Company Quick10K Filing
One Stop Systems
Price2.99 EPS-0
Shares16 P/E-25
MCap49 P/FCF126
Net Debt-1 EBIT-1
TEV48 TEV/EBIT-36
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-15
10-K 2019-12-31 Filed 2020-03-26
10-Q 2019-09-30 Filed 2019-11-07
10-Q 2019-06-30 Filed 2019-08-08
10-Q 2019-03-31 Filed 2019-05-09
10-K 2018-12-31 Filed 2019-03-21
10-Q 2018-09-30 Filed 2018-11-08
10-Q 2018-06-30 Filed 2018-08-08
10-Q 2018-03-31 Filed 2018-05-08
10-K 2017-12-31 Filed 2018-03-21
8-K 2020-05-14 Earnings, Exhibits
8-K 2020-05-11 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2020-04-24 Enter Agreement, Exhibits
8-K 2020-04-20 Enter Agreement, Exhibits
8-K 2020-04-05 Exit Costs
8-K 2020-03-26 Earnings, Exhibits
8-K 2020-02-15 Officers, Regulation FD, Exhibits
8-K 2020-02-15
8-K 2019-12-23 Officers
8-K 2019-11-07 Earnings, Exhibits
8-K 2019-11-04 Officers
8-K 2019-08-26 Leave Agreement, Regulation FD, Exhibits
8-K 2019-08-08 Earnings, Exhibits
8-K 2019-08-02 Enter Agreement, Regulation FD, Exhibits
8-K 2019-07-01 Enter Agreement, Regulation FD, Exhibits
8-K 2019-06-26 Enter Agreement, Other Events, Exhibits
8-K 2019-05-15 Shareholder Vote
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-03-20 Enter Agreement
8-K 2019-02-13 Officers
8-K 2019-01-31 Officers, Regulation FD, Exhibits
8-K 2019-01-02 Leave Agreement, Exit Costs
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-10-31 Enter Agreement, M&A, Sale of Shares, Regulation FD, Exhibits
8-K 2018-08-31 M&A, Sale of Shares, Regulation FD, Exhibits
8-K 2018-08-22 Enter Agreement, Regulation FD, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-07-30 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-26 Regulation FD, Exhibits
8-K 2018-05-22 Shareholder Vote
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-04-11 Officers, Regulation FD, Exhibits
8-K 2018-03-21 Earnings, Exhibits
8-K 2018-03-07 Regulation FD, Exhibits
8-K 2018-02-02 Amend Bylaw, Other Events, Exhibits
8-K 2018-02-01 Enter Agreement, Exhibits

OSS 10Q Quarterly Report

Part 1 - Financial Information
Item 1. Financial Statements.
Note 1 - The Company and Basis of Presentation
Note 2 - Significant Accounting Policies
Note 3 - Long - Lived Intangible Assets
Note 4 - Accounts Receivable
Note 5 - Inventories
Note 6 - Property and Equipment
Note 7 - Accrued Expenses and Other Liabilities
Note 8 - Debt
Note 9 - Stockholders' Equity
Note 10 - Employee Benefit Plan
Note 11 - Commitments and Contingencies
Note 12 - Related Party Transactions
Note 13 - Net Loss per Share
Note 14 - Segment and Geographic Information
Note 15 - Subsequent Events
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 oss-ex311_7.htm
EX-31.2 oss-ex312_8.htm
EX-32.1 oss-ex321_6.htm
EX-32.2 oss-ex322_9.htm

One Stop Systems Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
40322416802016201720182020
Assets, Equity
1511851-12016201720182020
Rev, G Profit, Net Income
1511730-42016201720182020
Ops, Inv, Fin

10-Q 1 oss-10q_20200331.htm 10-Q oss-10q_20200331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ________________

Commission File Number: 001-38371

 

One Stop Systems, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

33-0885351

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

2235 Enterprise Street #110

Escondido, California  92029

(Address of principal executive offices including Zip Code

 

(760) 745-9883

(Registrant’s telephone number, including area code)

 

(Former Name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol

Name of exchange on which registered

Common Stock, $0.0001 par value per share

OSS

The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                   Yes  No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                                                                     Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                    Yes      No 

As of April 30, 2020, the registrant had 16,485,362 shares of common stock (par value $0.0001) outstanding.

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Page

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

Unaudited Consolidated Balance Sheets

 

3

 

 

Unaudited Consolidated Statements of Operations

 

4

 

 

Unaudited Consolidated Statement of Comprehensive Loss

 

5

 

 

Unaudited Consolidated Statement of Stockholders’ Equity

 

6

 

 

Unaudited Consolidated Statements of Cash Flows

 

8

 

 

Notes to Unaudited Consolidated Financial Statements

 

10

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

32

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

48

Item 4.

 

Controls and Procedures

 

48

PART II. OTHER INFORMATION

Item 1.

 

Legal Proceedings

 

49

Item 1A.

 

Risk Factors

 

49

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

50

Item 3.

 

Defaults Upon Senior Securities

 

50

Item 4.

 

Mine Safety Disclosures

 

50

Item 5.

 

Other Information

 

50

Item 6.

