ONE STOP SYSTEMS, INC. — Q2 2019 Form 10-Q
Business and period: One Stop Systems designs and manufactures high-performance computing systems and flash arrays, with acquired businesses in in-flight entertainment (CDI) and European industrial IT (Bressner). This unaudited filing covers the quarter and six months ended June 30, 2019. Results include CDI and Bressner, acquired in 2018, and are not directly comparable with 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $14.89 million | $5.89 million | $24.94 million | $13.01 million |
| Gross margin | $5.41 million (36.4%) | $1.64 million (27.8%) | $7.82 million (31.4%) | $3.85 million (29.6%) |
| Operating loss | $(0.98) million | $(1.12) million | $(3.01) million | $(1.82) million |
| Net loss attributable to common stockholders | $(1.59) million | $(1.50) million | $(2.54) million | $(2.30) million |
| Basic and diluted loss per share | $(0.11) | $(0.12) | $(0.18) | $(0.20) |
- Q2 revenue rose 152.6%; management attributed $4.88 million of the increase to CDI and Bressner and $4.13 million to organic OSS growth, chiefly flash-array shipments for an airborne military contract and media and entertainment sales. Six-month revenue increased 91.7%, including $9.71 million from acquisitions.
- Gross margin improved, reflecting higher-margin OSS flash-array mix. Q2 gross margin was 42.9% at OSS, 23.6% at Bressner and 19.8% at CDI. CDI’s six-month margin was 10.9%, attributed to first-quarter cost overruns on fixed-price contracts.
- Q2 operating expenses were $6.39 million, including a $1.99 million goodwill impairment tied to CDI. G&A also rose with public-company costs and acquired operations. Q2 adjusted EBITDA, a non-GAAP measure, was $1.59 million versus a loss of $0.58 million; six-month adjusted EBITDA was $0.15 million versus a loss of $0.81 million.
Cash, liquidity and debt
- At June 30, cash and equivalents were $4.94 million, up from $2.27 million at year-end 2018. Current assets were $22.92 million and current liabilities $12.49 million (current ratio approximately 1.84). Accounts receivable was $8.34 million; inventory was $8.86 million.
- Six-month operating cash flow was positive $1.71 million, compared with negative $3.85 million in 2018. Capital expenditures were $1.36 million, yielding reported free cash flow of $0.36 million. Cash generation included favorable working-capital movements; inventory increased by $2.12 million in the cash-flow statement.
- Reported borrowings included $1.06 million on Bressner credit lines, approximately $2.12 million of other notes and $1.02 million of related-party notes, about $4.20 million total. OSS borrowed $1.50 million in April from individuals, including board members, at 9.5%, secured by company assets and accompanied by warrants. Board members had committed up to $4.00 million.
- The filing states management believes liquidity is sufficient for at least 12 months, while acknowledging profitability and future financing are uncertain. A $100 million shelf registration became effective in June; a related $10 million at-the-market common-stock offering had generated $1.77 million gross proceeds ($1.75 million net) by July 31, after the quarter-end.
Material changes, outlook and risks
- CDI goodwill was impaired by $1.99 million after underperformance versus plan, recurring working-capital needs and a decline in OSS’s stock price. CDI’s acquisition valuation was also revised, reducing identified intangible assets by $1.20 million and increasing goodwill by the same amount.
- Management cited cost containment and financing as part of liquidity planning. It expected to spend a further $200,000 over the next two quarters to complete ERP implementation; facility renovation and expansion were complete. The filing provides no formal revenue or earnings guidance.
- Customer concentration is significant: the top three customers accounted for 52% of Q2 sales and 57% of receivables at quarter-end. Inventory demand and obsolescence, execution on fixed-price projects, acquisition integration, and dependence on additional financing are important risks. The company also noted foreign-exchange exposure; no FX contracts were outstanding at June 30.
- Other notable items: Q2 income-tax expense was $558,072 despite a pretax loss; the six-month period recorded a $543,839 tax benefit. The company adopted ASC 606 with no significant revenue impact. Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control; no material litigation was reported.
Investor verification priorities
- Check subsequent quarterly results for CDI’s performance, further impairment indicators and progress addressing its working-capital needs.
- Validate the sustainability and composition of revenue growth, especially organic flash-array demand, customer concentration and vendor-managed inventory sales.
- Reconcile operating cash generation to working-capital changes, inventory accumulation and planned ERP/facility spending.
- Confirm current debt balances, repayment terms, related-party funding availability, and proceeds and dilution from the at-the-market offering.
- Assess CDI fixed-price contract cost overruns, segment margins and the assumptions behind management’s 12-month liquidity assessment.