One Stop Systems, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. OSS designs and sells specialized high-performance computing and storage systems, with a strategic focus on edge AI “Transportables,” including military and industrial applications. Its reportable segments are OSS and OSS Europe.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $16.78 million | $17.05 million |
| Gross profit / margin | $5.07 million / 30.2% | $5.14 million / 30.1% |
| Operating income (loss) | $(196,348) | $650,131 |
| Net income (loss) | $(400,512) | $579,234 |
| Diluted EPS | $(0.02) | $0.03 |
| Operating cash flow | $23,964 | $(5.02) million |
| Capital expenditures / free cash flow | $85,085 / $(61,121) | $85,841 / $(5.10) million |
- Operating expenses rose 17.3% to $5.27 million, or 31.4% of revenue, from $4.49 million, or 26.3%. Higher G&A and sales and marketing costs more than offset lower R&D expense.
- Adjusted EBITDA, a non-GAAP measure, was $529,911 versus $1.40 million. Non-GAAP net income was $89,505 versus $977,871; these measures exclude specified expenses and are not substitutes for GAAP results.
- At March 31, cash and cash equivalents were $3.47 million and short-term investments were $9.22 million. Working capital was $34.76 million. Current assets totaled $47.88 million against current liabilities of $13.12 million.
- Total notes payable were $3.20 million, of which $3.00 million was current; the debt was principally OSS Europe term loans. No balances were outstanding on the domestic $2.0 million revolver or OSS Europe’s credit lines. The domestic revolver was renewed after quarter-end, through June 11, 2024, subject to a minimum $4.0 million cash-and-investments balance.
- Inventory increased to $23.64 million from $20.78 million at year-end 2022. Non-cancellable inventory purchase orders totaled $12.10 million.
Material changes versus Q1 2022
- Revenue declined 1.6%, but the mix shifted: OSS revenue fell 18.4% to $8.63 million, mainly due to lower shipments to its media and entertainment customer; OSS Europe revenue grew 26.0% to $8.15 million, attributed to project work, more smaller accounts, and available inventory.
- Overall gross margin was nearly unchanged. OSS margin improved to 36.3% from 35.7%, while OSS Europe improved to 23.8% from 21.0%.
- Results shifted from operating and net income to losses as operating expenses increased. The tax provision was $261,502 despite a pretax loss of $139,010.
- Operating cash flow improved substantially from a $5.02 million outflow to near breakeven, primarily reflecting lower working-capital use. Cash increased to $3.47 million from $3.11 million at December 31, 2022.
Outlook, management commentary, and risks
- No specific revenue or earnings guidance is provided. Management said it believes liquidity is sufficient for anticipated requirements for at least the next 12 months, while noting that forecasts and cost-reduction efforts may not be achieved and financing may be needed.
- Management is redirecting the U.S. business toward AI Transportables, particularly military applications; plans include cost control, cash conservation, margin improvement, and new AI-compute products. The company reduced its workforce by 12 employees and made organizational changes in Q1.
- CEO David Raun announced he would step down when a successor is appointed. An April 2023 agreement provides for a prorated retention bonus equal to 50% of base salary and specified potential RSU and severance benefits. The CEO search was ongoing at the filing date.
- Risks cited include supply shortages, higher component and transport costs, longer lead times, inflation, recession concerns, geopolitical uncertainty, and banking-system disruption. Management says these factors make forecasting difficult. The company also reported cash above deposit-insurance limits, including $1.36 million in U.S. accounts; OSS Europe cash is subject to debt covenants that prevent use by the parent.
- OSS reported reduced demand for ruggedized media and entertainment equipment as a major customer shifts toward cloud and lower-cost commodity solutions. One customer represented approximately 29% of Q1 revenue. Customer concentration, supply availability, and inventory levels warrant attention.
- Management reported no material adverse expectation regarding ordinary-course legal matters and no material changes in internal control over financial reporting. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether OSS Europe’s revenue growth and improved margin can continue, and whether they offset the decline in the U.S. segment and media and entertainment demand.
- Whether the elevated inventory balance and $12.10 million of non-cancellable purchase commitments convert into sales without further obsolescence or reserve charges.
- Whether operations generate sustained positive cash flow, particularly given the quarter’s near-breakeven operating cash flow and management’s 12-month liquidity assessment.
- The timing and cost of the CEO transition, related retention and severance benefits, and the status of the successor search.
- Upcoming repayment or refinancing of the $3.00 million current debt balance, revolver availability conditions, and restrictions on OSS Europe cash.
- The impact of customer concentration, supply-chain constraints, banking access, and the media customer’s transition to cloud-based or lower-cost equipment.