One Stop Systems, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 25, 2021. This is an annual report, not a standalone fourth-quarter earnings report. OSS designs and sells specialized high-performance computing systems and components for edge deployments, including servers, GPU accelerators, flash storage arrays and PCIe expansion products. Its operations include OSS, CDI and German subsidiary Bressner.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $51.90 million | $58.31 million |
| Gross profit / margin | $16.43 million / 31.7% | $19.40 million / 33.3% |
| Operating loss | $0.42 million | $0.78 million |
| Net loss | $6,544 | $0.90 million |
| Adjusted EBITDA (non-GAAP) | $1.80 million | $3.18 million |
| Cash from operations | $(0.25) million | $2.37 million |
| Free cash flow (non-GAAP) | $(1.07) million | $(0.01) million |
Revenue fell 11.0%. OSS’s revenue declined 16.0%, while Bressner revenue was nearly flat. Consolidated gross margin contracted 1.6 percentage points, reflecting product mix at both OSS and Bressner. 2020 net loss was nearly break-even partly because the company recorded a $603,744 income tax benefit against a $610,288 pretax loss; 2019 included a $1.70 million CDI goodwill impairment, absent in 2020.
At year-end, cash and cash equivalents were $6.32 million and working capital was $16.27 million. Accounts receivable fell to $7.46 million from $11.67 million, while inventory rose to $9.65 million from $7.37 million. Total liabilities were $9.84 million. Debt principal and lease commitments were reported at $5.66 million and $1.35 million, respectively; debt carrying values are reduced by discounts and issuance costs. Bressner held approximately $1.06 million of cash that its debt covenants did not permit the parent to use.
Material changes and unusual items
- Management attributed most of the revenue decline to lower shipments to its two largest customers, especially a media and entertainment customer affected by COVID-19 restrictions. New business from four customers partly offset the decline.
- Revenue concentration among the two largest customers decreased to 24.1% from 41.0%. The filing identifies disguise and Raytheon as the concentrated customers; they also represented approximately 64% of year-end trade receivables.
- OSS reduced headcount and costs beginning in April 2020, suspended its 401(k) match, and limited hiring, work hours, overtime, travel and contractor spending. Management estimated annual savings of approximately $2.5 million.
- CEO Steve Cooper was terminated in February 2020 and replaced by David Raun. Cooper subsequently sued the company over alleged unpaid wages and bonus; OSS denied the claims and filed a cross-complaint. Damages sought were unspecified.
- 2020 financing included a $3.0 million senior secured convertible note issued at a 10% original issue discount and a $1.50 million Paycheck Protection Program loan. The PPP forgiveness application was pending at filing. The convertible note is subject to conversion and repayment terms, including potential settlement in shares.
- After year-end, OSS sold 1,497,006 shares at $6.68 per share in a registered offering, estimating net proceeds of approximately $9.25 million for general corporate and working capital needs. Shares outstanding were 18,409,318 as of March 15, 2021.
Outlook, risks and management commentary
Management provided no specific revenue or earnings guidance. It expected available liquidity, including the March 2021 offering proceeds and cost reductions, to meet anticipated requirements for at least twelve months, while cautioning that forecasts and financing availability were uncertain. Management’s stated priorities were conserving cash, strengthening margins, reducing costs and improving execution.
COVID-19 caused customer delays, slower collections, supply and delivery delays, and weaker demand in affected markets. The company warned that prolonged disruption could harm revenue, cash flow, liquidity and operations. Other material risks include dependence on a limited number of customers and a supplier, component shortages and tariffs, inventory obsolescence, competition and technology changes, and the possibility of further financing or dilution. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements but did not attest to internal controls under the emerging-growth-company exemption.
Important facts for investors to verify
- Whether the post-year-end $9.25 million net offering proceeds were received as estimated, and how proceeds affected liquidity and share dilution.
- Repayment, conversion and potential share issuance terms for the senior secured convertible note, and the status and ultimate forgiveness of the PPP loan.
- Current payment performance and order trends for disguise and Raytheon, given customer and receivables concentration and prior COVID-related delays.
- Whether the cost-reduction savings were realized and whether margins, operating cash flow and free cash flow improved after year-end.
- Whether semiconductor/component availability, pricing and tariffs affected delivery schedules, inventory levels or gross margins.
- The outcome and potential financial exposure of the former CEO’s lawsuit and the company’s cross-complaint.