 

Exhibits

 

51

 

 

Signatures

 

52

 

2


PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

Unaudited

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash  and cash equivalents

 

$

3,038,006

 

 

$

5,185,321

 

Accounts receivable, net

 

 

9,111,679

 

 

 

11,667,157

 

Inventories, net

 

 

8,984,877

 

 

 

7,369,356

 

Prepaid expenses and other current assets

 

 

840,525

 

 

 

453,938

 

Total current assets

 

 

21,975,087

 

 

 

24,675,772

 

Property and equipment, net

 

 

3,552,551

 

 

 

3,568,564

 

Deposits and other

 

 

45,133

 

 

 

47,146

 

Deferred tax assets, net

 

 

3,459,972

 

 

 

3,019,823

 

Goodwill

 

 

7,120,510

 

 

 

7,120,510

 

Intangible assets, net

 

 

1,171,667

 

 

 

1,346,192

 

 

 

$

37,324,920

 

 

$

39,778,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,833,791

 

 

$

4,115,977

 

Accrued expenses and other liabilities

 

 

4,610,506

 

 

 

4,607,432

 

Current portion of notes payable, net of debt discount of $7,019 and

   $7,019, respectively  (Note 8)

 

 

1,016,814

 

 

 

1,377,751

 

Current portion of related-party notes payable, net of debt discount

   of $23,060 and $23,060, respectively  (Note 8)

 

 

575,422

 

 

 

561,441

 

Total current liabilities

 

 

10,036,533

 

 

 

10,662,601

 

Notes payable, net of current portion and debt discount of $292 and  $2,047,

   respectively  (Note 8)

 

 

15,722

 

 

 

149,301

 

Related-party notes payable, net of current portion and debt discount

   of $961 and $6,726 , respectively  (Note 8)

 

 

50,686

 

 

 

199,943

 

Total liabilities

 

 

10,102,941

 

 

 

11,011,845

 

Commitments and contingencies (Notes 10 and 11)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $.0001 par value; 50,000,000 shares authorized;

   16,476,661 and 16,121,747 shares issued and outstanding, respectively

 

 

1,647

 

 

 

1,612

 

Additional paid-in capital

 

 

30,144,896

 

 

 

30,537,015

 

Noncontrolling interest

 

 

-

 

 

 

500

 

Accumulated other comprehensive loss

 

 

(73,340

)

 

 

(17,773

)

Accumulated deficit

 

 

(2,851,224

)

 

 

(1,755,192

)

Total stockholders’ equity

 

 

27,221,979

 

 

 

28,766,162

 

 

 

$

37,324,920

 

 

$

39,778,007

 

 

See accompanying notes to consolidated financial statements

3


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Revenue

 

$

13,359,637

 

 

$

10,057,899

 

Cost of revenue

 

 

9,963,950

 

 

 

7,646,277

 

Gross profit

 

 

3,395,687

 

 

 

2,411,622

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative

 

 

2,514,065

 

 

 

2,043,934

 

Marketing and selling

 

 

1,189,351

 

 

 

1,137,932

 

Research and development

 

 

1,203,425

 

 

 

1,261,964

 

Total operating expenses

 

 

4,906,841

 

 

 

4,443,830

 

Loss from operations

 

 

(1,511,154

)

 

 

(2,032,208

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

24,637

 

 

 

3,107

 

Interest expense

 

 

(68,784

)

 

 

(6,268

)

Other income (expense), net

 

 

(8,029

)

 

 

(11,271

)

Total other income (expense), net

 

 

(52,176

)

 

 

(14,432

)

Loss before income taxes

 

 

(1,563,330

)

 

 

(2,046,640

)

Benefit for income taxes

 

 

(467,298

)

 

 

(1,101,911

)

Net loss attributable to common stockholders

 

$

(1,096,032

)

 

$

(944,729

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

 

$

(0.07

)

Diluted

 

$

(0.07

)

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

16,332,898

 

 

 

14,239,711

 

Diluted

 

 

16,332,898

 

 

 

14,239,711

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements

4


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Net loss attributable to common stockholders

 

$

(1,096,032

)

 

$

(944,729

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

(55,567

)

 

 

(41,869

)

Total other comprehensive loss

 

 

(55,567

)

 

 

(41,869

)

Comprehensive loss

 

$

(1,151,599

)

 

$

(986,598

)

 

 

 

 

 

 

See accompanying notes to consolidated financial statements

 

5


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For The Three Months Ended March 31, 2020

 

 

Common Stock

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

Total

 

 

Shares

 

Amount

 

Additional

Paid-in-Capital

 

Noncontrolling

Interest

 

Comprehensive

loss

 

Accumulated

Deficit

 

Stockholders'

Equity

 

Balance, January 1, 2020

 

16,121,747

 

$

1,612

 

$

30,537,015

 

$

500

 

$

(17,773

)

$

(1,755,192

)

$

28,766,162

 

Stock-based compensation

 

-

 

 

-

 

 

207,761

 

 

-

 

 

-

 

 

-

 

 

207,761

 

Exercise of stock options, RSU's and Warrants

 

354,914

 

 

35

 

 

56,965

 

 

-

 

 

-

 

 

-

 

 

57,000

 

Return of capital upon dissolution of SkyScale

 

 

 

 

 

 

 

 

 

 

(500

)

 

 

 

 

 

 

 

(500

)

Taxes paid on net issuance of employee stock options

 

-

 

 

-

 

 

(656,845

)

 

-

 

 

-

 

 

-

 

 

(656,845

)

Currency translation adjustment

 

-

 

 

-

 

 

-

 

 

-

 

 

(55,567

)

 

-

 

 

(55,567

)

Net loss

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

(1,096,032

)

 

(1,096,032

)

Balance, March 31, 2020

 

16,476,661

 

$

1,647

 

$

30,144,896

 

$

-

 

$

(73,340

)

$

(2,851,224

)

$

27,221,979

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements

6


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For The Three Months Ended March 31, 2019

 

 

Common Stock

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

Total

 

 

Shares

 

Amount

 

Additional

Paid-in-Capital

 

Noncontrolling

Interest

 

Comprehensive

Income (loss)

 

Accumulated

Deficit

 

Stockholders'

Equity

 

Balance, January 1, 2019

 

14,216,328

 

$

1,422

 

$

27,424,113

 

$

500

 

$

1,142

 

$

(854,855

)

$

26,572,322

 

Stock-based compensation

 

-

 

 

-

 

 

167,474

 

 

-

 

 

 

 

 

-

 

 

167,474

 

Exercise of stock options, RSU's and Warrants

 

54,098

 

 

5

 

 

14,196

 

 

-

 

 

-

 

 

-

 

