on the date that is the twenty-three (23) month anniversary of the last day from the Initial Closing.

~~On April 28, 2020, the Company received a two year, 1% Paycheck Protection Program (PPP) loan of $1.5 million.~~

The Company has evaluated subsequent events after the consolidated balance sheet dated as of March 31, ~~2020~~2021 through the date of filing of this quarterly report. Based upon the Company’s evaluation, management has determined that, other than as disclosed in the accompanying notes, no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes ~~thereto.~~thereto, other than as disclosed in the accompanying notes and as set forth below.

On April 7, 2021, Bressner Technologies, Inc. received a short-term loan of €500,000 at an interest rate of 1.6% due September 30, 2021.

On May 3, 2021, the Company received notification from the Small Business Administration (SBA) that its Paycheck Protection Program (PPP) Loan of $1,499,360 plus accrued interest had been fully forgiven.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis of our financial condition and operating results together with our financial statements and related notes included elsewhere in this Quarterly Report. This discussion and analysis contains forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Quarterly Report.

One Stop Systems (OSS) designs, manufactures, and markets ~~custom high speed~~specialized high-performance computing modules and systems ~~for high performance~~targeting edge deployments. These specialized computers and storage products incorporate state-of-the art components and allow our customers to offer high-end computing ~~(HPC) applications. These~~capabilities (often embedded within their equipment) to their target markets. Edge computing is when data is processed/analyzed on devices, that is, at the edge of the network, rather than in the cloud itself. Factors such as increase in load on the cloud infrastructure globally and rises in artificial intelligence (AI) applications, are the major factors driving the growth of the edge computing market. 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. Systems are built using~~sets at their location not in the ~~latest GPU (graphical processing unit)~~cloud. This equipment requires datacenter class performance optimized for deployment at the edge in challenging environments. Unlike the controlled air-conditioned data center, many of these edge applications have unique requirements including special and ~~solid-state flash (memory) technologies.~~compact form factors ruggedized for harsh conditions. We are uniquely positioned as a ~~niche~~specialized provider for the high-end of ~~HPC~~this marketplace providing custom servers, data acquisition platforms, compute accelerators, solid-state storage arrays, system IO expansion systems as well as edge optimized industrial and ~~flash storage arrays.~~panel PCs, tablets and handheld compute devices. Our systems also offer industry leading capabilities that occupy less physical space and power consumption. We deliver this high-end technology to our customers through the sale of equipment and ~~software to customers.~~ embedded software.

We were originally organized as One Stop Systems, LLC, a California limited liability company in 1998 before converting into One Stop Systems, Inc., ~~(CDI) which was acquired~~a California corporation in 1999. On July 6, 2016, we entered into a Merger Agreement and Plan of Reorganization with Mission Technology Group, Inc. (“Magma”) whereby Magma merged with and into OSS with OSS continuing as the surviving corporation. We reincorporated as a Delaware corporation on December 14, 2017 and began trading as a public company on the Nasdaq Capital Markets on February 1, 2018.

On August 31, 2018, ~~specializes in the design and manufacture~~we acquired Concept Development Inc. (“CDI”), a provider of ~~specialized high-performance~~specialty in-flight entertainment, ~~systems for commercial aircraft. CDI’s capabilities include electrical, mechanical~~networking and ~~software design as well as extensive experience~~other aerospace technology located in ~~test and certifications required for airborne systems.~~Irvine, California. As of June 1, CDI has been fully integrated into the core operations of OSS.

On October 31, 2018, we acquired Bressner Technology GmbH ~~(Bressner) which was acquired on October 31, 2018, provides standard and customized servers, panel PCs, and PCIe expansion systems.~~(“Bressner”) located near Munich, Germany. Bressner provides manufacturing, test, sales and marketing services for customers throughout Europe. Furthermore, Bressner is a valued-added reseller of high technology hardware which expanded the company’s high-performance computing product lines to include industrial and panel PCs, tablets and handheld compute devices while also opening up new markets in Europe.

~~On August 31, 2018,~~In March 2020, the ~~Company acquired Concept Development Inc. (CDI) located~~World Health Organization declared the outbreak of Coronavirus, or COVID-19, a global pandemic and the United States federal government declared it a national emergency. COVID-19 continues to impact worldwide economic activity. A public health pandemic, including COVID-19, poses the risk that we or our employees, contractors, customers, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities.

More generally, COVID-19 raises the possibility of an extended global economic downturn, which could affect demand for our products and services and impact our results and financial condition even after the pandemic is contained and remediation/restriction measures are lifted. For example, we may be unable to collect receivables from customers that are significantly impacted by COVID-19. Also, a decrease in ~~Irvine, California for cash~~orders in a given period could negatively affect our revenues in future periods. COVID-19 may also have the effect of ~~$646,759, and common stock~~heightening many of ~~$4,194,673. CDI specializes~~the other risks described in the ~~design~~“Risk Factors” section of our Annual Report on Form 10-K filed on March 25, 2021, including risks associated with our customers and ~~manufacture of custom high-performance computing systems for airborne in-flight entertainment systems.~~

~~On October 31, 2018,~~supply chain. We will continue to evaluate the ~~Company’s wholly-owned German subsidiary, OSS GmbH, acquired 100%~~nature and extent of the ~~outstanding stock~~impact of Bressner Technology GmbH, a Germany limited liability company located near Munich, Germany, from its principal owners for cash consideration of €4,725,000 (US$5,374,582) and stock consideration of 106,463 newly-issued restricted shares of the Company’s common stock with an estimated fair value of $228,779.

~~On December 31, 2018, as a result of changes in the competitive landscape and downward pressure on pricing from large competitors, the members~~COVID-19 to ~~the joint venture agreement agreed to begin the dissolution of SkyScale.~~our business.

At present, it is clear the global economy has been negatively impacted by COVID-19, and demand for some of our products and services have been reduced due to uncertainty and the economic impact of COVID-19. Specifically, our business has been negatively affected by a range of external factors related to COVID-19 that are not within our control. For example, numerous measures have been implemented by governmental authorities across the globe to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, restrictions and limitations of public gatherings, and business limitations and shutdowns. Many of our customers’ businesses have been severely impacted by these measures and some have been required to reduce employee headcount as a result. If a significant number of our customers are unable to continue as a going concern, this would have an adverse impact on our business and financial condition. In ~~April 2019, certain members~~addition, many of our customers are working remotely, which may delay the timing of new business and implementations of our services. If COVID-19 continues to have a substantial impact on our partners, customers, or suppliers, our results of operations and overall financial performance will be harmed.

