ONE STOP SYSTEMS, INC. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 6, 2020. OSS designs and sells high-performance computing systems and components, with operations including OSS, CDI and German subsidiary Bressner. Results are unaudited.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $11.63 million | $14.89 million | $24.98 million | $24.94 million |
| Gross profit / margin | $3.33 million / 28.6% | $5.41 million / 36.4% | $6.72 million / 26.9% | $7.82 million / 31.4% |
| Operating loss | $0.41 million | $0.98 million | $1.92 million | $3.01 million |
| Net loss | $12,162 | $1.59 million | $1.11 million | $2.54 million |
| Net loss per share, basic and diluted | $0.00 | $0.11 | $0.07 | $0.18 |
| Adjusted EBITDA, non-GAAP | $72,574 | $1.27 million | $(884,502) | $(156,419) |
Q2 revenue fell 21.9% year over year, while first-half revenue was essentially flat. Q2 net loss narrowed substantially, in part reflecting a $441,511 income-tax benefit; first-half operating results also improved, but gross profit and gross margin declined. First-half operating expenses were lower, including because the prior-year period included a $1.70 million goodwill impairment at CDI.
- Cash flow: First-half operating cash use was $2.94 million, versus $1.71 million generated in 2019. Investing cash use was $414,040; financing provided $2.82 million. Free cash flow, a non-GAAP measure, was negative $3.35 million.
- Liquidity: June 30 cash and equivalents were $4.65 million and working capital was $14.38 million. Of reported cash, $677,715 held at Bressner could not be used by its parent under debt covenants.
- Debt: Debt carrying value was $5.83 million at quarter-end, against stated principal of $6.37 million. It included a $3.0 million-face senior secured convertible note issued at a 10% original issue discount, a $1.50 million PPP loan, and other domestic and German borrowings. The balance sheet reports $3.08 million of current debt carrying value.
- Other balance-sheet items: Accounts receivable, net, was $10.45 million; inventory was $8.92 million; total liabilities were $13.01 million and stockholders’ equity was $27.36 million.
Material changes versus prior periods
- Q2 revenue declined mainly because OSS core business sales, particularly media and entertainment and data-storage products, were lower. Bressner revenue increased, while CDI revenue decreased.
- Q2 gross margin contracted 7.8 percentage points. OSS core gross margin fell to 33.7% from 42.9%, largely due to fewer higher-margin military data-storage-unit sales. Bressner margin also declined; CDI margin improved following cost controls.
- First-half revenue was up less than 1%, but gross margin fell 4.5 percentage points. OSS’s first-half revenue declined by about $0.50 million; Bressner growth largely offset that decline.
- First-half operating cash flow moved from positive to negative, reflecting weaker working-capital contribution and lower noncash add-backs, despite a smaller net loss.
Outlook, commentary and risks
- Management expects its April cost-reduction measures—including workforce reductions, a hiring freeze, reduced work week and lower discretionary spending—to save an estimated $2.5–$3.0 million in 2020. No specific revenue or earnings guidance is provided.
- Management believes liquidity is sufficient for at least the next 12 months, based on cost actions and cash-flow forecasts, but cautions that forecasts may not be achieved and external financing may not be available on acceptable terms or at all.
- The initial convertible-note closing generated $2.7 million cash for $3.0 million face value. Up to another $3.0 million was available subject to conditions. Monthly amortization began July 1, 2020; repayment may involve cash or shares, with conversion-price adjustments that could create dilution.
- The company received a $1.50 million PPP loan and management expected most or all of it to be forgiven. Forgiveness was not established in this filing; repayment otherwise was scheduled to begin after the applicable deferral period.
- COVID-19 has reduced demand in affected markets, delayed customer payments and created supply-chain and operating uncertainty. OSS’s largest customer, in media and entertainment, was experiencing financial hardship; the company extended payment terms and reported that the customer was honoring them. Customers representing approximately 56% of trade receivables were individually above 10% of the receivables balance.
- The company reported no known pending, threatened or unasserted legal claims. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Subsequent collections from the largest customer, the aging and collectability of receivables, and the degree of customer concentration.
- Quarter-to-quarter gross-margin trends, particularly recovery in OSS core and Bressner margins and demand for higher-margin military data-storage products.
- Actual cash burn versus management’s forecasts, access to usable cash, and whether the company maintains liquidity through the next 12 months.
- Whether the additional convertible-note tranche was drawn, the note’s amortization and conversion terms, and resulting potential share dilution.
- PPP loan forgiveness status and any repayment obligation, as well as realized savings from the cost-reduction plan.