ONE STOP SYSTEMS, INC. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. OSS designs and manufactures specialized high-performance computing systems and components for edge deployments, alongside its European value-added reseller business through Bressner. Figures below are in U.S. dollars unless stated otherwise; interim results are unaudited.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $15.98 million | $12.98 million | $44.21 million | $37.96 million |
| Gross profit / margin | $5.52 million / 34.5% | $4.90 million / 37.8% | $14.60 million / 33.0% | $11.62 million / 30.6% |
| Operating income (loss) | $1.03 million | $0.98 million | $1.82 million | ($0.94 million) |
| Net income (loss) | $0.98 million | $0.86 million | $2.72 million | ($0.25 million) |
| Diluted EPS | $0.05 | $0.05 | $0.14 | ($0.02) |
| Operating cash flow | Not stated separately | Not stated separately | $3.30 million | ($1.39 million) |
- Q3 revenue rose 23.2% year over year; nine-month revenue rose 16.4%. Bressner drove much of the growth: revenue increased 68.0% in Q3 and 30.2% year to date. OSS’s respective increases were 3.2% and 9.1%.
- Q3 gross margin fell 3.3 percentage points year over year, reflecting product mix, including lower OSS margin; nine-month margin improved 2.4 points as margins increased at both OSS and Bressner.
- Nine-month operating expenses were $12.78 million, up slightly from $12.56 million. Marketing and selling costs rose 34.4%, while G&A fell 7.8% and R&D fell 11.6%.
- Nine-month other income included $1.514 million from forgiveness of the PPP loan and interest. The forgiveness was recognized in May 2021; it materially contributed to the swing to reported year-to-date net income.
- Cash and cash equivalents were $3.96 million and short-term investments were $14.53 million at September 30, 2021; working capital was $28.19 million. About $0.77 million of cash held by Bressner was unavailable to the parent under debt covenants.
- Nine-month investing cash outflow was $14.85 million, principally reflecting purchases of short-term investments; financing cash inflow was $9.23 million, including the March equity offering. Free cash flow, as defined by the company, was $2.98 million.
- Debt totaled $4.33 million principal, all classified as current: $2.59 million under the senior secured convertible note and $1.74 million of Bressner term loans. No revolving credit lines were drawn. The convertible note matures April 2022; Bressner term loans mature from November 2021 through March 2022.
Material changes and capital structure
- The company raised $10.0 million gross, approximately $9.2 million net, through a March 2021 registered direct stock offering at $6.68 per share. Shares outstanding increased to 18,666,022 at September 30, versus 16,684,424 at December 31, 2020.
- Inventory increased to $14.36 million from $9.65 million at year-end, partly as the company built stock to address component shortages, longer lead times, and rising costs.
- Accounts receivable declined to $5.81 million from $7.46 million. One customer accounted for approximately 60% of receivables at quarter-end.
Outlook, commentary, and risks
- Management said existing liquidity and cash-flow forecasts should fund anticipated requirements for at least the next 12 months. This expectation depends on cost controls and forecasted cash flows; additional financing may be needed if operating cash is insufficient, and availability on acceptable terms is not assured.
- Management’s stated priorities include controlling costs, conserving cash, strengthening margins, improving execution, and investing selectively in personnel, technology, systems, and product development. No quantified revenue or earnings guidance was provided.
- COVID-19-related supply constraints, component price increases, shortages, variable delivery dates, and customer demand uncertainty remain risks. The company reported carrying higher inventory to secure supply and pricing; this creates working-capital and inventory-obsolescence exposure.
- Customer concentration is notable: two customers represented approximately 41% of Q3 revenue, and two represented approximately 36% of nine-month revenue. A small number of customers also accounted for a substantial portion of receivables.
- The senior secured convertible note includes conversion and installment provisions, and its holder had deferred twelve installment payments as of September 30. Monitor repayment, conversion, and potential dilution.
- A lawsuit brought by the former CEO and the company’s related cross-claims were dismissed with prejudice in June 2021. Management reported disclosure controls were effective at a reasonable assurance level and no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth and gross-margin improvement year to date can continue, given Q3’s margin decline and changing product mix.
- How much reported earnings depended on the one-time $1.514 million PPP forgiveness, and the trajectory of operating earnings excluding that item.
- Whether elevated inventory converts to sales and cash, and whether component supply, costs, and delivery delays improve.
- Customer concentration, collection timing, and the restriction on Bressner cash when assessing usable liquidity.
- Repayment or conversion terms and timing for the $2.59 million convertible note and near-term Bressner maturities, including possible shareholder dilution.
- Management’s 12-month liquidity assessment and any subsequent financing, operating, or market developments; the filing cautions that interim results are not necessarily indicative of full-year results.