The terms “we,” “us,” “our,” “OSS” or the “Company” refer collectively to One Stop Systems, Inc. and its wholly-owned subsidiaries, unless otherwise stated. You should read the following discussion and analysis of our financial condition and operating results together with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report"). This discussion and analysis contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Quarterly Report. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2025 filed with the SEC on March 18, 2026. Readers are cautioned not to place undue reliance on these forward-looking statements. Overview The Company designs, manufactures, and markets specialized enterprise class high-performance compute, high speed switch fabrics, and storage hardware and software, which are designed to target edge applications for AI/ML, sensor processing, sensor fusion, and autonomy. Edge computing is a form of computing that is done on platform or on site, connected with the data source or the user, rather than in the cloud, minimizing the need for data to be processed remotely. This growing trend increases computing performance and security, as the data does not have to travel to distant datacenter locations. Edge computing is most recognizable in applications such as sensor processing, sensor fusion, autonomy, and AI/ML. To meet the demands at the edge, we offer specialized products and system solutions that consist of computers, switch fabrics, and storage products that incorporate the latest state-of-the art components with embedded proprietary software. Such products and systems allow us to offer high-end solutions to be integrated into edge platforms in our target markets. The global increase in load on cloud infrastructure and increase in AI applications are the primary factors driving the growth of the edge computing market. We market our products to manufacturers of automated equipment used for medical, industrial, and military applications. Our customer applications often require connection to a wide array of data sources and sensors, ultra-fast processing power, and the ability to quickly access and store large and ever-growing data sets at their physical location (rather than in the cloud). This equipment requires datacenter class performance optimized for deployment at the edge in challenging environments. Many of these edge applications have unique requirements, including special and compact form factors ruggedized for harsh conditions, which cannot be accommodated by traditional controlled air-conditioned datacenters. We believe that we are uniquely positioned as a specialized provider to address the needs of this market, providing custom servers, data acquisition platforms, compute accelerators, solid-state storage arrays, and system I/O expansion systems. Our systems also offer industry leading capabilities that occupy less physical space and require less power consumption. We deliver this high-end technology to our customers through the sale of equipment and embedded software. Components of Results of Operations Revenue The Company's revenues are recognized in accordance with ASC 606, Revenue from Contracts with Customers. Revenue is primarily generated from the sale of computer hardware and engineering services. The Company's performance obligations are satisfied over time as work is performed or at a point in time. Revenues on certain fixed-price contracts where we provide engineering services, prototypes, and completed products are recognized over time as the Company progresses toward fulfilling its performance obligations. The majority of the Company’s revenue is recognized at that point in time when products ship and control is deemed to be transferred to the customer. The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied. 24 Cost of revenue Cost of revenue primarily consists of costs of materials, costs paid to third-party contract manufacturers (which may include the costs of components), and personnel costs associated with manufacturing and support operations. Personnel costs consist of wages, bonuses, benefits, and stock-based compensation expenses. Cost of revenue also includes freight, allocated overhead costs and inventory write-offs and changes to our inventory and warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. Operating expenses Our operating expenses consist of general and administrative, sales and marketing, and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs. General and Administrative General and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, and fees for third-party professional services, as well as certain shared expenses which are allocated to general and administrative expense. