ONE STOP SYSTEMS, INC. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter report. OSS designs and sells specialized high-performance computing systems, including custom servers, GPU accelerators, flash storage arrays and PCIe expansion products.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $37.0 million | $27.5 million |
| Gross profit / margin | $11.3 million / 30.6% | $8.7 million / 31.5% |
| Operating loss | $3.2 million | $0.45 million |
| Net loss | $1.6 million | $0.22 million |
| Net income (loss) attributable to common stockholders | $(1.14) million | $0.10 million |
| Net cash used in operating activities | $3.91 million | $0.38 million |
| Capital expenditures | $0.62 million | $0.43 million |
| Cash and cash equivalents at year-end | $2.27 million | $0.19 million |
| Working capital at year-end | $11.08 million | $0.10 million |
Revenue grew 34.5%. Acquisitions contributed substantially: Bressner and CDI together accounted for approximately $4.5 million of reported revenue after their respective acquisition dates. OSS’s existing business also benefited from higher airborne military flash-array sales and media-and-entertainment OEM sales. Gross margin declined overall, although OSS reports its standalone gross margin improved to 33.7%; SkyScale had negative gross margin, and CDI’s reported acquisition-period gross margin was 0.9%.
Operating expenses rose to $14.5 million from $9.1 million, including higher public-company, acquisition, R&D and selling costs, as well as SkyScale dissolution charges. Adjusted EBITDA, a non-GAAP measure, was $0.80 million versus $0.98 million. Free cash flow, defined by the company as operating cash flow less capital expenditures, was negative $4.53 million versus negative $0.81 million.
At year-end, current assets were $20.30 million and current liabilities $9.22 million. Total liabilities were $9.48 million. Debt comprised $0.42 million drawn on Bressner bank lines and $1.42 million of Bressner term loans; OSS’s pre-acquisition borrowings were repaid after its February 2018 IPO. The filing reports $1.16 million of notes payable due within one year. Operating lease commitments totaled $2.71 million.
Material changes and significant events
- OSS completed its IPO in February 2018, raising $19.5 million gross and approximately $16.1 million net after total issuance costs reflected in equity. Proceeds were used in part to repay prior debt and fund acquisitions.
- OSS acquired Concept Development Inc. (CDI) in August for cash and stock consideration, and Bressner Technology GmbH in October for cash and stock consideration. Purchase-price allocations remained preliminary at filing.
- The company began dissolving SkyScale, a 50/50 HPC cloud-services joint venture, citing competitive changes and pricing pressure. Related 2018 charges totaled $705,309, including receivable write-offs and estimated wind-down costs.
- Revenue mix and operating comparisons are not fully comparable because CDI and Bressner were consolidated only from their acquisition dates.
Outlook, risks and other notable items
Management stated that existing cash and expected operating cash flows should cover anticipated requirements for at least 12 months, and disclosed up to $4 million of director funding commitments if needed. This is not formal earnings guidance. Management expects to invest in product development, sales and marketing, facility improvements and an ERP system; the ERP project was expected to cost approximately $700,000. Management expects adoption of the new revenue standard to have no significant revenue impact and preliminarily expects the new lease standard to increase reported assets and liabilities significantly.
Key risks include customer concentration, uneven order timing, competition and pricing pressure, dependence on a limited number of suppliers, product obsolescence and inventory risk, and execution and integration risks from acquisitions. Two customers accounted for approximately 61% of OSS standalone net sales in 2018; CDI and Bressner also had significant customer concentration during their partial-year ownership periods. The company also identifies foreign-exchange, export-control, cybersecurity, intellectual-property and liquidity risks.
Management concluded disclosure controls and internal control over financial reporting were effective as of year-end, but excluded recently acquired CDI and Bressner from its assessment. The company reported remediation of material weaknesses identified at December 31, 2017; the independent auditor did not attest to internal controls because of OSS’s emerging-growth-company exemption. The auditor issued an unqualified opinion on the consolidated financial statements. No material pending legal proceedings were identified.
Investor verification points
- Reconcile acquisition-period Bressner revenue: the results table reports $3.78 million, while the acquisition note reports $3.85 million.
- Assess whether operating cash use, receivables growth and inventory levels are manageable, and whether the $4 million director commitments are available on acceptable terms.
- Review customer concentration and the sustainability and margins of major military and media-and-entertainment programs.
- Track integration of CDI and Bressner, final purchase-price allocations, goodwill and intangible-asset recoverability, and the performance of acquired businesses.
- Confirm debt maturities, variable-rate exposure, and the effect of lease accounting and planned ERP and facility spending on liquidity.
- Distinguish GAAP losses and cash flows from management’s adjusted EBITDA and free-cash-flow measures; these non-GAAP measures may not be comparable with other companies’ calculations.