 

14,201

 

Currency translation adjustment

 

-

 

 

-

 

 

-

 

 

 

 

 

(41,869

)

 

-

 

 

(41,869

)

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(944,729

)

 

(944,729

)

Balance, March 31, 2019

 

14,270,426

 

$

1,427

 

$

27,605,783

 

$

500

 

$

(40,727

)

$

(1,799,584

)

$

25,767,399

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements

 

 

7


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(1,096,032

)

 

$

(944,729

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Deferred benefit for income taxes

 

 

(441,282

)

 

 

(1,165,219

)

(Gain) on disposal of property and equipment

 

 

(1,542

)

 

 

(1,050

)

Provision for bad debt

 

 

(2,405

)

 

 

(88

)

Warranty reserves

 

 

5,075

 

 

 

(3,428

)

Amortization of deferred gain

 

 

(41,479

)

 

 

(16,479

)

Amortization of intangibles

 

 

174,525

 

 

 

349,419

 

Depreciation

 

 

221,300

 

 

 

115,308

 

Inventory reserves

 

 

148,418

 

 

 

57,046

 

Amortization of debt discount

 

 

7,520

 

 

 

-

 

Stock-based compensation expense

 

 

207,761

 

 

 

167,474

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,530,072

 

 

 

1,868,297

 

Inventories

 

 

(1,826,564

)

 

 

(2,699,867

)

Prepaid expenses and other current assets

 

 

(386,005

)

 

 

(185,596

)

Accounts payable

 

 

(275,428

)

 

 

1,467,746

 

Accrued expenses and other liabilities

 

 

54,293

 

 

 

791,149

 

Net cash used in operating activities

 

 

(721,773

)

 

 

(200,017

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment, including capitalization of labor

   costs for test equipment and ERP

 

 

(200,049

)

 

 

(803,243

)

Proceeds from sales of property and equipment

 

 

1,542

 

 

 

1,050

 

Net cash used in investing activities

 

 

(198,507

)

 

 

(802,193

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of stock and stock options exercised

 

 

57,000

 

 

 

14,201

 

Payment of payroll taxes on net issuance of employee stock options

 

 

(656,845

)

 

 

-

 

Net (repayment) borrowings on bank lines of credit

 

 

(430,313

)

 

 

140,967

 

Net repayments on related-party notes payable

 

 

(141,042

)

 

 

-

 

Net repayments on notes payable

 

 

(42,919

)

 

 

(972,440

)

Net cash used in financing activities

 

 

(1,214,119

)

 

 

(817,272

)

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(2,134,399

)

 

 

(1,819,482

)

Effect of exchange rates on cash

 

 

(12,916

)

 

 

2,660

 

Cash and cash equivalents, beginning of period

 

 

5,185,321

 

 

 

2,272,256

 

Cash and cash equivalents, end of period

 

$

3,038,006

 

 

$

455,434

 

 

See accompanying notes to consolidated financial statements

8


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

22,369

 

 

$

6,268

 

Cash paid during the period for income taxes

 

$

-

 

 

$

62,349

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements

9


ONE STOP SYSTEMS, INC. (OSS)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For The Three Months Ended March 31, 2020 and 2019

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Nature of Operations

One Stop Systems, Inc. (“we,” “our,” “OSS,” or the “Company”) was originally incorporated as a California corporation in 1999 after initially being formed as a California limited liability company in 1998. On December 14, 2017, the Company was reincorporated as a Delaware corporation in connection with its initial public offering.  The Company designs, manufactures and markets industrial grade computer systems and components that are based on industry standard computer architectures. The Company markets its products to manufacturers of automated equipment used for entertainment, telecommunications, industrial and military applications.     

During the year ended December 31, 2015, the Company formed a new wholly-owned subsidiary in Germany (“OSS GmbH”).  During July 2016, the Company acquired Mission Technologies Group, Inc. (“Magma”) and its operations.

In April 2017, the Company and a related entity formed a joint venture named SkyScale, LLC in the State of California (“SkyScale”).  In accordance with the Contribution Agreement, each member contributed $750,000 and received a 50% interest in the joint venture.  The purpose of SkyScale was to engage in the business of providing high performance computing capabilities as cloud services.  As a result of changes in the competitive landscape and downward pressure on pricing from large competitors, the members to the SkyScale joint venture agreement agreed to dissolve SkyScale and ceased operations as of December 31, 2018.     

In May 2017, the Company entered into a Technology and Software License Agreement with Western Digital (“WDT”) for their Ion flash storage software.  The agreement provides the Company with the Ion source code and rights to develop and market derivative products.  The Company intends to develop and sell Ion flash storage software with its high-density storage arrays, as well as service existing WDT software users.

In July 2017, the Company entered in to a Service Agreement with WDT to service its existing customer base that utilizes Ion flash storage software.  The Company also purchased certain equipment from WDT and hired selected employees to assist in the servicing of these existing customers.  Management has determined that the activities and assets acquired from WDT comprise a business as defined in ASC 805-10-55-4 through 55.  Consideration paid by the Company to WDT pursuant to the arrangements described above was $67,000.  In addition, the Company is required to pay prospective royalties to WDT of $2,500 or $5,000 for each sale of the Company’s products that include licensed software.  WDT is obligated to pay the Company for services rendered to support existing WDT software users the amount of $1,400,000 in defined declining quarterly amounts over a three year period.  Management does not believe this business acquisition meets the significance definition provided in Regulation S-X, Rule 210.1-02(w).

On August 31, 2018, the Company acquired Concept Development Inc. (CDI) located in Irvine, California for cash of $646,759, and common stock valued at $4,194,673 (Note 3).  CDI specializes in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment systems.

 

On October 31, 2018, the Company’s wholly-owned German subsidiary, OSS GmbH, acquired 100% of the outstanding stock of Bressner Technology GmbH, a Germany limited liability company located near Munich, Germany, from its principal owners for cash consideration of €4,725,000 (US$5,374,582) and stock consideration of 106,463 newly-issued restricted shares of the Company’s common stock.

