(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, ~~2021,~~2022, the registrant had ~~18,510,415~~19,914,548 shares of common stock (par value $0.0001) outstanding.

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

This Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, should be read in conjunction with our audited financial statements for the year ended December 31, 2021, included in our Annual Report on Form 10-K, filed with the SEC on March 24, 2022.

The results of operations for the three months ended March 31, 2022, are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022.

	Unaudited						Unaudited		Audited
	March 31,			December 31,			March 31,		December 31,
	2021			2020			2022		2021
ASSETS
Current assets
Cash and cash equivalents	$	19,614,315		$	6,316,921		$	2,219,800	$	5,101,174
Accounts receivable, net		5,733,675			7,458,383
Inventories, net		9,548,960			9,647,504
Short-term investments (Note 3)								13,540,410		14,535,750
Accounts receivable, net (Note 4)								9,077,449		5,089,804
Inventories, net (Note 5)								16,430,384		12,277,873
Prepaid expenses and other current assets		889,043			655,708			1,055,181		580,651
Total current assets		35,785,993			24,078,516			42,323,224		37,585,252
Property and equipment, net		3,368,959			3,487,178			2,870,065		3,091,415
Operating lease right-of-use assets								1,082,774		-
Deposits and other		45,136			81,709			35,629		46,845
Deferred tax assets, net		3,638,073			3,698,593			3,568,566		3,641,032
Goodwill		7,120,510			7,120,510			7,120,510		7,120,510
Intangible assets, net		498,357			662,257
	$	50,457,028		$	39,128,763
Intangible assets, net (Note 6)								89,577		105,385
Total Assets							$	57,090,345	$	51,590,439

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	2,735,695		$	976,420		$	4,393,220	$	2,059,059
Accrued expenses and other liabilities		3,585,102			3,481,444
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
Accrued expenses and other liabilities (Note 7)								3,717,944		3,846,488
Current portion of operating lease obligation								545,642		-
Current portion of notes payable (Note 8)								2,219,128		1,137,651
Current portion of senior secured convertible note, net of debt discounts of $0 and $2,384, respectively (Note 8)								-		2,588,525
Total current liabilities		9,850,361			7,812,223			10,875,934		9,631,723
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
Operating lease obligation, net of current portion								794,427		-
Total liabilities		11,486,085			9,842,930			11,670,361		9,631,723
Commitments and contingencies (Note 9)
Commitments and contingencies (Note 10)
Stockholders’ equity
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
Common stock, $0.0001 par value; 50,000,000 shares authorized; 19,914,548 and 18,772,214 shares issued and outstanding, respectively								1,991		1,877
Additional paid-in capital		40,652,472			30,758,354			44,215,256		41,232,441
Accumulated other comprehensive income		37,159			287,547			96,999		153,361
Accumulated deficit		(1,720,538	)		(1,761,736	)
Accumulated earnings								1,105,738		571,037
Total stockholders’ equity		38,970,943			29,285,833			45,419,984		41,958,716
	$	50,457,028		$	39,128,763
Total Liabilities and Stockholders' Equity							$	57,090,345	$	51,590,439

For the Three Months Ended March 31,

2021

2020

Revenue

$
13,315,752

$
13,359,637

Cost of revenue

8,882,968

9,963,950

Gross profit

4,432,784

3,395,687

Operating expenses:

General and administrative

2,157,619

2,514,065

Marketing and selling

1,167,901

1,189,351

Research and development

832,233

1,203,425

Total operating expenses

4,157,753

4,906,841

Income (loss) from operations

275,031

(1,511,154
)
Other income (expense), net:

Interest income

5,300

24,637

Interest expense

(149,982
)

(68,784
)
Other income (expense), net

(28,629
)

(8,029
)
Total other income (expense), net

(173,311
)

(52,176
)
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

$
0.00

$
(0.07
)
Diluted

$
0.00

$
(0.07
)
Weighted average common shares outstanding:

Basic

17,348,164

16,332,898

Diluted

18,642,061

16,332,898

For the Three Months Ended March 31,

2021

2020

Net income (loss)

$
41,198

$
(1,096,032
)
Other comprehensive loss:

Currency translation adjustment

(250,388
)

(55,567
)
Total other comprehensive loss

(250,388
)

(55,567
)
Comprehensive loss

$
(209,190
)

$
(1,151,599
)

	For the Three Months Ended March 31,
	2022			2021
Revenue	$	17,052,677		$	13,315,752
Cost of revenue		11,912,022			8,882,968
Gross profit		5,140,655			4,432,784
Operating expenses:
General and administrative		1,774,689			2,157,619
Marketing and selling		1,471,720			1,167,901
Research and development		1,244,115			832,233
Total operating expenses		4,490,524			4,157,753
Income from operations		650,131			275,031
Other income (expense), net:
Interest income		51,005			5,300
Interest expense		(58,715	)		(149,982	)
Other income (expense), net		102,121			(28,629	)
Total other income (expense), net		94,411			(173,311	)
Income before income taxes		744,542			101,720
Provision for income taxes		165,308			60,522
Net income	$	579,234		$	41,198
Net income per share:
Basic	$	0.03		$	0.00
Diluted	$	0.03		$	0.00
Weighted average common shares outstanding:
Basic		18,886,939			17,348,164
Diluted		19,764,069			18,642,061

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

	For the Three Months Ended March 31,
	2022			2021
Net income	$	579,234		$	41,198
Other comprehensive loss:
Net unrealized losses on short-term investments		(5,996	)		-
Currency translation adjustment		(50,366	)		(250,388	)
Total other comprehensive loss		(56,362	)		(250,388	)
Comprehensive income (loss)	$	522,872		$	(209,190	)

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

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

	Common Stock							Accumulated Other						Total
	Shares		Amount		Additional Paid-in-Capital			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		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

For the Three Months Ended March 31,

2021

2020

Cash flows from 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

(59,290
)

(441,282
)
(Gain) on disposal of property and equipment

-

(1,542
)
Provision for bad debt

(16,590
)

(2,405
)
Warranty reserves

13,944

5,075

Amortization of deferred gain

-

(41,479
)
Amortization of intangibles

163,900

174,525

Depreciation

216,878

221,300

Inventory reserves

154,335

148,418

Amortization of debt discount

61,210

7,520

Stock-based compensation expense

438,394

207,761

Changes in operating assets and liabilities:

Accounts receivable

1,697,901

2,530,072

Inventories

(223,160
)

(1,826,564
)
Prepaid expenses and other current assets

(152,561
)

(386,005
)
Accounts payable

1,795,141

(275,428
)
Accrued expenses and other liabilities

159,766

54,293

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

(121,759
)

(200,049
)
Proceeds from sales of property and equipment

-

1,542

Net cash used in investing activities

(121,759
)

(198,507
)

Cash flows from financing activities:

Proceeds from exercise of stock options and warrants

278,968

57,000

Payment of payroll taxes on net issuance of employee stock options

(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

(80,117
)

(430,313
)
Net repayments on related-party notes payable

(155,022
)

(141,042
)
Net repayments on notes payable

(47,174
)

(42,919
)
Net cash provided by (used in) financing activities

9,173,593

(1,214,119
)

Net change in cash and cash equivalents

13,342,900

(2,134,399
)
Effect of exchange rates on cash

(45,506
)

(12,916
)
Cash and cash equivalents, beginning of period

6,316,921

5,185,321

Cash and cash equivalents, end of period

$
19,614,315

$
3,038,006

For the Three Months Ended March 31,

2021

2020

Supplemental disclosure of cash flow information:

Cash paid during the period for interest

$
83,392

$
22,369

Cash paid during the period for income taxes

$
80,629

$
-

	For the Three Months Ended March 31,
	2022			2021
Cash flows from operating activities:
Net income	$	579,234		$	41,198
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Deferred benefit for income taxes		71,370			(59,290	)
Gain on sale of intangible asset		(125,000	)		-
Loss on disposal of property and equipment		48,861			-
(Recovery) provision for bad debt		(5,524	)		(16,590	)
Warranty reserves		(14,929	)		13,944
Amortization of intangibles		15,809			163,900
Depreciation		253,982			216,878
Inventory reserves		19,342			154,335
Amortization of debt discount		1,224			61,210
Stock-based compensation expense		382,828			438,394
Changes in operating assets and liabilities:
Accounts receivable		(4,010,998	)		1,697,901
Inventories		(4,329,659	)		(223,160	)
Prepaid expenses and other current assets		(466,400	)		(152,561	)
Accounts payable		2,354,165			1,795,141
Accrued expenses and other liabilities		207,297			159,766
Net cash (used in) provided by operating activities		(5,018,398	)		4,291,066

Cash flows from investing activities:
Redemption of short-term investment grade securities		989,345			-
Proceeds from sale of intangible assets		125,000			-
Purchases of property and equipment, including capitalization of labor costs for test equipment and ERP		(85,841	)		(121,759	)
Net cash provided by (used in) investing activities		1,028,504			(121,759	)

Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		29,670			278,968
Payment of payroll taxes on net issuance of employee stock options		(20,478	)		(44,252	)
Proceeds from issuance of stock		-			10,000,000
Stock issuance costs		-			(778,810	)
Net (repayments) borrowings on bank lines of credit		-			(80,117	)
Proceed on borrowing of notes payable		2,219,128			-
Repayments on notes payable		(1,096,975	)		(47,174	)
Repayments on related-party notes payable		-			(155,022	)
Net cash provided by financing activities		1,131,345			9,173,593

Net change in cash and cash equivalents		(2,858,549	)		13,342,900
Effect of exchange rates on cash		(22,825	)		(45,506	)
Cash and cash equivalents, beginning of period		5,101,174			6,316,921
Cash and cash equivalents, end of period	$	2,219,800		$	19,614,315

For ~~The~~the Three Month Periods Ended March 31, ~~2021~~2022 and ~~2020~~2021

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~~specialized high-performance computing modules and systems, ~~and components that~~which are ~~based on industry standard computer architectures.~~designed to target edge computing deployments. The Company markets its products to manufacturers of automated equipment used for media and entertainment, medical, industrial, and military applications.

During the year ended December 31, 2015, the Company formed a ~~wholly owned~~wholly-owned subsidiary in Germany, One Stop Systems, GmbH (“OSS GmbH”). ~~During~~In 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 of the SkyScale joint venture agreement agreed to dissolve SkyScale and ceased operations as of December 31, 2018.

On August 31, 2018, the Company acquired Concept Development Inc. (“CDI”) located in Irvine, California. CDI specializes in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment and networking systems. CDI has been fully integrated into the core operations of OSS as of June 1, 2020.

