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 2020-06-30 Filed 2020-08-06
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 2020-08-06 Earnings, Exhibits
8-K 2020-06-24
8-K 2020-06-03
8-K 2020-06-03
8-K 2020-05-14
8-K 2020-05-11
8-K 2020-04-24
8-K 2020-04-20
8-K 2020-04-05
8-K 2020-03-26
8-K 2020-02-15
8-K 2020-02-15
8-K 2019-12-23
8-K 2019-11-07
8-K 2019-11-04
8-K 2019-08-26
8-K 2019-08-08
8-K 2019-08-02
8-K 2019-07-01
8-K 2019-06-26
8-K 2019-05-15
8-K 2019-05-09
8-K 2019-03-20
8-K 2019-02-13
8-K 2019-01-31
8-K 2019-01-02
8-K 2018-11-08
8-K 2018-10-31
8-K 2018-08-31
8-K 2018-08-22
8-K 2018-08-08
8-K 2018-07-30
8-K 2018-06-26
8-K 2018-05-22
8-K 2018-05-08
8-K 2018-04-11
8-K 2018-03-21
8-K 2018-03-07
8-K 2018-02-02
8-K 2018-02-01

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 - Accounts Receivable
Note 4 - Inventories
Note 5 - Long - Lived Intangile Assets
Note 6 - Accrued Expenses and Other Liabilities
Note 7 - Debt
Note 8 - Stockholders' Equity
Note 9 - Commitments and Contingencies
Note 10 - Related Party Transactions
Note 11 - Net Loss per Share
Note 12 - Revenue, Segment and Geographic Information
Note 13 - 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_8.htm
EX-31.2 oss-ex312_7.htm
EX-32.1 oss-ex321_9.htm
EX-32.2 oss-ex322_6.htm

One Stop Systems Earnings 2020-06-30

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

10-Q 1 oss-10q_20200630.htm OSS-10-Q-20200630 oss-10q_20200630.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 June 30, 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 July 31, 2020, the registrant had 16,627,623 shares of common stock (par value $0.0001) outstanding.

 


Table of Contents

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

Unaudited Consolidated Balance Sheets

 

3

 

 

Unaudited Consolidated Statements of Operations

 

4

 

 

Unaudited Consolidated Statements of Comprehensive Income (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

 

26

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

 

41

Item 1A.

 

Risk Factors

 

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

Item 3.

 

Defaults Upon Senior Securities

 

43

Item 4.

 

Mine Safety Disclosures

 

43

Item 5.

 

Other Information

 

43

Item 6.

 

Exhibits

 

44

 

 

Signatures

 

46

 

2


PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash  and cash equivalents

 

$

4,654,602

 

 

$

5,185,321

 

Accounts receivable, net

 

 

10,454,051

 

 

 

11,667,157

 

Inventories, net

 

 

8,924,435

 

 

 

7,369,356

 

Prepaid expenses and other current assets

 

 

604,742

 

 

 

453,938

 

Total current assets

 

 

24,637,830

 

 

 

24,675,772

 

Property and equipment, net

 

 

3,554,648

 

 

 

3,568,564

 

Deposits and other

 

 

81,710

 

 

 

47,146

 

Deferred tax assets, net

 

 

3,975,599

 

 

 

3,019,823

 

Goodwill

 

 

7,120,510

 

 

 

7,120,510

 

Intangible assets, net

 

 

997,141

 

 

 

1,346,192

 

 

 

$

40,367,438

 

 

$

39,778,007

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,018,133

 

 

$

4,115,977

 

Accrued expenses and other liabilities

 

 

4,162,857

 

 

 

4,607,432

 

Current portion of notes payable, net of debt discount of $5,556 and

   $7,019, respectively  (Note 7)

 

 

1,494,833

 

 

 

1,377,751

 

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

   of $18,256 and $23,060, respectively  (Note 7)

 

 

487,595

 

 

 

561,441

 

Senior secured convertible note, net of discounts of $407,244 (Note 7)

 

 

1,092,756

 

 

 

-

 

Total current liabilities

 

 

10,256,174

 

 

 

10,662,601

 

Notes payable, net of current portion and debt discount of $0 and  $2,047,

   respectively  (Note 7)