10


Liquidity and Going Concern Considerations

 

Given our recent operating losses, the Company’s primary sources of liquidity have been provided by (i) the Company’s February 2018 initial public offering (net proceeds were approximately $16,100,000), (ii) March 2019 notes payable from members of the Board of Directors and others of $1,500,000, (iii) the July 2019 sale of 1,554,832 shares of the Company’s common stock for net cash proceeds of $2,488,148 and (iv) the April 24, 2020 sale of $3,000,000 of Senior Secured Convertible Promissory Notes issued at a 10% original issue discount.

 

As of March 31, 2020, the Company’s cash and cash equivalents were $3,038,006 and working capital was $11,938,554.  Cash and cash equivalents held by Bressner totaled $599,511 (USD) at March 31, 2020, and Bressner’s debt covenants do not permit the use of those funds by its parent company. During the three months ended March 31, 2020, the Company experienced an operating loss of $1,511,154, with cash used in operating activities of $721,773.  Our largest customer, engaged in the media and entertainment industry, is having significant financial hardships attributable to the COVID-19 pandemic and as a result has been slow in paying its outstanding accounts receivables. The Company has formulated a plan whereby extended terms have been made available, and our customer is presently honoring those terms.

 

The Company’s revenue growth, inclusive of two acquisitions made in 2018, has resulted in growth of the Company as a whole, but has been offset by increased spending in all areas of operating expenses:  general and administrative, marketing and selling, and research and development.  

 

The recent outbreak of the novel strain of coronavirus, or COVID-19, which has been declared by the World Health Organization to be a “public health emergency of international concern,” has spread across the globe and is impacting worldwide economic activity. A public health pandemic, including COVID-19, poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt the supply chain and adversely impact our business, financial condition or results of operations. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.

Though management has been successfully managing through the current known impacts, if the situation further deteriorates or the outbreak results in further restriction on both supply and demand factors, our cash flows, financial position and operating results for fiscal year 2020 and beyond will be negatively impacted. Neither the length of time nor the magnitude of the negative impacts can be presently determined.

 

Management’s plans with respect to the above is to continue its efforts to restructure the Company with the primary objectives of reducing costs, conserving cash, strengthening margins, and improving company-wide execution.  Specific actions already implemented by management include the deferral of certain executive and Board compensation payments, a freeze on hiring and minimizing overtime, travel and entertainment, and contractor costs.  On April 7, 2020, the Company implemented a cost reduction plan which included the termination of certain employees and elimination of certain costs.  Estimated savings from this effort are estimated to be $2.5 to $3.0 million for the year ending 2020.

 

While management expects these actions to result in prospective cost reductions, management is also committed to securing debt and/or equity financing to ensure that liquidity will be sufficient to meet the Company’s cash requirements through at least a period of the next twelve months. Management believes potential sources of liquidity include at least the following:

 

 

In March 2019, the Company received funding commitments in the amount of $4,000,000 from members of the Board of Directors, of which $1,500,000 has been drawn through December 31, 2019, of which $786,125 remains outstanding. Management expects that $500,000 of such remaining commitments is available to the Company.

11


 

 

In May 2019, the Company filed a Form S-3 prospectus with the Securities and Exchange Commission which became effective on June 19, 2019, and allows the Company to offer up to $100,000,000 aggregate dollar amount of shares of its common stock, preferred stock, debt securities, warrants to purchase its common stock, preferred stock or debt securities, subscription rights to purchase its common stock, preferred stock or debt securities and\or units consisting of some or all of these securities, in any combination, together or separately, in one of more offerings, in amounts, at prices and on the terms that the Company will determine at the time of the offering and which will be set forth in a prospectus supplement and any related free writing prospectus.

 

 

On April 24, 2020, the Company completed a $6.0 million debt financing on a non-interest bearing convertible note with a 10% original issue discount.  The first tranche of $3.0 million was received April 27, 2020, with an additional $3.0 million available seven months from the date of closing at the option of the Company conditioned upon meeting certain requirements.  The note is repayable in twenty-two installments beginning three months after closing.

 

 

On April 28, 2020, the Company received a Paycheck Protection Program (PPP) loan in the amount of $1,500,000.

 

As a result of management’s cost reduction plans, the Company’s potential sources of liquidity and management’s most recent cash flow forecasts, management believes that the Company has sufficient liquidity to satisfy its anticipated cash requirements for at least the next twelve months. However, there can be no assurance that management’s cost reduction efforts will be effective, the forecasted cash flows will be achieved, or that external sources of financing, including the issuance of debt and/or equity securities, will be available at times and on terms acceptable to the Company, or at all.  

Basis of Presentation

The accompanying consolidated financial statements have been prepared on an accrual basis of accounting in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”), as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).  

 

The unaudited consolidated financial statements herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities Exchange Commission (“SEC”).  The accompanying interim unaudited consolidated financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the latest year ended December 31, 2019.  Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, 2019 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements.  The Company evaluated all subsequent events and transactions through the date of filing this report.

 

Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.  For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 26, 2020.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of OSS, which include the results from the Magma acquisition, Ion business combination, and acquisition of Concept Development Inc., since their respective dates of acquisition, its wholly-owned subsidiary, OSS GmbH, which includes the acquisition of Bressner Technology GmbH, and the accounts of the joint venture, SkyScale LLC, which was approved for dissolution on December 31, 2018 (collectively referred to as the “Company”).  Intercompany balances and transactions have been eliminated in consolidation.

12


NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets, liabilities, and expenses at the date of the consolidated financial statements during the reporting period.  

Significant estimates made by management include, among others, the fair value of acquired net assets of CDI in August 2018 with reevaluation in April 2019, and Bressner Technology GmbH in October 2018, the allowance for doubtful accounts, fair value of stock options, recoverability of inventories and long-lived assets, and realizability of deferred tax assets.  Actual results could differ from those estimates.