On October 31, 2018, OSS GmbH acquired 100% of the outstanding stock of Bressner Technology GmbH, a Germany limited liability company located near Munich, Germany (“Bressner”). Bressner provides standard and customized servers, panel PCs, and PCIe expansion systems. Bressner also provides manufacturing, test, ~~and~~ sales and marketing services for customers throughout Europe.

~~Liquidity, Going Concern Considerations~~The accompanying consolidated financial statements include the accounts of OSS, which include the acquisition of CDI, and ~~Management Plans~~its wholly owned subsidiary, OSS GmbH, which also includes the acquisition of Bressner. Intercompany balances and transactions have been eliminated in consolidation.

Given our 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 membersThe negative impact of the ~~Board of Directors~~COVID-19 pandemic and ~~others of $1,500,000; (iii)~~ the ~~July 2019 sale of 1,554,546 shares of~~impact on the ~~Company’s common stock for net cash proceeds of $2,488,148; (iv)~~global economy and capital markets resulting from the April 24, 2020 sale of $3,000,000 of Senior Secured Convertible Promissory Notes issued at a 10% original issue discount; (v) receipt of approximately $1,500,000 on April 28, 2020 of government loan proceeds undergeopolitical instability caused in part by the ~~Paycheck Protection Program,~~ongoing military conflict between Russia and ~~(vi) a receipt of approximately $9,221,000 on March 3, 2021 in a registered direct offering.~~

~~As of March 31, 2021,~~Ukraine have contributed to global supply chain issues and economic uncertainty, which has negatively affected our operations. For example, the Company’s cash and cash equivalents were $19,614,315 and working capital was $25,935,632. Cash and cash equivalents held by Bressner totaled $1,263,430 (USD) at March 31, 2021. Bressner’s debt covenants do not permit the use of these funds by its parent company.

During the three 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 $424,281, with cash used in operating activities of $250,173.

~~The~~ Company’s revenue growth during ~~the prior~~fiscal year 2020 slowed due to the effects of ~~COVID-19. However, resulting from a reduction~~COVID-19 and, although it rebounded in ~~force~~2021, it has not yet fully recovered, particularly in its media and ~~strict cost containment,~~entertainment business.

Currently, we are experiencing increased pricing, longer lead-times, unavailability of product and limited supplies, protracted delivery dates, changes in minimum order quantities to secure product, and/or shortages of certain parts and supplies that are necessary components for the ~~Company has been able to mitigate the effects, to some degree, of the reduced revenue attributable to the economic impact of COVID-19.~~

~~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 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 we offer to our customers. As a result, the Company is carrying increased inventory balances to ensure availability of necessary products and to secure pricing. Additionally, products that are in the “work-in-process” stage and our inventory of finished goods have increased due to the timing and availability of certain componentry necessary to complete our products.

These global issues are also impacting some of our customers, who are experiencing downturns or uncertainty in their own business operations and revenue, and as a result, these customers may need to decrease or delay their technology spending, requested pricing concessions or payment extensions, or seek to renegotiate their contracts.

As a result of these global issues, it has been difficult to accurately forecast our revenues or financial results, especially given that the near and long term impact of the pandemic and geopolitical issues. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets,

and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and ~~financial condition even after the pandemic is contained and remediation/restriction measures are lifted. For example, we may be unable~~investors, or cause our stock price to ~~collect receivables from customers that are significantly impacted by COVID-19. Also,~~decline.

Furthermore, a decrease in orders in a given period could negatively affect our revenues in future periods. ~~COVID-19~~These global issues and events may also have 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~~may take further actions that alter our operations as may be required by federal, state, or local authorities from time to ~~evaluate the nature~~time, or which we determine are in our best interests. In addition, we may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and ~~extent~~retain customers and our rate of ~~the impact~~innovation, either of ~~COVID-19 to~~which could harm 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 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 impact on our business and financial condition. 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 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 supply and demand factors, our cash flows, financial position and operating results for year 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~~Management plans with respect to the above isare to continue ~~its~~their efforts towards responding to the changing economic landscape, ~~attributable to COVID-19,~~ to continue to ~~reduce~~control costs, conserve cash, strengthen margins, and improve company-wide execution. Specific actions already implemented by management include a reduction in force, a limited freeze on hiring, 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. Savings from this effort are estimated to be $2.5 million on an annual basis.

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 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”).~~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, ~~2020.~~2021. Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, ~~2020~~2021, audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements. The ~~Company~~Company’s management has evaluated all subsequent events and transactions through the date of filing this report.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. Operating results for the three months ended March 31, ~~2021,~~2022, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022. For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, ~~2020~~2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March ~~25, 2021.~~24, 2022.

The accompanying consolidated financial statements include the accounts of OSS, which include the acquisition of Concept Development Inc., its wholly owned subsidiary, OSS GmbH, which also includes the acquisition of Bressner Technology 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.~~2021, except for the addition of a definition of, and description of our policy for accounting for leases in accordance with the adoption of ASU No. 2016-02, Leases (“ASU 2016-02”) as follows:

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. A lease must be classified as a finance lease if any of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys

the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.

Right-of-use assets and liabilities are initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right of use assets are reviewed for impairment. The lease liability is initially measured at the present value of future minimum lease payments over the expected lease term at the commencement date of each lease. The Company measures and records a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs.

In these cases where the discount rate implicit in the lease is not known, the Company measures the right-of-use assets and lease liabilities using a discount rate equal to the Company's incremental borrowing rate it pays on current debt instruments or would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The Company and its subsidiary have no leases classified as finance leases. The Company and its subsidiary currently lease plant, office facilities and equipment under operating leases expiring through August 2024. As of March 31, 2022, the weighted average remaining lease term for our operating leases was 32 months. The weighted average discount rate for our operating leases was 12.3%.

The Company’s lease agreements may include options to extend the lease following the initial term. On a case-by-case basis, the Company’s management determines if it is reasonably certain to exercise the renewal option; such renewal options were included in determining the initial lease term.

We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2022, and therefore did not reassess (i) whether any expired or existing contracts are, or contain, leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases. We elected to use hindsight for transition when considering judgments and estimates such as assessments of lease options to extend, or terminate, a lease, or to purchase the underlying asset. As result of the adoption of ASC 842, the Company recognized an accumulative adjustment to beginning retained earnings for the 2022 fiscal year of $44,533.

For all asset classes, we elected to (i) not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less and (ii) not separate non-lease components from lease components, and we have accounted for combined lease and non-lease components as a single lease component. Variable lease payments associated with the Company’s leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on which those payments are assessed. For those leases that are subsequently modified for terms, such changes may require a remeasurement of the lease liability.

Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense.

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

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

As of March 31, ~~2021,~~2022, we had ~~approximately $3.6 million~~$3,568,566 in net deferred tax assets ~~(DTAs)~~(“DTAs”). These DTAs include approximately ~~$5.1 million~~$7,100,000 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 future that will allow us to realize these DTAs. However, it is possible that certain economic conditions may decrease the likelihood that we will have sufficient taxable income in 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~~may have a material adverse effect on our results of operations and statement of financial condition.

On March 11, 2021, Congress passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which includes certain business tax provisions.At this point, we do not believe that these changes will have a material impact on our income tax provision for ~~2021.~~2022. We will continue to evaluate the impact of new legislation on our financial position, results of operations, and cash flows.

The U.S. Tax Cuts and Jobs Act (“TCJA”) was signed into law on December 22, 2017. Guidance continues to be issued clarifying the application of this legislation and new proposed legislation known as Build Back Better is under consideration within both houses of U.S. Congress. Significant business and international provisions have been proposed in various versions of the framework of the bill that could increase our total tax expense. We cannot predict the overall impact that the additional guidance and proposed changes may have on our business. Some jurisdictions have raised tax rates and it is reasonable to expect that other global taxing authorities will be reviewing current legislation for potential modifications in reaction to the implementation of U.S. tax legislation, current economic conditions, and COVID-19 response costs.

Due to the COVID-19 pandemic, ~~there~~economic uncertainty and capital markets disruption, which has been ~~uncertainty~~significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and ~~disruption in the global economy~~Ukraine supply chain issues, our business, financial condition and ~~financial markets.~~results of operations could be materially adversely affected by any negative impact from these events. We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions or a revision of the carrying value of our assets or liabilities as of the date of this Quarterly Report on Form 10-Q. These estimates and assumptions may change as new events occur and additional information is obtained. As a result, actual results could differ materially from these estimates and assumptions.

~~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, 2021, and interim periods within fiscal year 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.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. In November 2019, ASU 2016-13 was amended by ASU 2019-10 that changed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, with early adoption permitted. Further, the ASU clarifies that operating lease receivables are not within the scope of ASC

Subtopic 326-20 and should instead be accounted for under the new leasing standard, ASC 842. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial 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 became effective for the year ended December 31, 2020 (and interim periods in 2021). ASU 2018-07 did no~~t 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. 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~~ i~~ndexed to the entity’s own stock, which results in classification as a derivative liability. ASU 2017-11~~ ~~was adopted early~~short-term investments 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 assetssignificant investment category as of March 31, ~~2021.~~ 2022, are as follows:

Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	2,562,408	$	-	$	-	$	-	$	2,562,408
Certificates of deposit		579,176		-		4,679		795		575,292
Corporate bonds and notes		3,172,170		-		7,450		23,685		3,188,405
Municipal Securities		7,172,218		-		4,927		47,014		7,214,305
	$	13,485,972	$	-	$	17,056	$	71,494	$	13,540,410

The Company’s short-term investments by significant investment category as of December 31, 2021, are as follows:

Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Accrued Interest		Estimated Fair Value
Level 1: (1)
Cash alternatives	$	2,172,853	$	-	$	-	$	-	$	2,172,853
Certificates of deposit		591,968		-		3,294		1,222		589,896
Corporate bonds and notes		4,293,722		-		5,432		46,820		4,335,110
Municipal Securities		7,411,043		-		2,334		29,182		7,437,891
	$	14,469,586	$	-	$	11,060	$	77,224	$	14,535,750

Cash alternatives represents cash balances in savings accounts that are temporarily on-hand that are immediately available for investments in accordance with the Company’s investment policy.

The Company ~~made~~typically invests in highly rated securities and its investment policy limits the ~~election~~amount of credit exposure to ~~early adopt because, consistent~~any 1 issuer. The policy requires investments in fixed income instruments denominated and payable in U.S. dollars only and requires investments to be investment grade, with a primary objective of minimizing the ~~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.~~ potential risk of principal loss.

