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What changed in ONE STOP SYSTEMS, INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of ONE STOP SYSTEMS, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+496 added−469 removedSource: 10-K (2024-03-21) vs 10-K (2023-03-23)

Top changes in ONE STOP SYSTEMS, INC.'s 2023 10-K

496 paragraphs added · 469 removed · 322 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

227 edited+122 added−98 removed234 unchanged
Biggest changeAdditional discussion of the risks summarized in this “Risk Factors Summary” section, and other risks that we face, can be found below and should be carefully considered, together with other information included in this Annual Report. • Business disruptions could harm our business, lead to a decline in revenues and increase our costs. • Economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability, could harm our financial condition and results of operations. • Volatile or recessionary conditions in the United States or abroad could adversely affect our business and/or our access to capital markets in a material manner. • Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations. • We may be adversely affected by the effects of inflation. • The market for our products is developing and may not develop as we expect. • Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or our guidance. • Our products are subject to competition, including competition from the customers to whom we sell, and new entrants and the introduction of other distribution models in our markets may harm our competitive position. • Certain members of our senior management team and board of directors may have limited experience in certain sectors of the AI Transportable market that we are targeting. • Changes in U.S. government defense spending could negatively impact our financial position, results of operations, liquidity and overall business. 24 • If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed, and our reputation may be damaged. • A limited number of customers represent a significant portion of our sales, and the loss of any key customers could cause our sales to decrease significantly. • We rely on a limited number of parts suppliers to support our manufacturing and design processes. • Our future success depends on our ability to develop and successfully introduce new and enhanced products that meet the needs of our customers, as well as our ability to maintain our production schedule. • Unsuccessful government programs or OEM contracts could lead to reduced revenues. • Our inventory may rapidly become obsolete. • We offer an extended product warranty to cover defective products at no cost to the customer.
Biggest changeAdditional discussion of the risks summarized in this “Risk Factors Summary” section, and other risks that we face, can be found below and should be carefully considered, together with other information included in this Annual Report. • Economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability, could harm our financial condition and results of operations. • Volatile or recessionary conditions in the United States or abroad could adversely affect our business and/or our access to capital markets in a material manner. • Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations. • We may be adversely affected by the effects of inflation. • The market for our products is developing and may not develop as we expect. • Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or our guidance. • Our products are subject to competition, including competition from the customers to whom we sell, and new entrants and the introduction of other distribution models in our markets may harm our competitive position. • Cybersecurity risks and cyber incidents, as well as other significant disruptions of our information technology networks and related systems and resources, could adversely affect our business, disrupt operations and expose us to significant liabilities. • Changes in U.S. government priorities and/or delays or reductions in defense spending could negatively impact our financial position, results of operations, liquidity and overall business. • Changing procurement policies could adversely affect our business and financial results. • If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed, and our reputation may be damaged. • A limited number of customers represent a significant portion of our sales, and the loss of any key customers could cause our sales to decrease significantly. • We rely on a limited number of parts suppliers to support our manufacturing and design processes. • Our future success depends on our ability to develop and successfully introduce new and enhanced products that meet the needs of our customers, as well as our ability to maintain our production schedule. • Unsuccessful government programs or OEM contracts could lead to reduced revenues. • Our inventory may rapidly become obsolete. • We offer an extended product warranty to cover defective products at no cost to the customer.
Some of these provisions: • authorize our board of directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock and up to 50,000,000 shares of authorized common stock; • require that any action to be taken by our stockholders be affected at a duly called annual or special meeting, and not by written consent; • specify that special meetings of our stockholders can be called only by our board of directors, the chairman of the board of directors, the chief executive officer or the president; • establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors; 40 • provide that our directors may be removed only for cause; and • provide that vacancies on our board of directors may, except as otherwise required by law, be filled only by a majority of directors then in office, even if less than a quorum.
Some of these provisions: • authorize our board of directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock and up to 50,000,000 shares of authorized common stock; • require that any action to be taken by our stockholders be affected at a duly called annual or special meeting, and not by written consent; • specify that special meetings of our stockholders can be called only by our board of directors, the chairman of the board of directors, the chief executive officer or the president; • establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors; • provide that our directors may be removed only for cause; and • provide that vacancies on our board of directors may, except as otherwise required by law, be filled only by a majority of directors then in office, even if less than a quorum.
We believe that earnings growth can be accomplished by taking the following actions: Revenue growth driven by existing OEM and new design wins : • Focusing on the fast-growing, higher margin AI Transportable market; • Demonstrating technology leadership with a clear, ever building value proposition; • Utilizing a higher percentage of leading edge standard products for scalability; • Pursuing market leading OEMs in the AI Transportable market; • Continuing to layer in recurring high margin business; • Constantly improving and expanding a highly skilled direct sales force complimented by well positioned third party manufacture representatives; • Expanding worldwide sales efforts and marketing opportunities appropriately; and • Completing sizable accretive acquisitions.
We believe that earnings growth can be accomplished by taking the following actions: Revenue growth driven by existing OEM and new design wins : • Focusing on the fast-growing, higher margin AI Transportable market; • Demonstrating technology leadership with a clear, ever building value proposition; • Utilizing a higher percentage of leading edge standard products for scalability; • Pursuing market leading OEMs in the AI Transportable market; 9 • Continuing to layer in recurring high margin business; • Constantly improving and expanding a highly skilled direct sales force complimented by well positioned third party manufacture representatives; • Expanding worldwide sales efforts and marketing opportunities appropriately; and • Completing sizable accretive acquisitions.
Acquisitions may also cause us to: • use a substantial portion of our cash reserves or incur debt; • issue equity securities or grant equity incentives to acquired employees that would dilute our current stockholders’ percentage ownership; • assume liabilities, including potentially unknown liabilities; 34 • record goodwill and non-amortizable intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges; • incur amortization expenses related to certain intangible assets; • incur large and immediate write-offs and restructuring and other related expenses; or • become subject to intellectual property litigation or other litigation.
Acquisitions may also cause us to: • use a substantial portion of our cash reserves or incur debt; • issue equity securities or grant equity incentives to acquired employees that would dilute our current stockholders’ percentage ownership; • assume liabilities, including potentially unknown liabilities; • record goodwill and non-amortizable intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges; • incur amortization expenses related to certain intangible assets; • incur large and immediate write-offs and restructuring and other related expenses; or • become subject to intellectual property litigation or other litigation.
If our products are not adopted or there is a reduction in demand for our products caused by a lack of customer acceptance, a slowdown in demand for computational power, an overabundance of unused computational power, technological challenges, competing technologies and products, decreases in corporate spending, weakening economic conditions, or otherwise, it could result in reduced customer orders, early order cancellations, the loss of customers, or decreased sales, any of which would adversely affect our business, operating results, and financial condition.
If our products are not adopted or there is a reduction in demand for our products caused by a lack of customer acceptance, a slowdown in demand for computational power, an overabundance of unused computational power, technological challenges, competing technologies and products, decreases in corporate spending, weakening economic conditions, or otherwise, 29 it could result in reduced customer orders, early order cancellations, the loss of customers, or decreased sales, any of which would adversely affect our business, operating results, and financial condition.
The format of the electronic advertising varies, but with the common focus on content advertising demonstrating our market expertise with a secondary focus on brand awareness. The various electronic media formats that we utilize include, but are not limited to, search engine ads and keyword campaigns, digital ads, display ads, datasheet emails, customer use cases, e-newsletters, and text ads.
The format of the electronic advertising varies, but includes a common focus on content advertising demonstrating our market expertise with a secondary focus on brand awareness. The various electronic media formats that we utilize include, but are not limited to, search engine ads and keyword campaigns, digital ads, display ads, datasheet emails, customer use cases, e-newsletters, and text ads.
In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation, and the U.S. government has been unable to complete its budget process before the end of its fiscal year, resulting in both governmental shutdowns and continuing resolutions (“CRs”) providing only enough funds for U.S. government agencies to continue operating at prior-year levels.
In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation, and the U.S. government has been unable to complete its budget process before the end of its fiscal year, resulting in both governmental shutdowns and continuing resolutions providing only enough funds for U.S. government agencies to continue operating at prior-year levels.
We win when our customers realize that together we can produce better products faster, more ruggedly, and more cost-effectively than they can by themselves. This has proven to be particularly evident when customers require state-of-the-art products that are constructed of commercially available parts but need to be deployed in harsh mobile environments.
We win when our customers realize that together we can produce better products faster, and more cost-effectively than they can by themselves. This has proven to be particularly evident when customers require state-of-the-art products that are constructed of commercially available parts but need to be deployed in harsh mobile environments.
For example, the laws of certain countries in which our products are manufactured or licensed do not protect our proprietary rights to the same extent as the laws of the United States. In addition, third parties may seek to challenge, invalidate, or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing.
For example, the laws of certain countries in which our products are manufactured or licensed do not protect our proprietary rights to the same extent as the laws of the United States. In addition, third parties may seek to challenge, invalidate, or circumvent our trademarks, copyrights and trade secrets, or applications for any of the foregoing.
Any or all of these issues could negatively impact our competitive edge and our ability to obtain new customers thereby adversely affecting our financial results. 35 Our proprietary designs are susceptible to reverse engineering by our competitors. Much of the value of our proprietary rights is derived from our vast library of design specifications.
Any or all of these issues could negatively impact our competitive edge and our ability to obtain new customers thereby adversely affecting our financial results. Our proprietary designs are susceptible to reverse engineering by our competitors. Much of the value of our proprietary rights is derived from our vast library of design specifications.
Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how could have a material adverse effect on our business. Adverse determinations in any litigation could subject us to significant liabilities to third parties, require us to seek licenses from third parties and prevent us from manufacturing and selling our products.
Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how could have a material adverse effect on our business. Adverse determinations in any litigation could subject us to significant liabilities to third parties, require us to seek licenses from third parties and 39 prevent us from manufacturing and selling our products.
Standard servers and storage systems available in the market do not address, and typically will not survive, the AI Transportable requirements. Although the network, if it exists, may transfer data, or be used for updates, the latency is not acceptable for many of these applications where time is of the essence.
Standard servers and storage systems available in the market do not address, and typically will not survive, the AI Transportable requirements. Although the network or data link, if it exists, may transfer data, or be used for updates, the latency is not acceptable for many of these applications where time is of the essence.