Though management has been proactively managing through the current known impacts, if the situation further deteriorates or the outbreak results in further restriction on both supply and demand factors, our cash flows, financial position and operating results for 2021 and beyond will be negatively impacted. Neither the length of time nor the magnitude of the ~~Company’s Board~~negative impacts can be presently determined.

The longer the COVID-19 pandemic persists, the greater the potential for significant adverse impact to our business operations. Quarantines, travel restrictions, prohibitions on non-essential gatherings, shelter-in-place orders and other similar directives and policies intended to reduce the spread of ~~Directors executed definitive agreements to commit funds~~the disease, may reduce our productivity and that of ~~up to $4,000,000 as a credit facility.~~ the third parties on which we rely and may disrupt and delay many aspects of our business.

The Company ~~initially borrowed $1,150,000 from members~~is complying with state mandated requirements for safety in the workplace to ensure the health, safety and welling-being of our employees. These measures included personal protective equipment, social distancing, and cleanliness of the ~~Board of Directors~~facilities and $350,000 from other shareholders for a two year period at an interest rate of 9.5% which requires the Company to make monthly principal and interest payment of $69,000 per month. In connection with these loans, the Company issued the note holders warrants to purchase sharesdaily monitoring of the ~~Company’s common stock equal~~health of employees in our facilities. We have not developed a specific and comprehensive contingency plan designed to ~~10%~~address the challenges and risks presented by the COVID-19 pandemic and, even if and when we do develop such a plan, there can be no assurance that such plan will be effective in mitigating the potential adverse effects on our business, financial condition and results of the original principal as a price per share equal to $2.15 per share. Accordingly, the Company issued to the note holders warrants to purchase 69,766 share of the Company’s common stock. The relative fair value of the warrants issued was $60,158.operations.

On June 26, 2019, the Company filed a prospectus supplement relating to its common stock, par value $0.0001 per share, whereby under the prospectus supplement, the Company may offer and sell common stock having an aggregate offering price of up to $10,000,000 through Noble acting as the Company’s agent. As such, the Company entered into an Equity Distribution Agreement with Noble dated as of June 26, 2019. During the year ended December 31, 2019, the Company sold 1,554,832 shares of common stock for total gross proceeds of $2,700,714, which resulted in net proceeds to the Company of $2,488,148, after deducting compensation payable to Noble of $55,127 and other expenses of $157,439.

On February 15, 2020, Steve Cooper was terminated as President and CEO of One Stop Systems, Inc., and was replaced by David Raun who ~~has become interim~~is now the president and CEO of the Company.

On April 7, 2020, the Company implemented a cost reduction plan which included the termination of certain employees and elimination of certain costs. Savings from this effort are estimated to be approximately $2.5 million on an annual basis.

On April 24, 2020, the Company ~~consummated the initial closing of the offering (the “Initial Closing”) under the Purchase Agreement and issued~~completed a ~~Senior Secured Convertible Promissory Note~~$6.0 million debt financing on a non-interest bearing convertible note with ~~an aggregate of $3,000,000 to an institutional investor (“Initial Note”). The investors purchased the Initial Note for an aggregate purchase price of $2,700,000, at the Initial Closing after~~ a 10% original issue discount. The ~~Initial Note bears no interest rate (except upon event~~first tranche of ~~default) and, unless earlier converted or redeemed, will mature~~$3.0 million was received on April 27, 2020, with an additional $3.0 million available seven months from the date ~~that is~~of closing at the ~~twenty-three (23) month anniversary~~option of the ~~last day~~Company conditioned upon meeting certain requirements which have been satisfied. The note is repayable in twenty-two installments beginning three months after closing in cash or shares of the Company’s common stock.

On March 1, 2021, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company agreed to issue and sell, in a registered direct offering, 1,497,006 shares of the Company’s common stock, par value $0.0001 per share, to the purchaser at an offering price of $6.68 per share. The registered offering was conducted pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-231513), which was initially filed with the Securities and Exchange Commission on May 15, 2019 and was declared effective on June 19, 2019. As compensation for their services, the Company paid to the placement agents a fee equal to 7% of the gross proceeds received by the Company as a result of the registered offering, and reimbursed the placement agents for certain expenses incurred in connection with such offering. The net proceeds from the ~~Initial Closing.~~

~~OSS designs, manufactures~~registered offering are approximately $9.2 million after deducting certain fees due to the placement agents’ and ~~sells specialized high performance computing (HPC) systems to customers world-wide. We differentiate ourselves from other suppliers of HPC solutions~~the Company’s transaction expenses. The net proceeds received by ~~utilizing our expertise in custom systems design~~the Company will be used for general corporate and PCIe expansion to build systems with a greater quantity of PCIe add-in slots, GPU-based compute cards and/or flash cards. Our systems offer industry leading capabilities that occupy less physical space and power consumption.

Concept Development, LLC focuses on engineering innovative products and solutions that enhances success for our clients in their design, manufacturing and life support cycle, with in-flight entertainment and connectivity of their processes enabling efficiencies and cost savings.

Bressner Technology GmbH is a leading provider of industrial IT solutions with long standing international contact to assist in leveraging markets around the world to our customers benefit and give them early access to innovative new products. By continuing to forge strategic partnerships, we have significantly expanded our range of services. With this, we offer consistent product portfolio at all integration levels, superior product quality, efficient logistics and excellent support.working capital purposes.

~~On January 1, 2019, the~~The Company ~~adopted the new~~recognizes revenue under accounting standard ~~update~~ ASC ~~606,~~606. Revenue is primarily generated from ~~Contracts with Customers, which superseded nearly all existing~~the sale of computer hardware and engineering services and to some extent the sale of software, and sales of software maintenance and support contracts. The Company’s performance obligations are satisfied over time as work is performed or at a point in time. The majority of the Company’s revenue is recognized at a point in time when products ship and control is transferred to the customer. The Company determines revenue recognition ~~guidance under GAAP,~~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 ~~all contracts using~~ the ~~modified retrospective method. For~~performance obligations in the contract; and (5) recognition of revenue when, or as, a ~~more detailed description of our revenue recognition policies see the Company’s consolidated financial statements Note 2 – Significant Accounting Policies.~~performance obligation is satisfied.

