One Stop Systems, Inc. — Q2 2022 Form 10-Q
Business and period. Unaudited results for the three and six months ended June 30, 2022, compared with the same 2021 periods. OSS designs and manufactures specialized high-performance computing systems for edge deployments; its two reportable segments are OSS and German subsidiary Bressner. The filing cautions that interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $18.30 million | $14.91 million | $35.36 million | $28.22 million |
| Gross profit / margin | $5.20 million / 28.4% | $4.65 million / 31.2% | $10.34 million / 29.2% | $9.09 million / 32.2% |
| Operating income / margin | $0.40 million / 2.2% | $0.52 million / 3.5% | $1.05 million / 3.0% | $0.79 million / 2.8% |
| Net income | $0.32 million | $1.70 million | $0.90 million | $1.74 million |
| Operating cash flow | Not stated by quarter | $(7.58) million | $2.79 million |
- Q2 revenue rose 22.8%; six-month revenue rose 25.3%. Growth came from both OSS and Bressner, including increased shipments to a media and entertainment customer and Bressner sales supported by strategic inventory purchases.
- Gross margin fell 2.8 percentage points in Q2 and 3.0 points for the first half. OSS cited product mix and material costs; Bressner cited higher material, transportation, and fuel costs and inflation.
- Q2 net income declined year over year; six-month net income also declined. Comparisons were affected by $1.51 million of PPP loan and interest forgiveness recognized as other income in 2021. Q2 2022 other income was nearly zero, versus $1.52 million in Q2 2021.
- At June 30, cash and equivalents were $2.87 million and short-term investments were $11.51 million; working capital was $32.91 million. Cash and investments at Bressner of $2.64 million were restricted from use by the parent under debt covenants.
- Operating cash use of $7.58 million reflected increased working capital, particularly accounts receivable and inventory. Receivables were $10.01 million, up from $5.09 million at year-end; inventory was $20.47 million, up from $12.28 million.
- Debt totaled $3.66 million, all at Bressner: $2.87 million current and $0.80 million long-term. Several term loans mature in August–December 2022; the remaining $0.80 million is due in 2024. The prior senior secured convertible note was converted into 1,036,365 common shares in March 2022.
- A $2 million domestic revolving credit line was obtained in April; it was undrawn at quarter-end and requires at least $4 million in cash and investments to access. Operating lease liabilities totaled $1.19 million.
Changes, outlook, and risks
- Operating cash flow changed from $2.79 million provided in the first half of 2021 to $7.58 million used in the first half of 2022; free cash flow, a non-GAAP measure, was $(7.72) million versus $2.59 million.
- Six-month adjusted EBITDA, a non-GAAP measure, was $2.59 million versus $2.45 million. The 2021 result included the PPP forgiveness, which the company excludes in its reconciliation.
- Management said supply constraints, component shortages, longer lead times, rising prices, inflation, and transportation costs are affecting operations. The company increased inventory to secure supply and pricing; non-cancellable purchase orders were approximately $9.72 million.
- Management cited recession risk, the Russia-Ukraine conflict, COVID-19 effects, interest-rate increases, and customer uncertainty as factors that make forecasting difficult. Customers could delay or reduce spending, seek concessions, or extend payment terms. Management plans to control costs, conserve cash, strengthen margins, and improve execution; it believes available liquidity is sufficient for at least the next 12 months, while noting forecasts and cost reductions may not be achieved.
- No specific revenue or earnings guidance was provided. The company noted potential future need for additional financing if operating cash flows are insufficient; availability and terms are not assured.
- Revenue concentration is material: one customer represented approximately 35% of Q2 revenue, and two customers together represented approximately 60% of receivables at quarter-end. Non-U.S. customers accounted for approximately 78% of Q2 revenue.
- Management reported no material effect from pending legal matters expected and concluded disclosure controls were effective at a reasonable assurance level.
Investor verification points
- Track whether margin pressure from product mix, inflation, and supply-chain costs persists and whether the company can pass higher costs to customers.
- Check conversion of elevated inventory and receivables into shipments and cash, including collection timing and inventory obsolescence risk.
- Review maturities and repayment or refinancing of Bressner’s loans due in 2022, and the conditions governing access to the domestic credit line.
- Assess exposure to major customers and suppliers, including the concentrated receivables balance and reliance on strategic component purchases.
- Distinguish recurring operating performance from prior-year PPP forgiveness and other unusual items; review non-GAAP reconciliations alongside GAAP results.
- Monitor the stated 12-month liquidity assessment against actual cash use, restricted subsidiary cash, and any need for new financing.