While we have taken cybersecurity steps to protect our proprietary information, because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
While we have taken steps to protect our proprietary information, because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
Main markets serviced by NVIDIA GPUs include, without limitation: • Autonomous navigation; • Computational finance; • Climate, weather and ocean modeling; • Computational chemistry and biology; • Data science and analytics; 11 • Deep learning and machine learning; • Federal defense and intelligence; • Genomics; • Manufacturing; • Media and entertainment; • Medical imaging; • Oil and gas; and • Safety and security.
Main markets serviced by NVIDIA GPUs include, without limitation: • Autonomous navigation; • Computational finance; • Climate, weather and ocean modeling; • Computational chemistry and biology; • Data science and analytics; • Deep learning and machine learning; • Federal defense and intelligence; • Genomics; • Manufacturing; 11 • Media and entertainment; • Medical imaging; • Robotics; • Oil and gas; and • Safety and security.
In high-performance computing systems, especially those systems that operate on the edge, the trajectory and need for ever-increasing signaling speeds is continuing; provided, however, the number of companies that have the capability to design robust, highly reliable systems at speeds that can tolerate the harsh conditions on the edge are continuing to decline.
In high-performance computing systems, especially those systems that operate at the edge, the trajectory and need for ever-increasing signaling speeds is continuing; provided, however, the number of companies that have the capability to design robust, highly reliable systems at speeds that can tolerate the harsh conditions at the edge are continuing to decline.
Our management team strives to provide transparency to our employees through regular meetings designed to update employees on current metric driven results and future expectations. None of our employees are covered by 21 a collective bargaining agreement or represented by a labor union. We consider our relationship with our employees to be strong.
Our management team strives to provide transparency to our employees through regular meetings designed to update employees on current metric driven results and future expectations. None of our employees are covered by a collective bargaining agreement or represented by a labor union. We consider our relationship with our employees to be strong.
These economic conditions may also impact the financial condition of one or more of our key suppliers, which could affect our ability to secure product to meet our customers’ demand. Our results of operations and the implementation of our business strategy could be adversely affected by general conditions in the global economy.
These economic conditions may also impact the financial condition of one or more of our key suppliers, which could affect our ability to secure 28 product to meet our customers’ demand. Our results of operations and the implementation of our business strategy could be adversely affected by general conditions in the global economy.
We believe our core competency in large-scale, high-speed design, and layout will allow us to remain on the forefront of this growing industry. Complex System Design In addition to low-level signal integrity design expertise, we have amassed expertise and intellectual property in high-performance system architecture design.
We believe our core competency in large-scale, high-speed design, and layout will allow us to remain on the forefront of this growing industry. Complex System Design In addition to low-level signal integrity design expertise, we have amassed expertise and intellectual property in high-performance system architecture design and software.
Interestingly, it appears that when these large companies cut back on their workforce or have limited funding, such events bolster our position, as we may become these companies’ only option to get their desired product or service deployed within a reasonable period.
Interestingly, it appears that when these large companies cut back on their workforce or have limited funding, such events tend to bolster our position, as we may become these companies’ only option to get their desired product or service deployed within a reasonable period.
In particular, revisions to laws or regulations or their interpretation and enforcement could result in increased taxation, trade sanctions, the imposition of import duties or tariffs, restrictions and controls on imports or exports, or other retaliatory actions, which could have an adverse effect on our 26 business plans.
In particular, revisions to laws or regulations or their interpretation and enforcement could result in increased taxation, trade sanctions, the imposition of import duties or tariffs, restrictions and controls on imports or exports, or other retaliatory actions, which could have an adverse effect on our business plans.
The sale of our products to such defense customers are subject to U.S. government policies, budget decisions and appropriation processes, which are driven by numerous factors that are out of our control, including U.S. domestic and broader geopolitical events, macroeconomic conditions, and the ability of the U.S. government to enact relevant legislation.
The sale of our products to such defense customers are subject to U.S. government priorities, policies, budget decisions and appropriation processes, which are driven by numerous factors that are out of our control, including U.S. domestic and broader geopolitical events, macroeconomic conditions, and the ability of the U.S. government to enact relevant legislation.
When GPU technology and solid-state flash were first introduced, we began designing systems that maximized the effectiveness of these technologies. We now produce compute-systems with large numbers of GPUs and flash memory that communicate over PCIe and allow faster processing, data storage, and data retrieval.
GPU Compute Acceleration When GPU technology and solid-state flash were first introduced, we began designing systems that maximized the effectiveness of these technologies. We now produce compute-systems with large numbers of GPUs and flash memory that communicate over PCIe and allow faster processing, data storage, and data retrieval.
Any such defect may cause us to incur significant warranty, support and repair or replacement costs, write off the value of related inventory, cause us to lose market share, and divert the attention of our personnel from our product development efforts to find and correct the issue.
Any such defect may cause us to incur significant warranty, support and repair or replacement costs, write off the value of related inventory, cause us to lose customers and/or market share, and divert the attention of our personnel from our product development efforts to find and correct the issue.
Switched Serial Interconnect Switched serial interconnects are the data highways connecting many elements of today’s high-performance computing platforms. At ever increasing speeds, these pathways move data between system’s processing units, storage, networking, and peripheral elements. For high-performance computing, the primary processing, storage, and peripheral interconnect is PCIe.
Switched Serial Interconnect Switched serial interconnects are the data highways connecting many elements of today’s high-performance computing platforms. At ever increasing speeds, these pathways move data between a system’s processing units, storage, networking, and peripheral elements. For high-performance computing, the primary processing, storage, and peripheral interconnect is PCIe.
In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company. ITEM 1 A. RISK FACTORS Investing in our common stock involves a high degree of risk.
In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company. 25 ITEM 1 A. RISK FACTORS Investing in our common stock involves a high degree of risk.
Changes in our products or changes in applicable export or import laws and regulations may also create delays in the introduction and sale of our products in international markets, prevent our 37 end-customers with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries, governments or persons altogether.
Changes in our products or changes in applicable export or import laws and regulations may also create delays in the introduction and sale of our products in international markets, prevent our end-customers with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries, governments or persons altogether.
As a result, U.S. government defense spending levels are subject to a wide range of outcomes and are difficult to predict beyond the near-term due to numerous factors, including the external threat environment, future governmental priorities and the state of governmental finances.
As a result of the foregoing, U.S. government defense spending levels are subject to a wide range of outcomes and are difficult to predict beyond the near-term due to numerous factors, including the external threat environment, future governmental priorities and the state of governmental finances.
This also helps optimize cash flow throughout the manufacturing cycle. Within the manufacturing process, our operations encompass three categories of “builds”: 19 • Standard Builds – These are builds of standard products that are sold with little or no customization or non-standard features.
This also helps optimize cash flow throughout the manufacturing cycle. Within the manufacturing process, our operations encompass three categories of “builds”: • Standard Builds – These are builds of standard products that are sold with little or no customization or non-standard features.
We have no control over such analysts or the content and opinions in their reports. 39 Securities analysts may elect not to provide research coverage of our Company and such lack of research coverage may adversely affect the market price of our common stock.
We have no control over such analysts or the content and opinions in their reports. Securities analysts may elect not to provide research coverage of our Company and such lack of research coverage may adversely affect the market price of our common stock.
This includes target markets like autonomous semi-trucks, farming, and mining equipment deploying the latest technology. These companies, many of which are market leaders, then resell the products through their own sales channels.
This includes target markets like autonomous semi-trucks, farming, medical and mining equipment deploying the latest technology. These companies, many of which are market leaders, then resell the products through their own sales channels.
To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital, and processes in an efficient manner.
To manage any future growth effectively, we must continue to innovate and improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital, and processes in an efficient manner.
The extent of the impact of the COVID-19 pandemic, global instability and other microeconomic factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including, but not limited to, the duration, timing and severity of the impact on customer spending, including any recession in the U.S. or elsewhere in the world, all of which are uncertain and cannot be predicted.
The extent of the lingering impacts of the COVID-19 pandemic, global instability and other microeconomic factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including, but not limited to, the duration, timing and severity of the impact on customer spending, including any recession in the U.S. or elsewhere in the world, all of which are uncertain and cannot be predicted.
Many of these third parties mass-produce hardware solutions and have not heavily invested in or allocated resources to the smaller scale specialized products and solutions we design.
Many of these third parties mass-produce hardware solutions 30 and have not heavily invested in or allocated resources to the smaller scale specialized products and solutions we design.
Although we do believe we could locate additional suppliers to fulfill our needs in the event that our relationship with Concisys Inc. or any of our other suppliers terminated or they are unable to fulfill our manufacturing needs, any significant change in our relationship with these suppliers could have a material adverse effect on our business, operating results, and financial condition unless and until we are able to find suitable replacements.
Although we do believe we could locate additional suppliers to fulfill our needs in the event that our relationship with Concisys Inc., Digi International Inc. or any of our other suppliers terminated or they are unable to fulfill our manufacturing needs, any significant change in our relationship with these suppliers could have a material adverse effect on our business, operating results, and financial condition unless and until we are able to find suitable replacements.
We have also established good relationships with prime contractors or governmental agencies (Raytheon, Lockheed, Boeing, NASA, ONR, L3 and others), which can be important influencers or decision makers on technology selection. Competitors in this space include companies such as Mercury, Crystal, Curtiss Wright, Kontron, Trenton, Core Systems and Systel.
We have also established good relationships with prime contractors and governmental agencies (Raytheon, Sierra Nevada, Lockheed, Boeing, NASA, ONR, L3 and others), which can be important influencers or decision makers on technology selection. Competitors in this space include companies such as Mercury, Crystal, Curtiss Wright, Kontron, Trenton, Core Systems and Systel.
Our suppliers are not required to supply our raw materials for any specific period or in any specific quantity or price. 31 Global pandemics or other disasters or public health concerns in regions of the world where we have operations or source material or sell products, such as outbreaks of COVID-19 or H1N1 flu, could result in the disruption of our business.
Our suppliers are not required to supply our raw materials for any specific period or in any specific quantity or price. 34 Global pandemics or other disasters or public health concerns in regions of the world where we have operations or source material or sell products, such as outbreaks of COVID-19 or H1N1 flu, could result in the disruption of our business.
Compute Acceleration with GPUs GPUs have evolved from graphics display acceleration to becoming general-purpose processing workhorses for high-performance computing systems. Today, the majority of the fastest supercomputers in the world utilize GPUs as their primary compute engines. GPUs are ideal for high-performance computing workloads including AI training and inference because of their ability to complete massively parallel processing.
Compute Acceleration with GPUs GPUs have evolved from graphics display acceleration to becoming general-purpose processing workhorses for high-performance computing systems. Today, most of the fastest supercomputers in the world utilize GPUs as their primary compute engines. GPUs are ideal for high-performance computing workloads including AI training and inference because of their ability to complete massively parallel processing.