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.

Our operating expenses consist of general and administrative, ~~sales~~marketing and ~~marketing~~sales 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.

~~Sales~~Marketing and Selling – Marketing - ~~Sales~~ and ~~marketing~~Selling expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel, and entertainment expenses as well as allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications, and brand-building activities. We expect ~~sales~~marketing and ~~marketing~~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 consists of miscellaneous income and income received for activities outside of our core business. ~~This includes interest income from investments and finance charges from customers.~~ Other expense includes expenses for activities outside of our core business. ~~These expenses consist primarily of loan amortization and interest expense.~~

Provision for income taxes consists of estimated income taxes due to the United States and German governments ~~and to the~~as well as state tax authorities in jurisdictions in which we conduct business, ~~as well as~~along with the change in our deferred income tax assets and liabilities.

~~Results of operations for~~ ~~the three month periods ended March 31, 2020 and 2019~~ ~~include the following businesses: Magma, the purchase of the Ion assets from Western Digital,~~ ~~Concept Development LLC, and Bressner Technology GmbH.~~

The following tables set forth our results of operations for the three month periods ended March 31, ~~2020~~2021 and ~~2019~~2020 ~~respectively,~~, presented in dollars and as a percentage of ~~net revenue.~~revenue, respectively.

For the Three Months Ended March 31,

2020

2019

Revenue

$
13,359,637

$
10,057,899

Cost of revenue

9,963,950

7,646,277

Gross profit

3,395,687

2,411,622

Operating expenses:

General and administrative

2,514,065

2,043,934

Marketing and selling

1,189,351

1,137,932

Research and development

1,203,425

1,261,964

Total operating expenses

4,906,841

4,443,830

Loss from operations

(1,511,154
)

(2,032,208
)
Other income (expense):

Interest income

24,637

3,107

Interest expense

(68,784
)

(6,268
)
Other income (expense), net

(8,029
)

(11,271
)
Total other income (expense), net

(52,176
)

(14,432
)
Loss before income taxes

(1,563,330
)

(2,046,640
)
Benefit for income taxes

(467,298
)

(1,101,911
)
Net loss attributable to common stockholders

$
(1,096,032
)

$
(944,729
)

	For the Three Months Ended March 31,		For the Three Months Ended March 31,
	2020	2019	2021			2020
Revenue	100.0%	100.0%	$	13,315,752		$	13,359,637
Cost of revenue	74.6%	76.0%		8,882,968			9,963,950
Gross profit	25.4%	24.0%		4,432,784			3,395,687
Operating expenses:
General and administrative	18.8%	20.3%		2,157,619			2,514,065
Marketing and selling	8.9%	11.3%		1,167,901			1,189,351
Research and development	9.0%	12.5%		832,233			1,203,425
Total operating expenses	36.7%	44.2%		4,157,753			4,906,841
Loss from operations	-11.3%	-20.2%
Other income (expense):
Income (loss) from operations				275,031			(1,511,154	)
Other income (expense), net:
Interest income	0.2%	0.0%		5,300			24,637
Interest expense	-0.5%	-0.1%		(149,982	)		(68,784	)
Other income (expense), net	-0.1%	-0.1%		(28,629	)		(8,029	)
Total other income (expense), net	-0.4%	-0.1%		(173,311	)		(52,176	)
Loss before income taxes	-11.7%	-20.3%
Benefit for income taxes	-3.5%	-11.0%
Net loss attributable to common stockholders	-8.2%	-9.4%
Income (loss) before income taxes				101,720			(1,563,330	)
Provision (benefit) for income taxes				60,522			(467,298	)
Net income (loss)			$	41,198		$	(1,096,032	)

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) attributable to common stockholders before interest, taxes, depreciation, amortization, acquisition expenses, impairment of long-lived assets, financing costs, fair value adjustments from purchase accounting, stock-based compensation expense and expenses related to discontinued operations.

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

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

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 (loss) income attributable to common stockholders as (loss) or income before amortization, stock-based compensation, expenses related to discontinued operations, impairment of long-lived assets and non-recurring acquisition costs. Adjusted EPS expresses adjusted (loss) income on a per share basis using weighted average diluted shares outstanding.

Adjusted EPS is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses similar to the adjusted income from continuing operations and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring.

~~The following table sets-forth Non-GAAP net loss attributable to common stockholders and basic and diluted earnings per share:~~

Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by or used in operating activities less capital expenditures for property and equipment, which includes capitalized software development costs. We believe free cash flow provides investors with an important perspective on cash available for investments and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. We believe that trends in our free cash flow can be valuable indicators of our operating performance and liquidity.

Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies.

We expect to continue to incur expenditures similar to the free cash flow adjustments described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash. The following table reconciles cash provided by or used in operating activities, the most directly comparable GAAP financial measure, to free cash flow:

For the Three Months Ended March 31,

Change

Cash flow:

2020

2019

Cash used in operating activities

$
(721,773
)

$
(200,017
)

$
(521,756
)
Capital expenditures

(200,049
)

(803,243
)

603,194

Free cash flow

$
(921,822
)

$
(1,003,260
)

$
81,438

	For the Three Months Ended March 31,
	2021			2020
Revenue		100	%		100	%
Cost of revenue		67	%		75	%
Gross profit		33	%		25	%
Operating expenses:
General and administrative		16	%		19	%
Marketing and selling		9	%		9	%
Research and development		6	%		9	%
Total operating expenses		31	%		37	%
Income (loss) from operations		2	%		-11	%
Other income (expense), net:
Interest income		0	%		0	%
Interest expense		-1	%		-1	%
Other income (expense), net		0	%		0	%
Total other income (expense), net		-1	%		0	%
Income (loss) before income taxes		1	%		-12	%
Provision (benefit) for income taxes		0	%		-3	%
Net income (loss)		0	%		-8	%

For the Three Months Ended March 31, 2020

For the Three Months Ended March 31, 2019

Entity:

Revenue

Cost of
Revenue

Gross
Profit

Gross
Margin
%

Revenue

Cost of
Revenue

Gross
Profit

Gross
Margin
%

OSS - (inclusive of SkyScale)

$
7,818,278

$
(5,621,751
)

$
2,196,527

28.1%

$
5,230,086

$
(3,729,173
)

$
1,500,913

28.7%

Concept Development Inc.