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in growing the business. Legal Settlement Legal settlement consists of the Company's obligations under the settlement agreement term sheet entered into with Disguise Systems Limited and Disguise Technologies Limited. Marketing and Selling Marketing and Selling expense consists primarily of employee compensation and related expenses for marketing and sales functions, sales commissions, marketing programs, travel, and entertainment expenses, as well as certain shared expenses which are allocated to marketing and selling expense. Marketing programs consist of advertising, tradeshows, events, corporate communications, and brand-building activities. We expect marketing and selling expenses to increase in absolute dollars as we expand our sales force, increase marketing resources, and further develop sales channels. Research and Development Research and development expense consists primarily of employee compensation and related expenses for research and development functions, certain prototype expenses, depreciation associated with assets acquired for research and development, third-party engineering and contractor support costs, as well as certain shared expenses which are allocated to research and development expense. We expect variability in our research and development expenses due to the timing of new product development and introductions. Other Income (Expense), net Other income (expense), net consists of miscellaneous income and expense associated with activities outside of our core business, including interest income on our investment balances. Provision for Income Taxes Provision for income taxes consists of estimated income taxes due to the United States, as well as state tax authorities in jurisdictions in which we conduct business, along with the change in our deferred income tax assets and liabilities. (Loss) income from discontinued operations Income from discontinued operations consists of income from our Bressner Technologies subsidiary, which was sold on December 30, 2025. Income from discontinued operations also includes the gain recognized on the sale, as well as post-closing adjustments for net working capital, cash, and indebtedness. 25 Results of Operations The following tables set forth our results of operations for the three and six month periods ended June 30, 2026 and 2025, presented in dollars and as a percentage of revenue, respectively. For the Three Months Ended June 30, For the Six Months Ended June 30, 2026 2025 2026 2025 Revenue: Product $ 8,405,014 $ 5,375,709 $ 15,469,262 $ 10,172,145 Customer funded development 943,537 385,002 1,948,900 795,376 9,348,551 5,760,711 17,418,162 10,967,521 Cost of revenue: Product 4,994,499 3,127,961 8,630,081 5,615,780 Customer funded development 703,014 250,879 969,484 600,661 5,697,513 3,378,840 9,599,565 6,216,441 Gross profit 3,651,038 2,381,871 7,818,597 4,751,080 Operating expenses: General and administrative 2,453,864 1,907,425 4,898,609 3,815,809 Legal settlement 6,250,000 - 6,250,000 - Marketing and selling 1,765,955 1,658,753 3,342,917 3,265,629 Research and development 853,100 1,362,070 1,670,139 2,567,212 Total operating expenses 11,322,919 4,928,248 16,161,665 9,648,650 Loss from operations (7,671,881 ) (2,546,377 ) (8,343,068 ) (4,897,570 ) Other income (expense), net: Interest income 314,690 50,296 610,828 123,362 Other income, net 37,532 21,930 49,993 20,663 Total other income, net 352,222 72,226 660,821 144,025 Loss before income taxes (7,319,659 ) (2,474,151 ) (7,682,247 ) (4,753,545 ) Provision for income taxes - - - - Loss from continuing operations (7,319,659 ) (2,474,151 ) (7,682,247 ) (4,753,545 ) Income (loss) from discontinued operations, net of income taxes - 453,421 (157,274 ) 715,181 Net loss (7,319,659 ) (2,020,730 ) (7,839,521 ) (4,038,364 ) 26 For the Three Months Ended June 30, For the Six Months Ended June 30, 2026 2025 2026 2025 Revenue: Product 89.9 % 93.3 % 88.8 % 92.7 % Customer funded development 10.1 % 6.7 % 11.2 % 7.3 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue: Product 53.4 % 54.3 % 49.5 % 51.2 % Customer funded development 7.5 % 4.4 % 5.6 % 5.5 % 60.9 % 58.7 % 55.1 % 56.7 % Gross profit 39.1 % 41.3 % 44.9 % 43.3 % Operating expenses: General and administrative 26.2 % 33.1 % 28.1 % 34.8 % Legal settlement 66.9 % 0.0 % 35.9 % 0.0 % Marketing and selling 18.9 % 28.8 % 19.2 % 29.8 % Research and development 9.1 % 23.6 % 9.6 % 23.4 % Total operating expenses 121.1 % 85.5 % 92.8 % 88.0 % Loss from operations -82.1 % -44.2 % -47.9 % -44.7 % Other income (expense), net: Interest income 3.4 % 0.9 % 3.5 % 1.1 % Other income, net 0.4 % 0.4 % 0.3 % 0.2 % Total other income, net 3.8 % 1.3 % 3.8 % 1.3 % Loss before income taxes -78.3 % -42.9 % -44.1 % -43.3 % Provision for income taxes 0.0 % 0.0 % 0.0 % 0.0 % Loss from continuing operations -78.3 % -42.9 % -44.1 % -43.3 % Income (loss) from discontinued operations, net of income taxes 0.0 % 7.9 % -0.9 % 6.5 % Net loss -78.3 % -35.1 % -45.0 % -36.8 % 27 Comparison of the Three and Six Month Periods Ended June 30, 2026 and 2025 from Continuing Operations: Revenue For the three month period ended June 30, 2026, our total revenue increased $3,587,840, or 62%, as compared to the same period in 2025. This increase was driven by revenue generated from new customers in 2026 and from higher revenue with existing customers as certain programs ramped from prototypes into initial production. Key drivers of the revenue increase included: 1) higher sales to a medical imaging OEM of liquid-cooled server products to support a breast cancer screening application, as the customer moved from initial prototypes in 2025 to production in 2026; 2) sales with a new customer for short-depth server products engineered for military applications onboard naval vessels