We believe our future success will depend in large part on our ability to develop products, new business initiatives and creating innovative and custom designs for our customers. The growth of server clusters, specialized or high-performance applications, and hosted software solutions which require fast and efficient data processing, is crucial to our success.
We believe our future success will depend in large part on our ability to develop products, new business initiatives and create innovative and custom designs for our customers. The growth of server clusters, specialized or high-performance applications, and hosted software solutions which require fast and efficient data processing, is crucial to our success.
For as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, which includes, among other things: • being permitted to have only two years of audited financial statements and only two years of management’s discussion and analysis of financial condition and results of operations disclosure; • an exemption from the auditor attestation requirements under Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); • not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; • reduced disclosure obligations regarding executive compensation, amongst other things, in our periodic reports and proxy statements; and • exemption from the requirements of holding non-binding stockholder votes on executive compensation arrangements and stockholder approval of any golden parachute payments not previously approved.
For as long as we continue to be a smaller reporting company, we may choose to take advantage of certain exemptions from various reporting requirements or scaled disclosure requirements applicable to other public companies but not to smaller reporting companies, which includes, among other things: • being permitted to have only two years of audited financial statements and only two years of management’s discussion and analysis of financial condition and results of operations disclosure; • an exemption from the auditor attestation requirements under Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); • not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; 45 • reduced disclosure obligations regarding executive compensation, amongst other things, in our periodic reports and proxy statements; and • exemption from the requirements of holding non-binding stockholder votes on executive compensation arrangements and stockholder approval of any golden parachute payments not previously approved.
OSS leverages the latest technology to build complete storage systems, including all the software to provide the highest density and performance in a compact form factor ideal for vehicles of all types. This, combined with our hot swappable canisters, has enabled many autonomous truck and military aircraft applications.
OSS leverages the latest technology to build complete storage and data logging systems, including all the software to provide the highest density and performance in a compact form factor ideal for vehicles of all types. This, combined with our hot swappable canisters, has enabled many autonomous truck and military aircraft applications.
Although our business has not been materially impacted by the ongoing military conflict between Russian and Ukraine or other geopolitical instability to date, it is impossible to predict the extent to which our operations, or those of our suppliers and manufacturers, will be impacted in the short and long term, or the ways in which the conflict may impact our business.
Although our business has not been materially impacted by the ongoing military conflict between Russian and Ukraine, Israel and Hamas or other geopolitical instability to date, it is impossible to predict the extent to which our operations, or those of our suppliers and manufacturers, will be impacted in the short and long term, or the ways in which the conflict may impact our business.
Edge computing is a form of computing that is done on site, near a particular data source or the user (rather than in the cloud), minimizing the need for data to be processed in a remote data center. This growing trend increases computing performance and security, as the data does not have to travel to distant data center location.
Edge computing is a form of computing that is done on site, near a particular data source or the user, rather than in the cloud, minimizing the need for data to be processed in a remote datacenter. This growing trend increases computing performance and security, as the data does not have to travel to distant datacenter location.
A write off of the inventory, or a reduction in the inventory value due to a sales price reduction, could have an adverse effect on our financial condition and operating results. 32 If our products contain significant defects, we could incur significant expenses to remediate such defects, our reputation could be damaged, and we could lose market share.
A write off of the inventory, or a reduction in the inventory value due to a sales price reduction, could have an adverse effect on our financial condition and operating results. 35 If our products contain significant defects, we could incur significant expenses to remediate such defects, our reputation could be damaged, and we could lose market share.
Manufacturing and Operations Currently, OSS is certified under AS9100 and OSS Europe is certified under ISO 9001-2015 for “design, manufacture, and supply of industrial computers.” This means we have demonstrated our ability to consistently provide products that meet both customer requirements and applicable government regulations or statutory requirements.
Manufacturing and Operations Currently, OSS is certified under AS9100, and Bressner is certified under ISO 9001-2015 for “design, manufacture, and supply of industrial computers.” This means we have demonstrated our ability to consistently provide products that meet both customer requirements and applicable government regulations or statutory requirements.
Since acquiring this software asset, we have extended its capability to align with our AI Transportable strategy by adding Network Attached Storage ("NAS"), support for NVMe flash drives, NVMe over Fabric expansion capability, and several encryption methods required for government security applications.
Since acquiring this software asset, we have extended its capability to align with our AI Transportable strategy by adding Network Attached Storage (“NAS”), support for NVMe flash drives, NVMe over Fabric expansion capability, and several encryption methods required for government security applications.
We believe that our operations are substantially in compliance with all applicable laws and regulations and that we hold all necessary permits to operate our business in each jurisdiction in which our facilities are located. Our worldwide business activities are subject to various laws, rules, and regulations of the United States as well as of foreign governments.
We believe that our operations are in compliance with all material applicable laws and regulations and that we hold all necessary permits to operate our business in each jurisdiction in which our facilities are located. Our worldwide business activities are subject to various laws, rules, and regulations of the United States as well as of foreign governments.
A product recall, including a recall due to a bug in our products, or a significant number of product returns could be expensive, damage our reputation, harm our ability to attract new customers, result in the shifting of business to our competitors and result in litigation against us, such as product liability suits.
A product recall, including a recall due to a bug in our products, or a significant number of product returns could be expensive, damage our reputation, harm our ability to attract new customers or maintain our current customers, result in the shifting of business to our competitors and/or result in litigation against us, such as product liability suits.
Human Capital Resources, Employees, and Personnel We believe that our future success will depend, in part, on our ability to continue to attract, hire, and retain qualified personnel. To achieve this objective, we strive to provide competitive compensation, benefits, stock participation, and a success driven work environment.
Human Capital Resources, Employees, and Personnel We believe that our future success will depend, in part, on our ability to continue to attract, hire, and retain qualified personnel. To achieve this objective, we strive to provide competitive compensation, benefits, equity participation, and a success driven work environment.
Rugged Edge Servers While simple AI applications, such as facial recognition to open a door to a secure area, may run on traditional low power embedded processor, the needs of the AI Transportable applications require datacenter-class server performance brought to a mobile vehicle.
Rugged Edge Servers While simple AI applications, such as facial recognition to open a door to a secure area, may run on traditional low power embedded processor, the needs of the AI Transportable applications require datacenter-class server performance brought to a mobile platform.
This massive amount of mission data can then be easily off-loaded upon landing the aircraft and sent to the traditional government data center, which is a significant development given that satellite network links are too slow to handle transmitting that amount of data.
This massive amount of mission data can then be easily off-loaded upon landing the aircraft and sent to the traditional government datacenter, which is a significant development given that satellite network links are too slow to handle transmitting that amount of data.
NVIDIA, a key supplier of GPUs to the market, lists more than 400 such applications across a broad set of market spaces along with focused teams on specific industries of high growth potential such as their NVIDIA Drive team for autonomous navigation.
NVIDIA, a key supplier of GPUs to the market, lists more than 500 such applications across a broad set of market spaces, along with focused teams on specific industries of high growth potential such as their NVIDIA Drive team for autonomous navigation.
Additionally, at the edge for AI applications, a wide range of input power sources need to be supported from standard 110-220 VAC to 270 and 48 VDC for terrestrial vehicles to three phase 400-800Hz AC for airborne applications.
Additionally, at the edge for AI applications, a wide range of input power sources need to be supported from standard 110-220 VAC and 48-270 VDC for terrestrial vehicles as well as three phase 400-800Hz AC for airborne applications.
Vertical High Performance Compute Vendors – Military/Aerospace In certain vertical markets, there are competitors who focus primarily on the high-performance compute (“HPC”) military and aerospace markets. These vendors often provide complete solutions, including both hardware and software, and some specialization in terms of form factor and ruggedization.
Vertical High Performance Compute Vendors – Military/Aerospace In certain vertical markets, there are competitors who focus primarily on the HPC military and aerospace markets. These vendors often provide complete solutions, including both hardware and software, and some specialization in terms of form factor and ruggedization.
Changes in U.S. government defense spending for various reasons, including as a result of potential changes in policy, administration, or budgetary positions, priorities, and protracted lead times could negatively impact our results of operations, financial condition and liquidity.
Changes in U.S. government priorities and/or delays or reductions in defense spending for various reasons, including as a result of potential changes in policy, administration, or budgetary positions, priorities, and protracted lead times could negatively impact our results of operations, financial condition and liquidity.
We believe that our “Rigel Edge SuperComputer” (“Rigel”) is the highest performing, most dense, AI-compute platform that is deployable in extreme environments, including on military aircraft. GPU computing uses hardware components that are optimized to perform mathematical calculations in a rapid fashion. NVIDIA is the market leader in the design and manufacturing of these components.
We believe that our “Rigel Edge Super Computer” (“Rigel”) is the highest performing, most dense, AI-compute platform that is deployable in extreme environments, including on military aircraft. GPU computing uses hardware components that are optimized to perform mathematical calculations in a rapid fashion. NVIDIA is the market leader in the design and manufacturing of these components.
Our strategy is to be the disruptive leader in the platforms for AI Transportable applications, and our strategy is based on our unique ability to design high-quality, high-performance AI workflow compute/storage engines that can be deployed in harsh dynamic environments, which require unique system level features for vibration, cooling, and power.
Our strategy is to be the disruptive leader in the platforms for rugged edge applications, based on our unique ability to design high-quality, high-performance AI workflow compute/storage engines that can be deployed in harsh dynamic environments, which require unique system level features for vibration, cooling, and power.
Our international operations subject us to a variety of risks and challenges, including, without limitation, exposure to fluctuations in foreign currency exchange rates, increased management, travel, infrastructure and legal compliance costs associated with having international operations; reliance on channel partners; increased financial accounting and reporting burdens and complexities; compliance with foreign laws and regulations, which are subject to change; compliance with U.S. laws and regulations for foreign operations; conflicts between U.S. laws and regulations and foreign laws and regulations; import and export licensing requirements; and reduced protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad.
Our international operations subject us to a variety of risks and challenges, including, without limitation, exposure to fluctuations in foreign currency exchange rates; inflationary pressures and the possibility of recession; increased management, travel, infrastructure and legal compliance costs associated with having international operations; reliance on channel partners; increased financial accounting and reporting burdens and complexities; compliance with foreign laws and regulations, which are subject to change; compliance with U.S. laws and regulations for foreign operations; conflicts between U.S. laws and regulations and foreign laws and regulations; import and export licensing requirements; and reduced protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad.