 

Concentration Risks

 

At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (“FDIC”), which provides basic deposit coverage with limits up to $250,000 per owner.  As of March 31, 2020, the Company had $2,169,502 in excess of the insurance limits.  The Company has not experienced any such losses in these accounts.  In Germany, the deposit insurance is €100,000 per bank, per customer.  As of March 31, 2020, Bressner has €443,844 (US$489,275) on deposit with banks in excess of the insurance limits.

 

In the three month periods ended March 31, 2020, and 2019, the Company has one customer which represented greater than 10% of the Company’s revenue.  Collectively, this customer represented approximately 27%, and 26% of revenue, respectively.  As of March 31, 2020 and December 31, 2019, one customer accounted for 59% and 45% of net trade accounts receivables, respectively.

 

The Company made purchases from certain suppliers of which each supplier was greater than 10% of the Company’s total vendor purchases on an annual basis.  Collectively these vendors represented approximately 17% and 30% of purchases for the three month periods ended March 31, 2020, and 2019, respectively.  

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on deposit and money market accounts.  The Company considers all highly liquid temporary cash investments with an initial maturity of 90 days or less when acquired to be cash equivalents.  Management believes that the carrying amounts of cash equivalents approximate their fair value because of the short maturity period.

 

Accounts Receivable

Accounts receivable are presented at net realizable value.  This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the trade accounts receivable and unbilled receivables.   Unbilled receivables include costs and gross profit earned in excess of billings.  The allowance for doubtful accounts is an estimate to cover the losses resulting from the inability of customers to make payments on their outstanding balances and unbilled receivables.  In estimating the required allowance, management considers the overall quality and aging of the accounts receivable, specific customer circumstances, current economic trends, and historical experience with collections.  At March 31, 2020 and December 31, 2019, the allowance for doubtful accounts was $11,518, and $14,000, respectively.

 

Revenues earned in excess of related billings are recorded as an asset on the balance sheet as unbilled receivables.  Unbilled receivables as of March 31, 2020 and December 31, 2019, were $214 and $25,432, respectively.

13


Inventories

Inventories are valued at the lower of cost or net realizable value.  The Company uses the average cost method for purposes of determining cost, which approximates the first-in, first-out method.

The Company establishes reserves on its inventories to write-down the carrying value of its estimated obsolete or excess inventories to estimated net realizable value based upon observations of historical usage and assumptions about future demand and market conditions.  In addition, the Company considers changes in the market value of components in determining the net realizable value of its inventory.  Inventory reserves are not typically reversed until the specific inventories are sold or otherwise disposed.

 

Actual demand, product mix and alternative usage may be lower than those that we project and this difference could have a material adverse effect on our gross margin if inventory write-downs beyond those initially recorded become necessary.  Alternatively, if actual demand, product mix and alternative usage are more favorable than those we estimated at the time of such a write-down, our gross margin could be favorably impacted in future periods.

 

Property and Equipment

Property and equipment, other than leasehold improvements, are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, generally from three to seven years. Leasehold improvements are recorded at cost and are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the related asset.  Tooling and test equipment includes capitalized labor costs associated with the development of the related tooling and test equipment.  Costs incurred for maintenance and repairs are expensed as incurred, and expenditures for major replacements and improvements are capitalized. Upon retirement or sale, the cost and related accumulated depreciation and amortization of disposed assets are removed from the accounts and any resulting gain or loss is included in other income (expense), net.

Goodwill

 

Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event has occurred.  The Company reviews goodwill for impairment annually on December 31.  The Company completed its annual assessment for goodwill impairment and determined that goodwill is not impaired as of December 31, 2019 and no adjustment was required.  

 

In April 2019, the Company performed an impairment test of goodwill, as a result of a short-fall in the actual overall financial performance of CDI as compared to plan, a recurring need for working capital, and a decrease in the Company’s stock price.  As a result of this interim evaluation, the Company recorded an impairment loss to goodwill of $1,697,394, which was charged to operating expenses during the second quarter of 2019.

 

 

Intangible Assets and Long-lived Assets

 

We evaluate our intangible and long-lived assets for impairment when events or circumstances arise that indicate our intangible and long-lived assets may be impaired. Indicators of impairment include, but are not limited to, a significant deterioration in overall economic conditions, a decline in our market capitalization, the loss of significant business, significant decreases in funding for our contracts, or other significant adverse changes in industry or market conditions. The Company completed its qualitative assessment for impairment in December 2019 and determined that there was no impairment as of December 31, 2019.  There were no events or circumstances that arose during the three month period ended March 31, 2020, that gave an indication of impairment. There can be no assurance, however, that market conditions will not change or demand for the Company’s products will continue, which could result in an impairment of intangible and long-lived assets in the future.

14


Fair Value Measurements

 

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement.  These tiers include:

 

Level 1, defined as quoted market prices in active markets for identical assets or liabilities;

 

Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3, defined as unobservable inputs that are not corroborated by market data.

The carrying value of financial instruments including cash and cash equivalents accounts receivable and accounts payable and accrued expenses, lines of credit, and other liabilities approximate fair value due to the short-term nature of these instruments.  Assets and liabilities assumed in the acquisition of  the Ion software, Concept Development Inc., and Bressner Technology GmbH were recorded at fair value based upon the Company’s market assumptions which approximated carrying value (except for acquired intangible assets – Note 3) due to the short-term nature of the instruments.  The carrying amounts of the Company’s notes payable and Bressner’s existing lines of credit and notes payable approximate their fair values at the stated interest rates and are reflective of the prevailing market rates.

 

Revenue Recognition

 

On January 1, 2019, the Company adopted the new accounting standard update ASC 606, Revenue from Contracts with Customers, which superseded nearly all existing revenue recognition guidance under GAAP, to all contracts using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.  