 

 

-

 

 

 

149,301

 

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

   of $0 and $6,726 , respectively  (Note 7)

 

 

-

 

 

 

199,943

 

Senior secured convertible note, net of discounts of $108,082 (Note 7)

 

 

1,255,554

 

 

 

-

 

Paycheck protection plan note payable  (Note 7)

 

 

1,499,360

 

 

 

-

 

Total liabilities

 

 

13,011,088

 

 

 

11,011,845

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

   16,498,617 and 16,121,747 shares issued and outstanding, respectively

 

 

1,649

 

 

 

1,612

 

Additional paid-in capital

 

 

30,223,985

 

 

 

30,537,015

 

Noncontrolling interest

 

 

-

 

 

 

500

 

Accumulated other comprehensive loss

 

 

(5,898

)

 

 

(17,773

)

Accumulated deficit

 

 

(2,863,386

)

 

 

(1,755,192

)

Total stockholders’ equity

 

 

27,356,350

 

 

 

28,766,162

 

 

 

$

40,367,438

 

 

$

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 June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

$

11,625,327

 

 

$

14,886,236

 

 

$

24,984,964

 

 

$

24,944,135

 

Cost of revenue

 

 

8,300,132

 

 

 

9,473,078

 

 

 

18,264,082

 

 

 

17,119,354

 

Gross profit

 

 

3,325,195

 

 

 

5,413,158

 

 

 

6,720,882

 

 

 

7,824,781

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

1,877,358

 

 

 

2,234,084

 

 

 

4,391,423

 

 

 

4,278,019

 

Impairment of goodwill

 

 

-

 

 

 

1,697,394

 

 

 

-

 

 

 

1,697,394

 

Marketing and selling

 

 

845,098

 

 

 

1,237,003

 

 

 

2,034,449

 

 

 

2,374,936

 

Research and development

 

 

1,008,625

 

 

 

1,225,157

 

 

 

2,212,050

 

 

 

2,487,121

 

Total operating expenses

 

 

3,731,081

 

 

 

6,393,638

 

 

 

8,637,922

 

 

 

10,837,470

 

Loss from operations

 

 

(405,886

)

 

 

(980,480

)

 

 

(1,917,040

)

 

 

(3,012,689

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

99,343

 

 

 

10,168

 

 

 

123,980

 

 

 

13,275

 

Interest expense

 

 

(150,186

)

 

 

(53,013

)

 

 

(218,970

)

 

 

(59,281

)

Other income (expense), net

 

 

3,056

 

 

 

(13,236

)

 

 

(4,973

)

 

 

(24,507

)

Total other income (expense), net

 

 

(47,787

)

 

 

(56,081

)

 

 

(99,963

)

 

 

(70,513

)

Loss before income taxes

 

 

(453,673

)

 

 

(1,036,561

)

 

 

(2,017,003

)

 

 

(3,083,202

)

(Benefit) provision for income taxes

 

 

(441,511

)

 

 

558,072

 

 

 

(908,809

)

 

 

(543,839

)

Net loss attributable to common stockholders

 

$

(12,162

)

 

$

(1,594,633

)

 

$

(1,108,194

)

 

$

(2,539,363

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.00

)

 

$

(0.11

)

 

$

(0.07

)

 

$

(0.18

)

Diluted

 

$

(0.00

)

 

$

(0.11

)

 

$

(0.07

)

 

$

(0.18

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,488,325

 

 

 

14,442,291

 

 

 

16,410,660

 

 

 

14,341,560

 

Diluted

 

 

16,488,325

 

 

 

14,442,291

 

 

 

16,410,660

 

 

 

14,341,560

 

 

 

 

See accompanying notes to consolidated financial statements

4


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss attributable to common stockholders

 

$

(12,162

)

 

$

(1,594,633

)

 

$

(1,108,194

)

 

$

(2,539,363

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

67,442

 

 

 

43,803

 

 

 

11,875

 

 

 

1,934

 

Total other comprehensive income

 

 

67,442

 

 

 

43,803

 

 

 

11,875

 

 

 

1,934

 

Comprehensive income (loss)

 

$

55,280

 

 

$

(1,550,830

)

 

$

(1,096,319

)

 

$

(2,537,429

)

