10-Q 1 oss-10q_20200930.htm 10-Q oss-10q_20200930.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 September 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 October 31, 2020, the registrant had 16,620,908 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

 

27

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

41

Item 4.

 

Controls and Procedures

 

41

 

 

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

 

42

Item 1A.

 

Risk Factors

 

42

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

Item 3.

 

Defaults Upon Senior Securities

 

44

Item 4.

 

Mine Safety Disclosures

 

44

Item 5.

 

Other Information

 

44

Item 6.

 

Exhibits

 

45

 

 

Signatures

 

47

 

2


PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash  and cash equivalents

 

$

5,519,829

 

 

$

5,185,321

 

Accounts receivable, net

 

 

9,744,171

 

 

 

11,667,157

 

Inventories, net

 

 

9,999,680

 

 

 

7,369,356

 

Prepaid expenses and other current assets

 

 

720,070

 

 

 

453,938

 

Total current assets

 

 

25,983,750

 

 

 

24,675,772

 

Property and equipment, net

 

 

3,567,582

 

 

 

3,568,564

 

Deposits and other

 

 

81,711

 

 

 

47,146

 

Deferred tax assets, net

 

 

3,939,546

 

 

 

3,019,823

 

Goodwill

 

 

7,120,510

 

 

 

7,120,510

 

Intangible assets, net

 

 

826,157

 

 

 

1,346,192

 

 

 

$

41,519,256

 

 

$

39,778,007

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,680,192

 

 

$

4,115,977

 

Accrued expenses and other liabilities

 

 

3,758,109

 

 

 

4,607,432

 

Current portion of notes payable, net of debt discount of $3,802 and

   $7,019, respectively  (Note 7)

 

 

1,433,200

 

 

 

1,377,751

 

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

   of $12,491 and $23,060, respectively  (Note 7)

 

 

345,586

 

 

 

561,441

 

Senior secured convertible note, net of discounts of $337,247 (Note 7)

 

 

1,299,117

 

 

 

-

 

Total current liabilities

 

 

10,516,204

 

 

 

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 $51,707 (Note 7)

 

 

902,839

 

 

 

-

 

Paycheck protection plan note payable  (Note 7)

 

 

1,499,360

 

 

 

-

 

Total liabilities

 

 

12,918,403

 

 

 

11,011,845

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

   16,620,908 and 16,121,747 shares issued and outstanding, respectively

 

 

1,662

 

 

 

1,612

 

Additional paid-in capital

 

 

30,480,405

 

 

 

30,537,015

 

Noncontrolling interest

 

 

-

 

 

 

500

 

Accumulated other comprehensive income (loss)

 

 

124,382

 

 

 

(17,773

)

Accumulated deficit

 

 

(2,005,596

)

 

 

(1,755,192

)

Total stockholders’ equity

 

 

28,600,853

 

 

 

28,766,162

 

 

 

$

41,519,256

 

 

$

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 September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

$

12,976,058

 

 

$

14,938,964

 

 

$

37,961,023

 

 

$

39,883,099

 

Cost of revenue

 

 

8,074,445

 

 

 

9,909,045

 

 

 

26,338,527

 

 

 

27,028,399

 

Gross profit

 

 

4,901,613

 

 

 

5,029,919

 

 

 

11,622,496

 

 

 

12,854,700

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

1,817,499

 

 

 

2,190,003

 

 

 

6,208,922

 

 

 

6,468,021

 

Impairment of goodwill

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,697,394

 

Marketing and selling

 

 

1,103,384

 

 

 

1,383,965

 

 

 

3,137,833

 

 

 

3,758,901

 

Research and development

 

 

1,001,288

 

 

 

1,036,394

 

 

 

3,213,339

 

 

 

3,523,515

 

Total operating expenses

 

 

3,922,171

 

 

 

4,610,362

 

 

 

12,560,094

 

 

 

15,447,831

 

Income (loss) from operations

 

 

979,442

 

 

 

419,557

 

 

 

(937,598

)

 

 

(2,593,131

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

143,931

 

 

 

10,149

 

 

 

267,911

 

 

 

23,424

 

Interest expense

 

 

(174,205

)

 

 

(52,182

)

 

 

(393,175

)

 

 

(111,463

)

Other income (expense), net

 

 

(33,625

)

 

 

116,326

 

 

 

(38,598

)

 

 

91,819

 

Total other income (expense), net

 

 