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~~(Recovery) provision for bad debt expense related to accounts receivable was ~~($16,590)~~$5,524 and ~~($2,405)~~$16,590 for the three month periods ended March 31, 2022 and 2021, ~~and 2020,~~ respectively. The increase in accounts receivable is attributable to the timing of shipments. A significant portion of quarterly sales was shipped in the final days of the quarter.

Definite lived intangible assets related to acquisition are as follows, as of March 31, ~~2021:~~2022:

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets		Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	7 to 29 months	$	2,084,515	$	(1,695,302	)	$	389,213	36 to 60 months	0 to 17 months	$	2,084,515	$	(1,994,938	)	$	89,577
Drawings and technology	36 months	0 months		760,207		(760,207	)		-	36 months	0 months		760,207		(760,207	)		-
Trade name, trademarks & other	24 to 36 months	7 months		447,274		(383,202	)		64,072	24 to 36 months	0 months		447,274		(447,274	)		-
Non-compete	36 months	7 months		246,797		(201,725	)		45,072	36 months	0 months		246,797		(246,797	)		-
			$	3,538,793	$	(3,040,436	)	$	498,357			$	3,538,793	$	(3,449,216	)	$	89,577

Definite lived intangibles assets related to acquisitions are as follows, as of December 31, ~~2020:~~2021:

	Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets		Expected Life	Remaining Months	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
Customer lists and relationships	36 to 60 months	10 to 32 months	$	2,084,515	$	(1,578,178	)	$	506,337	36 to 60 months	0 to 20 months	$	2,084,515	$	(1,979,130	)	$	105,385
Drawings and technology	36 months	0 months		760,207		(760,207	)		-	36 months	0 months		760,207		(760,207	)		-
Trade name, trademarks & other	24 to 36 months	10 months		447,274		(355,742	)		91,532	24 to 36 months	0 months		447,274		(447,274	)		-
Non-compete	36 months	10 months		246,797		(182,409	)		64,388	36 months	0 months		246,797		(246,797	)		-
			$	3,538,793	$	(2,876,536	)	$	662,257			$	3,538,793	$	(3,433,408	)	$	105,385

As of March 31, ~~2021,~~2022, amortization expense of the definite lived intangible assets for the years remaining is as follows:

Amortization expense recognized during the three months ended March 31, 2022 and 2021, was $15,809 and ~~2020 was~~ $163,900, ~~and $174,525,~~ respectively.

Bressner ~~Technology GmbH~~ has ~~two~~3 revolving lines of credit with German institutions, ~~totaling~~including UniCredit Bank and VR Bank with total availability of up to €2,200,000 (US$~~2,578,904).~~2,441,041) as of March 31, 2022. Borrowing under the lines of credit bear interest at a variable rate of Euribor plus a stated rate. The current rates as of March 31, 2022, for the lines of credit ~~are 3.89% and~~range from 3.10% to 4.0%~~. One million euros of the credit line expires in January 2024,~~, with the balances remaining ~~balance being~~ open indefinitely or until occurrence of a defined change of control event. There were no0 outstanding lines of credit balances as of March 31, ~~2021~~2022 and December 31, ~~2020.~~

Bressner ~~Technology GmbH~~ has ~~two~~4 term loans outstanding as of March 31, ~~2021~~2022, with ~~a total~~an aggregate balance outstanding of ~~€1,000,000~~€2,000,000 (US$~~1,174,343)~~2,219,128) 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);

1, 2019, Bressner entered into a note payable in ~~June 2019 in~~ the amount of €500,000 (US$586,189), which bears interest at 1.70% and matured on 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, 2021 and December 31, 2020 is €500,000 (US$587,172, $611,406, respectively);

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

~~Bressner entered into a~~ note payable in September 2019 in the amount of €300,000 (US$336,810) which bore interest at 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~~December 31, ~~2020; and~~2021.

~~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, 2020 and has been paid in full.~~

In April 2019, the Company borrowed an aggregate of $350,000 from ~~three~~3 individuals for a two-year period at an interest rate of 9.5%, which ~~requires~~required the Company to make monthly principal and interest payments of $16,100 per month. These loans ~~are~~were secured by the assets of the Company. In connection with these loans, the Company issued to the noteholders warrants to purchase shares of the Company’s common stock in an amount equal to 10% of the original principal at a price per share equal to ~~$2.15 per share.~~$2.15. Accordingly, the Company issued to the noteholders warrants to purchase an aggregate of 16,276 shares of the Company’s common stock at an exercise price of $2.15 per share. The relative fair value of each warrant was $0.90. The relative fair value of warrants was estimated using Black-Scholes with the following weighted-average assumptions: fair value of the Company’s common stock at issuance of $2.15 per share; five year contractual term; 44.60% volatility; 0.0% dividend rate; and a risk-free interest rate of 2.307%. The total relative fair value of the warrants issued is $14,037. ~~The balance~~These loans have matured, and all balances have been paid in full. As such, the balances outstanding as of March 31, ~~2021~~2022 and December 31, ~~2020 is $16,014 and $63,188, respectively.~~2021, were $0.

In April 2019, the Company borrowed an aggregate of $1,150,000 from ~~three~~3 individuals who serve on the Company’s board of directors for a two-year period at an interest rate of 9.5%, which ~~requires~~required the Company to make monthly principal and interest payments of $52,900 per month. These loans ~~are~~were secured by the assets of the Company. In connection with these loans, the Company issued to the noteholders warrants to purchase shares of the Company’s common stock in an amount equal to 10% of the original principal at a price per share equal to ~~$2.15 per share.~~$2.15. Accordingly, the Company issued to the noteholders warrants to purchase an aggregate 53,490 shares of the Company’s common stock at an exercise price of $2.15 per share. The relative fair value of each warrant was $0.90. The relative fair value of warrants was estimated using Black-Scholes with the following weighted-average assumptions: fair value of the Company’s common stock at issuance of $2.15 per share; five year contractual term; 42.60% volatility; 0.0% dividend rate; and a risk-free interest rate of 2.3067%. The relative fair value of warrants issued is $46,121. ~~The balance~~These loans have matured, and all balances have been paid in full. As such, the balances outstanding as of March 31, ~~2021~~2022 and December 31, ~~2020 is $51,647 and $206,669, respectively.~~2021 were $0.

The relative fair value of warrants issued in connection with the notes payable described above were recorded as debt discount, decreasing notes payable and related-party notes payable and increasing additional paid-in-capital on the accompanying consolidated balance sheets. The debt discounts are being amortized to interest expense over the term of the corresponding notes payable using the straight-line method, which approximates the effective interest method. Amortization of debt discounts of $0 and $7,519 were recognized as interest expense for the three month periods ended March 31, 2022 and 2021, respectively.

On April 28, 2020, ~~One Stop Systems, Inc.~~the Company received authorization pursuant to the Paycheck Protection Program ~~(PPP)~~(“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~~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~~was scheduled to mature on April 28, 2022 and ~~bears~~bore interest at a rate of 1.0% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), was initially to commence on October 28, 2020. The Company did not provide any collateral or guarantees for the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The PPP Note ~~provides~~provided for customary events of default, including, among others, those relating to failure to make payment, breaches of any term, obligation, covenant, or condition contained in the PPP Note and payment of unauthorized expenses or use of proceeds contrary to CARES Act rules. ~~The Company 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~~On May 3, 2021, the Company ~~expects~~received notification from the SBA that its PPP ~~loan to be~~Loan of $1,499,360, plus accrued interest of $14,994, had been fully forgiven and such amount has been recognized as other income in ~~full, all related amounts have been presented as noncurrent liabilities (See Note 13).~~the consolidated statement of operations.

On April 20, 2020, the Company entered into a Securities Purchase Agreement with an institutional investor, providing for the issuance ofby the ~~Company’s~~Company of Senior Secured Convertible Promissory Notes with a principal face ~~amount~~value 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~~Notes issued ~~with~~under the Securities Purchase Agreement had a 10% original issue discount.

At the initial closing of this offering, the Company issued notes in the principal amount of $3,000,000 ~~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~~ with a 10% original issue discount resulting inan aggregate purchase price of $2,700,000 at the initial closing. The notes ~~bear no~~bore 0 interest rate (except upon event of default) and, unless earlier converted or redeemed, ~~will~~were scheduled to mature on April 1, 2022.

Pursuant to the Securities Purchase Agreement, the Company had the right to consummate additional closings of up to an additional $3,000,000, subject to the prior satisfaction of certain closing conditions. This right expired effective April 20, 2021, and the Company may no longer consummate additional closings under the Securities Purchase Agreement.

The ~~Notes are~~notes were convertible at any time, in whole or in part, at the option of the investors, into shares of Company common stock at the initial conversion price of $2.50 per share. The conversion price iswas subject to adjustment for the issuances of securities at a price below the conversion price then in effect and for stock splits, combinations or similar events. If immediately following the close of business on the ~~six~~nine month anniversary of the issuance date of each note, the conversion price then in effect ~~exceeds~~exceeded 135% of the volume weighted average price VWAP (the “Market Price”), the initial conversion price under any such note ~~will~~would 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). AsThe remaining balance of the notes of $2,590,909 was converted into Company common stock on March 31, ~~2021, the holder has elected to defer receipt of three installment payments as allowed per the agreement.~~2022.

Subject to the satisfaction of certain equity conditions set forth in the notes, installment amounts ~~may~~could be satisfied in shares of our common stock, with such installment conversion at a conversion price equal to the lower of (i) the conversion price then in effect; and (ii) the greater of (x) the floor price of $1.00 (80% of the Nasdaq market price at date of purchase agreement) and (y) the lower of (I) 82.5% the volume weighted average price of our common stock on the trading day immediately before the applicable installment date and (II) 82.5% of the quotient of (A) the sum of the volume weighted average price of our common stock for each of the three (3) trading days with the lowest volume weighted average price of our common stock during the twenty (20) consecutive trading day period ending and including the trading day immediately prior to the applicable installment date, divided by (B) three (3). Shares of our common stock to be issued with respect to any such installment ~~will~~would be pre-delivered on the second trading day after the applicable installment notice date (as defined in the notes) with a true-up on the applicable installment date. The market value of any installment amount below the floor price ~~will~~would 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, due 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~~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, 2022 and 2021, total debt discount amortization was $1,161 and $50,928, ~~and such amount is~~respectively. Such amounts are included in interest expense in the accompanying consolidated statements of operations.