Expertise in power, cooling, and mechanical design are required to address the requirements of the high-performance computing customers, especially while meeting the constrained time requirements of AI Transportable deployments. We have developed leadership design capability in high-power design and distribution within large rack enclosures as well as edge optimized configurations.
Expertise in power, cooling, and mechanical design are required to address the requirements of the high-performance computing customers, especially while meeting the constrained time requirements of rugged edge deployments. We have developed leadership design capability in high-power design and distribution within large rack enclosures as well as edge optimized configurations.
We have also developed extensive intellectual property to help ensure regulatory compliance of our complex high-performance computing system designs that span across emission, shock, vibration, thermal, humidity, and other environmental requirements that are required for highly reliable and highly available solutions.
We have also developed extensive expertise to help ensure regulatory compliance of our complex high-performance computing system designs that span across emission, shock, vibration, thermal, humidity, and other environmental requirements that are required for highly reliable and highly available solutions.
Additional Compute Products Through OSS Europe, we provide small form factor IoT and high-performance industrial and panel PCs compute-platforms customizable to meet needs in commercial applications on the edge where space constraint is a fundamental consideration.
Additional Compute Products Through Bressner, we provide small form factor IoT and high-performance industrial and panel PCs compute-platforms customizable to meet needs in commercial applications on the edge where space constraint is a fundamental consideration.
Optimize expenses : • Promoting a culture that innovates to minimize spending and drive higher efficiency per employee; • Utilizing technology and talent on team to increase efficiency; • Leveraging efficiencies of scale; and • Welcoming organizational change as business and markets adjust.
Optimize expenses : • Promoting a culture built on lean principles that innovates to minimize spending and drive higher efficiency per employee; • Utilizing technology and talent on team to increase efficiency; • Leveraging efficiencies of scale; and • Welcoming organizational change as business and markets adjust.
We strive to not only provide competitive advantage for companies, but also to address some of the most fundamental challenges in military and industrial applications. We believe that we are well situated to leverage these major industry forces.
We strive to not only provide competitive advantage for our customers, but also to address some of the most fundamental challenges in military and industrial applications. We believe that we are well situated to leverage these major industry forces.
This direct connection allows for very high bandwidth between the storage and the other system elements, which eliminates the need for protocol translation as data moves from storage subsystems to and from the compute complex. Today, flash memory modules with capacities up to 32 terabytes and PCIe Gen 4.0 interfaces are now available.
This direct connection allows for very high bandwidth between the storage and the other system elements, which eliminates the need for protocol translation as data moves from storage subsystems to and from the compute complex. Today, flash memory modules with capacities up to 60 terabytes and PCIe Gen 5.0 interfaces are now available.
In 2022 and into 2023, we are continuing to experience unavailability of certain critical products and some limited supplies, protracted delivery dates for components, increasing product costs, and changes in minimum order quantities, which creates limitations on our ability to secure product. Shortages have ranged from semiconductors to packing materials for shipping.
In 2022 and 2023, we continued to experience unavailability of certain critical products and some limited supplies, protracted delivery dates for components, increasing product costs, and changes in minimum order quantities, which creates limitations on our ability to secure product. Shortages have ranged from semiconductors to packing materials for shipping.
Within these product areas, the OSS “Catch the Wave” approach implies that we: • Anticipate trends in these markets and do not hesitate to share our vision with customers to create thought leadership and deeper engagement; • Swiftly deploy resources in engineering and sales to bring innovative products to market before our competitors; • Leverage strategic relationships to get early access to future products and technologies; • Hunt for early program wins with market leaders and leverage close relationships; 9 • Continuously monitor and influence the market for next generation technologies for which a new “Wave” may be forming; and • Establish leadership in the fast-growing AI Transportable portion of edge computing.
Within these product areas, the approach implies that we: • Anticipate trends in these markets and do not hesitate to share our vision with customers to create thought leadership and deeper engagement; • Swiftly deploy resources in engineering and sales to bring innovative products to market before our competitors; • Leverage strategic relationships to get early access to future products and technologies; • Hunt for early program wins with market leaders and leverage close relationships; • Continuously monitor and influence the market for next generation technologies for which a new concepts and solutions may be forming; and • Establish leadership in the fast-growing AI Transportable portion of edge computing.
These servers have custom basic input/output systems (“BIOS”) to ensure they work seamlessly with expansion chassis and support a high number of downstream I/O devices. Our SDS line supports rugged deployment in space constrained environments providing a maximum depth of 20 inches.
These servers have custom basic input/output systems (“BIOS”) to ensure they work seamlessly with expansion chassis and support a high number of downstream I/O devices. Our short-depth server (“SDS”) line supports rugged deployment in space constrained environments providing a maximum depth of 20 inches.
Additionally, the recent military conflict in Ukraine has led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia. Additional potential sanctions and penalties have also been proposed and/or threatened.
Additionally, the ongoing conflict in Ukraine has led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia. Additional potential sanctions and penalties have also been proposed and/or threatened.
Typically, they do not, however, offer the enhanced value platforms or customization capabilities that we specialize in to meet unique form factor, power, ruggedization or scale out requirements sought by OEM customers. Generally, these vendors focus on the large, air-conditioned data centers and competing with such vendors based on price/volume, as differentiation is challenging.
Typically, they do not, however, offer the enhanced value platforms or customization capabilities that we specialize in to meet unique form factor, power, ruggedization or scale out requirements sought by OEM customers. Generally, these vendors focus on the large, air-conditioned datacenters and compete with such vendors based on price/volume, as differentiation is challenging.
Factors that could cause fluctuations in the trading price of our common stock include, amongst other things: • price and volume fluctuations in the overall stock market from time to time; • volatility in the market prices and trading volumes of technology stocks; • changes in operating performance and stock market valuations of other technology companies generally, or particularly, those companies in our industry; • sales of shares of our common stock or other securities by us or our stockholders; • failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow the Company, or our failure to meet these estimates or the expectations of investors; • the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; 38 • announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships or capital commitments; • the public’s reaction to our press releases, other public announcements and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • actual or anticipated changes in our operating results or fluctuations in our operating results; • actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally; • litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property or other proprietary rights; • announced or completed acquisitions of businesses or technologies by us or our competitors; • new laws or regulations or new interpretations of existing laws or regulations applicable to our business; • changes in accounting standards, policies, guidelines, interpretations or principles; • any major change in our management; • general economic conditions and slow or negative growth of our markets; and • other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
Factors that could cause fluctuations in the trading price of our common stock include, amongst other things: • price and volume fluctuations in the overall stock market from time to time; • volatility in the market prices and trading volumes of technology stocks; • changes in operating performance and stock market valuations of other technology companies generally, or particularly, those companies in our industry; • sales of shares of our common stock or other securities by us or our stockholders; • failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow the Company, or our failure to meet these estimates or the expectations of investors; • the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; • announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships or capital commitments; • the public’s reaction to our press releases, other public announcements and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • actual or anticipated changes in our operating results or fluctuations in our operating results; • actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally; • litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property or other proprietary rights; • announced or completed acquisitions of businesses or technologies by us or our competitors; • new laws or regulations or new interpretations of existing laws or regulations applicable to our business; • changes in accounting standards, policies, guidelines, interpretations or principles; • any major change in our management; • general economic conditions and slow or negative growth of our markets; and • other events or factors, including those resulting from war, incidents of terrorism or responses to these events. 42 In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the relevant companies.
Due to this development, our engineers are often called upon to co-design with OEM designers to create the perfect solution to fit the needs of their customers. For highly scalable systems, a deep understanding and experience with switching topologies and interconnect fabric design is required.
Due to this development, our engineers are often called upon to co-design with OEM designers to create the perfect solution to fit the needs of their customers. For highly scalable systems, a deep understanding and experience with switching topologies, interconnect fabric design and low latency acceleration software is required.
Higher margins : • Challenging OSS-designed solutions that leverage our skills; • Increasing proprietary content, software, stickiness, barriers of entry, and differentiating features; • Prioritization of the highest return programs/markets; • Maximizing military and other high value applications and sectors; • Leveraging economies of scale and lowering material costs; • Eliminating lower margin products and markets; • Driving operational efficiencies up through automation, discipline, and process improvements; and • Layering in additional high margin services.
Higher margins : • Challenging OSS-designed solutions that leverage our skills; • Increasing proprietary content, software, stickiness, barriers of entry, and differentiating features; • Prioritization of the highest return programs/markets; • Maximizing military and other high value applications and sectors; • Retaining commerciality on products for the defense market; • Leveraging economies of scale and lowering material costs; • Eliminating lower margin products and markets; • Driving operational efficiencies up through automation, discipline, and process improvements; and • Layering in additional high margin services.
Sales and Marketing Our sales and marketing efforts are focused on the identification, engagement, and closure of significant targeted opportunities within the AI Transportables space.
Sales and Marketing Our sales and marketing efforts are focused on the identification, engagement, and closure of significant targeted opportunities within the AI Transportables market.
On October 31, 2018, OSS GmbH acquired 100% of the outstanding stock of Bressner Technology GmbH, a limited liability company registered under the laws of Germany and located near Munich, Germany (“OSS Europe”). OSS Europe designs and manufactures standard and customized servers, panel PCs, and PCIe accelerator systems.
On October 31, 2018, OSS GmbH acquired 100% of the outstanding stock of Bressner Technology GmbH, a limited liability company registered under the laws of Germany and located near Munich, Germany (“Bressner”). Bressner designs and manufactures standard and customized servers, panel PCs, and PCIe accelerator systems.
PCI Express Flash Storage – NVMe protocol The use of flash memory technology for system storage has gained traction over the past decade, which we believe to be a result of the continuous decline in the cost per gigabyte. Flash memory is now becoming the ubiquitous storage technology in high-performance systems.
PCI Express Flash Storage – NVMe protocol The use of flash memory technology for system storage has gained traction over the past decade, which we believe to be a result of the continuous decline in the cost per gigabyte. Flash memory has become the ubiquitous storage technology in high-performance systems.
We have consistently been among a small handful of companies able to come to market first with the latest 12 technology. In fact, we delivered the industry’s first PCIe over cable solutions for PCIe Gen 1.0, Gen 2.0, Gen 3.0, Gen 4.0, and Gen 5.0, which we deployed in 2022.
We have consistently been among a small handful of companies able to come to market first with the latest technology. In fact, we delivered the industry’s first PCIe over cable solutions for PCIe Gen 1.0, Gen 2.0, Gen 3.0, Gen 4.0, and Gen 5.0.
Our target market, including various types of vehicles that moves on land, in the air or at sea, creates extremely demanding requirements for compute systems, which must be compact, survive the elements and disruptions like vibration, as well as leverage the higher performance capabilities in the market. This is what we believe we do well.
