ONE STOP SYSTEMS, INC. — Q1 2019 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2019. OSS designs and sells high-performance computing systems, flash arrays, in-flight entertainment and connectivity systems, and industrial IT products. Results include acquisitions CDI (August 2018) and Bressner (October 2018); therefore, year-over-year comparisons are not fully comparable. SkyScale was being dissolved after competitive pressure and pricing declines.
Financial performance and liquidity
- Revenue: $10.06 million, up 41.3% from $7.12 million. Acquisitions contributed $4.83 million, while OSS’s existing operations’ revenue declined $1.77 million, primarily due to delayed shipments on an airborne military flash-array contract.
- Gross profit and margin: $2.41 million and 24.0%, versus $2.21 million and 31.1%. CDI recorded a 15.5% gross loss margin, attributed to fixed-price contract cost overruns. Bressner’s 21.1% margin was affected by a significant order sold at 6% margin. OSS’s own gross margin declined to 28.7%, reflecting lower flash-array sales.
- Operating expenses and profit: Operating expenses rose 52.5% to $4.44 million. Operating loss widened to $2.03 million from $0.70 million. Net loss was $0.94 million versus $0.91 million; loss attributable to common stockholders was $0.94 million versus $0.79 million. Basic and diluted loss per share improved to $0.07 from $0.08, with weighted average shares increasing to 14.24 million from 10.14 million.
- Taxes and non-GAAP results: A $1.10 million income tax benefit reduced the reported net loss; the company attributed it to its projected annual taxable income and a projected 53.85% tax rate. Adjusted EBITDA loss was $1.42 million versus $0.24 million. These non-GAAP measures are not substitutes for GAAP results.
- Cash flow: Operating cash use was $0.20 million, compared with $4.03 million. Investing cash use was $0.80 million, primarily facility improvements and ERP spending; financing cash use was $0.82 million. Free cash flow, as defined by the company, was negative $1.00 million versus negative $4.04 million.
- Liquidity and debt: Cash fell to $0.46 million from $2.27 million at year-end. Current assets were $19.33 million and current liabilities $10.60 million. March 31 borrowings included $0.55 million on bank lines and $0.43 million of notes payable ($0.22 million current, $0.21 million long-term). The company reported $4.00 million of director funding commitments; $1.50 million was borrowed from multiple parties after quarter-end. Bressner obtained a €2.0 million line of credit during the quarter and a €0.5 million term loan after quarter-end.
Material changes, outlook and risks
- Revenue growth was acquisition-driven; OSS’s existing business declined. Non-U.S. billing addresses represented 77% of revenue, versus 46% in Q1 2018.
- Management said it was pursuing cost containment and debt and/or equity financing, and believed available resources would cover anticipated cash needs for at least 12 months, including committed funding. It cautioned that profitability and acceptable external financing are not assured. No specific revenue or earnings guidance was provided.
- Management expected another $550,000 of spending over the next two quarters to complete facility and ERP projects, with ERP implementation expected to finish by the end of Q3 2019.
- Key risks include low cash on hand and continued operating losses; dependence on financing and cash collection; inventory and margin exposure; shipment delays; and customer concentration. The top three customers accounted for 36% of quarterly sales and 53% of receivables. Inventory rose to $9.39 million from $6.82 million.
- CDI and Bressner purchase-price allocations remained preliminary. The company adopted ASC 606 using the modified retrospective method and reported no significant revenue impact. Management reported no material change in risk factors from its 2018 Form 10-K, no material pending legal claims, and effective disclosure controls.
Important facts for investors to verify
- Terms, availability and repayment conditions of the $4.00 million funding commitments, including the $1.50 million borrowed after quarter-end.
- Whether OSS’s delayed military flash-array shipments resume as expected, and whether organic revenue and gross margins recover.
- Whether CDI fixed-price contract cost overruns and Bressner’s low-margin order affect future profitability.
- Cash conversion, inventory growth, customer concentration and the company’s ability to fund operations and complete facility and ERP projects.
- Final purchase-price allocations for CDI and Bressner, and the assumptions underlying the projected tax benefit.