Debt issuance costs in the amount of $316,274 related to this indebtedness were deducted from the face value of the note. Such costs are amortized to interest expense using the effective interest rate method over the term of the loan. Total debt issuance costs amortized during the three months ended March 31, 2022 and 2021, was $1,223 and $53,690, ~~and such amount is included in interest expense in the accompanying consolidated statements of operations.~~

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

A summary of outstanding debt obligations as of March 31, ~~2021~~2022, is as follows:

Loan Description	Current Interest Rate	Maturity Date	Balance (Euro)		Balance ($)		Current Portion		Long-term Portion		Current Interest Rate	Maturity Date	Balance (Euro)		Balance ($)		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	10% OID	April-22		-		-		-		-
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	$	-	1.487%	June-22	€	500,000	$	554,782	$	554,782	$	-
Uni Credit Bank AG	1.90%	April-21		500,000		587,172		587,172		-	1.580%	August-22		500,000		554,782		554,782
Uni Credit Bank AG											1.685%	September-22		500,000		554,782		554,782
VR Bank											1.950%	August-22		500,000		554,782		554,782		-
			€	1,000,000	$	1,174,343	$	1,174,343	$	-			€	2,000,000	$	2,219,128	$	2,219,128	$	-
					$	5,332,273	$	3,696,549	$	1,635,724			€	2,000,000	$	2,219,128	$	2,219,128	$	-

Outstanding debt obligations as of March 31, ~~2021~~2022, consist of the following:

Period Ended March 31, 2021	Related Parties			Third Parties			Convertible Note			PPP Loan		Foreign		Total
Period Ended March 31, 2022																	Convertible Note		Foreign		Total
Current portion:
Principal	$	51,647		$	16,014		$	2,454,545		$	-	$	1,174,343	$	3,696,549		$	-	$	2,219,128	$	2,219,128
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		$	-	$	2,219,128	$	2,219,128

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 notes payable as of March 31, ~~2021~~2022, are as follows:

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			-
Period Ending March 31, 2023																					Convertible Note		Foreign			Total			Discount / Loan Original Costs
Current portion of notes payable																					$	-	$	2,219,128		$	2,219,128		$	-
Total minimum payments		51,647			16,014			2,590,909			1,499,360		1,174,343			5,332,273			(166,985	)	$	-	$	2,219,128		$	2,219,128		$	-

Current portion of notes payable		(51,647	)		(16,014	)		(2,454,545	)		-		(1,174,343	)		(3,696,549	)		166,985			-		(2,219,128	)		(2,219,128	)		-
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.

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

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

On June 21, 2021, the Company filed a Form S-8 Registration Statement relating to 3,543,114 shares of the Company’s common stock, par value $0.0001 per share, issuable to the employees, officers, directors, consultants and advisors of the Company under the Company’s 2017 Plan, One Stop Systems, Inc. 2015 Stock Option Plan, and One Stop Systems, Inc. 2011 Stock Option Plan.

Effective June 24, 2020, the Company entered into an employment agreement with ~~Mr.~~David Raun to serve as the Company’s president and chief executive officer. Pursuant to the terms of the employment agreement, Mr. Raun is entitled to receive 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~~nine months after the one-year anniversary of the date of grant and every ~~six~~nine months thereafter until fully vested; and 412,125 Incentive Stock Options (“ISOs”) pursuant to the Company’s 2017 ~~Equity Incentive~~ Plan, whereby the exercise price for the ISOs shall be no less than the fair market value of the Company’s common stock at the date of grant ($2.14).

The ISOs shall vest at the end of each of the second and fourth quarters, the price of the Company’s common stock as of the end of quarter two or quarter four, as applicable, shall be determined using the ten-day trailing volume weighted average price (“VWAP”) after reporting of quarter two and quarter four earnings, as applicable. The date of each such determination shall be referred to as a “Determination Date.” If on any Determination Date the Company’s stock price has increased from the prior Determination Date, then a portion of the ISOs shall become vested. The number of ISOs that shall become vested on a ~~Determinate~~Determination Date is determined as follows: ((Price at Determination Date – Price at prior Determination Date) x 100) * 1,177.52 = Vested ISOs. If on any Determination Date the Company’s stock price is $5.50 per share, all ISOs shall immediately become vested. Mr. Raun’s ISOs are fully vested, but not exercised, based upon achievement of the specified performance objectives.

In the event that Mr. Raun’s employment agreement is terminated for a reason other than “good cause” or for “good ~~reason”,~~reason,” upon Mr. ~~Raun, upon executing~~Raun’s execution of an effective waiver and release of claims, unvested RSUs shall accelerate so that an additional twelve (12) months of RSUs shall vest from the termination date.

A summary of stock option activity under each of the Company’s ~~stock option~~equity incentive plans during the three month period ended March 31, ~~2021:~~2022, is as follows:

Stock Options Outstanding

Number of
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life (in years)

Aggregate
Intrinsic
Value

Outstanding 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

	Stock Options Outstanding
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding on January 1, 2022		1,025,499		$	2.01		6.35	$	1,867,324
Granted		-			-		-		-
Forfeited / Canceled		-			-		-		-
Exercised		(37,368	)		-		-		-
Outstanding on March 31, 2022		988,131		$	2.06		6.31	$	1,754,249
Exercisable as of March 31, 2022		981,461		$	2.05		6.30	$	1,746,779
Vested and expected to vest as of March 31, 2022		988,131		$	2.06		6.31	$	1,754,249

~~The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stock options granted by the Company.~~ There were no0 options granted during the three month ~~period~~periods ended March 31, ~~2021:~~2022 and 2021. The following table presents the grant date fair value of options vested and the intrinsic value of options exercised:

As of March 31, ~~2021,~~2022, the amount of unearned stock-based compensation estimated to be expensed from ~~2021~~2022 through 2025 related to unvested ~~common~~ stock options is ~~$49,012,~~$6,622, net of estimated forfeitures. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is ~~0.93~~0.55 years.

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

~~Restricted stock units~~RSUs may be granted at the discretion of the compensation committee of the 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~~RSUs 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~~RSUs vest. The compensation expense related to the ~~restricted stock units~~RSUs is calculated as the fair value of the common stock on the grant date and is amortized to expense over the vesting period and is adjusted for estimated forfeitures.

The Company’s ~~restricted stock unit~~RSU activity for the three ~~month period~~months ended March 31, ~~2021~~2022, is as follows:

Restricted Stock Units

Number of
Shares

Weighted
Average Grant
Date Fair Value

Unvested at January 1, 2021

575,922

$
2.65

Granted

-

$
-

Vested

(93,793
)

$
2.37

Cancelled

-

$
2.70

Unvested at March 31, 2021

482,129

$
2.70

	Restricted Stock Units
	Number of Shares			Weighted Average Grant Date Fair Value
Unvested on January 1, 2022		604,800		$	4.30
Granted		669,950		$	3.91
Vested		(73,662	)	$	4.83
Canceled		-		$	-
Unvested on March 31, 2022		1,201,088		$	4.05

As of March 31, ~~2021,~~2022, there was ~~$786,901~~$4,267,398 of unrecognized compensation cost related to unvested ~~restricted stock units~~RSUs, which is expected to be recognized over a weighted average period of ~~2.07~~1.44 years.

Stock-based compensation expense for the three month periods ended March 31, ~~2021~~2022 and ~~2020~~2021, was comprised of the following:

The following table summarizes the Company’s warrant activity during the three ~~month period~~months ended March 31, ~~2021:~~2022:

We are subject to litigation, claims, investigations, and audits arising from time to time in the ordinary course of our business.

On September 29, 2020, the Company’s former Chief Executive Officer, Stephen D. Cooper, commenced an action against the Company 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~~alleged claims for (1) breach of written contract and (2) violation of California Labor Code Sections 201 and 203 in connection with the Company’s alleged failure to pay unpaid wages and an earned bonus following the Company’s termination of Mr. Cooper’s employment with the Company in February 2020. Mr. Cooper ~~seeks~~sought 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 contract (in connection with a binding commitment letter and Mr. Cooper’s employment agreement),; (2) intentional ~~misrepresentation,~~misrepresentation; (3) negligent ~~misrepresentation,~~misrepresentation; and (4) breach of fiduciary ~~duty. The~~duty pursuant to which the Company ~~is seeking~~sought compensatory damages, punitive damages, pre-judgment interest, attorneys’ fees, and the cost of suit incurred in connection with Mr. Cooper’s complaint and the Cross Complaint. ~~The Company intends~~

On June 28, 2021, pursuant to ~~vigorously defend~~the parties’ agreement to resolve all ~~allegations.~~of their disputes, the court entered a dismissal with prejudice of the litigation, including all claims and cross-claims. As a result, these actions have been resolved.

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, 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 modified in February 2019 and expires in August ~~2024.~~2024. The Company also leases a 3,208 square foot facility in Salt Lake City, Utah that houses our Ion software development ~~team.~~team which expires in June 2023. The Company is the lessee of ~~a leased space comprising approximately~~ 12,880 square feet located in Irvine, California ~~with the lease expiring~~which expires in June ~~2021.~~2023. Bressner ~~Technology GmbH,~~ leases space ~~comprising~~comprised of 8,073 square feet on a month-to-month basis.

All Company leases are operating leases with a weighted average remaining lease term of 32 months with a weighted average discount rate of 12.28%. For the three ~~month periods~~months ended March 31, ~~2021~~2022 and ~~2020,~~2021, rent expense was $161,535 and $251,130, ~~and $189,417,~~ respectively.

The following table present a maturity of the Company’s operating lease liabilities as of March 31, 2022:

In the normal course of business, the Company ~~enters~~may enter 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~~2022 and ~~2020,~~2021, the Company had ~~two~~2 customers in each period that accounted for (in the aggregate) approximately 27% 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~~quarterly revenue.

As of March 31, 2022 and December 31 2021, the Company had ~~three~~2 customer and 3 customers, respectively, that accounted for approximately 47% and ~~as of December 31, 2020, one customers that had approximately 58% and 41%~~64%, 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~~2022 and ~~2020,~~2021, the Company had approximately ~~22%,~~25% and ~~18%~~22%, 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 an aggregate of $1,150,000 from members of the Board of Directors and an aggregated of $350,000 from other shareholders for a two-year period at an interest rate of 9.5%, which ~~requires~~required the Company to make monthly principal and interest payment of $69,000 per month. In connection with these loans, the Company issued to these note holders, warrants to purchase shares of the Company’s common stock equal to 10% of the original principal of such notes at a price per share equal to ~~$2.15 per share.~~$2.15. Accordingly, the Company issued to these note holders warrants to purchase an aggregate of 69,766 shares of the Company’s common stock. The relative fair value of the warrants issued was $60,158. The remaining unfunded commitments expired as of April 1, 2020, and the Company has 0t received any additional funding commitments from members of the Board of Directors. Interest expense on all related-party notes payable for the three months ended March 31, 2022 and 2021 was $0 and ~~2020 totaled~~ $3,678, ~~and $17,156,~~ respectively. The remaining unfunded commitments expired as of April 1, 2020, and the Company has not received any additional funding commitments from members of the Board of Directors as of the date of filing of the Quarterly Report on Form 10-Q.