Our target market, including various types of vehicles that move on land, in the air or at sea, creates extremely demanding requirements for compute systems, which must be compact, survive the elements and disruptions in power, as well as leverage the higher performance capabilities in the market. This is what we believe we do well.
The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects. As a result of inflation, we have experienced and may continue to experience, cost increases.
The existence of inflation in the domestic and global economies has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects. As a result of inflation, we have experienced and may continue to experience, cost increases.
The OSS direct sales teams interface directly with new potential customers at their facilities, live events, and virtual industry tradeshows, and present standard solutions and/or proposals for customized solutions (if solid return on investment) to address such customers’ high-performance AI Transportable needs at the edge. • Our Commercial Sales Team – Our commercial sales team focuses on OEM customers to whom we sell standard solutions or design and build customer specified systems based on OSS technology expertise that are branded with the OEM’s name and label.
The OSS direct sales teams interface directly with new potential customers at their facilities, live events, and virtual industry tradeshows, and present standard solutions and/or proposals for customized solutions (if solid return on investment) to address such customers’ datacenter class, rugged AI needs at the edge. • Our Commercial Sales Team – Our commercial sales team focuses on OEM customers to whom we sell standard products, solutions or design and build customer specified systems based on OSS technology expertise that are branded with the OEM’s name and label.
Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.
Although the length and impact of the ongoing military conflicts are highly unpredictable, the conflicts in Ukraine and Israel/Palestine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. We are continuing to monitor the situation in Ukraine, Israel/Palestine and globally and assessing its potential impact on our business.
These applications are great examples of AI transportable end products. We have continued to enhance and refresh the technology for this program while working on opportunities with other prime contractors, including other mobile applications such as video surveillance, video analytics and autonomous vehicles on land, in the sea and in the air.
These applications are great examples of rugged edge products. We have continued to enhance and refresh the technology for this program while working on opportunities with other prime contractors, including other mobile applications such as video surveillance, video analytics and autonomous vehicles on land, in the sea and in the air.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeAdditionally, we lease a 1,632 square foot facility located in Anaheim, California, with the lease expiring in June 2023. OSS Europe leases space comprising of 8,073 square feet on a month-to-month lease. 42 We believe our existing facilities and equipment are in good operating condition and are suitable for the conduct of our business.
Biggest changeAdditionally, we lease a 1,632 square foot facility located in Anaheim, California, with the lease expiring in June 2025. Bressner leases space comprising of 11,836 square feet on a month-to-month lease. We believe our existing facilities and equipment are in good operating condition and are suitable for the conduct of our business.
ITEM 2. PRO PERTIES. Our corporate headquarters are in a leased space comprising of approximately 29,342 square feet in Escondido, California under a lease that expires in August 2024. We also lease a 3,208 square foot facility in Salt Lake City, Utah that expires in June 2023, that houses our Ion software development team.
ITEM 2. PRO PERTIES. Our corporate headquarters are in a leased space comprising of approximately 29,342 square feet in Escondido, California under a lease that expires in August 2030. We also lease a 3,208 square foot facility in Salt Lake City, Utah that expires in June 2025, that houses our Ion software development team.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeITEM 3. LEG AL PROCEEDINGS. We are subject to litigation, claims, investigations, and audits arising from time to time in the ordinary course of our business. See footnote No. 12 “Commitments and Contingencies” in the accompanying consolidated financial statements. ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable 43 PART II
Biggest changeITEM 3. LEG AL PROCEEDINGS. We are subject to litigation, claims, investigations, and audits arising from time to time in the ordinary course of our business. See footnote No. 12 “Commitments and Contingencies” in the accompanying consolidated financial statements. ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable 48 PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeHigh Low First Quarter (through March 20, 2023) $ 3.71 $ 2.46 * * On March 20, 2023, the closing price was $2.47 per share. 2022 2021 Year ended December 31, 2022 and 2021: High Low High Low First Quarter $ 5.19 $ 3.75 $ 9.50 $ 3.61 Second Quarter $ 4.95 $ 3.80 $ 6.94 $ 4.27 Third Quarter $ 4.19 $ 3.13 $ 6.66 $ 4.78 Fourth Quarter $ 3.40 $ 2.69 $ 5.66 $ 4.40 Holders As of February 28, 2023, there were 20,343,071, shares of our common stock outstanding held by approximately 60 holders of record of our common stock.
Biggest changeHigh Low First Quarter (through March 8, 2024) $ 4.03 $ 1.79 * * On March 8, 2024, the closing price was $3.54 per share. 2023 2022 Year ended December 31, 2023 and 2022: High Low High Low First Quarter $ 3.71 $ 2.44 $ 5.19 $ 3.75 Second Quarter $ 3.42 $ 2.33 $ 4.95 $ 3.80 Third Quarter $ 3.40 $ 1.56 $ 4.19 $ 3.13 Fourth Quarter $ 2.34 $ 1.82 $ 3.40 $ 2.69 Holders As of March 8, 2024, there were 20,700,435 shares of our common stock outstanding held by approximately 5,800 holders of record of our common stock.
Unregistered Sales of Equity Securities During the year ended December 31, 2022, there were no unregistered sales of our securities that were not reported in a Current Report on Form 8-K or our Quarterly Reports on Form 10-Q. Issuer Repurchases of Equity Securities None. ITEM 6. [R ESERVED]. 44
Unregistered Sales of Equity Securities During the year ended December 31, 2023, there were no unregistered sales of our securities that were not reported in a Current Report on Form 8-K or our Quarterly Reports on Form 10-Q. Issuer Repurchases of Equity Securities None. ITEM 6. [R ESERVED]. 49

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeFor the Year Ended December 31, 2022 2021 Revenue $ 72,421,345 $ 61,982,104 Cost of revenue 52,023,736 42,342,815 Gross profit 20,397,609 19,639,289 Operating expenses: General and administrative 7,279,401 7,658,418 Marketing and selling 6,806,306 6,201,228 Research and development 4,743,574 4,032,616 Total operating expenses 18,829,281 17,892,262 Income from operations 1,568,328 1,747,027 Other income (expense): Interest income 237,751 244,382 Interest expense (162,391 ) (527,139 ) Gain on forgiveness of Paycheck Protection Program (PPP) loan and interest - 1,514,354 Other income (expense), net 550,854 (40,176 ) Total other income (expense), net 626,214 1,191,421 Income before income taxes 2,194,542 2,938,448 Provision for income taxes 4,423,597 605,675 Net (loss) income $ (2,229,055 ) $ 2,332,773 48 For the Year Ended December 31, 2022 2021 Revenue 100.0 % 100.0 % Cost of revenue 71.8 % 68.3 % Gross profit 28.2 % 31.7 % Operating expenses: General and administrative 10.1 % 12.4 % Marketing and selling 9.4 % 10.0 % Research and development 6.5 % 6.5 % Total operating expenses 26.0 % 28.9 % Income from operations 2.2 % 2.8 % Other income (expense): Interest income 0.3 % 0.4 % Interest expense -0.2 % -0.9 % Gain on forgiveness of Paycheck Protection Program (PPP) loan and interest 0.0 % 2.4 % Other income (expense), net 0.8 % -0.1 % Total other income (expense), net 0.9 % 1.9 % Income before income taxes 3.0 % 4.7 % Provision for income taxes 6.1 % 1.0 % Net (loss) income -3.1 % 3.8 % Comparison of the Years Ended December 31, 2022 and 2021: For The Year Ended December 31, 2022 For The Year Ended December 31, 2021 Entity: Revenue Cost of Revenue Gross Profit Gross Margin % Revenue Cost of Revenue Gross Profit Gross Margin % OSS $ 43,286,715 $ (29,142,852 ) $ 14,143,863 32.7 % $ 38,492,004 $ (24,272,292 ) $ 14,219,712 36.9 % OSS Europe 29,134,630 (22,880,884 ) 6,253,746 21.5 % 23,490,100 (18,070,523 ) 5,419,577 23.1 % $ 72,421,345 $ (52,023,736 ) $ 20,397,609 28.2 % $ 61,982,104 $ (42,342,815 ) $ 19,639,289 31.7 % Revenue For the year ended December 31, 2022, our total revenue increased $10,439,241, or 16.8%, as compared to the same period in 2021.
Biggest changeFor the Year Ended December 31, 2023 2022 Revenue $ 60,896,797 $ 72,421,345 Cost of revenue 42,942,175 52,023,736 Gross profit 17,954,622 20,397,609 Operating expenses: General and administrative 9,264,447 7,279,401 Impairment of goodwill 5,630,788 - Marketing and selling 6,651,516 6,806,306 Research and development 4,331,024 4,743,574 Total operating expenses 25,877,775 18,829,281 (Loss) income from operations (7,923,153 ) 1,568,328 Other income (expense): Interest income 544,958 237,751 Interest expense (117,774 ) (162,391 ) Employee retention credit 1,716,727 - Other (expense) income, net (9,806 ) 550,854 Total other income (expense), net 2,134,105 626,214 (Loss) income before taxes (5,789,048 ) 2,194,542 Provision for income taxes 927,128 4,423,597 Net loss $ (6,716,176 ) $ (2,229,055 ) 53 For the Year Ended December 31, 2023 2022 Revenue 100.0 % 100.0 % Cost of revenue 70.5 % 71.8 % Gross profit 29.5 % 28.2 % Operating expenses: General and administrative 15.2 % 10.1 % Impairment of goodwill 9.2 % 0.0 % Marketing and selling 10.9 % 9.4 % Research and development 7.1 % 6.5 % Total operating expenses 42.5 % 26.0 % (Loss) income from operations -13.0 % 2.2 % Other income (expense): Interest income 0.9 % 0.3 % Interest expense -0.2 % -0.2 % Employee retention credit 2.8 % 0.0 % Other income (expense), net 0.0 % 0.8 % Total other income (expense), net 3.5 % 0.9 % (Loss) income before taxes -9.5 % 3.0 % Provision for income taxes 1.5 % 6.1 % Net loss -11.0 % -3.1 % Comparison of the Years Ended December 31, 2023 and 2022: For The Year Ended December 31, 2023 For The Year Ended December 31, 2022 Entity: Revenue Cost of Revenue Gross Profit Gross Margin % Revenue Cost of Revenue Gross Profit Gross Margin % OSS $ 28,809,887 $ (18,544,901 ) $ 10,264,986 35.6 % $ 43,286,715 $ (29,142,852 ) $ 14,143,863 32.7 % Bressner 32,086,910 (24,397,274 ) 7,689,636 24.0 % 29,134,630 (22,880,884 ) 6,253,746 21.5 % $ 60,896,797 $ (42,942,175 ) $ 17,954,622 29.5 % $ 72,421,345 $ (52,023,736 ) $ 20,397,609 28.2 % Revenue For the year ended December 31, 2023, our total revenue decreased $11,524,548, or 15.9%, as compared to the same period in 2022.