621,946

(499,158
)

122,788

19.7%

299,454

(345,727
)

(46,273
)

-15.5%

Bressner Technology GmbH

4,919,413

(3,843,041
)

1,076,372

21.9%

4,528,359

(3,571,377
)

956,982

21.1%

$
13,359,637

$
(9,963,950
)

$
3,395,687

25.4%

$
10,057,899

$
(7,646,277
)

$
2,411,622

24.0%

	For the Three Months Ended March 31, 2021										For the Three Months Ended March 31, 2020
Entity:	Revenue		Cost of Revenue			Gross Profit		Gross Margin %			Revenue		Cost of Revenue			Gross Profit		Gross Margin %
OSS	$	8,601,971	$	(5,341,362	)	$	3,260,609		37.9	%	$	8,440,224	$	(6,120,909	)	$	2,319,315		27.5	%
Bressner Technology GmbH		4,713,781		(3,541,606	)		1,172,175		24.9	%		4,919,413		(3,843,041	)		1,076,372		21.9	%
	$	13,315,752	$	(8,882,968	)	$	4,432,784		33.3	%	$	13,359,637	$	(9,963,950	)	$	3,395,687		25.4	%

For the three month period ended March 31, ~~2020,~~2021, total revenue ~~increased $3,301,738~~decreased $43,885 or ~~32.8%~~0.33%, as compared to the same period in ~~2019.~~2020. OSS saw an increase in revenue of $161,747 or 1.21 percentage points as compared to the prior year. The majority of this increase is attributable to an increase in shipments of product to government OEM suppliers creating a change in mix of distributed products as compared to the prior year which was ~~primarily driven~~dominated by ~~revenue from OSS’ core~~product shipment to our largest media and entertainment ~~business and other products which provided an incremental $2,588,191~~customer. Bressner experienced a decrease of $205,632 or ~~25.7~~a decrease of 1.54 percentage ~~points of~~points. This decrease is mainly due to a general slow-down in Europe attributable to the ~~increase. Bressner contributed $391,054 or 3.9 percentage points and CDI contributed $322,493 or 3.2 percentage points of the total increase in revenue.~~ COVID-19 pandemic.

Cost of revenue ~~increased~~decreased by ~~$2,317,673~~$1,080,982 or ~~30.3%~~10.8%, for the three month period ended March 31, ~~2020~~2021 as compared to the ~~same period~~prior year in ~~2019.~~2020. The ~~increase~~decrease in cost of revenue was ~~primarily driven by~~mainly attributable to our reduced sales in the media and entertainment industry that is a lower margin business as compared to product sales to OEMs engaged in government contracts, thus driving a significant change in products shipped during the quarter. OSS saw a decrease in cost of revenue ~~from OSS’ core business which contributed $1,892,578~~of $779,547 or ~~24.7~~7.8 percentage points as compared to the prior year. Bressner’s cost of ~~the increase. Bressner contributed $271,664~~revenue decrease $301,435 or ~~3.6~~3.0 percentage points on lower sales and ~~CDI contributed $153,431 or 2.0 percentage points of the total increase~~changes in ~~cost of revenue.~~product mix.

The overall gross margin percentage ~~increased~~improved from ~~24.0% for the three month period ended March 30, 2019 to~~ 25.4% for the three month period ~~ended~~ March 31, 2020 ~~an increase of 1.4 percentage points. The gross margin~~to 33.3% for the ~~core OSS business for the three month~~same period ended March 31, ~~2020~~2021, an increase of 7.9 percentage points. OSS’ gross margin percentage for the three months ended March 31, 2021 was ~~28.1%~~37.9%, ~~which was 0.6~~an increase of 10.5 percentage points ~~less in comparison~~as compared to the prior year period of ~~28.7%. The majority of the improvement in overall gross margin is~~27.5% attributable to ~~CDI which improved margins from a negative contribution of (15.5%) to a favorable contribution of 19.7%~~changes in ~~the current year.~~product mix. Bressner contributed gross margin at a rate of ~~21.9%~~24.9% as compared to ~~21.1% in~~ the same prior year ~~ago period.~~period in 2020 of 21.9%, an increase of 3.0 percentage points which was attributable to a change in product mix.

General and administrative expense ~~increased $470,131~~decreased $356,446 or ~~23.0 %,~~14.2%, for the three months period ended March 31, 2021 as compared to the same prior year period in 2020. OSS experienced a decrease of $369,625 which was offset by an increase at Bressner of $13,179. The decrease in general and administrative expense was primarily attributable to cost containment efforts initially implemented in April 2020. Overall, total general and administrative expense decreased as a percentage of revenue to 16.2% during the three month period ended March 31, ~~2020~~2021 as compared to same period in 2019. The increase in general and administrative expenses is primarily attributable to the accrual for severance benefits attributable to the termination of our former president and chief executive officer. Overall general and administrative expenses decreased as a percentage of revenue to 18.8% ~~during the three month periods ended March 31, 2020 as compared to 20.3%~~ during the same period in ~~2019.~~2020.

Marketing and selling expense ~~increased $51,418~~decreased $21,450 or ~~4.5%~~1.8% during the three month ~~periods~~period ended March 31, ~~2020~~2021 as compared to the same prior year period ~~in 2019. The~~2020. OSS had a modest increase inof $18,433 which was offset by a decrease at Bressner of $39,883 due to less travel associated with COVID-19 restrictions. Overall, total marketing ~~and selling expenses is primarily attributable to increased personnel costs. Marketing~~ and selling expense decreased as a percentage of revenue to ~~8.9%~~8.8% during the three month period ended March 31, ~~2020~~2021 as compared to ~~11.3%~~8.9% during the same period in ~~2019.~~2020.