(63,899

)

 

 

74,293

 

 

 

(163,862

)

 

 

3,780

 

Income (loss) before income taxes

 

 

915,543

 

 

 

493,850

 

 

 

(1,101,460

)

 

 

(2,589,351

)

Provision (benefit) for income taxes

 

 

57,753

 

 

 

(51,051

)

 

 

(851,056

)

 

 

(594,890

)

Net income (loss)  attributable to common stockholders

 

$

857,790

 

 

$

544,901

 

 

$

(250,404

)

 

$

(1,994,461

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.03

 

 

$

(0.02

)

 

$

(0.13

)

Diluted

 

$

0.05

 

 

$

0.03

 

 

$

(0.02

)

 

$

(0.13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,585,773

 

 

 

15,777,158

 

 

 

16,469,457

 

 

 

14,825,351

 

Diluted

 

 

17,018,614

 

 

 

16,390,206

 

 

 

16,469,457

 

 

 

14,825,351

 

 

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 September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss) attributable to common stockholders

 

$

857,790

 

 

$

544,901

 

 

$

(250,404

)

 

$

(1,994,461

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

130,280

 

 

 

(68,316

)

 

 

142,155

 

 

 

(66,382

)

Total other comprehensive income (loss)

 

 

130,280

 

 

 

(68,316

)

 

 

142,155

 

 

 

(66,382

)

Comprehensive income (loss)

 

$

988,070

 

 

$

476,585

 

 

$

(108,249

)

 

$

(2,060,843

)

 

See accompanying notes to consolidated financial statements

 

5


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For The Three and Nine Months Ended September 30, 2020

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-in-Capital

 

 

Noncontrolling

Interest

 

 

Comprehensive

income (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

 

 

-

 

 

 

-

 

 

 

293,139

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

293,139

 

Exercise of stock options

 

 

376,870

 

 

 

37

 

 

 

64,430

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

64,467

 

Return of capital upon dissolution of SkyScale

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(500

)

 

 

-

 

 

 

-

 

 

 

(500

)

Taxes paid on net issuance of employee stock

   options

 

 

-

 

 

 

-

 

 

 

(670,599

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(670,599

)

Currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,875

 

 

 

-

 

 

 

11,875

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,108,194

)

 

 

(1,108,194

)

Balance, June 30, 2020

 

 

16,498,617

 

 

$

1,649

 

 

$

30,223,985

 

 

$

-

 

 

$

(5,898

)

 

$

(2,863,386

)

 

$

27,356,350

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

210,280

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

210,280

 

Exercise of stock options and warrants

 

 

122,291

 

 

 

13

 

 

 

59,987

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

60,000

 

Taxes paid on net issuance of employee stock

   options

 

 

-

 

 

 

-

 

 

 

(13,847

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,847

)

Currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

130,280

 

 

 

-

 

 

 

130,280

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

857,790

 

 

 

857,790

 

Balance, September 30, 2020

 

 

16,620,908

 

 

$

1,662

 

 

$

30,480,405

 

 

$

-

 

 

$

124,382

 

 

$

(2,005,596

)

 

$

28,600,853

 

 

See accompanying notes to consolidated financial statements

6


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For The Three and Nine Months Ended September 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

 

 

-

 

 

 

-

 

 

 

325,283

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

325,283

 

Exercise of stock options, RSU's and Warrants

 

 

281,319

 

 

 

28

 

 

 

21,121

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

21,149

 

Relative fair value of warrants issued with notes

   payable and notes payable to related parties

 

 

-

 

 

 

-

 

 

 

60,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60,158

 

Taxes paid on net issuance of employee stock

   options

 

 

 

 

 

 

 

 

 

 

(112,879

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(112,879

)

Currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,934

 

 

 

-

 

 

 

1,934

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,539,363

)

 

 

(2,539,363

)

Balance, June 30, 2019

 

 

14,497,647

 

 

$

1,450

 

 

$

27,717,796

 

 

$

500

 

 

$

3,076

 

 

$

(3,394,218

)

 

$

24,328,604

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

164,857

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

164,857

 

Exercise of stock options, RSU's and Warrants

 

 

48,981

 

 

 

5

 

 

 

7,995

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,000

 

Taxes paid on net issuance of employee stock

   options

 

 

-

 

 

 

-

 

 

 

(19,138

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(19,138

)

Proceeds from issuance of stock, net of issuance

   costs of $212,566

 