Basic and diluted net ~~loss~~income per share was calculated as follows for the three month periods ended March 31, ~~2021~~2022 and ~~2020:~~2021:

	For the Three Months Ended March 31,					For the Three Months Ended March 31,
	2021		2020			2022		2021
Basic and diluted net income (loss) per share:
Basic and diluted net income per share:
Numerator:
Net income (loss)	$	41,198	$	(1,096,032	)
Net income						$	579,234	$	41,198
Denominator:
Weighted average common shares outstanding - basic		17,348,164		16,332,898			18,886,939		17,348,164
Effect of dilutive securities		1,293,897		-			877,130		1,293,897
Weighted average common shares outstanding - diluted		18,642,061		16,332,898			19,764,069		18,642,061
Net income (loss) per common share:
Net income per common share:
Basic	$	0.00	$	(0.07	)	$	0.03	$	0.00
Diluted	$	0.00	$	(0.07	)	$	0.03	$	0.00

The Company operates in ~~two~~2 reportable segments: the first being our design and manufacture of high-performance customized computers and flash arrays, which is inclusive of in-flight entertainment ~~& connectivity,~~ and connectivity; and the second being our subsidiary, Bressner, which operates as value-added reseller with minimal product 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 ~~2021~~2022 and ~~2020~~2021, is as follows:

	For the Three Months Ended March 31, 2021									For the Three Months Ended March 31, 2020									For the Three Months Ended March 31, 2022									For the Three Months Ended March 31, 2021
	OSS			Bressner			Total			OSS			Bressner			Total			OSS			Bressner			Total			OSS			Bressner			Total
Revenues	$	8,601,971		$	4,713,781		$	13,315,752		$	8,440,224		$	4,919,413		$	13,359,637		$	10,582,042		$	6,470,635		$	17,052,677		$	8,601,971		$	4,713,781		$	13,315,752
Cost of revenues		(5,341,362	)		(3,541,606	)		(8,882,968	)		(6,120,909	)		(3,843,041	)		(9,963,950	)		(6,801,711	)		(5,110,311	)		(11,912,022	)		(5,341,362	)		(3,541,606	)		(8,882,968	)
Gross profit		3,260,609			1,172,175			4,432,784			2,319,315			1,076,372			3,395,687			3,780,331			1,360,324			5,140,655			3,260,609			1,172,175			4,432,784
Gross margin %		37.9	%		24.9	%		33.3	%		27.5	%		21.9	%		25.4	%		35.72	%		21.02	%		30.15	%		37.91	%		24.87	%		33.29	%
Total operating expenses		(3,251,785	)		(905,968	)		(4,157,753	)		(3,986,209	)		(920,632	)		(4,906,841	)		(3,628,616	)		(861,908	)		(4,490,524	)		(3,251,785	)		(905,968	)		(4,157,753	)
Income from operations	$	8,824		$	266,207		$	275,031		$	(1,666,894	)	$	155,740		$	(1,511,154	)	$	151,715		$	498,416		$	650,131		$	8,824		$	266,207		$	275,031

Revenue from customers with non-U.S. billing addresses represented approximately ~~66%~~70% and ~~50%,~~ 66%of the Company’s revenue during the three month periods ended March 31, 2022 and 2021, ~~and 2020,~~ respectively.

As of March 31, ~~2021,~~2022, substantially all the Company’s long-lived assets ~~were~~are located in the United States of America, with the exception of assets of ~~$215,961~~$162,465 located in Germany.

The ~~Company~~Company’s management has evaluated subsequent events after the consolidated balance sheet dated as of March 31, ~~2021~~2022, 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, other than as disclosed in the accompanying notes~~thereto.

~~On April 7, 2021, Bressner Technologies, Inc. received a short-term loan~~Analysis of ~~€500,000 at an interest rate~~Financial Condition and Results 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~~.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~~contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Quarterly Report. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” included in our Annual Report filed on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 24, 2022. Readers are cautioned not to place undue reliance on these forward-looking statements.

One Stop Systems, ~~(OSS)~~Inc. (the “Company”) designs, manufactures, and markets specialized high-performance computing modules and systems, ~~targeting~~which are designed to target edge deployments. These specialized modules and systems consist of computers and storage products that incorporate the latest state-of-the art components with our embedded proprietary software. Such modules and systems allow our customers to offer high-end computing capabilities (often ~~embedded~~integrated within their equipment) to their target ~~markets.~~ markets and applications. Edge computing is ~~when data is processed/analyzed on devices,~~a form of computing that is atdone on site, near a particular data source or the ~~edge of the network, rather~~user (rather than in the ~~cloud itself. Factors such as~~cloud), minimizing the need for data to be processed in a remote data center. The global increase in load on the cloud infrastructure ~~globally~~ and ~~rises~~increase in artificial intelligence ~~(AI)~~(“AI”) applications are the ~~major~~primary factors driving the growth of the edge computing market. We market our products to manufacturers of automated equipment used for media and entertainment, medical, industrial, and military applications. Our customer applications often require connection to a wide array of data sources and sensors, ultra-fast processing power, and the ability to quickly access and store large and ever-growing data sets at their physical location ~~not~~(rather than in the ~~cloud.~~cloud). This equipment requires datacenter class performance optimized for deployment at the edge in challenging environments. ~~Unlike the controlled air-conditioned data center, many~~Many of these edge applications have unique requirements, including special and compact form factors ruggedized for harsh ~~conditions.~~conditions, which cannot be accommodated by traditional controlled air-conditioned data centers. We believe that we are uniquely positioned as a specialized provider ~~for~~to address the ~~high-end~~needs of this ~~marketplace~~market, providing custom servers, data acquisition platforms, compute accelerators, solid-state storage arrays, system IOI/O expansion systems, as well as edge optimized industrial and panel PCs, tablets, and handheld compute devices. Our systems also offer industry leading capabilities that occupy less physical space and require less power consumption. We deliver this high-end technology to our customers through the sale of equipment and embedded software.

~~We were originally organized as~~ One Stop Systems, ~~LLC,~~Inc. was originally incorporated as a California corporation in 1999, after initially being formed as a California limited liability company in ~~1998 before converting into One Stop Systems, Inc., a California corporation in 1999.~~1998. 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~~December 14, 2017, the ~~surviving corporation. We~~Company was reincorporated as a Delaware corporation onin connection with the initial public offering of its securities.

During the year ended December ~~14, 2017~~31, 2015, the Company formed a wholly owned subsidiary in Germany, One Stop Systems, GmbH (“OSS GmbH”). In July 2016, the Company acquired Mission Technologies Group, Inc. (“Magma”) and ~~began trading as a public company on the Nasdaq Capital Markets on February 1, 2018.~~

On August 31, 2018, wethe Company acquired Concept Development Inc. (“CDI”)~~, a provider of specialty in-flight entertainment, networking and other aerospace technology~~ located in Irvine, California. AsCDI specializes in the design and manufacture of ~~June 1,~~ custom high-performance computing systems for airborne in-flight entertainment and networking systems. CDI has been fully integrated into the core operations of ~~OSS.~~

On October 31, 2018, weOSS GmbH acquired 100% of the outstanding stock of Bressner Technology GmbH, ~~(“Bressner”)~~a Germany limited liability company located near Munich, ~~Germany.~~Germany (“Bressner”). Bressner designs and manufactures standard and customized servers, panel PCs, and PCIe expansion systems. Bressner also provides manufacturing, test, sales, and marketing services for customers throughout Europe. ~~Furthermore, Bressner is a valued-added reseller~~

The negative impact 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.~~

~~In March 2020, the 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~~impact on the global economy and capital markets resulting from the geopolitical instability caused in part by the ongoing military conflict between Russia and Ukraine, have contributed to ~~impact worldwide~~global supply chain issues and economic ~~activity. A public health pandemic, including COVID-19, poses~~uncertainty, which has affected negatively our operations. For example, 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~~Company’s revenue growth during fiscal year 2020 slowed due to ~~shutdowns~~the effects of COVID-19 and, although it rebounded in 2021, it has not yet fully recovered, particularly in our media and entertainment business.

Currently, we are experiencing increased pricing, longer lead-times, unavailability of product and limited supplies, protracted delivery dates, changes in minimum order quantities to secure product, and/or shortages of certain parts and supplies that ~~may be requested or mandated by governmental authorities.~~

~~More generally, COVID-19 raises~~are necessary components for the ~~possibility of an extended global economic downturn, which could affect demand for our~~ products and services we offer to our customers. As a result, the Company is carrying increased inventory balances to ensure availability of necessary products and to secure pricing. Additionally, products that are in the “work-in-process” stage and our inventory of finished goods have increased due to as the timing and availability of certain componentry necessary to complete our products.

As a result of these global issues, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long-term impact of the pandemic and geopolitical issues. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and ~~financial condition even after the pandemic is contained and remediation/restriction measures are lifted. For example, we may be unable~~investors, or cause our stock price to ~~collect receivables from customers that are significantly impacted by COVID-19. Also,~~decline.

Furthermore, a decrease in orders in a given period could negatively affect our revenues in future periods. ~~COVID-19~~These global issues and events may also have the effect of heightening many ~~of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K filed on March 25, 2021, including~~ risks associated with our customers and supply chain. We ~~will~~may take further actions that alter our operations as may be required by federal, state, or local authorities from time to time, or which we determine are in our best interests. In addition, we may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business.

Management’s plans with respect to the above is to continue their efforts towards responding to the changing economic landscape, to continue to ~~evaluate the nature~~control costs, conserve cash, strengthen margins, and ~~extent of the impact of COVID-19 to 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 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 negative impacts can be presently determined.

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 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 operations.

~~On February 15, 2020, Steve Cooper was terminated as President and CEO of One Stop Systems, Inc., and was replaced by David Raun who 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 completed a $6.0 million debt financing on a non-interest bearing convertible note with a 10% original issue discount. The first tranche of $3.0 million was received on April 27, 2020, with an additional $3.0 million available seven months from the date of closing at the option of the 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 registered offering are approximately $9.2 million after deducting certain fees due to the placement agents’ and the Company’s transaction expenses. The net proceeds received by the Company will be used for general corporate and working capital purposes.improve company-wide execution.

