One Stop Systems, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. OSS designs and sells high-performance computing systems and components; its businesses include customized computers and flash arrays, in-flight entertainment and connectivity, and value-added resale. Results include acquisitions CDI (acquired August 2018) and Bressner (acquired October 2018), so reported year-over-year growth is not directly comparable with 2018.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $14.94 million | $9.63 million | $39.88 million | $22.65 million |
| Gross profit (margin) | $5.03 million (33.7%) | $3.17 million (32.9%) | $12.85 million (32.2%) | $7.02 million (31.0%) |
| Operating income (loss) | $0.42 million | $(0.28) million | $(2.59) million | $(2.10) million |
| Net income (loss) attributable to common stockholders | $0.54 million | $1.28 million | $(1.99) million | $(1.02) million |
| Basic/diluted EPS | $0.03 / $0.03 | $0.10 / $0.09 | $(0.13) / $(0.13) | $(0.08) / $(0.08) |
- Q3 revenue grew 55%; nine-month revenue grew 76%. Acquisitions contributed most of the increase. OSS organic revenue declined 3.5% in Q3, mainly due to lower airborne military flash-array shipments, but increased 9% for the nine months on flash-array and media/entertainment sales.
- Q3 operating profitability improved, while nine-month operating and net losses remained. The nine-month loss included a $1.99 million goodwill impairment related to CDI. Q3 net income also reflects a $51,000 income-tax benefit; the prior-year quarter included a substantially larger $1.45 million tax benefit.
- Cash from operations was $0.39 million for the nine months, versus $5.13 million used in 2018. Capital expenditures were $2.06 million, leaving reported free cash flow of negative $1.67 million.
- Cash and equivalents were $4.23 million at September 30, up from $2.27 million at year-end 2018. Current assets were $22.48 million and current liabilities $9.56 million. Total liabilities were $10.15 million; debt, including bank lines, was approximately $2.98 million.
- Stockholders’ equity was $27.45 million. Common shares outstanding rose from 14.22 million at year-end to 16.10 million at September 30, including 1.55 million shares sold through the 2019 offering.
Material changes, outlook and risks
- Q3 gross margin improved to 33.7% from 32.9%; nine-month gross margin rose to 32.2% from 31.0%. Management attributed OSS margin improvement primarily to product mix, including higher flash-array sales. CDI reported nine-month gross margin of 22.5%, partly due to first-quarter cost overruns on fixed-price contracts; Bressner’s was 22.8%.
- Operating expenses increased in dollars, reflecting the acquired businesses, continued investment, and public-company costs. Nine-month general and administrative expense also includes CDI’s goodwill impairment.
- Management said it believes liquidity is sufficient for anticipated needs over at least the next 12 months and is developing cost-containment plans. Board members committed up to $4 million in funding; $1.5 million had been borrowed by September 30. The company also raised $2.70 million gross ($2.49 million net) through an equity distribution program, which terminated August 26, 2019. Management cautioned that profitability and access to acceptable external financing are not assured. No numerical revenue or earnings guidance was provided.
- Key risks include customer concentration (two customers represented about 30% of Q3 revenue and 35% of nine-month revenue; three customers held 48% of receivables), inventory demand and obsolescence, CDI performance and working-capital needs, foreign-exchange exposure, and reliance on financing. The filing reports no material change to previously disclosed risk factors.
- Three foreign-exchange forward contracts were outstanding at quarter-end. Management reported no pending, threatened, or unasserted legal claims known to it and stated disclosure controls were effective at a reasonable-assurance level.
Investor verification points
- Assess whether revenue growth can continue without the same acquisition contribution, and review organic bookings and shipment trends, especially in airborne military flash arrays.
- Track CDI’s operating performance, contract cost estimates, working-capital needs, and any further impairment indicators.
- Verify cash conversion, inventory growth, receivables collection, capital spending, and the company’s ability to meet debt and lease obligations.
- Monitor customer concentration, gross-margin mix, and any additional equity or related-party borrowing that could affect dilution or financing costs.