 

1,554,832

 

 

 

155

 

 

 

2,487,993

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,488,148

 

Currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(122,220

)

 

 

-

 

 

 

(122,220

)

Gain on forward contract

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

53,904

 

 

 

-

 

 

 

53,904

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

544,901

 

 

 

544,901

 

Balance, September 30, 2019

 

 

16,101,460

 

 

$

1,610

 

 

$

30,359,503

 

 

$

500

 

 

$

(65,240

)

 

$

(2,849,317

)

 

$

27,447,056

 

 

See accompanying notes to consolidated financial statements

 

 

7


 

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(250,404

)

 

$

(1,994,461

)

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

   activities:

 

 

 

 

 

 

 

 

Deferred benefit for income taxes

 

 

(910,959

)

 

 

(275,949

)

Loss on foreign currency transactions

 

 

-

 

 

 

18,647

 

Gain on disposal of property and equipment

 

 

(1,542

)

 

 

(89,168

)

Provision for bad debt

 

 

10,950

 

 

 

495

 

Impairment of goodwill

 

 

-

 

 

 

1,697,394

 

Warranty reserves

 

 

(723

)

 

 

3,982

 

Amortization of deferred gain

 

 

(53,838

)

 

 

(45,316

)

Depreciation

 

 

688,727

 

 

 

430,347

 

Amortization of intangibles

 

 

520,035

 

 

 

809,540

 

Inventory reserves

 

 

382,472

 

 

 

191,012

 

Amortization of debt discount

 

 

249,882

 

 

 

13,786

 

Stock-based compensation expense

 

 

503,419

 

 

 

490,140

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,971,324

 

 

 

1,220,504

 

Inventories

 

 

(2,872,108

)

 

 

(1,664,165

)

Prepaid expenses and other current assets

 

 

(294,475

)

 

 

(106,598

)

Accounts payable

 

 

(484,327

)

 

 

(60,607

)

Accrued expenses and other liabilities

 

 

(843,823

)

 

 

(251,236

)

Net cash (used in) provided by operating activities

 

 

(1,385,390

)

 

 

388,347

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment, including capitalization of labor

   costs for test equipment and ERP

 

 

(664,385

)

 

 

(2,061,762

)

Proceeds from sales of property and equipment

 

 

1,542

 

 

 

1,050

 

Net cash used in investing activities

 

 

(662,843

)

 

 

(2,060,712

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of stock and stock options exercised

 

 

124,467

 

 

 

29,149

 

Payment of payroll taxes on net issuance of employee stock options

 

 

(684,446

)

 

 

(132,017

)

Proceeds from issuance of common stock

 

 

-

 

 

 

2,700,714

 

Stock issuance costs

 

 

-

 

 

 

(212,566

)

Net (repayments) borrowings on bank lines of credit

 

 

(23,622

)

 

 

62,519

 

Borrowings on related-party notes payable

 

 

-

 

 

 

1,150,000

 

Borrowings on notes payable

 

 

-

 

 

 

374,623

 

Repayments on related-party notes payable

 

 

(433,094

)

 

 

(312,691

)

Repayments on notes payable

 

 

(131,792

)

 

 

-

 

Proceeds on senior secured convertible note

 

 

2,383,726

 

 

 

-

 

Repayments on senior secured convertible note

 

 

(409,090

)

 

 

-

 

Proceeds on Paycheck Protection Program (PPP) note payable

 

 

1,499,360

 

 

 

-

 

Net cash provided by financing activities

 

 

2,325,509

 

 

 

3,659,731

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

277,276

 

 

 

1,987,366

 

Effect of exchange rates on cash

 

 

57,232

 

 

 

(33,421

)

Cash and cash equivalents, beginning of period

 

 

5,185,321

 

 

 

2,272,256

 

Cash and cash equivalents, end of period

 

$

5,519,829

 

 

$

4,226,201

 

 

See accompanying notes to consolidated financial statements

8


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

 

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

202,022

 

 

$

111,463

 

Cash paid during the period for income taxes

 

$

228,129

 

 

$

4,000

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash flow transactions:

 

 

 

 

 

 

 

 

Original issue discount on senior secured convertible note

 

$

300,000

 

 

$

-

 

Forward foreign currency contracts

 

$

-

 

 

$

53,904

 

Reclassification of inventories to property and equipment

 

$

157,133

 

 

$

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 Nine Months Ended September 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 wholly-owned subsidiary in Germany, One Stop Systems, GmbH (“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.

