One Stop Systems(US:OSS)2023-08-10 20:05Company Focus and Strategy - One Stop Systems, Inc. focuses on high-performance compute and storage hardware for edge AI applications, targeting markets such as medical, industrial, and military [125]. - The company has shifted its focus to AI Transportables since 2021, with increased efforts in the military and defense sectors, supported by a new strategic advisory board [144]. - Recent organizational changes include the appointment of Michael Knowles as CEO and the hiring of a new VP of Sales with defense industry experience [132][145]. - The board of directors is being reprofiled to align with the company's focus on AI Transportables and military business [133]. - The company has made strategic acquisitions, including OSS GmbH and Bressner Technology GmbH, to enhance its capabilities in high-performance computing [129]. - The company is committed to navigating government bureaucracy and leveraging contacts in the defense sector through its advisory board [131]. - The company has shifted its focus to the development and sale of AI Transportables, particularly targeting military and defense sectors, with new leadership in place to support this strategy [212][216]. Financial Performance - For the three months ended June 30, 2023, total revenue decreased by $1,091,811, or 6.0%, compared to the same period in 2022 [169]. - OSS Classic revenue decreased by $2,437,265, or 22.8%, primarily due to decreased shipments to a media customer and bankruptcy of an autonomous trucking customer [169]. - OSS Europe revenue increased by $1,345,454, or 17.7%, attributed to additional project-based business and an increase in smaller accounts [169]. - Gross profit for the three months ended June 30, 2023, was $4,797,938, representing a gross margin of 27.9% [166]. - Total operating expenses for the three months ended June 30, 2023, were $8,211,495, which is 47.7% of revenue [166]. - The company reported a net loss of $2,399,496 for the three months ended June 30, 2023 [166]. - General and administrative expenses increased to $3,072,880 for the three months ended June 30, 2023, compared to $1,821,445 in the same period of 2022 [166]. - Impairment of goodwill amounted to $2,700,000 for the three months ended June 30, 2023 [166]. - Research and development expenses for the three months ended June 30, 2023, were $954,650, representing 5.5% of revenue [166]. - Total revenue decreased by $1,362,594, or 3.9%, for the six months ended June 30, 2023, compared to the same period in 2022 [170]. - OSS Classic revenue decreased by $4,388,721, or 20.6%, primarily due to reduced shipments to a media customer and bankruptcy of an autonomous trucking customer [170]. - OSS Europe revenue increased by $3,026,127, or 21.5%, due to additional project-based business and an increase in smaller accounts [170]. - Overall gross margin percentage was 29.0% for the six months ended June 30, 2023, compared to 29.2% in the same period in 2022 [175]. - General and administrative expenses increased by $1,761,848, or 49.0%, for the six months ended June 30, 2023, primarily due to organizational restructuring costs [177]. - Marketing and selling expenses increased by $74,013, or 2.3%, for the six months ended June 30, 2023, with OSS Europe experiencing a 16.9% increase [180]. - Research and development expenses decreased by $346,174, or 13.9%, for the six months ended June 30, 2023, with OSS Classic seeing a 16.2% decrease [182]. - The company recorded an impairment of goodwill of $2,700,000 in June 2023, reflecting poor financial performance and strategic shifts [178]. - The company experienced a net loss of $2,800,008 for the six months ended June 30, 2023, a decrease of $3,702,064 from a net income of $902,056 in 2022 [202]. - Adjusted EBITDA for the six months ended June 30, 2023, was $1,016,454, down from $2,589,691 in the same period of 2022, representing a decrease of approximately 60.7% [235]. - Free cash flow for the six months ended June 30, 2023, was $1,749,043, a significant improvement compared to a negative free cash flow of $(7,718,040) in the same period of 2022 [242]. Operational Challenges - As of June 30, 2023, the company completed most orders from a long-term media customer, which is transitioning to cloud solutions, negatively impacting operations [143]. - The company is experiencing supply chain issues, including increased pricing and longer lead times, leading to higher inventory balances [147]. - Economic uncertainties, including inflation and potential recession risks, are affecting customer spending and may lead to order delays or cancellations [146][148]. - The company anticipates continued negative impacts on operations due to customer funding delays and program postponements [148]. - The company is facing delays in funding for customer projects and extended sales cycles, which have negatively impacted results for the three and six months ended June 30, 2023 [209]. - The transition of a major long-term customer to cloud solutions has negatively impacted the company's results and is expected to continue affecting operations in the near term [211]. - Inflation has led to increased costs in semiconductor products and transportation, impacting the company's manufacturing and operating expenses [217]. Cash and Investments - As of June 30, 2023, total cash and cash equivalents were $6,100,317, with short-term investments of $9,321,456 [190]. - The net working capital sources for the six months ended June 30, 2023, were $1,184,919, compared to a use of working capital of $10,071,443 in the prior year, indicating a reduction in working capital use of $11,256,362 [204]. - Cash generated from investing activities decreased to $503,054 in the six months ended June 30, 2023, down from $2,878,600 in the prior year, reflecting a net decrease of $2,375,546 [206]. - Financing activities generated $413,575 during the six months ended June 30, 2023, compared to cash generated from new borrowings in the same period of 2022 [207]. - As of June 30, 2023, the company had $250,000 in cash exceeding FDIC insurance limits, and OSS Europe had €1,898,289 (approximately $2,072,507) in excess of insurance limits in Germany [226]. Shareholder Information - Stock-based compensation expense for the three months ended June 30, 2023, was $898,008, an increase from $532,636 in the same period of 2022 [235]. - The weighted average diluted shares outstanding for the three months ended June 30, 2023, was 20,397,741, compared to 21,180,490 for the same period in 2022 [238]. - The company reported a provision for income taxes of $396,863 for the three months ended June 30, 2023, compared to $85,490 for the same period in 2022 [235]. - Adjusted EPS for the three months ended June 30, 2023, was $(0.00), compared to $0.04 for the same period in 2022 [238]. - The company expects to continue incurring expenses similar to those reflected in adjusted income from continuing operations and adjusted EPS financial adjustments [237]. - The company utilizes foreign exchange forward contracts to manage market risks related to currency fluctuations, indicating a proactive approach to financial risk management [231].