and aircraft; 3) sales with a new customer for compute products to support autonomous construction and mining equipment; and 4) higher revenue from customer-funded development programs. For the six month period ended June 30, 2026, our total revenue increased $6,450,641, or 59%, as compared to the same period in 2025. This increase was driven by revenue generated from new customers in 2026 and from higher production volume with certain existing customers. Key drivers of the revenue increase included: 1) higher sales to a defense prime customer of data storage products to support the P-8A Poseidon reconnaissance aircraft; 2) higher sales to a medical imaging OEM of liquid-cooled server products to support a breast cancer screening application, as the customer moved from initial prototypes in 2025 to production in 2026; 3) sales with a new customer for short-depth server products engineered for military applications onboard naval vessels and aircraft; and 4) higher revenue from customer-funded development programs. Gross Profit and Gross Margin Gross profit increased $1,269,167, or 53%, for the three months ended June 30, 2026 as compared to the same period in 2025. Gross margin percentage was 39.1% for the three months ended June 30, 2026, as compared to 41.3% for the same period in 2025. The decrease in gross margin percentage was primarily driven by product mix, including a higher volume of customer-funded development programs in the current year period. This was partially offset by more favorable manufacturing absorption due to higher production volume and higher usage of reserved inventory to fulfill customer orders. Gross profit increased $3,067,517, or 65%, for the six months ended June 30, 2026, as compared to the same period in 2025. Gross margin percentage was 44.9% for the six months ended June 30, 2026, as compared to 43.3% for the same period in 2025. The increase in gross margin percentage was primarily driven by engineering efficiencies realized on certain of our customer-funded development programs and more favorable manufacturing absorption due to higher production volume. Operating expenses General and administrative expense General and administrative expense increased $546,439, or 28.6%, for the three months ended June 30, 2026, as compared to the same period in 2025. This increase was primarily attributable to higher stock-based compensation expense due a higher grant date fair value of RSUs expensed in the current year period. The increase was also driven by higher fees associated with increased usage of professional services. General and administrative expense decreased as a percentage of revenue to 26.2% for the three months ended June 30, 2026, as compared to 33.1% for the same period in 2025. General and administrative expense increased $1,082,800, or 28.4%, for the six months ended June 30, 2026, as compared to the same period in 2025. This increase was attributable to higher stock-based compensation expense due to a higher grant date fair value of RSUs expensed in the current year period, as well as higher fees associated with increased usage of professional services. General and administrative expense decreased as a percentage of revenue to 28.1% for the six months ended June 30, 2026, as compared to 34.8% for the same period in 2025. 28 Legal settlement Legal settlement expense for the three and six month periods ended June 30, 2026 consists of the company's obligations under a settlement agreement term sheet entered into with Disguise Systems Limited and Disguise Technologies Limited. Pursuant to the Term Sheet, the Company will, without any admission of wrongdoing or liability, pay or cause to be paid to Disguise a net monetary payment of $6,250,000 US, in a single lump sum payment by the Company, due and owing to Disguise, within thirty (30) days of a fully executed definitive settlement agreement. The value of this settlement was accrued as an expense in the three month period ended June 30, 2026. Marketing and selling expense Marketing and selling expense increased $107,202, or 6.5%, for the three months ended June 30, 2026, as compared to the same period in 2025. This increase was primarily attributable to higher trade show and marketing expenses, as well as higher personnel expenses. Marketing and selling expense decreased as a percentage of revenue to 18.9% for the three months ended June 30, 2026, as compared to 28.8% for the same period in 2025. Marketing and selling expense increased $77,288, or 2.4%, for the six months ended June 30, 2026, as compared to the same period in 2025. This increase was primarily attributable to higher trade show and marketing expenses, as well as higher personnel expenses, partially offset by lower expenses related to demonstration materials. Marketing and selling expense decreased as a percentage of revenue to 19.2% for the six months ended June 30, 2026, as compared to 29.8% for the same period in 2025. Research and development expense Research and development expense decreased $508,970, or 37.4%, for the three months ended June 30, 2026, as compared to the same period in 2025. This decrease was primarily attributable to the deployment of engineering labor onto customer-funded development programs in 2026 and the non-recurrence of