 

The Company’s performance obligations are satisfied over time as work is performed or at a point in time. The majority of the Company’s revenue is recognized at a point in time when products ship and control is transferred to the customer. The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied.

 

The Company’s contracts are executed through a combination of written agreements along with purchase orders with all customers including certain general terms and conditions. Generally, purchase orders entail products, quantities and prices, which define the performance obligations of each party and are approved and accepted by the Company. The Company’s contracts with customers do not include extended payment terms. Payment terms vary by contract type and type of customer and generally range from 30 to 60 days from invoice. Additionally, taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue.

 

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration, if any.  Variable consideration may include discounts, rights of return, refunds, and other similar obligations. The Company allocates the transaction price to each distinct product and service based on its relative standalone selling price. The standalone selling price for products primarily involves the cost to produce the deliverable plus the anticipated margin and for services is estimated based on the Company’s approved list price.

15


In the normal course of business, the Company does not accept product returns unless the items are defective as manufactured. The Company establishes provisions for estimated returns and warranties. In addition, the Company does not typically provide customers with the right to a refund and does not transact for noncash consideration.

 

Customer agreements include one vendor managed inventory program. The Company recognizes revenue under this arrangement when all of the following criteria are met: (i) the goods have been identified separately as belonging to the customer; (ii) the goods are ready for physical shipment to the customer; (iii) the Company does not have the ability to direct the goods to another customer; and (iv) the arrangement was requested by the customer and that the customer has sufficiently explained a substantial business purpose for the arrangement.  Management also considers whether the customer's custodial risks are insured and whether modifications to the Company's normal billing and credit terms were required.

The Company recorded revenue from product sales that are held in vendor managed inventory under these agreements of $3,179,943 and $1,494,078 during the three month periods ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, $1,329,057 and $459,893, respectively, of product sold through those dates were held by the Company in the vendor management program.

Revenues on certain fixed-price contracts where we provide engineering services, prototypes and completed products are recognized based upon percentage of completion or based upon milestones delivered that are provided during the period and compared to milestone goals to be provided over the entire contract. These services require that we perform significant, extensive and complex design, development, modification or implementation of our customers’ systems. Performance will often extend over long periods of time, and our right to receive future payment depends on our future performance in accordance with the agreement.

The percentage-of-completion methodology involves recognizing probable and reasonably estimable revenue using the percentage of services completed, on a current cumulative cost to estimated total cost basis, using a reasonably consistent profit margin over the performance period. Due to the long-term nature of these projects, developing the estimates of costs often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the projects include, but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed and the impact of delayed performance. If changes occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, which may result in increases or decreases in revenues and costs, and such revisions are reflected in earnings in the period in which the revision becomes known.

 

During the three month periods ended March 31, 2020 and 2019, revenue recognized on a fixed price contractual basis was $73,750 and $43,071, respectively.

 

The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation.

 

On certain contracts with several of the Company’s significant customers, the Company receives payments in advance of manufacturing. Advanced payments are recorded as deferred revenue until the revenue recognition criteria described above has been met.

 

Related billings that are in excess of revenue earned are deferred and recorded as a liability on the consolidated balance sheet until the related services are provided. Deferred revenue was $12,359 and $24,718 as of March 31, 2020 and December 31 2019, respectively.

 

16


Remaining performance obligations represent the amount of revenue from fixed-fee contracts. As of March 31, 2020 and December 31, 2019, approximately $0, attributable to cancellation of a contract, and $317,718, respectively of revenue from fixed-fee contracts that is expected to be recognized from these remaining performance obligations.  We elected to utilize the practical expedient exemption to exclude from this disclosure the amount of revenue from contracts which are not fixed-fee and where we do not have the right to invoice until the services have been performed.

The Company’s operating segment revenues disaggregated by primary geographic market, which is determined based on a customer’s geographic location, for the three months ended March 31, 2020 and 2019 is as follows:

 

 

 

For The Three Month Period

Ended March 31, 2020

 

 

 

For The Three Month Period

Ended March 31, 2019

 

Entity:

 

Domestic

 

 

International

 

 

Total

 

 

 

Domestic

 

 

International

 

 

Total

 

Customized computers and flash

   arrays

 

$

6,207,898

 

 

$

1,610,380

 

 

$

7,818,278

 

 

 

$

2,042,510

 

 

$

3,187,576

 

 

$

5,230,086

 

In-flight entertainment &

   connectivity

 

 

529,406

 

 

 

92,540

 

 

 

621,946

 

 

 

 

296,529

 

 

 

2,925

 

 

 

299,454

 

Value-added reseller with

   minimal customization

 

 

-

 

 

 

4,919,413

 

 

 

4,919,413

 

 

 

 

-

 

 

 

4,528,359

 

 

 

4,528,359

 

 

 

$

6,737,304

 

 

$

6,622,333

 

 

$

13,359,637

 

 

 

$

2,339,039

 

 

$

7,718,860

 

 

$

10,057,899

 

Warranty Reserves

The Company offers product warranties that extend for one year from the date of sale. Such warranties are considered assurance-type warranties and therefore, they would not be deemed to be a separate performance obligation under ASC 606.  Such warranties require the Company to repair or replace defective product returned to the Company during the warranty period at no cost to the customer. The Company records an estimate for warranty‑related costs at the time of sale based on its historical and estimated future product return rates and expected repair or replacement costs (Note 7).  

While such costs have historically been within management’s expectations and the provisions established, unexpected changes in failure rates could have a material adverse impact on the Company, requiring additional warranty reserves and could adversely affect the Company’s gross profit and gross margins.

The Company offers customers extended warranties beyond the standard one-year warranty on the product.  The extended warranties are considered service-type warranties and would be considered as a separate performance obligation under ASC 606.  The Company is the primary obligor and, revenue is recognized on a gross basis ratably over the term of the extended warranty.  The customer can purchase extended warranties from one to five years, in the bronze, silver or gold categories.  This entails hardware repair or replacement, shipping methods on how the warranties will be returned / delivered, response times and hours of operations to receive support.  The amount of warranties sold for the three months ended March 31, 2020 and 2019 were $92,724 and $80,123, respectively.