 

 

 

 

 

See accompanying notes to consolidated financial statements

 

5


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For The Three and Six Months Ended June 30, 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

 

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

 

Stock-based compensation

 

-

 

 

-

 

 

85,378

 

 

-

 

 

-

 

 

-

 

 

85,378

 

Exercise of stock options

 

21,956

 

 

2

 

 

7,465

 

 

-

 

 

-

 

 

-

 

 

7,467

 

Taxes paid on net issuance of employee stock options

 

-

 

 

-

 

 

(13,754

)

 

-

 

 

-

 

 

-

 

 

(13,754

)

Currency translation adjustment

 

-

 

 

-

 

 

-

 

 

-

 

 

67,442

 

 

-

 

 

67,442

 

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(12,162

)

 

(12,162

)

Balance, June 30, 2020

 

16,498,617

 

$

1,649

 

$

30,223,985

 

$

-

 

$

(5,898

)

$

(2,863,386

)

$

27,356,350

 

 

See accompanying notes to consolidated financial statements

6


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For The Three and Six Months Ended June 30, 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

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(944,730

)

 

(944,730

)

Balance, March 31, 2019

 

14,270,426

 

$

1,427

 

$

27,605,783

 

$

500

 

$

(40,727

)

$

(1,799,585

)

$

25,767,398

 

Stock-based compensation

 

-

 

 

-

 

 

157,809

 

 

-

 

 

-

 

 

-

 

 

157,809

 

Exercise of stock options, RSU's and Warrants

 

227,221

 

 

23

 

 

6,925

 

 

-

 

 

-

 

 

-

 

 

6,948

 

Taxes paid on net issuance of employee stock options

 

-

 

 

-

 

 

(112,879

)

 

-

 

 

-

 

 

-

 

 

(112,879

)

Relative fair value of warrants issued with notes payable and notes payable to related parties

 

-

 

 

-

 

 

60,158

 

 

-

 

 

-

 

 

-

 

 

60,158

 

Currency translation adjustment

 

-

 

 

-

 

 

-

 

 

-

 

 

43,803

 

 

-

 

 

43,803

 

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,594,633

)

 

(1,594,633

)

Balance, June 30, 2019

 

14,497,647

 

$

1,450

 

$

27,717,796

 

$

500

 

$

3,076

 

$

(3,394,218

)

$

24,328,604

 

 

See accompanying notes to consolidated financial statements

 

 

7


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(1,108,194

)

 

$

(2,539,363

)

Adjustments to reconcile net loss to net cash (used in) provided by operating

   activities:

 

 

 

 

 

 

 

 

Deferred benefit for income taxes

 

 

(953,939

)

 

 

(253,097

)

Unrealized gain on foreign currency transactions

 

 

-

 

 

 

18,743

 

Gain on disposal of property and equipment

 

 

(1,542

)

 

 

(63,939

)

(Recovery) provision for bad debt

 

 

(1,411

)

 

 

1,358

 

Impairment of goodwill

 

 

-

 

 

 

1,697,394

 

Warranty reserves

 

 

-

 

 

 

4,818

 

Amortization of deferred gain

 

 

(53,838

)

 

 

(32,957

)

Depreciation

 

 

449,159

 

 

 

268,411

 

Amortization of intangibles

 

 

349,051

 

 

 

618,571

 

Inventory reserves

 

 

210,176

 

 

 

136,609

 

Amortization of debt discount

 

 

115,990

 

 

 

6,266

 

Stock-based compensation expense

 

 

293,139

 

 

 

325,283

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,216,931

 

 

 

2,185,438

 

Inventories

 

 

(1,769,655

)

 

 

(2,118,771

)

Prepaid expenses and other current assets

 

 

(183,698

)

 

 

(106,591

)

Accounts payable

 

 

(1,107,724

)

 

 

(559,831

)

Accrued expenses and other liabilities

 

 

(389,504

)

 

 

2,125,542

 

Net cash (used in) provided by operating activities

 

 

(2,935,059

)

 

 

1,713,884

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment, including capitalization of labor

   costs for test equipment and ERP

 

 

(415,582

)

 

 

(1,356,975

)

Proceeds from sales of property and equipment

 

 

1,542

 