certain targeted investments in internal new product development, as well as engineering headcount reductions. Research and development expense decreased as a percentage of revenue to 9.1% for the three months ended June 30, 2026, as compared to 23.6% for the same period in 2025. Research and development expense decreased $897,073, or 34.9%, for the six months ended June 30, 2026, as compared to the same period in 2025. This decrease was primarily attributable to the deployment of engineering labor onto customer-funded development programs in 2026 and the non-recurrence of certain targeted investments in internal new product development, as well as engineering headcount reductions. Research and development expense decreased as a percentage of revenue to 9.6% for the six months ended June 30, 2026, as compared to 23.4% for the same period in 2025. Interest income Interest income increased $264,394 for the three months ended June 30, 2026, as compared to the same period in 2025. This increase is primarily attributable to higher investment and cash balances as a result of: 1) the sale of Bressner completed on December 30, 2025 and 2) the proceeds from the registered direct offering of common stock completed on October 1, 2025. Interest income increased $487,466 for the six months ended June 30, 2026, as compared to the same period in 2025. This increase is primarily attributable to higher investment and cash balances as a result of: 1) the sale of Bressner completed on December 30, 2025 and 2) the proceeds from the registered direct offering of common stock completed on October 1, 2025. 29 Other income (expense), net Other income (expense), for the three months ended June 30, 2026 resulted in net other income of $37,532, as compared to net other income of $21,930 in the same period in 2025, for an increase in net other income of $15,602. This increase was primarily attributable to changes in foreign currency gains and losses, as well as higher rebates. Other income (expense), for the six months ended June 30, 2026 resulted in net other income of $49,993, as compared to net other income of $20,663 in the same period in 2025, for an increase in net other income of $29,330. This increase was primarily attributable to changes in foreign currency gains and losses, as well as higher rebates. (Loss) income from discontinued operations, net of income taxes There was no income or loss from discontinued operations, net of income taxes in the three months ended June 30, 2026. Income from discontinued operations, net of income taxes was $453,421 for the three months ended June 30, 2025. Income in the prior year period resulted from the operations of the Bressner business, which was divested on December 30, 2025. Loss from discontinued operations, net of income taxes was $157,274 in the six months ended June 30, 2026, compared to income of $715,181 for the same period in 2025. The loss in the current year period was due to post-transaction adjustments to the gain on sale of the Bressner business for final net working capital balances. Income in the prior year period resulted from the operations of the Bressner business, which was divested on December 30, 2025. Liquidity and Capital Resources Historically, our primary sources of liquidity have been provided by public and private offerings of our securities and revenues generated from our business operations. In December 2025, we also received cash from the sale of our Bressner subsidiary. As of June 30, 2026, we had total cash and cash equivalents of $17,279,139; short-term investments of $14,128,617; and total working capital of $38,082,133. During the six month period ended June 30, 2026, we had a loss from operations of $8,343,068, with cash used in continuing operating activities of $629,138. During the six month period ended June 30, 2025, we had a loss from operations of $4,897,570, with cash used in continuing operating activities of $2,773,914. During the year ended December 31, 2025, we had a loss from operations related to continuing operations of $3,379,112, with cash used in continuing operating activities of $6,551,087. Our sources of liquidity and cash flows are used to fund ongoing operations, fund research and development projects for new products technologies, and provide ongoing support services for our customers. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our business. In addition, as part of our business strategy, we are evaluating potential acquisitions of businesses, products and technologies or other strategic acquisitions. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, successfully integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. There are multiple risks that could result in economic uncertainty and volatility in the capital markets in the near term and could negatively affect our operations. We intend to continue to monitor the effects of inflation, global supply chain shortages, and general economic conditions, and, if appropriate, we may alter our plans to address such concerns as they may arise. 