One Stop Systems(OSS) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for the six months ended June 30, 2019, reflect significant revenue growth driven by acquisitions, a consistent net loss, and improved operating cash flow Unaudited Consolidated Balance Sheets Total assets increased to $37.7 million as of June 30, 2019, while total liabilities rose and stockholders' equity decreased Consolidated Balance Sheet Summary (Unaudited) | Balance Sheet Items | June 30, 2019 ($) | December 31, 2018 ($) | | :--- | :--- | :--- | | Current Assets | | | | Cash and cash equivalents | 4,944,853 | 2,272,256 | | Accounts receivable, net | 8,341,412 | 10,540,150 | | Inventories, net | 8,859,281 | 6,823,930 | | Total Assets | 37,689,553 | 36,056,818 | | Current Liabilities | | | | Accounts payable | 3,143,232 | 3,708,865 | | Accrued expenses and other liabilities | 6,017,251 | 3,930,718 | | Total Liabilities | 13,360,949 | 9,484,496 | | Total Stockholders' Equity | 24,328,604 | 26,572,322 | - Goodwill decreased from $7.9 million to $7.1 million, while intangible assets, net, decreased from $3.5 million to $1.7 million between December 31, 2018, and June 30, 2019[10] Unaudited Consolidated Statements of Operations Revenues significantly increased for the three and six months ended June 30, 2019, driven by acquisitions, while net loss remained consistent Consolidated Statements of Operations Summary (Unaudited) | Metric | Q2 2019 ($) | Q2 2018 ($) | 6 Months 2019 ($) | 6 Months 2018 ($) | | :--- | :--- | :--- | :--- | :--- | | Revenue | 14,886,236 | 5,892,666 | 24,944,135 | 13,012,378 | | Gross Margin | 5,413,158 | 1,640,182 | 7,824,781 | 3,853,048 | | Loss from Operations | (980,480) | (1,118,619) | (3,012,689) | (1,820,447) | | Net Loss | (1,594,633) | (1,619,818) | (2,539,363) | (2,526,821) | | Net Loss per Share (Basic & Diluted) | (0.11) | (0.12) | (0.18) | (0.20) | Unaudited Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $1.7 million for the six months ended June 30, 2019, driven by non-cash adjustments and working capital changes Consolidated Statements of Cash Flows Summary (Unaudited, Six Months Ended June 30) | Cash Flow Activity | 2019 ($) | 2018 ($) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | 1,713,884 | (3,848,089) | | Net cash used in investing activities | (1,355,925) | (60,210) | | Net cash provided by financing activities | 2,323,170 | 12,989,902 | | Net change in cash and cash equivalents | 2,681,129 | 9,081,603 | | Cash and cash equivalents, end of period | 4,944,853 | 9,267,320 | - A non-cash goodwill impairment charge of $1,988,701 was a significant adjustment reconciling net loss to net cash from operating activities[23] Notes to Unaudited Consolidated Financial Statements The notes detail company operations, recent acquisitions, accounting policies, and a significant goodwill impairment charge related to the CDI acquisition - The company designs, manufactures, and markets industrial-grade computer systems and components. Recent strategic activities include the acquisition of Concept Development Inc. (CDI) in August 2018 and Bressner Technology GmbH in October 2018[27][33][35] - The SkyScale, LLC joint venture was dissolved on December 31, 2018, due to changes in the competitive landscape, resulting in a total charge of $705,309 for the year ended December 31, 2018[30] - The company adopted the new revenue recognition standard, ASC 606, on January 1, 2019, using the modified retrospective method, with no significant impact on revenues[65][111] - A goodwill impairment loss of $1,988,701 related to the CDI acquisition was recorded during the six-month period ended June 30, 2019, due to shortfalls in financial performance compared to plan[62][120] - The company operates in three reportable segments: customized computers and flash arrays, in-flight entertainment & connectivity, and value-added reseller with minimal customization[174] - Subsequent to the quarter end, as of July 31, 2019, the company sold 1,019,561 shares of common stock for net proceeds of $1,746,046 through a follow-on public offering[178] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant Q2 2019 revenue growth driven by acquisitions and organic expansion, improved gross margin, increased operating expenses due to acquisitions and impairment, and enhanced liquidity Results of Operations Q2 2019 revenue increased significantly due to acquisitions and organic growth, improving gross margin despite a surge in general and administrative expenses from a goodwill impairment charge Revenue and Gross Margin by Entity (Q2 2019 vs Q2 2018) | Entity | Revenue Q2 2019 ($) | Gross Margin % Q2 2019 | Revenue Q2 2018 ($) | Gross Margin % Q2 2018 | | :--- | :--- | :--- | :--- | :--- | | OSS (organic) | 10,007,805 | 42.9% | 5,892,666 | 27.8% | | Concept Development Inc. | 894,561 | 19.8% | - | 0.0% | | Bressner Technology GmbH | 3,983,870 | 23.6% | - | 0.0% | | Total | 14,886,236 | 36.4% | 5,892,666 | 27.8% | - Q2 2019 revenue increase of $9.0 million was driven by $4.9 million from acquisitions (Bressner and CDI) and $4.1 million from organic growth, primarily from the airborne military flash contract[219] - General and administrative expense for Q2 2019 increased by $2.8 million, with $2.1 million of that increase attributable to CDI, including a $1,988,701 goodwill impairment charge[226] Non-GAAP Financial Measures Non-GAAP measures, including Adjusted EBITDA and Adjusted EPS, are presented to provide a clearer view of core business performance by excluding specific non-recurring or non-cash items Adjusted EBITDA Reconciliation (Unaudited) | Metric | Q2 2019 ($) | Q2 2018 ($) | 6 Months 2019 ($) | 6 Months 2018 ($) | | :--- | :--- | :--- | :--- | :--- | | Net loss attributable to common stockholders | (1,594,633) | (1,502,822) | (2,539,363) | (2,297,240) | | Impairment of goodwill | 1,988,701 | - | 1,988,701 | - | | Stock-based compensation expense | 157,807 | 124,816 | 325,283 | 160,133 | | Depreciation and amortization | 432,452 | 274,736 | 886,982 | 528,494 | | Provision (benefit) for income taxes | 558,072 | 555,629 | (543,839) | 772,752 | | Adjusted EBITDA | 1,585,200 | (576,478) | 150,354 | (813,045) | Adjusted EPS Reconciliation (Unaudited) | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net loss attributable to common stockholders ($) | (1,594,633) | (1,502,822) | (2,539,363) | (2,297,240) | | Non-GAAP net income (loss) attributable to common stockholders ($) | 821,026 | (1,279,346) | 393,191 | (1,939,781) | | Non-GAAP net income (loss) per share (Diluted) | $0.06 | ($0.10) | $0.03 | ($0.17) | Liquidity and Capital Resources The company's liquidity is supported by existing cash, borrowings, a board member credit facility, and recent equity offerings, providing sufficient resources for the next twelve months - Primary sources of liquidity during the period were existing cash and third-party borrowings. Board members committed to a credit facility of up to $4,000,000, of which $1,500,000 has been borrowed[241] - An S-3 prospectus became effective on June 19, 2019, allowing the company to offer up to $100 million in securities. An equity distribution agreement was subsequently established to sell up to $10 million in common stock[242][243] - As of July 31, 2019, the company sold 1,019,561 shares for net proceeds of $1,746,046 under its at-the-market offering[244] - Cash from operating activities was $1.7 million for the first six months of 2019, a $5.6 million improvement from the same period in 2018, driven by non-cash adjustments (like goodwill impairment) and reduced working capital needs[250] Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure primarily stems from interest rate fluctuations on variable-rate borrowings and foreign currency risk from its Euro-denominated German subsidiary operations - The company is exposed to interest rate risk through variable rate borrowings on its revolving lines of credit[291] - Foreign currency risk exists due to the operations of its German subsidiary (OSS GmbH), whose functional currency is the Euro. Fluctuations in the Euro exchange rate can impact the consolidated financial statements[295] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by the report[300] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2019, that have materially affected or are reasonably likely to materially affect internal controls[301] PART II. OTHER INFORMATION Legal Proceedings The company is not aware of any material pending or threatened legal proceedings that would significantly impact its financial condition - The company is not currently aware of any material pending or threatened legal proceedings[304] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes have occurred from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[305] Unregistered Sales of Equity Securities and Use of Proceeds On April 4, 2019, the company issued 69,766 warrants at an exercise price of $2.15 per share in conjunction with $1.5 million in notes payable - On April 4, 2019, the Company issued 69,766 warrants at an exercise price of $2.15 per share in conjunction with $1,500,000 in notes payable[306] Exhibits This section lists exhibits filed with the quarterly report, including agreements related to notes and warrants, and officer certifications - Exhibits filed include forms of Note and Warrant Purchase Agreements, CEO/CFO certifications, and XBRL data files[311]