One Stop Systems, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The financial statements are unaudited. OSS designs and sells high-performance computing and storage hardware, software, and systems for edge AI applications, with an increasing focus on defense and military customers. Its reportable segments are OSS Classic and OSS Europe.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $17.21 million | $18.30 million | $33.99 million | $35.36 million |
| Gross profit / margin | $4.80 million / 27.9% | $5.20 million / 28.4% | $9.87 million / 29.0% | $10.34 million / 29.2% |
| Operating income (loss) | $(3.41) million | $0.40 million | $(3.61) million | $1.05 million |
| Net income (loss) | $(2.40) million | $0.32 million | $(2.80) million | $0.90 million |
| Operating cash flow | Not presented by quarter | $2.05 million | $(7.58) million |
- Q2 revenue fell 6.0% year over year; first-half revenue fell 3.9%. OSS Classic revenue declined 22.8% in Q2 and 20.6% in the first half, while OSS Europe revenue grew 17.7% and 21.5%, respectively.
- Q2 gross margin was 27.9%, down 0.5 percentage points. OSS Classic’s Q2 margin fell to 29.2% from 33.0%, while OSS Europe’s increased to 26.7% from 21.9%. For the first half, total gross margin eased to 29.0% from 29.2%.
- Operating expenses rose to $8.21 million in Q2, including a $2.70 million goodwill impairment charge. General and administrative costs also increased, partly due to restructuring and professional services. The first-half net loss included the impairment and a $1.30 million net Employee Retention Credit (ERC) benefit.
- Six-month operating cash flow improved to $2.05 million from a use of $7.58 million, aided by working-capital changes. Free cash flow, as defined by the company, was $1.75 million versus a use of $7.72 million.
Balance sheet, debt, and liquidity
- At June 30, OSS had $6.10 million in cash and equivalents, $9.32 million in short-term investments, and $35.95 million in working capital. Cash and investments together totaled $15.42 million.
- Total assets were $54.82 million; stockholders’ equity was $43.14 million. Goodwill declined to $4.42 million after the $2.70 million impairment.
- Notes payable totaled $3.01 million, all classified as current at quarter-end, consisting of OSS Europe term loans. No domestic or European revolving credit balances were outstanding. OSS had a $2 million domestic credit line, subject to maintaining at least $4 million in cash and investments.
- OSS Europe held $2.45 million of cash and equivalents that debt covenants do not permit the parent to use. Subsequent to quarter-end, OSS Europe paid a €500,000 note (approximately $550,947) that matured July 31, 2023.
- Non-cancellable inventory purchase orders totaled $10.76 million. The company reported $250,000 of U.S. cash above FDIC/SIPC insurance limits and OSS Europe reported deposits exceeding German insurance limits.
Material changes, outlook, and risks
- OSS says it has substantially completed orders for a long-term media and entertainment customer and expects minimal to no business from that customer in the second half of 2023 and thereafter. The customer’s shift toward cloud solutions is expected to continue weighing on results in the near term.
- Other revenue pressure came from the bankruptcy of an autonomous-trucking customer and delays in military orders. The company also reported delayed, postponed, and cancelled customer orders related to funding, program timing, and changes in customer business plans.
- Management is emphasizing AI Transportables and defense and military markets, while pursuing new orders to replace lost media-customer revenue. Its stated priorities include cost control, cash conservation, margin improvement, new product development for military and industrial applications, and improved execution. The filing provides no specific revenue or earnings guidance and cautions that forecasting is difficult.
- Management believed liquidity was sufficient for anticipated operating needs for at least the next 12 months, but noted that this depends on cost controls and forecast cash flows; additional financing may be needed if operating cash generation is inadequate and may not be available on acceptable terms.
- Risks include supply constraints, longer lead times and higher input costs; recession and customer spending uncertainty; lengthy defense-sector sales cycles; customer and supplier concentration; foreign-currency exposure; and potential disruption to access to cash from banking-sector instability. Inventory was $21.46 million at quarter-end, including reserves of $1.41 million for obsolete and slow-moving inventory.
- CEO Michael Knowles took office June 5, 2023. He received inducement awards of 400,000 options and 400,000 RSUs; the former CEO’s agreement provided for accelerated vesting of 150,556 RSUs. Two directors later announced resignations effective September 30, 2023, with the CEO and an advisory-board member appointed to fill the vacancies on that date.
- The company recognized $1.30 million of net ERC benefit in the first half and disclosed receipt of a further $418,430 net payment on July 17, 2023. Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter. Management did not expect pending ordinary-course legal matters to have a material adverse effect.
Important facts for investors to verify
- Whether new AI Transportables and defense orders can replace the lost media and entertainment revenue, and how long military order delays and sales cycles persist.
- How sustainable operating cash generation is, given the first-half improvement was materially influenced by working-capital movements and the ERC benefit.
- Inventory quality, future reserve requirements, and the ability to manage the $10.76 million of non-cancellable purchase commitments amid uncertain customer demand.
- Near-term debt maturities and repayment status: all $3.01 million of notes were classified current at June 30, while one €500,000 note was paid after quarter-end.
- The filing’s operating cash flow discussion cites $2,048,984 in one passage, while the cash flow statement reports $2,048,934; verify the correct figure. The filing also describes the domestic credit line as available subject to minimum cash and investment balances.