One Stop Systems(OSS) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This part provides the company's unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, and cash flows, showing significant revenue growth and a shift to net income for the nine months ended September 30, 2021 Consolidated Balance Sheet Highlights (Unaudited) | Account | September 30, 2021 ($) | December 31, 2020 ($) | | :--- | :--- | :--- | | Total Current Assets | 39,780,385 | 24,078,516 | | Total Assets | 53,802,595 | 39,128,763 | | Total Current Liabilities | 11,595,366 | 7,812,223 | | Total Liabilities | 11,595,366 | 9,842,930 | | Total Stockholders' Equity | 42,207,229 | 29,285,833 | Consolidated Statements of Operations Highlights (Unaudited) | Metric | Q3 2021 ($) | Q3 2020 ($) | Nine Months 2021 ($) | Nine Months 2020 ($) | | :--- | :--- | :--- | :--- | :--- | | Revenue | 15,984,293 | 12,976,058 | 44,205,054 | 37,961,023 | | Gross Profit | 5,516,703 | 4,901,613 | 14,602,231 | 11,622,496 | | Income (Loss) from Operations | 1,026,279 | 979,442 | 1,817,960 | (937,598) | | Net Income (Loss) | 980,696 | 857,790 | 2,719,016 | (250,404) | | Diluted EPS | 0.05 | 0.05 | 0.14 | (0.02) | Consolidated Statements of Cash Flows Highlights (Unaudited, Nine Months Ended) | Cash Flow Activity | September 30, 2021 ($) | September 30, 2020 ($) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | 3,297,125 | (1,385,390) | | Net cash used in investing activities | (14,845,282) | (662,843) | | Net cash provided by financing activities | 9,228,588 | 2,325,509 | Note 1 – The Company and Basis of Presentation This note describes the company's industrial-grade computer system operations, corporate structure, and the significant impact of the COVID-19 pandemic on supply chains and component pricing - The company designs, manufactures, and markets industrial-grade computer systems for various applications, including media, medical, industrial, and military[30] - In March 2021, the company raised net proceeds of $9,188,673 through a registered direct offering of its common stock[34] - The COVID-19 pandemic has caused increased pricing and shortages of necessary components, leading to longer lead times and increased inventory balances to ensure product availability[40][43] Note 8 – Debt This note details the company's debt structure, including foreign obligations, a Senior Secured Convertible Note, and the full forgiveness of its $1.5 million PPP loan in May 2021 - On May 3, 2021, the company received notification from the SBA that its Paycheck Protection Program (PPP) loan of $1,499,360, plus accrued interest of $14,994, had been fully forgiven[80] - The company has a Senior Secured Convertible Promissory Note with a principal face value of $3,000,000, issued in April 2020 with a 10% original issue discount, maturing in April 2022[81][82] Outstanding Debt Obligations as of September 30, 2021 | Loan Description | Balance ($) | Current Portion ($) | | :--- | :--- | :--- | | Convertible senior secured note | 2,590,909 | 2,590,909 | | Foreign (Uni Credit Bank AG) | 1,736,546 | 1,736,546 | | Total | 4,327,455 | 4,327,455 | Note 9 – Stockholders' Equity This note details stockholders' equity components, including stock-based compensation for options, RSUs, and warrants, totaling approximately $1.3 million for the nine months ended September 30, 2021 - As of September 30, 2021, there were 1,076,999 stock options outstanding with a weighted average exercise price of $1.95[98] - As of September 30, 2021, there was $2,285,644 of unrecognized compensation cost related to 697,321 unvested restricted stock units (RSUs), expected to be recognized over a weighted average period of 1.87 years[101] Stock-Based Compensation Expense | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $399,148 | $210,280 | | Nine Months Ended Sep 30 | $1,302,878 | $503,419 | Note 10 – Commitments and Contingencies This note addresses legal matters, lease obligations, and significant customer concentration, including the resolution of a former CEO's legal dispute and one customer accounting for 60% of receivables - A legal action brought by former CEO Stephen D. Cooper was resolved, and the litigation was dismissed with prejudice on June 28, 2021[108][110] - For the nine months ended September 30, 2021, two customers accounted for approximately 36% of consolidated revenue[118] - As of September 30, 2021, one customer accounted for approximately 60% of consolidated trade accounts receivable[119] Note 13 – Revenue, Segment and Geographic Information This note details segment performance, with OSS generating $27.0 million revenue (38.5% gross margin) and Bressner $17.2 million (24.4% gross margin) for the nine months ended September 30, 2021, with 62% of revenue from non-U.S. customers Segment Performance (Nine Months Ended September 30, 2021) | Segment | Revenues ($) | Gross Profit ($) | Gross Margin % | | :--- | :--- | :--- | :--- | | OSS | 26,968,202 | 10,395,769 | 38.5% | | Bressner | 17,236,852 | 4,206,462 | 24.4% | | Total | 44,205,054 | 14,602,231 | 33.0% | - For the nine months ended September 30, 2021, revenue from customers with non-U.S. billing addresses represented approximately 62% of the company's total