Research and development expense decreased ~~by $58,539~~$371,192 or ~~4.6%~~30.8% during the three month period ended March 31, ~~2020~~2021 as compared to the same prior year period ~~in 2019. The majority~~2020. OSS saw a decrease of $383,231 or 103.2% of the decrease. The decrease ~~is attributable to reductions~~was largely driven by engineering resources being deployed on billable projects for which their costs are reclassified as cost of ~~$110,942~~revenue or classified as work in ~~the activities of the core OSS business attributable to reductions in outside engineering and contract labor fees, and prototypes, and a~~process labor. This reduction ~~at Bressner of $8,982. These reductions were~~was offset by ~~increases~~a modest increase of $12,039 or 3.2% at ~~CDI of $61,385 attributable to on-going projects.~~Bressner. Overall, total research and development expense as a percentage of revenue decreased as a percentage of revenue to ~~9.0%~~6.2% during the three month period ended March 31, ~~2020~~2021 as compared to ~~12.5%~~9.0% during the same period in ~~2019.~~2020.

Interest income ~~increased $21,530~~decreased $19,337 for the three month period ended March 31, ~~20209~~2021 as compared to the same prior year period in ~~2019.~~2020. The ~~increase~~decrease is attributable to ~~increased~~reduced finance charges on outstanding accounts receivable balances from our largest customer in the media and entertainment ~~industry.~~industry which has brought their account current.

Interest expense increased ~~$62,516~~$81,198 for the three month period ended March 31, ~~2020~~2021 as compared to same period in ~~2019.~~2020. On April ~~4, 2019,~~24, 2020, the Company borrowed ~~$1,500,000 from individuals~~$3,000,000 through a senior secured convertible debt offering issued with a 10% original issue discount and ~~related parties at~~incurred legal costs associated with this debt offering. The interest and the professional fees incurred on securing the debt are being amortized on an ~~annual~~effective interest rate ~~of 9.5%, additionally, warrants of 10% of the value of the borrowing were also granted. The fair value of the warrants is amortized over the life of the loans and such costs are included as~~basis to interest expense. ~~The increase in increase expenses is mainly attributable to this increase in borrowings.~~

Other income (expense), for the three month period ended March 31, ~~2020~~2021 resulted in net expenses of $28,629 as compared to net other expenses of $8,029 in the same prior year period in 2020, for a net ~~decrease~~change of $20,600. The majority of the increase is an increase in ~~other income~~foreign currency transactions gains and ~~expense of $3,242 and compared to the same period in 2019.~~ losses.

We have recorded an income tax ~~benefit~~provision (benefit) of ~~$467,298~~$60,522 and ~~$1,101,911,~~$(467,298), respectively, for the three month periods ended March 31, ~~2020~~2021 and ~~2019. This benefit is attributable to projected annual taxable income for 2020 with a projected tax rate of 28.2%.~~2020. The ~~projected~~ effective tax rate for the ~~quarter~~years ended March 31, 2021 and 2020 differs from the statutory rate mainly due to permanent non-deductible goodwill amortization for Bressner Technology GmbH, ~~income from the Global Intangible Low-Taxed Income inclusion,~~deductions related to expenses of OSS stock options, as well as projecting federal, foreign and state tax liabilities for the year.

~~In determining the periodic income tax expense, GAAP requires us to forecast our annual~~ The effective ~~income~~ tax rate ~~(“AETR”)~~ for 2021 is 76.4% as compared to 28.2% in the years December 31, 2020 and 2019. Based on management’s projections, the Company expects income tax benefits related to research and development credits and equity compensation benefits to exceed our pretax earnings in 2020 and 2019.prior year 2020.

Given our ~~recent~~prior year operating losses, the Company’s primary sources of liquidity have been provided by (i) the Company’s February 2018 initial public offering (net proceeds were approximately $16,100,000),; (ii) March 2019 notes payable from members of the Board of Directors and others of ~~$1,500,000,~~$1,500,000; (iii) the ~~June~~July 2019 sale of ~~1,554,832~~1,554,546 shares of the Company’s common stock for net cash proceeds of ~~$2,488,148 and~~$2,488,148; (iv) the April 24, 2020 sale of $3,000,000 of Senior Secured Convertible Promissory Notes issued at a 10% original issue ~~discount.~~

discount; (v) receipt of approximately $1,500,000 on April 28, 2020 of government loan proceeds under the Paycheck Protection Program; and (vi) a receipt of approximately $9,221,000 on March 3, 2021 in a registered direct offering.

As of March 31, ~~2020,~~2021, the Company’s cash and cash equivalents were ~~$3,038,006~~$19,614,315 and working capital ~~of $11,938,554.~~was $22,935,632. Cash and cash equivalents held by Bressner totaled ~~$504,103~~$1,263,439 (USD) aton March 31, ~~2020,~~2021, and Bressner’s debt covenants do not permit the use of those funds by its parent company. During the three ~~months~~month period ended March 31, 2021, the Company experienced an operating income of $275,031, with cash generated by operating activities of $4,291,066. During the year ended December 31, 2020, the Company experienced an operating loss of ~~$1,511,154~~$424,281, with cash used in operating activities of $721,773. Our largest customer who is engaged in the media and entertainment industry is having significant financial hardships attributable to the COVID-19 pandemic and as a result has been slow in paying its outstanding accounts receivables. The Company has formulated a plan whereby extended terms have been made available, and our customer is presently honoring those terms.$250,173.

Our sources of liquidity and cash flows are used to fund ongoing operations, research and development projects for new products and 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 and 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, 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.

The Company’s revenue growth ~~inclusive~~during the year 2020 slowed due to the effects of ~~two acquisitions made~~COVID-19. However, resulting from a reduction in ~~2018,~~force and strict cost containment, the Company has ~~resulted in growth~~been able to mitigate the effects, to some degree, of the ~~Company as~~reduced revenue. For a ~~whole, but has been offset by increased spending in all areas of operating expenses: general~~further description and ~~administrative, marketing and selling, and research and development.~~

~~The recent outbreak~~risk factors associated with COVID-19, please see Part 1A of the novel strain of coronavirus, or COVID-19, which has been declared by the World Health Organization to be a “public health emergency of international concern,” has spread across the globe and is impacting worldwide economic activity. A public health pandemic, including COVID-19, poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could haveDecember 31, 2020 Annual Report on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt the supply chain and adversely impact our business, financial condition or results of operations. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.