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.
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; 59 however, there can be no assurances that new products and/or software will result in significant improvements to revenues or earnings. For competitive reasons, we do not disclose all of our new product development activities.
In anticipation of these transactions, we enter into foreign exchange contracts to provide currency at a fixed rate. 59 Non-GAAP financial measures Adjusted EBITDA We believe that the use of adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, is helpful for an investor to assess the performance of the Company.
In anticipation of these transactions, we enter into foreign exchange contracts to provide currency at a fixed rate. Non-GAAP financial measures Adjusted EBITDA We believe that the use of adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, is helpful for an investor to assess the performance of the Company.
See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. Revenue Recognition 54 The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers.
See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. Revenue Recognition The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers.
There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be fully recovered. These increasing costs are being aggressively managed by the Company and actions are being taken to minimize the impact to the Company, particularly in the purchase of inventories to minimizing price increases.
There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be fully recovered. These increasing costs are being aggressively managed by the Company and actions are being taken to minimize the impact to the Company, particularly in the purchase of inventories to minimize price increases.
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.
Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations. 65 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.
Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies.
Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our business. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies.
Marketing and Selling – Marketing and Selling expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel, and entertainment expenses as well as allocated overhead. 47 Marketing programs consist of advertising, tradeshows, events, corporate communications, and brand-building activities.
Marketing and Selling – Marketing and Selling expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel, and entertainment expenses as well as allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications, and brand-building activities.
However, there can be no assurance that management’s cost reduction efforts will be effective or the forecasted cash flows 51 will be achieved.
However, there can be no assurance that management’s cost reduction efforts will be effective or the forecasted cash flows will be achieved.
A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation. 55 On certain contracts with several of the Company’s significant customers, the Company receives payments in advance of manufacturing.
A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation. 61 On certain contracts with several of the Company’s significant customers, the Company receives payments in advance of manufacturing.
Variable lease payments associated with the Company’s leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on which those payments are 56 assessed. For those leases that are subsequently modified for terms, such changes may require a remeasurement of the lease liability.
Variable lease payments associated with the Company’s leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on 62 which those payments are assessed. For those leases that are subsequently modified for terms, such changes may require a remeasurement of the lease liability.
The Company defines adjusted EBITDA as income (loss) before interest, taxes, depreciation, amortization, acquisition expense, impairment of long-lived assets, financing costs, fair value adjustments from purchase accounting, stock-based compensation expense and expenses related to discontinued operations. Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles in the United States, or GAAP.
The Company defines adjusted EBITDA as income (loss) before interest, taxes, depreciation, amortization, acquisition expense, impairment of long-lived assets, financing costs, government funded programs, 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.
On August 31, 2018, the Company acquired CDI, which was located in Irvine, California. CDI specialized in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment, flight safety equipment, and networking systems. CDI’s business was fully integrated into the core operations of OSS as of June 1, 2020.
On August 31, 2018, the Company acquired Concept Development, Inc. ("CDI"), which was located in Irvine, California. CDI specialized in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment, flight safety equipment, and networking systems. CDI’s business was fully integrated into the core operations of OSS as of June 1, 2020.
We do not anticipate any significant investments not normally anticipated in the ordinary course of business in the near term. 52 Financing Activities Given the current economic, financial, and geopolitical instability, the Company believes it is imperative to maintain opportunities for additional financial resources to ensure financial stability during trying economic times.
We do not anticipate any significant investments not normally anticipated in the original course of business in the near term. Financing Activities Given the current economic, financial, and geopolitical instability, the Company believes it is imperative to maintain opportunities for additional financial resources to ensure financial stability during trying economic times.
We also conduct business outside the United States through OSS Europe our foreign subsidiary in Germany, where business is largely transacted in non-U.S. dollar currencies, particularly the Euro, which is subject to fluctuations due to changes in foreign currency exchange rates. Accordingly, we are subject to exposure from changes in the exchange rates of local currencies.
We also conduct business outside the United States through Bressner our foreign subsidiary in Germany, where business is largely transacted in non-U.S. dollar currencies, particularly the Euro, which is subject to fluctuations due to changes in foreign currency exchange rates. Accordingly, we are subject to exposure from changes in the exchange rates of local currencies.
In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 from its bank, which renews on an annual basis at the current prime rate. To access this line of credit the Company must maintain cash and investments balances at a minimum of $4,000,000.
In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 from its bank, which was renewed in April 2023 and renews on an annual basis at the current prime rate. To access this line of credit the Company must maintain cash and investments balances at a minimum of $4,000,000.
Results of Operations The following tables set forth our results of operations for the years ended December 31, 2022 and 2021, respectively, presented in dollars and as a percentage of revenue.
Results of Operations The following tables set forth our results of operations for the years ended December 31, 2023 and 2022, respectively, presented in dollars and as a percentage of revenue.
This discussion and analysis contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Annual Report. Overview One Stop Systems, Inc.
This discussion and analysis contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Annual Report.
We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary. Foreign currency risk We operate primarily in the United States. Foreign sales of products and services are primarily denominated in U.S. dollars.
We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary. Foreign currency risk We operate in the United States and Germany. Our primary reporting currency is the United States dollar. Foreign sales of products and services are primarily denominated in U.S. dollars.
As of December 31, 2022, the Company had $2,378,546 of cash in our accounts that exceeded the insurance limits. The Company has not experienced any such losses in these accounts, and believes that the financial institutions at which such amounts are held are stable; however, no assurances can be provided.
As of December 31, 2023, the Company had $250,000 of cash in our accounts that exceeded the insurance limits. The Company has not experienced any such losses in these accounts, and believes that the financial institutions at which such amounts are held are stable; however, no assurances can be provided.
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.
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.
Inflation We experienced some affects due to inflation during the most recent period, including increased product pricing due to semiconductor product shortages, increased transportation costs due to increases in the cost of energy and general price increases due to inflation in the economy.
Inflation We experienced some effects due to inflation in both the U.S. and Europe during the most recent period, including increased product pricing due to semiconductor product shortages, increased transportation costs due to increases in the cost of energy and general price increases due to inflation in the economy.
The effective tax rate for the years ended December 31, 2022 and 2021 differed from the statutory rate mainly due to permanent non-deductible goodwill amortization for OSS Europe, deductions related to expenses of OSS stock options, research and development credits, forgiveness of the PPP loan, and changes in reserves for uncertain tax positions, as well as projecting federal, foreign and state tax liabilities for the year.
The effective tax rate for the years ended December 31, 2023 and 2022 differed from the statutory rate mainly due to permanent non-deductible goodwill amortization for Bressner, change in valuation allowance, deductions related to expenses of OSS stock options, research and development credits, and changes in reserves for uncertain tax positions, as well as projecting federal, foreign and state tax liabilities for the year.
The Company defines non-GAAP income (loss) as income or (loss) before amortization, stock-based compensation, expenses related to discontinued operations, and acquisition costs. Adjusted EPS expresses adjusted income (loss) on a per share basis using weighted average diluted shares outstanding.
The Company defines non-GAAP income (loss) as income or (loss) before amortization, government funded programs, impairment of long lived assets, stock-based compensation, expenses related to discontinued operations, and acquisition costs. Adjusted EPS expresses adjusted income (loss) on a per share basis using weighted average diluted shares outstanding.
This increase in cost of revenue is mainly attributable to an increase in our sales of AI Transportable products into the autonomous trucking industry and to our media and entertainment customer (disguise) and additional allowance for inventory obsolescence related primarily to disguise.
This decrease in cost of revenue is mainly attributable to a decrease in our sales of products into the autonomous trucking industry and to our media customer (disguise) and additional allowance for inventory obsolescence related primarily to disguise.
On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with its initial public offering. During the year ended December 31, 2015, the Company formed a wholly owned subsidiary in Germany, OSS GmbH. Then, in July 2016, the Company acquired Magma and its operations.
On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with its initial public offering. During the year ended December 31, 2015, the Company formed a wholly owned subsidiary in Germany, OSS GmbH. Then, in July 2016, the Company acquired Magma and its operations that complemented OSS' manufacture of custom high-performance compute servers.
In the first quarter of 2023, we implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate, our strategy to focus on the AI Transportables industry, and our military business in particular.
During 2023, the Company implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate our strategy to focus on, the AI Transportables industry and our military business.
In furtherance of this strategy and our goals, we have taken various steps to strengthen our management team with individuals who have deep experience and high-level contacts in the defense sector.
In furtherance of this strategy and our goals, during 2023 we took various steps to strengthen our management team and board of directors with individuals who have deep experience and high-level contacts in the defense sector, as discussed below.
In Germany, the deposit insurance is €100,000 per bank, per customer. OSS Europe has funds on deposit in both Euro and U.S. dollar denominations of €145,599 (US$156,261) with banks in excess of the insurance limits. We provide credit to our customers in the normal course of business.
In Germany, the deposit insurance is €100,000 per bank, per customer. Bressner has funds on deposit in both Euro and U.S. dollar denominations of €919,664 (US$1,015,214) with banks in excess of the insurance limits. We provide credit to our customers in the normal course of business.
This is particularly true of their virtual products, which do not require the same level of ruggedization as this system is not typically operated in harsh environments and for which software is being developed to eventually provide a real-time cloud solution. As a result, we expect that our customer will transition to a lower cost, commodity type equipment solution.
This is particularly true of their virtual products, which do not require the same level of ruggedization, as this system is not typically operated in harsh environments and for which software is being developed to provide a real-time cloud solution.
These indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make. Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities.
These indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make.
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.
Additionally, the potential for growth in new markets is uncertain. We will continue to explore these opportunities until such time as we either generate sales or determine that resources would be more efficiently used elsewhere.
Revenues on certain fixed-price contracts where we provide engineering services, prototypes and completed products are recognized based upon percentage of completion or based upon milestones delivered that are provided during the period and compared to milestone goals to be provided over the entire contract.
Revenues on certain fixed-price contracts where we provide engineering services, prototypes and completed products are recognized based upon milestones delivered that are provided during the period and compared to milestone goals to be provided over the entire contract. These services require that we perform significant, extensive, and complex design, development, modification or implementation of our customers’ systems.
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.
This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. 67 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.