 

The revenue that was recognized for the warranties sold for the three months ended March 31, 2020 and 2019 were $69,105 and $106,698, respectively. The Company does have recourse with some of its suppliers that offer more than a one-year guarantee on parts, but this is not standard.  The few that offer greater than a year warranty, the Company may be able to cover the cost of the part from the manufacturer for the failed part.  The amounts of these costs vary in a wide range, but are not material, due to the infrequency of failure.  As of March 31, 2020 and December 31, 2019, deferred revenue totaled $388,378 and $394,571, respectively.  The Company expects to recognize $388,378 of unearned revenue amounts from 2020 through 2024.

Shipping and Handling Costs

The Company's shipping and handling costs are included in cost of goods sold for all periods presented.

17


 

Foreign Currency

 

We operate primarily in the United States.  Foreign sales of products and services are primarily denominated in U.S. dollars.  We also conduct business outside the United States through our foreign subsidiary in Germany, where business is largely transacted in non-U.S. dollar currencies, particularly the Euro, which is subject to fluctuations due to changes in foreign currency exchange rates.   Accordingly, we are subject to exposure from changes in the exchange rates of local currencies. Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations.

OSS GmbH operates as an extension of OSS’ domestic operations.  The functional currency of OSS GmbH is the Euro. Transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the average exchange rate in effect during the period.  At the end of each reporting period, monetary assets and liabilities are remeasured using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Consequently, changes in the exchange rates of the currencies may impact the translation of the foreign subsidiaries’ statements of operations into U.S. dollars, which may in turn affect our consolidated statements of operations. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive (loss) income in the consolidated balance sheets.

 

Derivative Financial Instruments

 

We employ derivatives to manage certain market risks through the use of foreign exchange forward contracts. We do not use derivatives for trading or speculative purposes. Our derivatives are designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we enter into foreign exchange contracts to provide currency at a fixed rate. As of March 31, 2020, the Company had no foreign exchange contracts outstanding.  

 

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated other comprehensive income until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as “Other income (expense) – net” in the consolidated statements of income in each period.

Stock-Based Compensation

 

The Company accounts for employee and director share-based compensation in accordance with the provisions of ASC Topic 718 “Compensation – Stock Compensation”.  Under ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

 

All transactions in which goods or services are the consideration received for the issuance of equity instruments to non-employees are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the estimated fair value of the equity instrument issued is the earlier of the date on which the third-party performance is complete or the date on which it is probable that performance will occur.

 

Employee and director stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period.  Given that stock-based compensation expense recognized in the accompanying consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company’s estimated average forfeiture rates are based on historical forfeiture experience and estimated future forfeitures.

18


 

Compensation cost for stock awards, which include restricted stock units (“RSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service period. The fair value of stock awards is based on the quoted price of our common stock on the grant date.

 

The estimated fair value of common stock option awards is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions regarding future stock price volatility and expected time to exercise, along with assumptions about the risk-free interest rate and expected dividends, all of which affect the estimated fair values of the Company’s common stock option awards.  The expected term of options granted is calculated using the simplified method, which is the weighted average vesting period and the contractual lives of the options.  

 

This calculation is based on a method acceptable in instances where the vesting and exercise terms of options granted meet certain conditions and where limited historical exercise data is available.  The expected volatility is based on the historical volatility of the common stock of comparable public companies that operate in similar industries as the Company.

The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the expected term of the grant effective as of the date of the grant. The expected dividend assumption is based on the Company’s history and management’s expectation regarding dividend payouts. Compensation expense for common stock option awards with graded vesting schedules is recognized on a straight-line basis over the requisite service period for the last separately vesting portion of the award, provided that the accumulated cost recognized as of any date at least equals the value of the vested portion of the award.

If there are any modifications or cancellations of the underlying vested or unvested stock-based awards, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense, or record additional expense for vested stock-based awards. Future stock-based compensation expense and unearned stock- based compensation may increase to the extent that the Company grants additional common stock options or other stock-based awards.

 

Business Combinations

 

We utilize the acquisition method of accounting for business combinations and allocate the purchase price of an acquisition to the various tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. We primarily establish fair value using the income approach based upon a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates. Other estimates include:

 

 

Estimated step-ups or write-downs for fixed assets and inventory;

 

Estimated fair values of intangible assets; and

 

Estimated income tax assets and liabilities assumed from the target

While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the business acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

For changes in the valuation of intangible assets between preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs. Subsequent to the purchase price allocation period, any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is determined.  Should we issue shares of our common stock in an acquisition, we will be required to estimate the fair value of the shares issued. See Note 3.

19


 

Advertising Costs

Advertising costs are expensed as incurred and included in marketing and selling expense in the accompanying consolidated statements of operations.  Advertising costs for the three month periods ended March 31, 2020 and 2019 were $122,092 and $130,922, respectively.  

 

Research and Development Expenses

Research and development expenditures are expensed in the period incurred.  Research and development expenses primarily consist of salaries, benefits and stock-based compensation, as well as consulting expenses and allocated facilities and other overhead costs. Research and development activities include the development of new technologies, features and functionality in support of the Company’s products and customer needs.

 

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Under ASC Topic 740, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.  An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.  Additionally, ASC Topic 740 provides requirements for derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.  

 

The Company files income tax returns in the U.S. federal jurisdiction, California and Germany.  The Company has elected to treat the tax effect of Global Intangible Low Tax Income (“GILTI”) as a current-period expense when occurred.  The Company does not foresee material changes to its gross liability of uncertain tax positions within the next twelve months.

