One Stop Systems, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. OSS designs and sells high-performance computing and storage systems, focusing on edge AI “Transportables” for military, industrial, medical and other applications. Its reportable segments are OSS and Bressner, a European value-added reseller.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $13.75 million | $18.82 million | $47.74 million | $54.17 million |
| Gross profit / margin | $3.65 million / 26.6% | $5.08 million / 27.0% | $13.52 million / 28.3% | $15.42 million / 28.5% |
| Operating income (loss) | ($3.98 million) | $0.16 million | ($7.59 million) | $1.22 million |
| Net income (loss) | ($3.64 million) | $0.13 million | ($6.44 million) | $1.03 million |
| Diluted EPS | ($0.18) | $0.01 | ($0.32) | $0.05 |
- Q3 revenue fell 26.9% year over year; nine-month revenue fell 11.9%. For nine months, OSS segment revenue declined 29.9% to $22.41 million, while Bressner revenue rose 14.1% to $25.33 million.
- Q3 gross margin declined 0.4 percentage points. OSS reported Q3 margin of 32.4% and Bressner 22.6%; management cited lower production utilization as a margin headwind.
- Operating expenses included $2.93 million of Q3 goodwill impairment. The nine-month impairment totaled $5.63 million. The company recorded $1.72 million of net Employee Retention Credit (ERC) income in the first nine months, including $0.42 million in Q3.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $3.74 million and short-term investments were $9.44 million. Working capital was $34.41 million; total current assets were $45.05 million and current liabilities $10.63 million.
- Operating cash flow was positive $0.23 million for the first nine months, versus cash use of $8.67 million in 2022. Capital expenditures were $0.37 million, giving reported free cash flow of negative $0.15 million.
- Notes payable totaled $2.26 million, all classified as current; no balance was outstanding on the company’s $2.0 million domestic revolver or Bressner’s revolving credit lines. Bressner held $1.73 million of cash that covenants do not permit the parent to use.
- Management said it expects available liquidity to meet operating needs for at least 12 months, while noting that forecasts may not be achieved and additional financing may be needed. The company has an effective shelf registration permitting offerings of up to $100 million and an undrawn domestic revolver subject to borrowing conditions.
Changes, outlook and risks
- Revenue weakness reflected the cessation of shipments to a former media and entertainment customer, the bankruptcy of an autonomous-trucking customer, and delays in military orders and customer funding/programs. OSS does not expect significant future business from the former media customer.
- Management is redirecting strategy toward AI Transportables and defense, with new CEO Michael Knowles appointed in June and a new Vice President of Sales appointed in July. The company is seeking replacement orders and describes defense opportunities as having long sales cycles and significant contracting requirements. No specific revenue or earnings guidance is provided.
- Management cited supply shortages, longer lead times, higher component and transportation costs, inflation, geopolitical uncertainty, recession risk, customer order delays/cancellations, and possible difficulty accessing capital. Inventory increased to $22.23 million from $20.78 million at year-end; the filing says elevated inventory is being carried to secure supply and pricing.
- Other notable items: the company recorded $5.63 million of goodwill impairment following interim tests prompted by performance versus plan, strategy changes and order deferrals; it extended its Escondido lease through August 2030; and disclosed $6.90 million of non-cancellable inventory purchase orders. Management reported disclosure controls were effective at a reasonable assurance level.
- For context, adjusted EBITDA, a non-GAAP measure, was negative $0.25 million in Q3 and positive $0.77 million for nine months, versus $0.96 million and $3.55 million, respectively, in 2022. These measures exclude specified items and are not GAAP results.
Investor verification priorities
- Reconcile MD&A narrative figures with the financial statements: the cash-flow discussion cites $255,469 of operating cash provided, while the cash-flow statement reports $225,469; another MD&A passage cites a $6,303,616 net loss, while the statements report $6,438,616.
- Assess whether replacement AI Transportables and defense orders can offset the lost media customer and customer-specific delays, including the timing and conversion of defense programs.
- Monitor cash generation, the usability of Bressner cash, near-term debt maturities and the assumptions behind management’s at-least-12-month liquidity assessment.
- Review the goodwill impairment assumptions, inventory reserve and purchase commitments, and the impact of reduced manufacturing utilization on margins.
- Track customer and supplier concentration: two customers represented approximately 25% of nine-month revenue, and two vendors accounted for approximately 36% of nine-month purchases.