On October 31, 2018, OSS GmbH acquired 100% of the outstanding stock of Bressner Technology GmbH, a Germany limited liability company located near Munich, Germany ("OSS Europe"). OSS Europe designs and manufactures standard and customized servers, panel PCs, and PCIe expansion systems. OSS Europe also provides manufacturing, test, sales, and marketing services for customers throughout the EMEA.
On October 31, 2018, OSS GmbH acquired 100% of the outstanding equity of Bressner Technology GmbH, a Germany limited liability company located near Munich, Germany ("Bressner"). Bressner designs and manufactures standard and customized servers, panel PCs, and PCIe expansion systems.
The following table reconciles cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow: For the Year Ended December 31, Cash flow: 2022 2021 Cash (used in) provided by operating activities $ (7,806,025 ) $ 5,622,596 Capital expenditures (529,908 ) (563,815 ) Free cash flow $ (8,335,933 ) $ 5,058,781 61 ITEM 7A.
The following table reconciles cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow: For the Year Ended December 31, Cash flow: 2023 2022 Cash used in operating activities $ (439,679 ) $ (7,806,025 ) Capital expenditures (821,753 ) (529,908 ) Free cash flow $ (1,261,432 ) $ (8,335,933 ) 68 ITEM 7A.
Our customer applications often require connection to a wide array of data sources and sensors, ultra-fast processing power, and the ability to quickly access and store large and ever-growing data sets at their physical location (rather than in the cloud). This equipment requires datacenter class performance optimized for deployment at the edge in challenging environments.
We market our products to manufacturers of automated equipment used for medical, industrial, and military applications. Our customer applications often require connection to a wide array of data sources and sensors, ultra-fast processing power, and the ability to quickly access and store large and ever-growing data sets at their physical location (rather than in the cloud).
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.
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, 52 third-party engineering, and contractor support costs, as well as allocated overhead.
Payment terms vary by contract type and type of customer and generally range from 30 to 60 days from invoice. Additionally, taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue.
Additionally, taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, which are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue.
These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.
These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward. We are experiencing delays in funding for customer projects, delays in delivery schedules based upon customer requirements and an extended sales cycle.
The Company determines revenue recognition through the following steps: (i) identification of the contract with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when, or as, a performance obligation is satisfied.
The Company determines revenue recognition through the following steps: (i) identification of the contract with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when, or as, a performance obligation is satisfied. 60 The Company’s contracts are executed through a combination of written agreements along with purchase orders with all customers including certain general terms and conditions.
With respect to our media and entertainment business, we are seeing an acceleration in our customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry.
This resulted from an acceleration in such customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry.
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.
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.
We anticipate that we will begin to experience a decrease in the demand for our high-compute, ruggedized media and entertainment focused equipment and our expertise in this area in the first half of 2023. 53 We believe that the need for improved productivity in the research and development activities directed toward developing new products and/or software will continue to result in increasing adoption of high-performance computers and interconnect technologies such as those we produce.
We believe that the need for improved productivity in the research and development activities directed toward developing new products and/or software will continue to result in increasing adoption of high-performance computers and interconnect technologies such as those we produce.
Alternatively, if actual demand, product mix and alternative usage are more favorable than those we estimated at the time of such a write-down, our gross margin could be favorably impacted in future periods. 57 Goodwill, Intangible Assets and Long-lived Assets We evaluate our goodwill, intangible and long-lived assets for impairment when events or circumstances arise that indicate our goodwill, intangible and long-lived assets may be impaired.
Alternatively, if actual demand, product mix and alternative usage are more 63 favorable than those we estimated at the time of such a write-down, our gross margin could be favorably impacted in future periods.
Known trends or uncertainties Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry during economic downturns.
Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities. 58 Known trends or uncertainties Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry during economic downturns.
Edge computing is a form of computing that is done on site, near a particular data source or the user (rather than in the cloud), minimizing the need for data to be processed in a remote data center.
Edge computing is a form of computing that is done on site, near a particular data source or the user, rather than in the cloud, minimizing the need for data to be processed in a remote datacenter. This growing trend increases computing performance and security, as the data does not have to travel to a distant datacenter location.
The following table summarizes our cash flows for the years ended December 31, 2022 and 2021: For the Year Ended December 31, Cash flows: 2022 2021 Net cash (used in) provided by operating activities $ (7,806,025 ) $ 5,622,596 Net cash provided by (used in) investing activities $ 3,908,323 $ (15,110,625 ) Net cash provided by financing activities $ 1,946,553 $ 8,430,712 Operating Activities During the year ended December 31, 2022, we used $7,806,025 in cash for operating activities, a difference of $13,428,621 when compared to the cash provided by operating activities of $5,622,596 during the 2021 year.
The following table summarizes our cash flows for the years ended December 31, 2023 and 2022: For the Year Ended December 31, Cash flows: 2023 2022 Net cash (used in) operating activities $ (439,679 ) $ (7,806,025 ) Net cash provided by investing activities $ 1,520,799 $ 3,908,323 Net cash (used in) provided by financing activities $ (171,344 ) $ 1,946,553 Operating Activities During the year ended December 31, 2023, we used $439,679 in cash for operating activities, a difference of $7,366,346 when compared to the cash used in operating activities of $7,806,025 during the same period in 2022.
Many of these edge applications have unique requirements, including special and compact form factors ruggedized for harsh conditions, which cannot be accommodated by traditional controlled air-conditioned data centers.
This equipment requires datacenter class performance optimized for deployment at the edge in challenging environments. Many of these edge applications have unique requirements, including special and compact form factors ruggedized for harsh conditions, which cannot be accommodated by traditional controlled air-conditioned datacenters.
The decrease in general and administrative expense is primarily attributable to reductions in amortization and legal expenses. Overall, total general and administrative expense decreased as a percentage of revenue to 10.1% for the year ended December 31, 2022, as compared to 12.4% during the same period in 2021.
Overall, total general and administrative expense increased as a percentage of revenue to 15.2% for the year ended December 31, 2023, as compared to 10.1% during the same period in 2022.
Management’s plans are to continue their efforts towards responding to the changing economic landscape, including inflation, foreign currency exchange rates, a potential recession, increases in the Federal Reserve interest rate, supply chain constraints and international conflicts, by continuing to control hiring and operating costs, conserve cash, focus on improving margin.
Management’s plans are to focus on acquiring new customer orders to replace lost revenue attributable to our previous media customer, to continue our efforts towards responding to the changing economic landscape, including significant inflation, both domestically and internationally, foreign currency exchange rates, a potential recession in the U.S. and/or Germany, the high Federal Reserve and European Central Bank interest rates, supply chain constraints and 56 international conflicts, by continuing to control hiring and operating costs, conserve cash, and continual focus on improving margin.
This increase was attributable to increased testing of product to support the increase in revenue. Overall, total research and development expense as a percentage of revenue was the same for both years at 6.5%. Interest income Interest income decreased $6,631 for the year ended December 31, 2022, as compared to the same prior year period in 2021.
Bressner experienced an increase of $82,981, or 19.1%. This increase was attributable to increased testing of product to support the increase in revenue. Overall, total research and development expense as a percentage of revenue increased as a percentage of revenue to 7.1% during the year ended December 31, 2023, as compared to 6.5% during the same period in 2022.
These services require that we perform significant, extensive, and complex design, development, modification or implementation of our customers’ systems. Performance will often extend over long periods of time, and our right to receive future payment depends on our future performance in accordance with the agreement.
Performance will often extend over long periods of time, and our right to receive future payment depends on our future performance in accordance with the agreement.
The Company’s contracts are executed through a combination of written agreements along with purchase orders with all customers including certain general terms and conditions. Generally, purchase orders entail products, quantities and prices, which define the performance obligations of each party and are approved and accepted by the Company. The Company’s contracts with customers do not include extended payment terms.
Generally, purchase orders entail products, quantities and prices, which define the performance obligations of each party and are approved and accepted by the Company. The Company’s contracts with customers do not include extended payment terms. Payment terms vary by contract type and type of customer and generally range from 30 to 60 days from invoice.
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.
The reported results for the years ended December 31, 2023 and 2022, reflect the application of the guidance of ASC 842. 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).
For the Year Ended December 31, 2022 2021 Net (loss) income $ (2,229,055 ) $ 2,332,773 Depreciation and amortization 1,050,299 1,480,608 Stock-based compensation expense 1,991,117 1,695,105 Interest income (237,751 ) (244,382 ) Interest expense 162,391 527,139 PPP loan and interest forgiveness - (1,514,354 ) Provision for income taxes 4,423,597 605,675 Adjusted EBITDA $ 5,160,598 $ 4,882,564 Adjusted EPS Adjusted EPS excludes the impact of certain items and, therefore, has not been calculated in accordance with GAAP.
For the Year Ended December 31, 2023 2022 Net loss $ (6,716,176 ) $ (2,229,055 ) Depreciation and amortization 1,077,516 1,050,299 Stock-based compensation expense 2,345,358 1,991,117 Interest income (544,958 ) (237,751 ) Interest expense 117,774 162,391 Employee retention credit (ERC) (1,716,727 ) - Impairment of goodwill 5,630,788 - Provision for income taxes 927,128 4,423,597 Adjusted EBITDA $ 1,120,703 $ 5,160,598 66 Adjusted EPS Adjusted EPS excludes the impact of certain items and, therefore, has not been calculated in accordance with GAAP.
Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be 50 capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization requirement increases our deferred tax assets and may have an impact on payment of tax liabilities.
Additionally, during 2023, the Company recorded an impairment of goodwill attributable to OSS that impacted the effective tax rate. Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S. tax purposes effective January 1, 2022.
Other Income (Expense), net Other income consists of miscellaneous income and income received for activities outside of our core business. Other expense includes expenses for activities outside of our core business.
We expect our research and development expenses to increase in absolute dollars as we continue to invest in new and existing products. Other Income (Expense), net Other income consists of miscellaneous income and income received for activities outside of our core business. Other expense includes expenses for activities outside of our core business.
We are exposed to the impact of interest rate changes primarily through our borrowing activities for our variable rate borrowings. The Federal Reserve interest rates have increased recently and may increase further in the near term.
Interest rate risk Our exposure to interest rate risk is primarily associated with borrowing on revolving lines of credit denominated in both U.S. dollars and Euros. We are exposed to the impact of interest rate changes primarily through our borrowing activities for our variable rate borrowings. Both the Federal Reserve and European Central Bank interest rates have increased significantly recently.
