Business Context and Reporting Period
Company: ONE STOP SYSTEMS, INC. (OSS)
Filing Type: Form 8-K (Current Report)
Date of Report: July 1, 2019
Event: Entry into a Material Definitive Agreement (Item 1.01) and Regulation FD Disclosure (Item 7.01).
Key Financial Metrics and Agreement Terms
This filing details a new Original Equipment Manufacturing and Supply Agreement with Disguise Systems Limited and Disguise Technologies Limited. Key financial terms include:
- Total Minimum Value: Approximately $60,000,000 over the 5-year term.
- Credit Line: The Company will provide the Buyer with a total credit line of $2,500,000.
- Minimum Annual Commitments:
- Year 1: $10,000,000
- Year 2: $11,000,000
- Year 3: $12,000,000
- Year 4: $13,000,000
- Year 5: $14,000,000
- Term: 5 years from the Effective Date (July 1, 2019).
Note: This filing does not provide current revenue, profit, cash flow, margins, debt, or liquidity figures for the Company.
Material Changes and Contractual Adjustments
The new Agreement supersedes a prior agreement dated October 1, 2015. Material provisions regarding performance adjustments include:
- Price Renegotiation: Product prices are subject to renegotiation every six months.
- Shortfall Adjustments: If invoiced amounts drop below the minimum annual business level, the combined cost of sales/general/administrative expenses and profit markup will be adjusted in the following quarter until the minimum is achieved.
- Price Reduction Triggers: Product prices will be adjusted if invoices (net of credit memos) fall below 25% of the minimum commitment in two consecutive quarters or below the minimum commitment in any calendar year.
Outlook, Rights, and Risks
Exclusive Manufacturing Rights:
- North, Central, and South America: Exclusive rights granted to the Company.
- Japan and Korea: Exclusive rights granted, subject to automatic termination if the Buyer commences production shipments with a separate manufacturer in Asia.
- Conditions: Exclusive rights are contingent on sales/general/administrative costs and profit markup rates not exceeding base rates listed in the Agreement.
Support Obligations: The Company must provide components for replacement and repair for two years after a Product is shipped.
Risks: The agreement includes mechanisms that could reduce the Company's profit margins or revenue per unit if minimum business levels are not met. The exclusive rights in Asia are conditional and terminable.
Investor Verification Checklist
- Verify the Company's current liquidity position to support the $2,500,000 credit line commitment.
- Review the specific "base rates" for sales/general/administrative costs and profit markup to understand the threshold for maintaining exclusive rights.
- Monitor quarterly invoiced amounts against the minimum annual commitments to assess the risk of price adjustments.
- Confirm the status of the Buyer's production capabilities in Asia to evaluate the stability of exclusive rights in Japan and Korea.
- Check subsequent filings for actual revenue recognition related to this agreement.