The Company recognizes revenue under accounting standard ASC 606. Revenue is primarily generated from the sale of computer hardware and engineering services and to ~~some~~a minimal extent the sale of software, and sales of software maintenance and support contracts. The Company’s performance obligations are satisfied over time as work is performed or at a point in time. The majority of the Company’s revenue is recognized at a point in time when products ship and control is transferred to the customer. The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied.

Cost of revenue primarily consists of costs of materials, costs paid to third-party contract manufacturers (which may include the costs of components), and personnel costs associated with manufacturing and support operations. Personnel costs consist of wages, bonuses, benefits, and stock-based compensation expenses. Cost of revenue also includes freight, allocated overhead costs and inventory write-offs and changes to our inventory and warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect cost of revenue to increase in absolute dollars with an improvement in margin, as product revenue increases.

Our operating expenses consist of general and administrative, marketing and ~~sales~~selling, and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs.

General and Administrative - General and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, and fees for third-party professional services, as well as allocated overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in growing the business.

Marketing and Selling – Marketing and ~~Selling~~selling expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel, and entertainment expenses as well as allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications, and brand-building activities. We expect marketing and selling expenses to increase in absolute dollars as we expand our sales force, increase marketing resources, and further develop sales channels.

Research and Development - Research and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for research and development, third-party engineering, and contractor support costs, as well as allocated overhead. We expect our research and development expenses to increase in absolute dollars as we continue to invest in new and existing products.

Other income consists of miscellaneous income and income received ~~for~~from activities outside of our core business. Other expense includes expenses ~~for~~from activities outside of our core business.

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

The following tables set forth our results of operations for the three month periods ended March 31, ~~2021~~2022 and ~~2020~~2021, presented in dollars and as a percentage of revenue, respectively.

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2021			2020			2022			2021
Revenue	$	13,315,752		$	13,359,637		$	17,052,677		$	13,315,752
Cost of revenue		8,882,968			9,963,950			11,912,022			8,882,968
Gross profit		4,432,784			3,395,687			5,140,655			4,432,784
Operating expenses:
General and administrative		2,157,619			2,514,065			1,774,689			2,157,619
Marketing and selling		1,167,901			1,189,351			1,471,720			1,167,901
Research and development		832,233			1,203,425			1,244,115			832,233
Total operating expenses		4,157,753			4,906,841			4,490,524			4,157,753
Income (loss) from operations		275,031			(1,511,154	)
Income from operations								650,131			275,031
Other income (expense), net:
Interest income		5,300			24,637			51,005			5,300
Interest expense		(149,982	)		(68,784	)		(58,715	)		(149,982	)
Other income (expense), net		(28,629	)		(8,029	)		102,121			(28,629	)
Total other income (expense), net		(173,311	)		(52,176	)		94,411			(173,311	)
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	)
Income before income taxes								744,542			101,720
Provision for income taxes								165,308			60,522
Net income							$	579,234		$	41,198

	For the Three Months Ended March 31,
	2022	2021
Revenue	100.0%	100.0%
Cost of revenue	69.9%	66.7%
Gross profit	30.1%	33.3%
Operating expenses:
General and administrative	10.4%	16.2%
Marketing and selling	8.6%	8.8%
Research and development	7.3%	6.2%
Total operating expenses	26.3%	31.2%
Income from operations	3.8%	2.1%
Other income (expense), net:
Interest income	0.3%	0.0%
Interest expense	-0.3%	-1.1%
Other income (expense), net	0.6%	-0.2%
Total other income (expense), net	0.6%	-1.3%
Income before income taxes	4.4%	0.8%
Provision for income taxes	1.0%	0.5%
Net income	3.4%	0.3%

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, 2021										For the Three Months Ended March 31, 2020										For the Three Months Ended March 31, 2022										For the Three Months Ended March 31, 2021
Entity:	Revenue		Cost of Revenue			Gross Profit		Gross Margin %			Revenue		Cost of Revenue			Gross Profit		Gross Margin %			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	%	$	10,582,042	$	(6,801,711	)	$	3,780,331		35.7	%	$	8,601,971	$	(5,341,362	)	$	3,260,609		37.9	%
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	%		6,470,635		(5,110,311	)		1,360,324		21.0	%		4,713,781		(3,541,606	)		1,172,175		24.9	%
	$	13,315,752	$	(8,882,968	)	$	4,432,784		33.3	%	$	13,359,637	$	(9,963,950	)	$	3,395,687		25.4	%	$	17,052,677	$	(11,912,022	)	$	5,140,655		30.1	%	$	13,315,752	$	(8,882,968	)	$	4,432,784		33.3	%

For the three month period ended March 31, ~~2021,~~2022, total revenue ~~decreased $43,885~~increased $3,736,925, or ~~0.33%~~28%, as compared to the same period in ~~2020.~~2021. OSS saw an increase in revenue of ~~$161,747~~$1,980,071, or ~~1.21 percentage points~~23%, as compared to the prior ~~year.~~year in 2021. The majority of this increase is attributable to an increase in shipments of product to ~~government OEM suppliers creating a change in mix~~our media and entertainment customer. Bressner experienced improved revenue of ~~distributed products~~$1,756,854, or 37.3%, as compared to the prior year ~~which was dominated by product shipment to our largest media and entertainment customer. Bressner experienced a decrease of $205,632 or a decrease of 1.54 percentage points.~~in 2021. This ~~decrease~~increase is mainly due to a general ~~slow-down~~economic improvement in Europe attributable to the diminishing impact of the COVID-19 ~~pandemic.~~pandemic in the current business environment.

Cost of revenue ~~decreased by $1,080,982~~increased $3,029,054, or ~~10.8%~~34.1%, for the three month period ended March 31, ~~2021~~2022, as compared to the prior year in 2020. The decrease in cost of revenue was 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.2021. OSS saw ~~a decrease~~an increase in cost of revenue of ~~$779,547~~$1,460,349, or ~~7.8 percentage points~~27.3%, as compared to the prior ~~year.~~year in 2021 The increase in cost of revenue is mainly attributable to our improved sales to our media and entertainment customer. Bressner’s cost of revenue ~~decrease $301,435~~increased $1,568,705, or ~~3.0 percentage points on lower~~44.3%, as compared to the prior year in 2021, which increase is primarily attributable to higher sales and changes in product mix.

The overall gross margin percentage ~~improved~~decreased from ~~25.4%~~33.3% for the three month period March 31, ~~2020~~2021, to ~~33.3%~~30.1% for the same period ended March 31, ~~2021, an increase~~2022, a decrease of ~~7.9~~3.2 percentage points. OSS’ gross margin percentage for the three months ended March 31, ~~2021~~2022, was ~~37.9%~~35.7%, ~~an increase~~a decrease of ~~10.5~~2.2 percentage points as compared to the prior year period in 2021 of ~~27.5%~~37.9%, which the decrease was primarily attributable to ~~changes in product mix.~~a higher concentration of the sales of our media and entertainment product. Bressner contributed gross margin at a rate of ~~24.9%~~21% as compared to the same prior year period in ~~2020~~2021 of ~~21.9%~~24.9%, ~~an increase~~a decrease of ~~3.0~~3.9 percentage points which was primarily attributable to ~~a change~~an increase in ~~product mix.~~ material and transportation costs.

General and administrative expense decreased ~~$356,446~~$382,930, or ~~14.2%~~17.8%, for the three ~~months~~month period ended March 31, ~~2021~~2022, as compared to the same prior year period in ~~2020.~~2021. OSS experienced a decrease of ~~$369,625 which was offset by an increase at~~$286,967, or 17.6% and Bressner ~~of $13,179.~~had a decrease $95,963, or 18.1%. The decrease in general and administrative expense ~~was~~is primarily attributable to ~~cost containment efforts initially~~a reduction in stock compensation expense, which was higher in the prior year due to the acceleration of performance based vesting and legal costs. We have reinstated certain employee benefits, implemented ~~in April 2020.~~pay increases and reestablished certain services that were suspended during the strict policies implemented during the height of the pandemic. Overall, total general and administrative expense decreased as a percentage of revenue to ~~16.2%~~10.4% during the three month period ended March 31, ~~2021~~2022, as compared to ~~18.8%~~16.2% during the same period in ~~2020.~~2021.

~~Marketing~~Selling and ~~selling~~marketing expense ~~decreased $21,450~~increased $303,819, or ~~1.8%~~26%, during the three month period ended March 31, ~~2021~~2022, as compared to the same prior year period ~~2020.~~in 2021. OSS had ~~a modest~~an increase of ~~$18,433~~$260,224, or 29.2%, which was ~~offset by a decrease at~~mainly attributable to normalized business activities which include trade shows, business travel, and increased marketing activities. Bressner had an increase of ~~$39,883~~$43,595, or 15.7%, due to ~~less travel associated with~~new marketing personnel and sales collateral materials. Generally, both OSS and Bressner experienced additional marketing costs as markets are beginning to re-open now that certain restrictions have been lifted that were previously imposed during the height of the COVID-19 ~~restrictions.~~pandemic. Overall, total marketing and selling expense decreased as a percentage of revenue to ~~8.8%~~8.6% during the three month period ended March 31, ~~2021~~2022, as compared to ~~8.9%~~8.8% during the same period in ~~2020.~~2021.

Research and development expense ~~decreased $371,192~~increased $411,882, or ~~30.8%~~49.5%, during the three month period ended March 31, ~~2021~~2022, as compared to the same prior year period ~~2020.~~in 2021. OSS saw ~~a decrease~~an increase of ~~$383,231~~$403,574 or ~~103.2% of the decrease. The decrease~~55%. This increase was largely driven by the deployment of more engineering resources ~~being deployed~~ on internal development projects rather than on customer billable projects for which ~~their~~such costs ~~are reclassified as~~would have been charged to cost of revenue ~~or classified as work in process labor. This reduction was offset by~~rather than being charged to research and development expense. Bressner had a modest increase of ~~$12,039~~$8,308, or ~~3.2% at Bressner.~~8.4%. Overall, total research and development expense as a percentage of revenue ~~decreased~~increased as a percentage of revenue to ~~6.2%~~7.3% during the three month period ended March 31, ~~2021~~2022, as compared to ~~9.0%~~6.2% during the same period in ~~2020.~~2021.