 

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

 

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act resulted in two adjustments to our income tax provision for the three months ended March 31, 2020, relating to a projected 2018 NOL utilization and tax benefits from NOL carrybacks. We have recorded a discrete benefit of $100,000 in our income tax provision for the three months ended March 31, 2020 related to the CARES Act.

20


 

Interest Expense

Interest expense consists primarily of interest associated with the Company’s issued debt including the amortization of debt discounts.  The Company recognizes the amortization of debt discounts and the amortization of interest costs using a straight-line method which approximates the effective interest method.

 

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average common shares outstanding during the period.  Diluted net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average shares and dilutive potential common shares outstanding during the period. Dilutive potential shares consist of dilutive shares issuable and the exercise or vesting of outstanding stock options and warrants, respectively, computed using the treasury stock method. During a period where a net loss is incurred, dilutive potential shares are excluded from the computation of dilutive net loss per share, as inclusion is anti-dilutive.   

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”).  Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  ASU 2016-02 is effective for the Company for fiscal years beginning after December 15, 2020, and interim periods within fiscal year 2022.  Early application is permitted.  Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.  Lessees may not apply a full retrospective transition approach.  The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements and disclosures.  Based on our preliminary analysis, management expects the Company’s assets and liabilities to increase by the present value of the lease payments disclosed in Note 11.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 is effective for the Company for the year ended December 31, 2019 and interim reporting periods within 2020. The effect of the adoption of this guidance did not significantly impact the Company’s consolidated financial statements.

 

In September 2018, the FASB issued ASU No. 2018-07, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting, which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. This ASU becomes effective for the year ending December 31, 2020 (and interim periods in 2021) and early adoption is permitted but no earlier than an entity’s adoption date of Topic 606. Entities will apply the ASU by recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the annual period of adoption. We are currently evaluating the impact that ASU 2018-07 will have on our condensed consolidated financial statements.

 

21


Recently Implemented Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in FASB Topic 605, Revenue Recognition. ASU 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards.  This guidance provides a single, comprehensive accounting model for revenue arising from contracts with customers. This guidance supersedes most of the existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that a company expects to be entitled to upon transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer. The new guidance also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flow arising from customer contracts, including significant judgments and changes in judgments. We adopted this standard beginning January 1, 2019 and used the modified retrospective method of adoption. Under the new guidance, based on the nature of our contracts, we continued to recognize revenue in a similar manner as with the former guidance. Additionally, we expect the unit of accounting, that is, the identification of performance obligations, will be consistent with current revenue guidance. Accordingly, the adoption of this standard did not significantly impact our revenues.  

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company’s adoption of this guideline did not have a material effect on the Company’s consolidated financial statements.

 

NOTE 3 – Long-Lived Intangible Assets

 

Definite lived intangible assets related to acquisition are as follows, as of March 31, 2020:

 

 

 

Expected

Life

 

Remaining

Months

 

Gross

Intangible

Assets

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Customer lists and relationships

 

36 to 60 months

 

19 to 41 months

 

$

2,084,515

 

 

$

(1,226,805

)

 

$

857,710

 

Drawings and Technology

 

36 months

 

0 months

 

 

760,207

 

 

 

(760,207

)

 

 

-

 

Trade name, Trademarks & other

 

24 to 36 months

 

5 to 19 months

 

 

447,274

 

 

 

(255,655

)

 

 

191,619

 

Non-compete

 

36 months

 

19 months

 

 

246,797

 

 

 

(124,460

)

 

 

122,337

 

 

 

 

 

 

 

$

3,538,793

 

 

$

(2,367,126

)

 

$

1,171,667

 

 

Definite lived intangibles assets related to acquisitions are as follows, as of December 31, 2019:

 

 

 

Expected

Life

 

Remaining

Months

 

Gross

Intangible

Assets

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Customer lists and relationships

 

36 to 60 months

 

22 to 44 months

 

$

2,084,515

 

 

$

(1,109,681

)

 

$

974,834

 

Drawings and Technology

 

36 months

 

0 months

 

 

760,207

 

 

 

(760,207

)

 

 

-

 

Trade name, Trademarks & other

 

24 to 36 months

 

8 to 22 months

 

 

447,274

 

 

 

(217,570

)

 

 

229,704

 

Non-compete

 

36 months

 

22 months

 

 

246,797

 

 

 

(105,143

)

 

 

141,654

 

 

 

 

 

 

 

$

3,538,793

 

 

$

(2,192,601

)

 

$

1,346,192

 

 

 

As of March 31, 2020, amortization expense of the definite lived intangible assets for the years remaining is as follows:

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

Total

 

 

$

509,410

 

 

$

556,872

 

 

$

63,231

 

 

$

42,154

 

 

$

1,171,667

 

 

 

 

22


Amortization expense recognized during the three months ended March 31, 2020 and 2019 was $174,525               and $349,419, respectively.

 

NOTE 4 – ACCOUNTS RECEIVABLE

Accounts receivable, net consists of the following: 

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accounts receivable

 

$

9,122,983

 

 

$

11,655,725

 

Unbilled receivables

 

 

214

 

 

 

25,432

 

 

 

 

9,123,197

 

 

 

11,681,157

 

Less:  allowance for doubtful accounts

 

 

(11,518

)

 

 

(14,000

)

 

 

$

9,111,679

 

 

$

11,667,157

 

 

Unbilled receivables include amounts associated with percentage of completion and milestone billing accounting, which includes cost and gross profit earned in excess of billing, not currently billable due to contractual provisions.  Recoveries of bad debt expense related to accounts receivable was ($2,405) and ($88) for the three month periods ended March 31, 2020 and 2019, respectively.

NOTE 5 – INVENTORIES

Inventories, net consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials

 

$

3,820,575

 

 

$

2,478,882

 

Sub-assemblies

 

 

1,277,061

 

 

 

1,857,004

 

Work-in-process

 

 

1,024,973

 

 

 

493,276

 

Finished goods

 

 

3,490,385

 

 

 

3,087,529