 

 

1,050

 

Net cash used in investing activities

 

 

(414,040

)

 

 

(1,355,925

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of stock and stock options exercised

 

 

64,467

 

 

 

21,149

 

Payment of payroll taxes on net issuance of employee stock options

 

 

(670,599

)

 

 

(112,879

)

Net borrowings on bank lines of credit

 

 

49,271

 

 

 

1,028,134

 

Net (repayments) borrowings on related-party notes payable

 

 

(285,320

)

 

 

932,762

 

Net (repayments) borrowings on notes payable

 

 

(86,824

)

 

 

454,004

 

Proceeds, net of repayments, on senior secured convertible note

 

 

2,247,363

 

 

 

-

 

Proceeds on Paycheck Protection Program (PPP) note payable

 

 

1,499,360

 

 

 

-

 

Net cash provided by financing activities

 

 

2,817,718

 

 

 

2,323,170

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(531,381

)

 

 

2,681,129

 

Effect of exchange rates on cash

 

 

662

 

 

 

(8,532

)

Cash and cash equivalents, beginning of period

 

 

5,185,321

 

 

 

2,272,256

 

Cash and cash equivalents, end of period

 

$

4,654,602

 

 

$

4,944,853

 

 

See accompanying notes to consolidated financial statements

8


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

 

 

 

For the Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

108,313

 

 

$

59,281

 

Cash paid during the period for income taxes

 

$

146,132

 

 

$

4,000

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash flow transactions:

 

 

 

 

 

 

 

 

Original issue discount on senior secured convertible note

 

$

300,000

 

 

$

-

 

Reclassification of inventories to property and equipment

 

$

20,027

 

 

$

67,948

 

Relative fair value of warrants issued in connection with notes and related

   party notes payable

 

$

-

 

 

$

60,158

 

 

 

See accompanying notes to consolidated financial statements

9


ONE STOP SYSTEMS, INC. (OSS)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Six Months Ended June 30, 2020 and 2019

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Historical Information and Company Overview

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, One Stop Systems, GmbH (“OSS GmbH”).  During July 2016, the Company acquired Mission Technologies Group, Inc. (“Magma”) and it 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.

On August 31, 2018, the Company acquired Concept Development Inc. (“CDI”) located in Irvine, California.  CDI specializes in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment and networking systems.

On October 31, 2018, OSS GmbH acquired 100% of the outstanding stock of Bressner Technology GmbH, a Germany limited liability company located near Munich, Germany (“Bressner”).  Bressner provides standard and customized servers, panel PCs, and PCIe expansion systems.  Bressner also provides manufacturing, test, sales and marketing services for customers throughout Europe.

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; (iv) the April 24, 2020 sale of $3,000,000 of Senior Secured Convertible Promissory Notes issued at a 10% original issue discount and (v) receipt of approximately $1,500,000 on April 28, 2020 of government loan proceeds under the Paycheck Protection Program.

 

As of June 30, 2020, the Company’s cash and cash equivalents were $4,654,602 and working capital was $14,381,656.  Cash and cash equivalents held by Bressner totaled $677,715 (USD) at June 30, 2020, and Bressner’s debt covenants do not permit the use of those funds by its parent company. During the six months ended June 30, 2020, the Company experienced an operating loss of $1,917,040, with cash used in operating activities of $2,935,059.  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 payment 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 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

10


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.

 

More generally, COVID-19 raises the possibility of an extended global economic downturn, which could affect demand for our products and services and impact our results and financial condition even after the pandemic is contained and remediation/restriction measures are lifted. For example, we may be unable to collect receivables from customers that are significantly impacted by COVID-19. Also, a decrease in orders in a given period could negatively affect our revenues in future periods. COVID-19 may also have the effect of heightening many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K, including risks associated with our customers and supply chain. We will continue to evaluate the nature and extent of the impact of COVID-19 to our business.

 

At present, it is clear the global economy has been negatively impacted by COVID-19, and demand for some of our products and services have been reduced due to uncertainty and the economic impact of COVID-19. For example, customers in certain of the industries most impacted by COVID-19, have requested, and we expect will continue to request, relief to existing contracts or payment obligations, and the impact of those is uncertain. Furthermore, some customers are delaying payments owed to the Company while they address immediate financial crises in their operations due to COVID-19. In particular, in the media and entertainment industry, demand for the use of outdoor media equipment has been impacted due to restrictions on public gatherings. Until such restrictions improve, we expect that demand for certain of our clients’ products and services will be limited, and thus, may impact our financial results and operations.

