ONE STOP SYSTEMS, INC. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 14, 2020. OSS designs and sells high-performance computing systems and components, including customized computers and flash arrays, in-flight entertainment and connectivity systems, and value-added reseller products. Results include OSS, CDI and Bressner.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $13.36 million | $10.06 million |
| Gross profit / margin | $3.40 million / 25.4% | $2.41 million / 24.0% |
| Operating loss | $1.51 million | $2.03 million |
| Net loss | $1.10 million | $0.94 million |
| Net loss per share, basic and diluted | $0.07 | $0.07 |
| Cash used in operating activities | $0.72 million | $0.20 million |
| Capital expenditures | $0.20 million | $0.80 million |
| Free cash flow (non-GAAP) | $(0.92) million | $(1.00) million |
Revenue rose 32.8% year over year. Gross margin improved 1.4 percentage points; operating loss narrowed, but net loss increased as the income tax benefit fell to $0.47 million from $1.10 million and interest expense increased. Adjusted EBITDA, a non-GAAP measure, was a loss of $0.95 million versus a loss of $1.42 million.
At March 31, cash and cash equivalents were $3.04 million, working capital was $11.94 million, and current liabilities were $10.04 million. Total reported debt, including related-party and foreign term loans, was approximately $1.66 million net of debt discount; Bressner’s revolving credit lines had no balances outstanding. Cash declined from $5.19 million at year-end, and total Q1 cash outflow was $2.13 million.
Material changes versus the prior period
- OSS core revenue increased approximately $2.59 million; Bressner revenue rose $0.39 million and CDI revenue rose $0.32 million. CDI gross margin moved from negative 15.5% to positive 19.7%; OSS core margin declined to 28.1% from 28.7%.
- Operating expenses increased 10.4% to $4.91 million. General and administrative expense rose 23.0%, primarily due to severance accrual for the former CEO; marketing and selling rose 4.5%, while research and development declined 4.6%.
- Interest expense increased to $68,784 from $6,268, primarily reflecting 9.5% notes issued in 2019 and related debt-discount amortization.
- Accounts receivable fell to $9.11 million from $11.67 million, while inventory increased to $8.98 million from $7.37 million. Cash used in operations increased, notwithstanding the receivables reduction.
Outlook, risks and unusual items
- Management stated that COVID-19’s effects on supply chains, demand, operations and results could not yet be estimated. The largest customer, in media and entertainment, was experiencing financial hardship and paying more slowly; OSS provided extended payment terms. One customer represented approximately 27% of Q1 revenue and 59% of receivables at March 31.
- Management reported cost controls including deferred executive and Board compensation, a hiring freeze, reduced overtime and travel, and an April 2020 workforce and cost reduction plan affecting approximately 19% of 115 employees. Estimated 2020 savings: $2.5–$3.0 million.
- Management believed liquidity would cover anticipated requirements for at least 12 months, based on cost reductions, forecasts and potential financing, but cautioned that savings and forecasts may not be achieved and financing may not be available on acceptable terms.
- After quarter-end, OSS issued a $3.0 million face-value senior secured convertible note for $2.7 million cash proceeds after a 10% original issue discount. A further $3.0 million tranche was available subject to conditions. OSS also received a $1.5 million, two-year PPP loan at 1% interest. These are post-quarter events, not Q1 cash or debt balances.
- Steve Cooper was terminated as CEO in February 2020; David Raun became interim CEO. The filing reported no known pending, threatened or unasserted claims and stated that disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Customer collections and credit exposure: reconcile the 59% receivables concentration with the customer’s reported payment difficulties and extended terms.
- Liquidity figures and availability: the filing gives differing Bressner cash amounts ($599,511 in the notes and $504,103 in MD&A); verify the amount restricted from parent-company use and the reported cash totals.
- Convertible-note terms: confirm the conditions and availability of the additional $3.0 million tranche, repayment schedule, conversion and security provisions. The filing describes maturity in 23 months in one section and installments beginning three months after closing in another.
- Execution of the cost plan and 12-month cash forecast, including whether projected $2.5–$3.0 million savings are realized and whether additional financing is needed.
- Inventory recoverability and gross margins, given the inventory build and the company’s reliance on estimates of future demand and obsolescence.