30 Management’s plans are to focus on acquiring new customer orders, to further grow and expand our business in both commercial and military markets, and to respond to the changing economic landscape by continuing to control hiring and operating costs, conserve cash, and focus on growth and margin expansion. Management is committed to conserving cash and securing debt and/or equity financing, as required, for liquidity to meet our near-term cash requirements. In April 2022, the Company obtained a domestic revolving line of credit of $2,000,000 at Torrey Pines Bank (the "Line of Credit"). To access the Line of Credit, the Company must maintain a minimum cash balance of $2,500,000 with the bank and maintain a maximum debt to tangible net worth of ratio of 1.00. The Line of Credit is also collateralized by the assets of the Company. The Line of Credit matures on September 11, 2026 and is subject to renewal thereafter. No balance was outstanding on either June 30, 2026 or December 31, 2025. Additionally, in August 2023, we filed a new registration statement on Form S-3 (Registration No. 333-274073) with the SEC, which became effective on August 25, 2023, and allows us to offer and sell up to an aggregate of $100,000,000 of our common stock, preferred stock, debt securities, warrants to purchase our common stock, preferred stock or debt securities, subscription rights to purchase our common stock, preferred stock or debt securities and/or units consisting of some or all of these securities, in any combination, together or separately, in one or more offerings, in amounts, at prices and on the terms that we will determine at the time of the offering and which will be set forth in a prospectus supplement and any related free writing prospectus. In the event that we need additional financing, we may choose to consummate an offering of our securities under the registration statement on S-3 in order to raise capital. On September 29, 2025, the Company entered into a Securities Purchase Agreement with certain institutional investors, pursuant to which the Company agreed to issue and sell to the investors in a registered direct offering 2,500,000 shares of the Company's common stock, par value $0.0001 per share. The common stock was sold pursuant to a prospectus supplement, filed October 1, 2025, supplementing the Registration Statement on Form S-3. Net proceeds of the offering were $11,565,146, which is comprised of gross proceeds of $12,500,000 less offering expenses of $934,854. The offering closed on October 1, 2025. Management believes that we have sufficient liquidity to satisfy our anticipated working capital requirements for our ongoing operations and obligations for at least the next twelve months. However, there can be no assurance that management’s efforts will be effective or the forecasted cash flows will be achieved. Furthermore, we will continue to evaluate our capital expenditure needs based upon various factors, including but not limited to, our sales from operations, growth rate, the timing and extent of spending to support development efforts, the expansion of our sales and marketing efforts, the timing of new product introductions, and the continuing market acceptance of our products and services. The following table summarizes our cash flows for the six month periods ended June 30, 2026 and 2025: For the Six Months Ended June 30, Cash flows: 2026 2025 Net cash used in continuing operating activities $ (629,138 ) $ (2,773,914 ) Net cash (used in) provided by continuing investing activities $ (14,300,749 ) $ 2,128,105 Net cash (used in) provided by continuing financing activities $ (1,008,676 ) $ 697,303 Net cash (used in) provided by discontinued operations $ (157,274 ) $ 1,152,482 Cash from Continuing Operating Activities During the six month period ended June 30, 2026, we used $629,138 in cash from continuing operating activities, compared to cash used in continuing operating activities of $2,773,914 for the same period in 2025. Net cash used in continuing operating activities during the six month period ended June 30, 2026 was the result of three components: 1) net loss from continuing operations of $7,682,247; 2) net adjustments to net loss from 31 continuing operations for non-cash items of $1,831,691, of which the largest components were stock-based compensation expense of $1,516,341 and depreciation expense of $366,616; and 3) an decrease in net operating assets associated with continuing operations of $5,221,418. The decrease in net operating assets associated with continuing operations was primarily driven by an an accrual of $6,250,000 for a legal settlement, an increase in accounts payable due to the timing of payment to suppliers for inventory material, and a decrease in accounts receivable due to collections of billings from 2025. This was partially offset by increases in inventory to support deliveries planned in the second half of 2026. Our ability to generate cash from operations in future periods will depend in large part on our profitability, the rate and timing of collections of our accounts receivable, our inventory turns, and our ability to manage other areas of working capital, including accounts payable and accrued expenses. Cash from Continuing Investing Activities During the six month period ended June 30, 2026, the Company used cash of $14,300,749 in continuing investing activities, as compared to $2,128,105 of cash provided by continuing investing activities during the same