The Company’s operations team is closely monitoring the potential impact to the Company’s business, including its cash flows, supply chains, customers and employees. Though management has been successfully managing through the current known impacts, if the situation further deteriorates or the outbreak results in further restriction on both supply and demand factors, our cash flows, financial position and operating results for fiscal year 2020 and beyond will be negatively impacted. Neither the length of time nor the magnitude of the negative impacts can be presently determined.

Management’s plans ~~with respect to the above is~~are to continue its efforts towards responding to the changing economic landscape attributable to COVID-19, to restructure the Company with the primary objectives of reducing costs, conserving cash, strengthening margins, and improving company-wide execution. Specific actions already implemented by management include ~~the deferral of certain executive and Board compensation payments,~~ a reduction in force, a limited freeze on hiring, ~~and~~reduced work week, minimizing overtime, travel and entertainment, and contractor costs. On April 7, 2020, the Company implemented a cost reduction plan which included the termination of certain employees and elimination of certain costs. ~~Estimated savings from this effort are expected to be $2.5 to $3.0 million for the year ending 2020.~~

As a result of management’s cost reduction plans, the Company’s potential sources of liquidity and management’s most recent cash flow forecasts, management believes that the Company has sufficient liquidity to satisfy its anticipated ~~cash~~working capital requirements for its ongoing operations and obligations for at least the next twelve months. However, there can be no assurance that management’s cost reduction efforts will be effective or the forecasted cash flows will be ~~achieved,~~achieved. Furthermore, the Company shall continue to evaluate its capital expenditure needs based upon factors including but not limited to the Company’s sales from operations, growth rate, the timing and extent of spending to support development efforts, the expansion of the Company’s sales and marketing, the timing of new product introductions, and the continuing market acceptance of the Company’s products and services. If cash generated from operations is insufficient to satisfy the Company’s capital requirements, the Company may open a revolving line of credit with a bank, or it may have to sell additional equity or debt securities or obtain expanded credit facilities to fund its operating expenses, pay its obligations, diversify its geographical reach, and grow the Company. In the event such financing is needed in the future, there can be no assurance that ~~external sources of~~such financing ~~including the issuance of debt and/or equity securities,~~ will be available ~~at times~~to the Company, or, if available, that it will be in amounts and on terms acceptable to the Company. If the Company cannot raise additional funds when it needs or wants them, the Company’s operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at ~~all.~~ the current level, and if no additional financing were obtained, then management would restructure the Company in a way to preserve its business while maintaining expenses within operating cash flows.

The following table summarizes our cash flows for the three month periods ended March 31, ~~2020~~2021 and ~~2019~~2020:

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
Cash flows:	2020			2019			2021			2020
Net cash used in operating activities	$	(721,773	)	$	(200,017	)
Net cash provided by (used in) operating activities							$	4,291,066		$	(721,773	)
Net cash used in investing activities	$	(198,507	)	$	(802,193	)	$	(121,759	)	$	(198,507	)
Net cash used in financing activities	$	(1,214,119	)	$	(817,272	)
Net cash provided by (used in) financing activities							$	9,173,593		$	(1,214,119	)

During the three month period ended March 31, ~~2020 we~~2021, the Company generated ~~used $721,773~~$4,291,066 in cash from operating activities, ~~a decrease in cash~~an increase of ~~$521,756~~$5,012,839 when compared to the cash used in operating activities of ~~$200,017~~$721,773 during the same three month period year in ~~2019.~~ 2020. This improvement in operating cash flow is mainly attributable to better earnings resulting from improved gross margins, a reduction in expenses, and reduction in working capital requirement resulting in better collections from customers.

The ~~increase~~improvement in cash ~~used in~~generated by operating activities was primarily a result of a ~~reduction~~decrease in working capital requirements of ~~$1,145,361,~~$3,180,719, an ~~increase~~improvement in net loss of ~~$151,303, which was offset by~~$1,137,230, and an increase in non-cash adjustments of ~~$774,908.~~$694,890. Non-cash adjustments include increases of ~~$977,611 comprised~~$794,122 attributable to deferred taxes; gain on disposal of property and equipment, warranty reserves, amortization of deferred ~~benefit for income taxes, warranty~~gain, inventory reserves, ~~depreciation, and~~amortization of debt discount ~~inventory reserves~~ and stock-based compensation expense. These increases were offset by ~~$(202,703)~~$29,232 in decreases in non-cash adjustments attributable to ~~gain on disposal of property and equipment,~~the provision for bad debt ~~amortization of deferred gain~~depreciation, and ~~amortization of intangibles.~~amortization.

Working capital ~~decreased~~requirements were reduced overall by ~~$1,145,361.~~$3,180,719. The sources of working capital of ~~$1,535,078 are~~$4,012,890 were attributable to ~~reductions in~~changes inventory levels, prepaid and other current assets and accounts ~~receivable~~payable and ~~inventories~~accrued expenses and other liabilities for the comparable period. These sources were offset by ~~uses of~~reductions in working capital ~~due~~of $832,171 attributable to ~~increases in prepaids and other assets, and reduced~~ accounts ~~payable and accrued expenses and other liabilities of $2,680,439.~~receivable.

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.~~payable and accrued expenses.

During the three month period ended March 31, ~~2020~~2021, wethe Company used cash of ~~$198,507~~$121,759 in investing activities as compared to ~~$802,193~~$198,507 used during the ~~same~~prior year period in ~~2019,~~2020, a decrease of ~~$603,686. In~~$76,748. The main projects for the ~~prior reporting period,~~three months ended March 31, 2021 and 2020 were the Company was expanding and remodeling its facility for increased capacity. Such costs were not incurred in the current period. Additionally, in the prior year, the Company was implementing phase Icontinued enhancement of ~~its~~our ERP system, ~~which included a team~~and the purchase of ~~external resources~~test equipment for ~~which~~ the ~~costs were capitalized. Though phase II is~~engineering department. We currently ~~in process, the implementation team is significantly smaller and as a result we are not incurring comparable costs. We~~ do not anticipate any other significant purchases of equipment or expansion of our ERP system beyond ~~that~~completion of phase II of the project, which is ~~anticipated for use in~~ the ~~normal course~~integration of ~~our core business activity.~~certain sales functions.

