One Stop Systems, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. OSS designs and manufactures high-performance computing systems for edge deployments, serving media and entertainment, medical, industrial, and military markets. Its two reportable segments are OSS’s customized systems business and Bressner, a European value-added reseller. This unaudited filing covers the three and nine months ended September 30, 2022; comparisons are with the same 2021 periods.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $18.82 million | $15.98 million | $54.17 million | $44.21 million |
| Gross profit / margin | $5.08 million / 27.0% | $5.52 million / 34.5% | $15.42 million / 28.5% | $14.60 million / 33.0% |
| Operating income | $163,000 | $1.03 million | $1.22 million | $1.82 million |
| Net income | $133,000 | $981,000 | $1.03 million | $2.72 million |
| Diluted EPS | $0.01 | $0.05 | $0.05 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $955,000 | $1.81 million | $3.55 million | $4.26 million |
- Q3 revenue increased 17.7%; nine-month revenue increased 22.6%. Growth came from both segments, including higher OSS shipments to a media and entertainment customer and improved Bressner sales.
- Gross margin contracted in both periods. Management cited a greater share of lower-margin media and entertainment sales, fewer higher-margin government-prime sales, and increased material, transportation, and fuel costs.
- Operating expenses rose 9.4% in Q3 and 11.1% year to date. Higher selling and marketing and R&D spending contributed; nine-month R&D expense increased 28.7%.
- Nine-month 2021 net income included $1.51 million of PPP loan and interest forgiveness. Other income also fell substantially year over year for the nine-month period.
Cash, liquidity, and debt
- At September 30, 2022, cash and cash equivalents were $3.18 million and short-term investments were $9.54 million. Working capital was $33.01 million; current assets were $45.23 million against current liabilities of $12.23 million.
- Operating cash flow was negative $8.67 million for the first nine months, versus positive $3.30 million in 2021. Free cash flow, a non-GAAP measure, was negative $8.96 million. Management attributed the cash use primarily to increases in receivables and inventory.
- Inventory was $20.09 million, up from $12.28 million at year-end 2021; net accounts receivable was $11.39 million, up from $5.09 million.
- Total notes payable were $3.25 million, including $2.69 million current and $559,000 long term. The $2.59 million senior secured convertible note was converted to common stock in March 2022. No revolving-credit balances were outstanding at quarter end.
- The company has a $2.0 million domestic revolving credit line, subject to maintaining at least $4.0 million in cash and investments. Bressner held $1.94 million of cash that debt covenants prohibit its parent from using.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided. Management said it expects sufficient liquidity for at least the next 12 months, while noting this depends on forecasts and cost-control efforts being achieved.
- Management plans to conserve cash, control costs, improve margins, and develop products focused on autonomous trucking and AI computing for military and industrial applications.
- Risks include supply shortages, longer lead times, inflation and transportation costs, recession concerns, geopolitical instability, and customer delays or reductions in technology spending. These factors also make forecasting more difficult.
- OSS warned that media and entertainment customers’ shift toward cloud technology and lower-cost, less ruggedized equipment could reduce demand for its high-compute ruggedized products beginning in the second half of 2023.
- To secure components and pricing, the company carried higher inventory and had approximately $13.27 million of non-cancellable purchase commitments at quarter end. Customer concentration remains notable: one customer represented about 39% of accounts receivable.
- Management said ordinary-course litigation was not expected to materially affect financial position or results. The company adopted ASC 842 lease accounting in 2022, recording operating lease assets and liabilities and a $44,533 adjustment to beginning retained earnings.
Investor verification priorities
- Assess whether the margin decline reflects temporary product and customer mix or a more persistent cost and pricing problem.
- Track receivable collections, inventory levels and turnover, and the cash impact of purchase commitments.
- Verify the timing and repayment capacity for the $2.69 million current debt balance and the availability conditions on the domestic credit line.
- Monitor media and entertainment customer demand, cloud-transition plans, and customer concentration in revenue and receivables.
- Evaluate management’s 12-month liquidity assessment against operating cash burn and the restriction on Bressner cash.