Overall, total marketing and selling expense decreased as a percentage of revenue to 9.4% during the year ended December 31, 2022, as compared to 10.0% during the same period in 2021. Research and development expense Research and development expense increased $710,958, or 17.6%, for the year ended December 31, 2022, as compared to the same prior year period in 2021.
Bressner had an increase of $244,302, or 17.2%, primarily resulting from the addition of new marketing personnel and sales collateral material. Overall, total marketing and selling expense increased as a percentage of revenue to 10.9% during the year ended December 31, 2023, as compared to 9.4% during the same period in 2022.
While management expects these actions and continued diligence towards cost growth and containment will result in a decreased rate of growth in costs as compared to revenue growth, our results of operations for the year ended December 31, 2022 improved partially as a result of such actions, management is also committed to conserving cash and securing debt and/or equity financing, as required, for liquidity to meet our cash requirements through at least a period of the next twelve months.
Management is also committed to conserving cash and securing debt and/or equity financing, as required, for liquidity to meet our cash requirements through at least a period of the next twelve months.
Cost of revenue and gross profit Cost of revenue increased $9,680,921, or 22.9%, for the year ended December 31, 2022, as compared to the prior year in 2021. OSS saw an increase in cost of revenue of $4,870,560, or 20.1%, as compared to the prior year period in 2021.
Cost of revenue and gross profit Cost of revenue decreased $9,081,561, or 17.5%, for the year ended December 31, 2023, as compared to the prior year in 2022. OSS saw a decrease in cost of revenue of $10,597,951, or 36.4%, as compared to the prior year period in 2022.
Should we issue shares of our common stock in an acquisition, we will be required to estimate the fair value of the shares issued. Recent accounting pronouncements Per the Company’s consolidated financial statements Note 2 – Significant Accounting Policies, we may be implementing certain accounting changes as required by FASB.
Should we issue shares of our common stock in an acquisition, we will be required to estimate the fair value of the shares issued. 64 Recent accounting pronouncements Management has evaluated recent accounting pronouncements through the date of the consolidated financial statements included in this Annual Report and believes that the recent accounting pronouncements as disclosed in Note 2 to the financial statements included elsewhere in this Annual Report, will not have a material impact on the Company's consolidated financial statements.
We expect to continue to incur expenses similar to the adjusted income from continuing operations and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring. 60 The following table reconciles net income to adjusted EPS and diluted earnings per share: For the Year Ended December 31, 2022 2021 Net (loss) income $ (2,229,055 ) $ 2,332,773 Amortization of intangibles 63,231 556,842 Stock-based compensation expense 1,991,117 1,695,105 PPP loan and interest forgiveness - (1,514,354 ) Non-GAAP net (loss) income $ (174,707 ) $ 3,070,366 Non-GAAP net (loss) income per share: Basic $ (0.01 ) $ 0.17 Diluted $ (0.01 ) $ 0.16 Weighted average common shares outstanding: Basic 19,730,698 18,305,878 Diluted 19,730,698 19,503,737 Free Cash Flow Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures for property and equipment, which includes capitalized software development costs.
The following table reconciles net loss to adjusted EPS and diluted earnings per share: For the Year Ended December 31, 2023 2022 Net loss $ (6,716,176 ) $ (2,229,055 ) Amortization of intangibles 42,154 63,231 Stock-based compensation expense 2,345,358 1,991,117 Employee retention credit (ERC) (1,716,727 ) - Impairment of goodwill 5,630,788 Non-GAAP net (loss) income $ (414,603 ) $ (174,707 ) Non-GAAP net (loss) income per share: Basic $ (0.02 ) $ (0.01 ) Diluted $ (0.02 ) $ (0.01 ) Weighted average common shares outstanding: Basic 20,854,777 19,730,698 Diluted 20,854,777 19,730,698 Free Cash Flow Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures for property and equipment, which includes capitalized software development costs.
Please see the section of this Annual Report entitled “Advisory Board Members,” below, for information regarding each of the members of our advisory board. 45 Furthermore, in the first quarter of 2023, we implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate, our strategy to focus on the AI Transportables industry, and our military business in particular.
Bressner also provides manufacturing, test, sales, and marketing services for customers throughout the EMEA. 50 Recent Developments Management and Board Changes In the first quarter of 2023, we implemented certain internal organizational changes to align our US-based operations with, and to further support and accelerate, our strategy to focus on the AI Transportables industry and our defense business in particular.
OSS’ gross margin percentage for the year ended December 31, 2022, was 32.7%, a decrease of 4.2 percentage points as compared to the prior year period in 2021 of 36.9%, due to the predominance of lower margin product sales to our media and entertainment customer, an overall increase in material costs for the majority of our products, and additional allowance for inventory 49 obsolescence.
OSS’ gross margin percentage for the year ended December 31, 2023, was 35.6%, an increase of 2.9 percentage points as compared to the prior year period in 2022 of 32.7%, due to the decline in lower margin sales to our previous 54 media custom, offset set by underutilization of production resources, due to overall lower revenue.
The effective tax rate for the year ended December 31, 2022, is 201.4%, as compared to 20.6% in the prior year 2021 due to the effect of the valuation for deferred tax assets.
The mandatory capitalization requirement increases our deferred tax assets and the related valuation allowance and may have an impact on payment of tax liabilities. The effective tax rate for the year ended December 31, 2023, is (16.0%), as compared to 201.4% in the prior year 2022.
Additionally, the general consensus among economists continues to suggest that we should expect a higher recession risk to continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations.
As discussed elsewhere in this Annual Report, during the year 2023, economists continued to suggest that an elevated risk of economic downturn in the U.S. and Germany will continue for the foreseeable future, which could result in further economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations.
(“OSS”) designs, manufactures, and markets specialized high-performance compute and storage hardware, software, and systems, which are designed to target edge AI Transportable deployments. These specialized modules and systems consist of computers and storage products that incorporate the latest state-of-the art components with our embedded proprietary software.
Overview The Company designs, manufactures, and markets specialized high-performance compute, high speed switch fabrics and storage hardware and software, which are designed to target edge AI Transportable deployments.
Interest expense Interest expense decreased $364,748 for the year ended December 31, 2022, as compared to the same period in 2021 as a result of the April 2021 maturity and repayment in full of certain outstanding promissory notes and related party notes payable.
Interest expense Interest expense decreased $44,617 for the year ended December 31, 2023, as compared to the same period in 2022, as a result of the paydown of approximately $1,300,000 in outstanding debt.
With respect to our media and entertainment business, we are seeing an acceleration in our customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry.
This resulted from an acceleration in such customer’s investment in cloud technology and a drive towards less intelligent compute capability at the edge to reduce the costs of their componentry. This customer’s transition to cloud solutions had a negative impact on the Company’s results of operations for the year ended December 31, 2023.
Additionally, the Company continues to enhance the capabilities of its ERP system, and purchases test equipment for the engineering department.
The source of investing funds was attributable to the redemption of short-term investments in both years and the sale of the Magma.com URL in the prior year. Additionally, the Company continues to enhance the capabilities of its ERP system, and purchase test equipment for the engineering department.
OSS Europe’s cost of revenue increased $4,810,361, or 26.6%, as compared to the prior year in 2021, due to a general economic improvement in Europe resulting from the diminishing impact of the COVID-19 pandemic in the business environment and procuring large, one-time orders.
Bressner’s cost of revenue increased $1,516,390, or 6.6%, as compared to the prior year in 2022, due to a general economic improvement in Europe in the business environment and procuring large, one-time orders. The overall gross margin percentage was 29.5% for the 2023 period as compared to 28.2% in the same period in 2022.
The Company and its subsidiary have no leases classified as finance leases. The Company and its subsidiary currently lease plant, office facilities and equipment under operating leases expiring through August 2024. As of December 31, 2022, the weighted average remaining lease term for our operating leases was 20.2 months. The weighted average discount rate for our operating leases was 12.8%.
The Company 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 2032. The Company’s lease agreements may include options to extend the lease following the initial term.
The most significant contributions to the year-over-year change include the forgiveness of the principal and interest in the amount of $1,514,354 of the Company’s Paycheck Protection Program (“PPP”) loan in 2021, the sale of a URL for Magma.com in 2022 for $125,000, and $500,320 for reversal of a settlement accrual for previous contract disputes.
The most significant contributions to the year-over-year change include $500,320 reversal of a settlement accrual for previous contract disputes and the sale of a URL for Magma.com in 2022 for $125,000 and translation gain, net. Provision for income taxes We have recorded an income tax provision of $927,128 and $4,423,597, respectively, for the years ended December 31, 2023 and 2022.
Inflation has risen, Federal Reserve interest rates have increased recently, and the general consensus among economists suggests that we should continue to expect a higher recession risk to continue over the next year. These factors, amongst other things, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.
These factors, amongst other things, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations.
The global increase in load on the cloud infrastructure and increase in AI applications, are the primary factors driving the growth of the edge computing market. We market our products to manufacturers of automated equipment used for medical, industrial, and military applications.
Such modules and systems allow us to offer high-end solutions to target markets to be integrated into, platforms, vehicles and applications. The global increase in load on the cloud infrastructure and increase in AI applications are the primary factors driving the growth of the edge computing market.
Net favorable adjustments in the current period for non-cash items amounted to $5,272,731, which was comprised of $6,077,378 of favorable non-cash items, offset by $804,647 of negative non-cash items that did not affect operating cash flow. Additionally, there was a net increase in the use of operating cash flow for working capital items of $14,139,524.
Additionally, there were net favorable adjustments in the current period for non-cash items of $479,443, which were comprised of $6,196,922 of favorable non-cash items, inclusive of the write-down for the impairment of goodwill, offset by $5,717,549 of negative non-cash items that did not affect operating cash flow and exclusion of $1,716,727 for the ERC.
The source of working capital of $1,431,046 was attributable to changes in accounts payable for the comparable period, which was then offset by uses of working capital of $15,570,570 being applied to changes in accounts receivables, increased inventory levels due to supply chain constraints, prepaid expenses and other current assets, and accrued expenses and other liabilities.
These sources were offset by uses of working capital of $5,145,488 being applied to changes in inventory levels, prepaid expenses and other current assets, and accounts payable.
Investing Activities During the year ended December 31, 2022, the Company generated cash of $3,908,323 in investing activities, as compared to $15,110,625 used during the prior year period in 2021, a net change of $19,018,948. The source of investing funds was attributable to the redemption of short-term investments and the sale of the Magma.com URL in 2022.
Investing Activities During the year ended December 31, 2023, the Company generated cash of $1,520,799 in investing activities, as compared to $3,908,323 provided by investing activities during the prior year period in 2022, a net decrease of $2,387,524.

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