Interest income ~~decreased $19,337~~increased $45,705 for the three month period ended March 31, ~~2021~~2022, as compared to the same prior year period in ~~2020.~~2021. The ~~decrease~~increase is attributable to ~~reduced finance charges~~interest on ~~outstanding accounts receivable balances from our largest customer~~marketable securities that were purchased in ~~the media and entertainment industry which has brought their account current.~~April 2021.

Interest expense ~~increased $81,198~~decreased $91,267 for the three month period ended March 31, ~~2021~~2022, as compared to the same period in ~~2020.~~2021. On April 24, 2020, the Company borrowed $3,000,000 through a senior secured convertible debt offering issued with a 10% original issue discount and incurred legal costs associated with this debt offering. Interest and related transaction costs are amortized using the effective interest method for which the periodic amortization costs decreases over the time. The ~~interest and the professional fees incurred on securing~~notes issued in the debt ~~are being amortized~~offering were scheduled to mature on ~~an effective interest rate basis to interest expense.~~April 1, 2022; however, on March 31, 2022, these notes converted into shares of common stock of the Company.

Other income (expense), for the three month period ended March 31, ~~2021~~2022, resulted in net ~~expenses~~other income of ~~$28,629~~$102,121, as compared to net other ~~expenses~~expense of ~~$8,029~~$28,629 in the same prior year period in ~~2020,~~2021, for a net ~~change~~increase of ~~$20,600.~~$130,750. The ~~majority~~most significant contribution to this increase is the sale of the ~~increase is an increase in~~URL for Magma.com, off-set by foreign currency ~~transactions gains and~~ losses.

We have recorded an income tax provision ~~(benefit)~~ of ~~$60,522~~$165,308 and ~~$(467,298),~~$60,522, respectively, for the three month ~~periods~~period ended March 31, 2022 and 2021, ~~and 2020.~~respectively. The effective tax rate for the ~~years~~period ended March 31, ~~2021~~2022 and ~~2020~~2021, differs from the statutory rate mainly due to permanent non-deductible goodwill amortization for Bressner Technology GmbH, deductions related to expenses of OSS stock options, as well as projecting federal, foreign and state tax liabilities for the year. The ~~effective~~annual expect tax rate for ~~2021~~2022 is ~~76.4% as compared~~anticipated to ~~28.2% in the prior year 2020.~~be approximately 20.66%.

~~Given~~On March 3, 2021, we sold and issued 1,497,006 shares of Company common stock to an accredited investor pursuant to a Securities Purchase Agreement through a registered direct offering, resulting in net proceeds of $9,188,673 to us.

Historically, our ~~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~~and private offerings of our securities and revenues generated from members of the Board of Directors and others of $1,500,000; (iii) the July 2019 sale of 1,554,546 shares of the Company’s common stock for net cash proceeds of $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; (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.

our business operations. As of March 31, ~~2021, the Company’s~~2022, we had total cash and cash equivalents ~~were $19,614,315~~of $2,219,800, with short-term investments of $13,540,410, and total working capital ~~was $22,935,632.~~of $31,447,290. Cash and cash equivalents held by Bressner totaled ~~$1,263,439 (USD)~~US$979,990 on March 31, ~~2021, and~~2022. Bressner’s debt covenants do not permit the use of those funds by its parent company.

During the ~~three month period~~year ended ~~March~~December 31, 2021, ~~the Company experienced an operating~~we had income from operations of ~~$275,031,~~$1,747,027, with cash generated by operating activities of ~~$4,291,066. During the year ended December 31, 2020, the Company experienced an operating loss of $424,281, with cash used in operating activities of $250,173.~~$5,622,596.

Our sources of liquidity and cash flows are used to fund ongoing operations, fund 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, successfully integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all.

~~The Company’s~~Our revenue growth during ~~the year~~ 2020 slowed due to the effects of ~~COVID-19.~~COVID-19, and, although it rebounded somewhat in 2021, it has not yet fully recovered, particularly in our media and entertainment business. However, ~~resulting from~~through a reduction in force and strict cost containment, ~~the Company has~~we have been able to mitigate the effects, to some degree, of the reduced revenue. For a further description and risk factors associated with COVID-19, please see Part 1A of ~~the December 31, 2020~~our Annual Report filed on ~~Form 10-K filed~~ March ~~25, 2021.~~24, 2022.

Management’s plans are to continue its efforts towards responding to the changing economic landscape ~~attributable~~by continuing to ~~COVID-19, to restructure the Company with the primary objectives of reducing~~control hiring and costs, ~~conserving~~conserve cash, ~~strengthening~~strengthen margins, and ~~improving~~improve company-wide execution. Specific actions already implemented by management include a reduction in force, a limited freeze on hiring, 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.

While management expects these actions to result in prospective cost ~~reductions,~~containment, and our results of operations for the year ended December 31, 2021, and the three month period ended March 31, 2022, improved partially as a result of such actions, management is also committed to conserving cash and securing debt and/or equity financing, ~~to ensure that~~as required, for liquidity ~~will be sufficient~~ to meet ~~the Company’s~~our 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 implementation of our cost reduction plans, ~~the Company’s~~our potential sources of liquidity and management’s most recent cash flow forecasts, management believes that ~~the Company has~~we have sufficient liquidity to satisfy ~~its~~our anticipated working capital requirements for ~~its~~our ongoing operations and obligations for at least the next twelve months. However, there can be no assurance that management’s cost reduction efforts will be effective or the forecasted cash flows will be achieved. Furthermore, ~~the Company shall~~we will continue to evaluate ~~its~~our capital expenditure needs based upon factors including but not limited to, ~~the Company’s~~our sales from operations, growth rate, the timing and extent of

spending to support development efforts, the expansion of ~~the Company’s~~our sales and marketing efforts, the timing of new product introductions, and the continuing market acceptance of ~~the Company’s~~our products and services.

If cash generated from operations is insufficient to satisfy ~~the Company’s~~our capital requirements, ~~the Company~~we may open a revolving line of credit with a bank, ~~or it~~ may have to sell additional equity or debt securities, or may obtain expanded credit facilities to fund ~~its~~our operating expenses, pay ~~its~~our obligations, diversify ~~its~~our geographical reach, and grow the Company. In the event such financing is needed in the future, there can be no assurance that such financing will be available to ~~the Company,~~us, or, if available, that it will be in amounts and on terms acceptable to ~~the Company.~~us. If ~~the Company~~we cannot raise additional funds when ~~it needs~~we need or wants them, ~~the Company’s~~our operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional financing were obtained, then management would ~~restructure~~consider restructuring the Company in a way to preserve its business while maintaining expenses within operating cash flows.

The following table summarizes our cash flows for the three month periods ended March 31, ~~2021~~2022 and ~~2020~~2021:

During the three month period ended March 31, ~~2021, the Company generated~~ 2022, we used $~~4,291,066~~5,018,398 in cash from operating activities, ~~an increase~~a difference of ~~$5,012,839~~$9,309,464 when compared to the cash ~~used in~~provided by operating activities of ~~$721,773~~$4,291,066 during the ~~same~~ three month period in year ~~in 2020.~~2021. This ~~improvement~~significant decrease in operating cash flow is mainly attributable to ~~better~~improved earnings resulting from ~~improved gross margins,~~increased sales, offset by a ~~reduction in expenses, and reduction~~significant increase in working capital ~~requirement resulting in better collections from customers.~~requirements for accounts receivable and inventories.

The ~~improvement~~change is cash used in ~~cash generated by~~ operating activities ~~was~~during the three month period ended March 31, 2022, as compared to the same period in 2021, is primarily a result of ~~a decrease~~the improvement in profitability from net income of $41,198 in the prior year period to net income of $579,234 in the current year, an improvement of $538,036. Net negative adjustments for non-cash items of $(324,818) were comprised of $227,691 of favorable non-cash items, offset by $552,509 of negative non-cash items that did not generate operating cash flow. Additionally, there was an increase in the use of operating cash flow for working capital items of $9,522,682.

Net working capital requirements of $3,180,719, an improvement in net loss of $1,137,230, and an increase in non-cash adjustments of $694,890. Non-cash adjustments include increases of $794,122 attributable to deferred taxes; gain on disposal of property and equipment, warranty reserves, amortization of deferred gain, inventory reserves, amortization of debt discount and stock-based compensation expense. These increasesfor the three month period ended March 31, 2022, were ~~offset by $29,232 in decreases in non-cash adjustments attributable~~$6,245,595, as compared to the ~~provision for bad debt depreciation, and amortization.~~

~~Working capital requirements were reduced overall by $3,180,719. The~~prior year period sources of working capital of ~~$4,012,890 were~~$3,277,087, an increase in the use of working capital of $9,522,682. The source of working capital of $559,024 was attributable to changes in accounts payable for the comparable period. This source was offset by uses of working capital of $10,081,706 being applied to changes in accounts receivables, inventory levels, prepaid and other current assets, ~~and accounts payable and~~ accrued expenses, and other ~~liabilities for the comparable period. These sources were offset by reductions in working capital of $832,171 attributable to accounts receivable.~~liabilities.

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

During the three month period ended March 31, ~~2021~~2022, the Company ~~used~~generated cash of ~~$121,759~~$1,028,504 in investing activities, as compared to ~~$198,507~~$121,759 used during the prior year period in ~~2020, a decrease~~2021, an improvement of ~~$76,748.~~$1,150,263. The ~~main projects for~~source of investing funds was attributable to the ~~three months ended March 31, 2021~~redemption of short-term investments and ~~2020 were~~ the ~~continued enhancement~~sale of ~~our~~the Magma.com URL. Additionally, the Company continues to enhance the capabilities of its ERP system, and ~~the~~ purchase of test equipment for the engineering department. We ~~currently~~ do not anticipate any ~~other~~ significant ~~purchases~~investments not normally anticipated in the original course of ~~equipment or expansion of our ERP system beyond completion of phase II of the project, which is the integration of certain sales functions.~~business.

Given the current economic, financial, and ~~financial hardships operating in a COVID-19 environment,~~geopolitical instability, the Company ~~believed~~believes it ~~to be~~is imperative to ~~secure~~maintain opportunities for additional financial resources to ensure financial stability during trying economic times. During the three month period ended March 31, ~~2021,~~2022, the Company generated ~~$9,173,593~~$1,131,345 in cash from ~~financing~~borrowing activities for Bressner for working capital to finance inventory purchases, as compared to the cash ~~used in~~provided by financing activities of ~~$1,214,119~~$9,173,593, during the same three month period year in ~~2020.~~

~~During~~2021. The main differences between the ~~three month~~comparative periods ~~ended March 31, 2021and 2020,~~are new borrowings from our German subsidiary, Bressner for inventories, and the ~~Company~~proceeds received ~~proceeds of $278,968 and $57,000, respectively,~~in the prior year from ~~the exercise of warrants and stock options which was offset by 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 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~~$10,000,000 registered direct offering ~~1,497,006 shares of~~that was completed in March 2021.

Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the ~~Company’s common stock, par value $0.0001 per share,~~industry continue to occur, those events could adversely impact our revenues and earnings going forward.

As discussed in this Quarterly Report on Form 10-Q, the ~~purchaser at an offering price of $6.68 per share. The net proceeds from the registered offering were approximately $9.22 million after deducting certain fees~~world has been affected due to the ~~placement agents’~~COVID-19 pandemic. Until the pandemic has passed, there remains uncertainty as to the effect of COVID-19 on our business in both the short and long-term.

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

Also, the potential for growth in new markets is uncertain. We will continue to explore these opportunities until such time as we either generate sales or determine that resources would be more efficiently used elsewhere.

We have not been affected materially by inflation during the periods presented, but we may experience some effect in the near future due to increased product pricing due to semiconductor product shortages, increased transportation costs due to increases in the cost of energy and general price increases due to inflation in the economy.

~~Other than lease commitments incurred in the normal course of business and certain indemnification provisions, we~~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~~See Note 11 to 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 shareholdersaccompanying financial statements for a ~~two-year period at an interest rate of 9.5% which requires~~discussion regarding our stockholder transactions for 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.relevant periods.

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

Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for year ended December 31, ~~2020.~~2021. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. There were no significant changes to our critical accounting policies during the three month period ended March 31, ~~2021.~~2022, except for adoption of ASU No. 2016-02, Leases (“ASU 2016-02”).

On January 1, 2022, the Company adopted ASC 842 using the Transition method. The reported results for the three month period ended March 31, 2022, reflect the application of the guidance of ASC 842 while the reported results for the three month period ended March 31, 2021, was prepared under the guidance of ASC 840.

Per the Company’s consolidated financial statements Note ~~2 –~~2- Significant Accounting Policies, we have ~~implemented a number of changes,~~adopted “Lease accounting” as required by ~~FASB.~~FASB ASC 842. See Note 2 ofto the accompanying financial statements for further details.

Effective January 1, 2022, the Company implemented ASU No. 2016-02, Leases (“ASU 2016-02”). Under ASU 2016-02, the Company recognized for all leases a lease liability, which is our obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company elected to use the transition method and reflected the cumulative effect of adoption as an adjustment to beginning retained earnings.

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, short-term investments and accounts receivable. We place our cash and cash equivalents with financial institutions with high credit quality. On March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, we had ~~$19,614,315~~$2,219,800 and ~~$6,316,921,~~$5,101,174, respectively, of cash and cash equivalents on deposit or invested with our financial and lending institutions. We provide credit to our customers in the normal course of business. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary.

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 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~~non-GAAP income (loss) as income asor (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 income (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 reconciles ~~Non-GAAP~~non-GAAP net income (loss) and basic and diluted earnings per share:

	For the Three Months Ended March 31,					For the Three Months Ended March 31,
	2021		2020			2022		2021
Net income (loss)	$	41,198	$	(1,096,032	)
Net income						$	579,234	$	41,198
Amortization of intangibles		163,900		174,525			15,809		163,900
Stock-based compensation expense		438,394		207,761			382,828		438,394
Non-GAAP net income (loss)	$	643,492	$	(713,746	)
Non-GAAP net income (loss) per share:
Non-GAAP net income						$	977,871	$	643,492
Non-GAAP net income per share:
Basic	$	0.04	$	(0.04	)	$	0.05	$	0.04
Diluted	$	0.03	$	(0.04	)	$	0.05	$	0.03
Weighted average common shares outstanding:
Basic		17,348,164		16,332,898			18,886,939		17,348,164
Diluted		18,642,061		16,332,898			19,764,069		18,642,061

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

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

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

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

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

Management is required to evaluate our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures are controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at a reasonable assurance level as of the end of the period covered by this report.

There were no changes in our internal control over financial reporting during the quarter ended March 31, ~~2021,~~2022, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

For a description of our material pending legal proceeding, please see Note 9,10, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, Item ~~IA.~~1A. of our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, which could materially affect our business, financial condition, or future results. In evaluating our business, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K, as updated by our subsequent filings under the Exchange Act. The occurrence of any of the risks discussed in such filings, or other events that we do not currently anticipate or that we currently deem immaterial, could harm our business, prospects, financial condition and results of operations. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

~~We must successfully navigate the demand, supply and operational challenges associated with the ongoing coronavirus (COVID-19) pandemic.~~

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 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.

The impacts of COVID-19 on our business, customers, partners, suppliers, employees, markets and financial results and condition are uncertain, evolving and dependent on numerous unpredictable factors outside of our control, including:

~~If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.~~

It is clear the global economy has been negatively impacted by COVID-19, and demand for some of our products and services has been reduced due to uncertainty and the economic impact of COVID-19. In particular, in the media and entertainment and commercial airlines industries, demand for the use of outdoor media equipment has been impacted due to restrictions on public gatherings and the airlines industry has been impacted by reduced travel. Until such restrictions improve, we expect that demand for certain of our clients’ products and services will be limited, and thus, may impact our financial results and operations.

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 orders in a given period could negatively affect our revenues in future periods. COVID-19 may also have the effect of heightening many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K, 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.

The information set forth below relates to our issuances of securities without registration under the Securities Act of 1933 during the reporting period which were not previously included in an Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K:None.

~~During the three months ended March 31, 2021, the Company issued 35,067 shares of common stock upon the exercise of warrants for total proceeds of $65,000.~~

These securities were issued pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising.

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

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 Statements of ~~Comprehensive Loss~~Operations	5
	Unaudited Consolidated ~~Statement~~Statements of ~~Stockholders’ Equity~~Comprehensive Income (Loss)	6
	Unaudited Consolidated ~~Statements~~Statement of ~~Cash Flows~~Stockholders’ Equity	87
	Unaudited Consolidated Statements of Cash Flows	9
	Notes to Unaudited Consolidated Financial Statements	1011
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2728
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4041
Item 4.	Controls and Procedures	4041

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	4142
Item 1A	Risk Factors	4142
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	4243
	Signatures	45

	March 31,			December 31,			March 31,			December 31,
	2021			2020			2022			2021
Raw materials	$	4,014,408		$	5,210,327		$	8,334,178		$	5,603,868
Sub-assemblies		208,453			255,699			289,304			495,320
Work-in-process		768,473			407,328			624,607			518,838
Finished goods		5,218,864			4,424,603			7,764,973			6,228,892
		10,210,198			10,297,957			17,013,062			12,846,918
Less: reserves for obsolete and slow-moving inventories		(661,238	)		(650,453	)		(582,678	)		(569,045	)
	$	9,548,960		$	9,647,504		$	16,430,384		$	12,277,873

	March 31,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Accrued compensation and related liabilities	$	992,810	$	932,988	$	1,026,101	$	1,372,342
Deferred revenue and customer deposits		1,281,663		1,096,672		1,297,782		844,081
Warranty reserve		425,377		425,636		547,484		571,903
Other accrued expenses						846,577		545,951
Deferred rent		292,890		312,909		-		512,211
Other accrued expenses		592,362		713,239
	$	3,585,102	$	3,481,444	$	3,717,944	$	3,846,488

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

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☒

	For the Three Months Ended March 31,				For the Three Months Ended March 31,
Stock-based compensation classified as:	2021		2020		2022		2021
General and administrative	$	401,000	$	159,680	$	202,095	$	401,000
Production		14,659		17,969		55,456		14,659
Marketing and selling		15,397		17,292		82,180		15,397
Research and development		7,338		12,820		43,097		7,338
	$	438,394	$	207,761	$	382,828	$	438,394

	Number of Warrants			Weighted Average Exercise Price		Number of Warrants		Weighted Average Exercise Price
Warrants outstanding – January 1, 2021		505,946		$	5.00
Warrants outstanding – January 1, 2022							451,112	$	5.37
Warrants granted		-		$	-		-	$	-
Warrants exercised		(35,067	)	$	1.85		-	$	0
Warrants outstanding – March 31, 2021		470,879		$	5.23
Warrants outstanding – March 31, 2022							451,112	$	5.37

Supplement Cash Flow Information:	For the Three Months Ended March 31, 2022
Cash paid for amounts included in the measurement of operating lease liabilities	$	160,910

Year	Operating Leases
Remainder of 2022	$	487,015
2023		611,465
2024		417,288
2025		-
2026		-
Thereafter		-
Total lease payments		1,515,768
Less: Amount representing interest		(175,699	)
Present value of lease payment		1,340,069
Less: current portion of operating lease obligation		(545,642	)
Operating lease obligation, net of current portion	$	794,427

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

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
Cash flow:	2021			2020			2022			2021
Cash provided by (used in) operating activities	$	4,291,066		$	(721,773	)
Net cash (used in) provided by operating activities							$	(5,018,398	)	$	4,291,066
Capital expenditures		(121,759	)		(200,049	)		(85,841	)		(121,759	)
Free cash flow	$	4,169,307		$	(921,822	)	$	(5,104,239	)	$	4,169,307

Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
2.1	Agreement and Plan of Merger and Reorganization, dated August 22, 2018, with Concept Development Inc.	8-K	001-38371	2.1	September 6, 2018

2.2	Share Purchase Agreement, dated October 31, 2018, with Bressner Technology GmbH.	8-K	001-38371	2.1	November 6, 2018

3.1	Amended and Restated Certificate of Incorporation (currently in effect).	8-K/A	001-38371	3.1	March 21, 2018

3.2	Bylaws, as amended (currently in effect).	8-K	001-38371	3.2	February 6, 2018

4.1	Second Amended and Restated Investors’ Rights Agreement, dated January 2007.	S-1	333-222121	4.2	December 18, 2017

4.2	Common Shareholder Piggyback Registration Rights Agreement, dated July 15, 2016.	S-1	333-222121	4.3	December 18, 2017

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

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

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

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.					X

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.**

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.**

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

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

101.INS*		~~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~~X

	~~ONE STOP SYSTEMS, INC.~~One Stop Systems, Inc.

Date: May ~~13, 2021~~12, 2022	By:	/s/ David Raun
		David Raun
		President and Chief Executive Officer (Principal Executive Officer)

Date: May ~~13, 2021~~12, 2022	By:	/s/ John W. Morrison Jr.
		John W. Morrison Jr.
		Chief Financial Officer (Principal Financial and Accounting Officer)