 

Specifically, our business has also begun to be negatively affected by a range of external factors related to COVID-19 that are not within our control. For example, numerous measures have been implemented by governmental authorities across the globe to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, restrictions and limitations of public gatherings, and business limitations and shutdowns. Many of our customers’ businesses have been severely impacted by these measures and some have been required to reduce employee headcount as a result. If a significant number of our customers are unable to continue as a going concern, this would have an adverse impact on our business and financial condition. In addition, many of our customers are working remotely, which may delay the timing of new business and implementations of our services. If COVID-19 continues to have a substantial impact on our partners, customers, or suppliers, our results of operations and overall financial performance will be harmed.

Though management has been proactively 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.

The longer the COVID-19 pandemic persists, the greater the potential for significant adverse impact to our business operations.   Quarantines, travel restrictions, prohibitions on non-essential gatherings, shelter-in-place orders and other similar directives and policies intended to reduce the spread of the disease, may reduce our productivity and that of the third parties on which we rely and may disrupt and delay many aspects of our business. .

We have not developed a specific and comprehensive contingency plan designed to address the challenges and risks presented by the COVID-19 pandemic and, even if and when we do develop such a plan, there can be no assurance that such plan will be effective in mitigating the potential adverse effects on our business, financial condition and results of operations.

Management’s plans with respect to the above is to continue its efforts towards responding to the changing economic landscape attributable to COVID-19, 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 a reduction in force, a freeze on hiring, reduced work week, 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

11


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 notes payable $660,081 remains outstanding at June 30, 2020.  The unused remaining funding commitments expired as of April 1, 2020.

 

 

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 in cash or shares of the Company’s common stock.

 

 

On April 28, 2020, the Company received a Paycheck Protection Program (PPP) loan in the amount of $1,499,360.  Management believes that most of the loan, if not all, will likely be forgiven.

 

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.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying condensed financial statements.  Operating results for the three and six months ended June 30, 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 acquisition of Concept Development Inc., its wholly-owned subsidiary, OSS GmbH, which also includes the

12


acquisition of Bressner Technology GmbH.  Intercompany balances and transactions have been eliminated in consolidation.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

There have been no changes to our accounting policies disclosed in our audited consolidated financial statements and the related notes for the year ended December 31, 2019.

 

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions.

 

On an ongoing basis, our management evaluates these estimates and assumptions, including those related to determination of standalone selling prices of our products and services, allowance for doubtful account and sales reserves, income tax valuations, stock-based compensation, goodwill, intangible assets and inventory valuations and recoverability. We base our estimates on historical data and experience, as well as various other factors that our management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities.

 

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions or a revision of the carrying value of our assets or liabilities as of the date of this Quarterly Report on Form 10-Q. These estimates and assumptions may change as new events occur and additional information is obtained. As a result, actual results could differ materially from these estimates and assumptions.

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, 2021, and interim periods within fiscal year 2023.  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 9.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. In November 2019, ASU 2016-13 was amended by ASU 2019-10 that changed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, with early adoption permitted. Further, the ASU clarifies that operating lease receivables are not within the scope of ASC Subtopic 326-20 and should instead be accounted for under the new leasing standard, ASC 842. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements and related disclosures.

 

13


In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards. ASU 2019-12 removes certain exceptions from Topic 740, Income Taxes, including (i) the exception to the incremental approach for intra period tax allocation; (ii) the exception to accounting for basis differences when there are ownership changes in foreign investments; and (iii) the exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 also simplifies GAAP in several other areas of Topic 740 such as (i) franchise taxes and other taxes partially based on income; (ii) transactions with a government that result in a step up in the tax basis of goodwill; (iii) separate financial statements of entities not subject to tax; and (iv) enacted changes in tax laws in interim periods. ASU 2019-12 is effective for annual reporting periods and interim periods within those years beginning after December 15, 2021, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements and related disclosures.

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