period in 2025. This change is primarily attributable to $14,175,356 of purchases of marketable securities during the six months ended June 30, 2026, as compared to $2,184,302 of sales of marketable securities in the same period in 2025. Continuing Financing Activities During the six month period ended June 30, 2026, the Company used $1,008,676 in cash from continuing financing activities, compared to $697,303 of cash generated from continuing financing activities for the same period in 2025. The change was due to higher payments of withholding taxes on stock-based awards, driven primarily by a higher share price on the vesting date for employee restricted stock units which vested in the period. Additionally, the Company received lower proceeds from the exercise of stock options in the six month period ended June 30, 2026 as compared to the same period in 2025, due to a lower number of options exercised in the period. Known Trends or Uncertainties With our shifted focus to the development and sale of edge computing products, we have significantly increased our efforts to penetrate the military and defense sectors in particular. These sectors typically have protracted sales cycles, significant contracting requirements, and multi-year deliverables. Our pipeline is generally affected by the procurement habits and timing of the military and defense sector. Tariffs and the threat of tariffs, ongoing military conflicts, macroeconomic conditions and policy, inflation and the risk of inflation, and uncertainty about the timing and substance of U.S. government budgets and policy actions have contributed to uncertainty and capital markets volatility overall, which could negatively impact our operations. We have received notifications from certain of our suppliers of extended lead times for certain components used in our products. In late 2025, a global shortage of certain memory products resulting from datacenter build-out demand led to significant increases in lead times, pricing volatility, and significant price increases. We have worked with our suppliers to secure availability of supply, including through the negotiation of long-term agreements. While we attempt to pass on component cost increases to our customers, our ability to do so is dependent upon many factors, including market conditions for the Company's products. 32 Inflation We have recently experienced and continue to experience effects from inflation. Although the Company attempts to pass on increases in raw material, labor, energy and fuel-related costs to our customers, the Company’s ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures, and market conditions for the Company’s products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be fully recovered. These increasing costs are being aggressively managed by the Company and actions are being taken to minimize the impact to the Company. Inflation affects the Company’s manufacturing costs, distribution costs, and operating expenses. U.S. Government Budget Environment 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. Our business and results of operations could be impacted by future disruptions to U.S. government operations, and these impacts could include delays in contract awards and new program starts. A prolonged shutdown could delay new awards and funding for defense-related projects involving U.S. government agencies and prime contractor customers. These delays could temporarily affect the timing of our revenue recognition, increase our working capital requirements, or reduce near-term liquidity. Off balance sheet arrangements We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not consolidated in the financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose entities. Stockholder transactions See Note 9 to the accompanying consolidated financial statements for a discussion regarding our stockholder transactions for the relevant periods. Critical accounting policies and estimates In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and our historical experience. Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2025. Interest rate risk Our exposure to interest rate risk is primarily associated with borrowing on revolving lines of credit denominated in U.S. dollars. We are exposed to the impact of interest rate changes primarily through our borrowing activities for our variable rate borrowings. We did not have any outstanding balances on our line of credit as of June 30, 2026 or December 31, 2025. 33 Concentration of credit risk At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation (“SIPC”), both of which provide basic deposit coverage with limits up to $250,000 per owner. As of June 30, 2026, the Company had $2,836,333 in cash in our accounts that exceeded the insurance limits. The Company has not experienced any losses in these accounts and believes that the financial institutions at which such amounts are held are stable; however, no assurances can be provided as to such. We provide credit to our customers in the normal course of business. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary. Foreign currency risk We operate primarily in the United States. Foreign sales of products and services are primarily denominated in U.S. dollars. We have previously conducted business outside the United States, primarily through Bressner, our former foreign subsidiary in Germany, which was sold on December 30, 2025 and is classified as discontinued operations. Bressner's business was 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 have been subject to exposure from changes in the exchange rates of local currencies. Foreign currency transaction gains and losses associated with continuing operations are recorded in other income (expense), net in the consolidated statements of operations. Foreign currency transaction gains and losses associated with discontinued operations are recorded in income from discontinued operations, net of income taxes in the consolidated statements of operations. The functional currency for the Bressner business was the Euro. Transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, monetary assets and liabilities are remeasured using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Consequently, changes in the exchange rates of the currencies may impact the translation of the foreign subsidiaries’ statements of operations into U.S. dollars, which may in turn affect our consolidated statement of operations. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in the consolidated balance sheets. With the divestiture of the Bressner business in 2025, cumulative currency translation adjustments associated with our Bressner business were released from accumulated other comprehensive income (loss) and recorded within income from discontinued operations, net of income taxes. Non-GAAP Financial Measures Adjusted EBITDA We believe that the use of adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, is helpful for an investor to assess the performance of the Company. The Company defines adjusted EBITDA as income (loss) before interest, taxes, depreciation, amortization, acquisition expenses, impairment of long-lived assets, financing costs, fair value adjustments from purchase accounting, stock-based compensation expense and expenses related to discontinued operations. Adjusted EBITDA also excludes the impact of the legal settlement agreement. Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles in the United States, or GAAP. Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company’s non-cash operating expenses, we believe that providing a non-GAAP financial measure that excludes non-cash and non-recurring expenses allows for meaningful comparisons between our core business operating results and those of other companies, as well as providing us with an important tool for financial and operational decision making and for evaluating our own core business operating results over different periods of time. 34 Our adjusted EBITDA measure may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. Our adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to operating income or as an indication of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider adjusted EBITDA to be a substitute for, or superior to, the information provided by GAAP financial results. Adjusted EBITDA associated with our continuing operations for the three and six month periods ended June 30, 2026 and 2025 was as follows: For the Three Months Ended June 30, For the Six Months Ended June 30, 2026 2025 2026 2025 Loss from continuing operations $ (7,319,659 ) $ (2,474,151 ) $ (7,682,247 ) $ (4,753,545 ) Legal settlement 6,250,000 - 6,250,000 - Depreciation 182,465 195,657 366,616 390,437 Amortization of right-of-use assets net of change in operating lease liability (4,946 ) (2,033 ) (10,153 ) (4,065 ) Stock-based compensation expense 861,213 483,350 1,516,341 1,061,755 Interest income (314,690 ) (50,296 ) (610,828 ) (123,362 ) Adjusted EBITDA $ (345,617 ) $ (1,847,473 ) $ (170,271 ) $ (3,428,780 ) Adjusted EBITDA associated with discontinued operations for the three and six month periods ended June 30, 2026 and 2025 was as follows: For the Three Months Ended June 30, For the Six Months Ended June 30, 2026 2025 2026 2025 Income (loss) from discontinued operations, net of income taxes $ - $ 453,421 $ (157,274 ) $ 715,181 Post-closing adjustments to gain on sale - - 157,274 - Depreciation - 31,504 - 60,572 Amortization of right-of-use assets net of change in operating lease liability - 53,909 53,909 Stock-based compensation expense - 32,424 - 66,580 Interest expense - 13,690 - 27,876 Interest income - - - 555 Provision for income taxes - 224,188 - 333,654 Adjusted EBITDA $ - $ 809,137 $ - $ 1,258,327 35 Consolidated adjusted EBITDA from continuing and discontinued operations for the three and six month periods ended June 30, 2026 and 2025 was as follows: For the Three Months Ended June 30, For the Six Months Ended June 30, 2026 2025 2026 2025 Net loss $ (7,319,659 ) $ (2,020,730 ) $ (7,839,521 ) $ (4,038,364 ) Legal settlement 6,250,000 - 6,250,000 - Post-closing adjustments to gain on sale - - 157,274 - Depreciation 182,465 227,161 366,616 451,009 Amortization of right-of-use assets net of change in operating lease liability (4,946 ) 51,876 (10,153 ) 49,844 Stock-based compensation expense 861,213 515,774 1,516,341 1,128,335 Interest expense - 13,690 - 27,876 Interest income (314,690 ) (50,296 ) (610,828 ) (122,807 ) Provision for income taxes - 224,188 - 333,654 