ONE STOP SYSTEMS, INC. — Q1 2021 Form 10-Q
Business context and reporting period
One Stop Systems designs and manufactures specialized high-performance computing systems and components for edge deployments, including industrial, military, medical, media and entertainment, and aerospace applications. The filing reports unaudited results for the three months ended March 31, 2021, compared with the same period in 2020.
Financial performance and position
- Revenue: $13.32 million, down 0.3% from $13.36 million. OSS segment revenue rose 1.9% to $8.60 million; Bressner revenue fell 4.2% to $4.71 million.
- Gross profit and margin: $4.43 million and 33.3%, versus $3.40 million and 25.4%. The company attributed the margin improvement primarily to product mix, including lower media and entertainment sales and increased government OEM shipments.
- Operating results: Operating income was $275,000, compared with an operating loss of $1.51 million. Operating expenses decreased 15.3% to $4.16 million.
- Net income: $41,000, versus a net loss of $1.10 million. Basic and diluted EPS were each reported as $0.00, compared with a loss of $0.07 per share.
- Cash flow: Operating cash flow was $4.29 million, compared with cash use of $722,000. Capital expenditures were $122,000; reported free cash flow, a non-GAAP measure, was $4.17 million. Financing activities provided $9.17 million, including net proceeds of approximately $9.22 million from an equity offering.
- Cash and liquidity: Cash and equivalents were $19.61 million at March 31, up from $6.32 million at December 31, 2020. Current assets were $35.79 million and current liabilities $9.85 million. About $1.26 million of cash held by Bressner was restricted from use by the parent under debt covenants.
- Debt: Reported debt carrying value was approximately $5.17 million, including the PPP loan, convertible note and foreign borrowings. The $2.59 million face amount of the convertible note was subject to installment payments and conversion provisions. The $1.50 million PPP loan was outstanding at quarter-end but was fully forgiven on May 3, 2021, after the quarter.
- Other metrics: Total assets were $50.46 million and stockholders’ equity was $38.97 million at March 31. The company issued 1,497,006 shares in its March offering; shares outstanding were 18,502,902 at quarter-end.
Material changes versus Q1 2020
- Revenue was essentially flat, but gross margin improved by 7.9 percentage points and the company moved from an operating loss to operating income.
- Management cited lower-cost product mix, cost containment, and lower operating expenses as drivers of the improved results. R&D expense declined in part because engineering costs were assigned to billable projects.
- Interest expense increased to $150,000 from $69,000, largely due to amortization of discounts and issuance costs on the senior secured convertible note.
- Operating cash flow improved by about $5.01 million, with management citing better earnings, collections, and lower working-capital requirements.
Outlook, risks and unusual items
- Management stated that available liquidity and cash-flow forecasts were expected to cover anticipated requirements for at least the next 12 months. No revenue or earnings guidance was provided.
- Management continued to cite COVID-19 risks to demand, customers, suppliers, collections, and operations. Media and entertainment and airline-related demand remained exposed to restrictions and reduced travel; supply-chain delays, including at suppliers in China, were also identified.
- Cost actions included workforce reductions, hiring limits, a reduced work week, and cuts to overtime, travel, entertainment, and contractor costs. The company estimated annual savings of approximately $2.5 million from its 2020 cost-reduction plan.
- Customer concentration is notable: two customers each represented more than 10% of Q1 2021 revenue; three customers together accounted for approximately 58% of receivables at quarter-end. Management also disclosed significant supplier concentration.
- A former CEO’s lawsuit alleges unpaid wages and bonus; the company denies the claims and has filed a cross-complaint. Damages sought are unspecified.
- The company disclosed no material off-balance-sheet arrangements beyond ordinary-course leases and indemnities. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Working capital discrepancy: The balance sheet implies working capital of approximately $25.94 million ($35.79 million current assets less $9.85 million current liabilities). The liquidity note reports $25.94 million, but MD&A states $22.94 million. Confirm the correct figure.
- Assess whether the Q1 margin improvement and positive operating cash flow are sustainable, given flat revenue and the contribution of working-capital movements and expense reductions.
- Review the convertible note’s amortization, conversion, and potential dilution terms, as well as upcoming foreign loan maturities and the post-quarter PPP forgiveness.
- Monitor customer and supplier concentration, COVID-19-related demand and supply conditions, and the outcome of the former CEO litigation.
- Consider that management’s 12-month liquidity assessment depends on forecasts and cost reductions; the filing notes that additional financing may be needed if operating cash flows are insufficient.