revenue[125] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial performance for the three and nine months ended September 30, 2021, covering revenue growth, gross margin, operating expenses, and liquidity, including non-GAAP measures like Adjusted EBITDA and EPS Results of Operations This subsection details financial results, with Q3 2021 revenue growing 23.2% to $16.0 million, driven by Bressner, while nine-month revenue increased 16.4% to $44.2 million with improved gross margin - Q3 2021 revenue increased 23.2% year-over-year to $16.0 million, driven by a $2.7 million (68.0%) increase at Bressner and a $0.3 million (3.2%) increase at OSS[158] - Nine-month 2021 revenue increased 16.4% year-over-year to $44.2 million, reflecting a general economic improvement and recovery from the COVID-19 pandemic's impact[159] - Consolidated gross margin for Q3 2021 decreased to 34.5% from 37.8% in Q3 2020, primarily due to changes in product mix at the OSS segment; however, the nine-month gross margin improved to 33.0% from 30.6% in the prior year[161][164] Liquidity and Capital Resources This subsection reviews liquidity, with $4.0 million cash, $14.5 million short-term investments, and $28.2 million working capital as of September 30, 2021, bolstered by a $9.2 million stock offering - As of September 30, 2021, the company had cash and cash equivalents of $4.0 million, short-term investments of $14.5 million, and working capital of $28.2 million[181] - Net cash provided by operating activities for the nine months ended September 30, 2021, was $3.3 million, a $4.7 million improvement compared to the $1.4 million used in the same period in 2020[190] - Financing activities provided $9.2 million in cash, primarily from a $10.0 million registered direct stock offering completed in March 2021[195] Non-GAAP Financial Measures This subsection presents non-GAAP metrics like Adjusted EBITDA ($4.3 million) and Non-GAAP diluted EPS ($0.15) for the nine months ended September 30, 2021, providing insight into core operating performance Adjusted EBITDA Reconciliation | Period | Q3 2021 ($) | Q3 2020 ($) | Nine Months 2021 ($) | Nine Months 2020 ($) | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) | 980,696 | 857,790 | 2,719,016 | (250,404) | | Adjusted EBITDA | 1,811,899 | 1,566,649 | 4,262,897 | 682,147 | Non-GAAP Net Income and EPS | Metric | Q3 2021 ($) | Q3 2020 ($) | Nine Months 2021 ($) | Nine Months 2020 ($) | | :--- | :--- | :--- | :--- | :--- | | Non-GAAP Net Income | 1,543,744 | 1,239,055 | 2,999,241 | 773,050 | | Non-GAAP Diluted EPS | 0.08 | 0.07 | 0.15 | 0.05 | - Free cash flow for the nine months ended September 30, 2021, was $3.0 million, compared to a negative free cash flow of $(2.0) million in the same period of 2020[223] Quantitative and Qualitative Disclosures About Market Risk The company's market risks include interest rate exposure on variable debt, credit risk from receivables, and foreign currency fluctuations primarily from its German subsidiary Bressner's Euro transactions - The company is exposed to interest rate risk through its variable rate borrowings[207] - Credit risk is concentrated in cash, cash equivalents, and accounts receivable, with ongoing credit evaluations performed to mitigate this risk[208] - The company is subject to foreign currency risk as its German subsidiary, Bressner, largely transacts in Euros, with resulting translation adjustments recorded in other comprehensive income[209][210] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, 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 as of the end of the period covered by the report[227] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2021[228] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, and details regarding unregistered sales of equity securities and use of proceeds Legal Proceedings This section refers to Note 10, detailing the resolution and dismissal of a legal action filed by the company's former CEO in June 2021 - A legal action filed by former CEO Stephen D. Cooper against the company was resolved, and the court entered a dismissal with prejudice on June 28, 2021[110][231] Risk Factors This section highlights ongoing business risks from the COVID-19 pandemic, including demand fluctuations, supply chain disruptions, and impacts on media, entertainment, and airline industries - The business continues to face negative effects from the COVID-19 pandemic, including impacts on customers, suppliers, and overall demand[233] - Demand from customers in the media, entertainment, and commercial airline industries has been particularly impacted by restrictions on public gatherings and reduced travel[236] - The pandemic raises the possibility of an extended global economic downturn, which could disrupt the supply chain and negatively affect revenues in future periods[237] Unregistered Sales of Equity Securities and Use of Proceeds During the first nine months of 2021, the company issued common stock shares from warrant exercises, generating $107,500 in proceeds, without registration under the Securities Act of 1933 - During the nine months ended September 30, 2021, the company issued 54,834 shares of common stock from the exercise of warrants, generating total proceeds of $107,500[238]