Adjusted EBITDA $ (345,617 ) $ (1,038,336 ) $ (170,271 ) $ (2,170,453 ) Adjusted EPS Adjusted EPS excludes the impact of certain items, and therefore, has not been calculated in accordance with GAAP. We believe that exclusion of certain selected items assists in providing a more complete understanding of our underlying results and trends and allows for comparability with our peer company index and industry. We use this measure along with the corresponding GAAP financial measures to manage our business and to evaluate our performance compared to prior periods and the marketplace. The Company defines non-GAAP income (loss) as income or (loss) before amortization, stock-based compensation, expenses related to discontinued operations, impairment of long-lived assets and non-recurring acquisition costs. Non-GAAP income (loss) also excludes the impact of the legal settlement agreement. Adjusted EPS expresses adjusted income (loss) on a per share basis using weighted average diluted shares outstanding. Adjusted EPS is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses similar to the adjusted income from continuing operations and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring. 36 The following table reconciles loss from continuing operations to non-GAAP adjusted net income (loss) from continuing operations and basic and diluted earnings per share for the three and six month periods ended June 30, 2026 and 2025: For the Three Months Ended June 30, For the Six Months Ended June 30, 2026 2025 2026 2025 Loss from continuing operations $ (7,319,659 ) $ (2,474,151 ) $ (7,682,247 ) $ (4,753,545 ) Legal settlement 6,250,000 - 6,250,000 - Stock-based compensation expense 861,213 483,350 1,516,341 1,061,755 Non-GAAP net (loss) income from continuing operations $ (208,446 ) $ (1,990,801 ) $ 84,094 $ (3,691,790 ) Non-GAAP net (loss) income from continuing operations per share: Basic $ (0.01 ) $ (0.09 ) $ 0.00 $ (0.17 ) Diluted $ (0.01 ) $ (0.09 ) $ 0.00 $ (0.17 ) Weighted average common shares outstanding: Basic 24,841,334 21,687,808 24,761,553 21,534,925 Diluted 24,841,334 21,687,808 25,920,480 21,534,925 The following table reconciles income from discontinued operations to non-GAAP adjusted net income from discontinued operations and basic and diluted earnings per share for the three and six month periods ended June 30, 2026 and 2025: For the Three Months Ended June 30, For the Six Months Ended June 30, 2026 2025 2026 2025 Income (loss) from discontinued operations, net of income taxes $ - $ 453,421 $ (157,274 ) $ 715,181 Post-closing adjustments to gain on sale - - 157,274 - Stock-based compensation expense - 32,424 - 66,580 Non-GAAP net income from discontinued operations $ - $ 485,845 $ - $ 781,761 Non-GAAP net income from discontinued operations per share: Basic $ - $ 0.02 $ - $ 0.04 Diluted $ - $ 0.02 $ - $ 0.04 Weighted average common shares outstanding: Basic 24,841,334 21,687,808 24,761,553 21,534,925 Diluted 25,999,867 21,951,955 25,920,480 22,022,039 37 The following table reconciles net income to non-GAAP adjusted net income and basic and diluted earnings per share for the three and six month periods ended June 30, 2026 and 2025: For the Three Months Ended June 30, For the Six Months Ended June 30, 2026 2025 2026 2025 Net loss $ (7,319,659 ) $ (2,020,730 ) $ (7,839,521 ) $ (4,038,364 ) Legal settlement 6,250,000 - 6,250,000 - Post-closing adjustments to gain on sale - - 157,274 - Stock-based compensation expense 861,213 515,774 1,516,341 1,128,335 Non-GAAP net (loss) income $ (208,446 ) $ (1,504,956 ) $ 84,094 $ (2,910,029 ) Non-GAAP net (loss) income per share: Basic $ (0.01 ) $ (0.07 ) $ 0.00 $ (0.14 ) Diluted $ (0.01 ) $ (0.07 ) $ 0.00 $ (0.14 ) Weighted average common shares outstanding: Basic 24,841,334 21,687,808 24,761,553 21,534,925 Diluted 24,841,334 21,687,808 25,920,480 21,534,925 Free Cash Flow Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by or used in operating activities, less capital expenditures for property and equipment. We believe free cash flow provides investors with an important perspective on cash available for investments and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. We believe that trends in our free cash flow can be valuable indicators of our operating performance and liquidity. Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. Investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash. The following table reconciles cash provided by or used in continuing operating activities to free cash flow for the six month periods ended June 30, 2026 and 2025: For the Six Months Ended June 30, Cash flow: 2026 2025 Net cash used in continuing operating activities $ (629,138 ) $ (2,773,914 ) Capital expenditures in continuing operations (125,393 ) (56,197 ) Free cash flow from continuing operations $ (754,531 ) $ (2,830,111 ) The following table reconciles cash provided by discontinued operating activities to free cash flow for the six month periods ended June 30, 2026 and 2025: 38 For the Six Months Ended June 30, Cash flow: 2026 2025 Net cash (used in) provided by discontinued operating activities (157,274 ) $ 1,269,614 Capital expenditures in discontinued operations - (117,132 ) Free cash flow from discontinued operations (157,274 ) 1,152,482 39