One Stop Systems, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022, compared with Q1 2021. OSS designs and manufactures high-performance computing systems for edge deployments, serving applications including media and entertainment, medical, industrial, and military. Its reportable segments are OSS and Bressner, a European value-added reseller and systems provider. The company cautions that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $17.05 million | $13.32 million; up 28% |
| Gross profit and margin | $5.14 million; 30.1% | $4.43 million; 33.3% |
| Operating income | $650,131 | $275,031 |
| Net income | $579,234; $0.03 diluted EPS | $41,198; $0.00 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $1.40 million | $1.07 million |
| Cash from operating activities | $(5.02) million | $4.29 million provided |
| Cash and short-term investments at quarter-end | $15.76 million combined | Cash $2.22 million; investments $13.54 million |
Working capital was $31.45 million. Total assets were $57.09 million and total liabilities were $11.67 million, including $2.22 million of current notes payable and $1.34 million of operating lease obligations. The $2.59 million balance of senior secured convertible debt was converted into 1,036,365 common shares on March 31; no balance remained at quarter-end. Common shares outstanding increased to 19,914,548 from 18,772,214 at December 31, 2021.
Material changes versus Q1 2021
- OSS segment revenue rose 23% to $10.58 million, primarily on increased shipments to a media and entertainment customer. Bressner revenue rose 37% to $6.47 million, which management attributed mainly to improving European business conditions.
- Gross margin fell 3.2 percentage points to 30.1%. OSS margin declined to 35.7%, partly due to a greater share of media and entertainment sales; Bressner margin declined to 21.0%, primarily due to higher material and transportation costs.
- Operating expenses increased 8% to $4.49 million: lower general and administrative costs were more than offset by higher selling and marketing and research and development spending. G&A benefited from lower stock compensation and legal costs; R&D rose as more engineering resources went to internal projects.
- Operating cash flow swung to a $5.02 million use, largely reflecting working-capital investment: accounts receivable rose about $4.0 million and inventory about $4.3 million. Inventory reached $16.43 million, up from $12.28 million at year-end, as the company built stock amid supply constraints.
- Other income included a $125,000 gain from selling the Magma.com URL. Interest expense declined as debt-related amortization decreased and the convertible note was converted.
Outlook, risks and unusual items
- Management said it believes available liquidity and forecast cash flows are sufficient for anticipated needs for at least the next 12 months, while noting that forecasts may not be achieved and additional financing may be needed. The company’s existing $100 million shelf registration was due to terminate June 19, 2022.
- Management gave no specific revenue or earnings guidance. It plans to control costs, conserve cash, strengthen margins, and improve execution; it expects to use liquidity and operating cash flows to fund growth.
- COVID-19 aftereffects, the Russia-Ukraine conflict, and supply-chain disruption are driving higher prices, longer lead times, shortages, and delivery uncertainty. These conditions have made forecasting difficult and may constrain customer spending, delay orders, pressure margins, and affect access to capital.
- Cash generation is exposed to collections and inventory turnover. Bressner held approximately $980,000 of cash, but debt covenants restrict the parent company’s use of those funds. Two customers represented approximately 27% of quarterly revenue in aggregate; customers above the stated threshold represented approximately 47% of receivables. Supplier concentration and foreign exchange exposure are additional considerations.
- The company adopted ASC 842 lease accounting on January 1, 2022, recording operating lease right-of-use assets and liabilities and a $44,533 reduction to opening retained earnings. Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting.
- The former CEO’s litigation and the company’s cross-claims were dismissed with prejudice in June 2021. No other subsequent event requiring recognition or disclosure was identified.
Most important facts for investors to verify
- Whether working-capital growth converts into operating cash flow, particularly receivables collection and inventory turnover.
- Whether supply availability, input and freight costs, and product mix allow gross margins to recover.
- Customer and supplier concentration, including the timing and sustainability of shipments to the media and entertainment customer.
- The status and repayment or refinancing of the $2.22 million of Bressner notes, all classified as current and maturing in 2022.
- How management maintains liquidity after the shelf registration’s stated expiration, and whether financing or other liquidity measures are required.
- The effect of the convertible-debt conversion and equity awards on future share count and dilution.