Given the economic and financial hardships operating in a COVID-19 environment, the Company believed it to be imperative to secure additional financial resources to ensure financial stability during trying economic times. Duringthe three month period ended March 31, ~~2020~~2021, the Company ~~, we used $1,214,119~~generated $9,173,593 in cash from financing activities, as compared to the cash used in financing activities of ~~$817,272~~$1,214,119 during the same three month period year in ~~2019.~~ 2020.

During the three month ~~period~~periods ended March 31, 2021and 2020, ~~in addition to payments on term loans and outstanding lines of credit,~~ the Company received proceeds of $278,968 and $57,000, ~~through~~respectively, from the exercise of warrants and stock options which was offset by a payment for taxes of $44,252 and $656,845, respectively that was paid on behalf of those that exercised options and RSU’s on a net cashless basis.

On March ~~31, 2019,~~1, 2021, the Company ~~received~~entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company agreed to issue and sell, in a registered direct offering, 1,497,006 shares of the Company’s common stock, par value $0.0001 per share, to the purchaser at an offering price of $6.68 per share. The net proceeds from the ~~exercise of options of $14,201and paid net $831,473 on the outstanding debt obligations.~~

~~The following table sets forth our non-cancellable contractual obligations as of March 31, 2020.~~

~~We have made~~registered offering were approximately $9.22 million after deducting certain ~~indemnities, under which the Company may be required to make payments to an indemnified party, in relation to certain transactions. We indemnify our directors, officers, employees and agents~~fees due to the ~~maximum extent permitted under~~placement agents’ and 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.Company’s transaction expenses.

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.

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 $1,150,000 from members of the Board of Directors and $350,000 from other shareholders for a ~~two year~~two-year period at an interest rate of 9.5% which requires the Company to make monthly principal and interest payment of $69,000 per month. In connection with these loans, the Company issued to the 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 per share. Accordingly, the Company issued to the note holders warrants to purchase 69,766 shares of the Company’s common stock. The relative fair value of the warrants issued was $60,158. The remaining unfunded loan commitments expired as of April 1, 2020, and the Company has not received any additional funding commitments from members of the Board of Directors. These are now fully paid as of April 2021.

~~Our~~In preparing our consolidated financial statements ~~are prepared~~ in ~~accordance~~conformity with U.S. generally accepted accounting principles, ~~(GAAP). The preparation~~management must make a variety of ~~these financial statements requires us to make estimates and assumptions that affect~~decisions which impact the reported amounts ~~of assets, liabilities, revenue, expenses,~~ and the related disclosures. ~~We evaluate our estimates~~These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on ~~an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe~~which to ~~be reasonable under the circumstances. Our actual results could differ from~~base accounting estimates. In making these ~~estimates. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.~~

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 servicedecisions, management applies its judgment 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~~understanding and ~~for services is estimated based on the Company’s approved list price.~~

~~Customer agreements include one vendor managed inventory program. The Company recognizes revenue under this arrangement when all~~analysis of the ~~following criteria~~relevant circumstances and our historical experience.

Our accounting policies and estimates that are ~~met: (i) the goods have been identified separately as belonging~~most critical to the ~~customer; (ii)~~presentation of our results of operations and financial condition, and which require the ~~goods~~greatest use of judgments and estimates by management, are ~~ready~~designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for ~~physical shipment~~year ended December 31, 2020. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. There were no significant changes 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 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 providedour critical accounting policies during the three month 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.

~~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.~~

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 and 2015 Stock Option Plan that was approved in December 2015 (the “2015 Plan”), based on the estimated fair value of the award. We use the Black-Scholes option pricing model to estimate the fair value of stock option awards granted under the 2017 Plan and 2015 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 fair value of the underlying common stock, 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.

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.

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.

We evaluate our goodwill, intangible and long-lived assets for impairment when events or circumstances arise that indicate our goodwill, intangible and long–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.

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.

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.ended March 31, 2021.

Per the Company’s consolidated financial statements Note 2 – Significant Accounting Policies, we have implemented a number of changes, as required by FASB. See Note 2 ~~for further details.~~

~~Per~~of the ~~Company’s consolidated~~accompanying financial statements ~~Note 2 – Significant Accounting Policies, we may be implementing a number of changes, as required by FASB. See Note 2~~ for further details.

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.

Financial instruments that potentially expose us to concentrations of credit risk consist principally of cash, cash equivalents, and accounts receivable. We place our cash and cash equivalents with financial institutions with high credit quality. AtOn March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we had ~~$2,658,777~~$19,614,315 and ~~$5,185,321,~~$6,316,921, respectively, of cash and cash equivalents on deposit or invested with our financial and lending institutions.

We provide credit to our customers in the normal course of business. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary.

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 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.

We employ derivatives on a periodic basis to manage certain market risks through the use of foreign exchange forward contracts. We do not use derivatives for trading or speculative purposes. Our derivatives are designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we may enter into foreign exchange contracts to provide currency at a fixed rate.

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

Adjusted 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 (loss) income as (loss) or income before amortization, stock-based compensation, expenses related to discontinued operations, impairment of long-lived assets and non-recurring acquisition costs. Adjusted EPS expresses adjusted (loss) income on a per share basis using weighted average diluted shares outstanding.

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

Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by or used in operating activities less capital expenditures for property and equipment, which includes capitalized software development costs for the implementation of the Company’s ERP system. We believe free cash flow provides investors with an important perspective on cash available for investments and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. We believe that trends in our free cash flow can be valuable indicators of our operating performance and liquidity.

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

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets	3
	Unaudited Consolidated Statements of Operations	4
	Unaudited Consolidated ~~Statement~~Statements of Comprehensive Loss	5
	Unaudited Consolidated Statement of Stockholders’ Equity	6
	Unaudited Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3227
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4840
Item 4.	Controls and Procedures	4840

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	4941
Item ~~1A.~~1A	Risk Factors	4941
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5042
Item 3.	Defaults Upon Senior Securities	5042
Item 4.	Mine Safety Disclosures	5042
Item 5.	Other Information	5042
Item 6.	Exhibits	5142
	Signatures	5245

	March 31,			December 31,
	2021			2020
Raw materials	$	4,014,408		$	5,210,327
Sub-assemblies		208,453			255,699
Work-in-process		768,473			407,328
Finished goods		5,218,864			4,424,603
		10,210,198			10,297,957
Less: reserves for obsolete and slow-moving inventories		(661,238	)		(650,453	)
	$	9,548,960		$	9,647,504

	March 31,			December 31,
	2020			2019
Raw materials	$	3,820,575		$	2,478,882
Sub-assemblies		1,277,061			1,857,004
Work-in-process		1,024,973			493,276
Finished goods		3,490,385			3,087,529
		9,612,994			7,916,691
Less: reserves for obsolete and slow-moving inventories		(628,117	)		(547,335	)
	$	8,984,877		$	7,369,356

	March 31,			December 31,
	2020			2019
Computers and computer equipment	$	659,763		$	633,546
Furniture and office equipment		337,901			340,801
Manufacturing equipment and engineering tools		2,503,576			2,501,020
ERP System		1,892,420			1,709,125
Leasehold improvements		902,974			892,097
		6,296,634			6,076,589
Less: accumulated depreciation and amortization		(2,744,083	)		(2,508,025	)
	$	3,552,551		$	3,568,564

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☒

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	19 to 41 months	$	2,084,515	$	(1,226,805	)	$	857,710
Drawings and Technology	36 months	0 months		760,207		(760,207	)		-
Trade name, Trademarks & other	24 to 36 months	5 to 19 months		447,274		(255,655	)		191,619
Non-compete	36 months	19 months		246,797		(124,460	)		122,337
			$	3,538,793	$	(2,367,126	)	$	1,171,667

	For the Three Months Ended March 31,						Change
Cash flow:	2020			2019
Cash used in operating activities	$	(721,773	)	$	(200,017	)	$	(521,756	)
Capital expenditures		(200,049	)		(803,243	)		603,194
Free cash flow	$	(921,822	)	$	(1,003,260	)	$	81,438

	For the Three Months Ended March 31, 2020								For the Three Months Ended March 31, 2019
Entity:	Revenue		Cost of Revenue			Gross Profit		Gross Margin %	Revenue		Cost of Revenue			Gross Profit			Gross Margin %
OSS - (inclusive of SkyScale)	$	7,818,278	$	(5,621,751	)	$	2,196,527	28.1%	$	5,230,086	$	(3,729,173	)	$	1,500,913		28.7%
Concept Development Inc.		621,946		(499,158	)		122,788	19.7%		299,454		(345,727	)		(46,273	)	-15.5%
Bressner Technology GmbH		4,919,413		(3,843,041	)		1,076,372	21.9%		4,528,359		(3,571,377	)		956,982		21.1%
	$	13,359,637	$	(9,963,950	)	$	3,395,687	25.4%	$	10,057,899	$	(7,646,277	)	$	2,411,622		24.0%

Contractual Obligations:	Total		Less than 1 year		1-3 years		3-5 years		More than 5 Years
Notes payable	$	1,689,977	$	1,622,316	$	67,661			$	-
Operating leases		1,740,468		635,693		972,442		132,333		-
Total	$	3,430,445	$	2,258,009	$	1,040,103	$	132,333	$	-

Exhibit Number		Description

2.1 (1)		Agreement and Plan of Merger and Reorganization, dated August 22, 2018, with Concept Development Inc.

2.2 (2)		Share Purchase Agreement, dated October 31, 2018, with Bressner Technology GmbH.

3.1 (3)		Amended and Restated Certificate of Incorporation (currently in effect).

3.2 (4)		Bylaws, as amended (currently in effect).

4.1 (5)		Second Amended and Restated Investors’ Rights Agreement, dated January 2007.

4.2 (5)		Common Shareholder Piggyback Registration Rights Agreement, dated July 15, 2016.

10.1+ (6)		Form of Indemnification Agreement between One Stop Systems, Inc. and each its directors and executive officers.

10.2+ (5)		One Stop Systems, Inc. 2000 Stock Option Plan and related form agreements.

10.3+ (5)		One Stop Systems, Inc. 2011 Stock Option Plan and related form agreements.

10.4+ (5)		One Stop Systems, Inc. 2015 Stock Option Plan and related form agreements.

10.5+ (5)		One Stop Systems, Inc. 2017 Stock Equity Incentive Plan and related form agreements.

10.6 (12)		Amendment No. 1 to the 2017 Stock Equity Incentive Plan.

10.7 (6)		Lease Agreement dated October 21, 2004, as amended.

10.8 (1)		Piggyback Registration Rights Agreement by and between One Stop Systems, Inc. and James M. Reardon, dated August 31, 2018.

10.9 (7)		Form of Binding Commitment Letter.

10.10 (8)		Executive Employment Agreement between One Stop Systems, Inc., and David Raun, dated March 24, 2020.

10.11 (9)		Form of Senior Secured Convertible Promissory Note.

10.12 (9)		Form of Securities Purchase Agreement, dated April 20, 2020, by and between the Company and the investors.

10.13 (9)		Form of Security Agreement, dated April 20, 2020, by and between the Company, certain of its subsidiaries and the investors.

10.14 (9)		Form of Intercreditor Agreement, dated April 20, 2020, by and between the Company, the investors and certain secured parties.

10.15 (10)		Senior Secured Convertible Promissory Note, dated April 24, 2020, by and between the Company and the investor.

10.16 (11)		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 (12)		Employment Agreement between One Stop Systems, Inc., and David Raun, dated June 24, 2020.

10.18 (13)		Form of Securities Purchase Agreement

10.19 (13)		Form of Placement Agency Agreement

31.1**		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002 .~~2002.

31.2**		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002 .~~2002.

32.1**		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002 .~~2002.

32.2**		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002 .~~2002.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

	~~Company Name~~ONE STOP SYSTEMS, INC.

Date: May ~~14, 2020~~13, 2021	By:	/s/ David Raun
		David Raun
		~~Interim~~President and Chief Executive Officer (Principal Executive Officer)

Date: May ~~14, 2020~~13, 2021	By:	/s/ John W. Morrison Jr.
		John W. Morrison Jr.
		Chief Financial Officer (Principal Financial and Accounting Officer)