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.  CDI has been fully integrated into the core operations of OSS as of July 1, 2020.

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 1,554,546 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 September 30, 2020, the Company’s cash and cash equivalents were $5,519,829 and working capital was $15,467,546.  Cash and cash equivalents held by Bressner totaled $1,224,020 (USD) at September 30, 2020, and Bressner’s debt covenants do not permit the use of those funds by its parent company. During the nine months ended September 30, 2020, the Company experienced an operating loss of $937,598, with cash used in operating activities of $1,385,390.  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.

10


The Company’s revenue growth during the year has slowed due to the effects of COVID-19.   However, resulting from a reduction in force and strict cost containment, the Company has been able to mitigate the effects, to some degree, of the reduced revenue.

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 continues to impact worldwide economic activity. A public health pandemic, including COVID-19, poses the risk that we or our employees, contractors, customers, 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 may not return to prior levels, 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.

The Company is complying with state mandated requirements for safety in the workplace to ensure the health, safety and welling-being of our employees.  These measures included personal protective equipment, social distancing, cleanliness of the facilities and daily monitoring of the health of employees in our facilities.  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

11


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 limited 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 $1.5 to $2.0 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 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. 

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 nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December

12


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 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.

As of December 31, 2019, we had approximately $3.9 million in net deferred tax assets (DTAs). These DTAs include approximately $4.4 million related to net operating loss carryforwards that can be used to offset taxable income in future periods and reduce our income taxes payable in those future periods.  At this time, we consider it more likely than not that we will have sufficient taxable income in the future that will allow us to realize these DTAs. However, it is possible that economic conditions may decrease the likelihood that we will have sufficient taxable income in the future. Therefore, unless we are able to generate sufficient taxable income from our operations, a substantial valuation allowance to reduce our U.S. DTAs may be required, which would materially increase our expenses in the period the allowance is recognized and materially adversely affect our results of operations and statement of financial condition.

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

13


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.

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 though the adoption is not expected to have a significant financial impact.

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.

14


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 July 2017, the FASB issued Accounting Standards Update No. 2017-11, Accounting for financial instruments with down rounds features (“ASU 2017-11”), which addressed (I) accounting for certain financial instruments with down round features, and (II) replacement of the indefinite deferral for mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests with a scope exception. The main provisions of Part I of ASU 2017-11 is to change the classification analysis of certain equity-linked financial instruments and embedded features with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument or embedded conversion option no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Under previous US GAAP, the existence of down round features often result in an accounting conclusion that the evaluated feature or instrument is not indexed to the entity’s own stock, which results in classification as a derivative liability. ASU 2017-11 was adopted early by the Company on April 1, 2020, with adjustments (if any) reflected as of the beginning of the fiscal year. The Company’s April 2020 convertible note payable described in Note 7 possesses down round features.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), an amendment to the guidance on income taxes, which is intended to simplify the accounting for income taxes. The amendment eliminates certain exceptions related to the methodology for calculating income taxes on an interim period, the approach for intraperiod tax allocation, and the recognition of deferred tax liabilities for outside basis differences. The amendment also clarifies existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. The effective date of the standard is annual periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company elected to early adopt ASU 2019-12 prospectively as of July 1, 2020, which did not have a material impact on the Consolidated Financial Statements, except for the elimination of the rule that limited the interim tax benefit to the tax benefit expected for the year. The adoption resulted in the Company recording an additional interim tax benefit of $446,099 for the three months ended September 30, 2020.  The adoption will not impact the Company’s annual income tax benefit or expense for the year ending December 31, 2020 or the amount of net deferred income tax assets as of December 31, 2020. The Company made the election to early adopt because, consistent with the FASB, it believes that it will reduce the time and cost associated with income tax accounting and reporting, while not adversely altering the information provided to stakeholders on an interim basis.  

NOTE 3 – ACCOUNTS RECEIVABLE

Accounts receivable, net consists of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accounts receivable

 

$

9,769,730

 

 

$

11,655,725

 

Unbilled receivables

 

 

106

 

 

 

25,432

 

 

 

 

9,769,836

 

 

 

11,681,157

 

Less:  allowance for doubtful accounts

 

 

(25,665

)

 

 

(14,000

)

 

 

$

9,744,171

 

 

$

11,667,157

 

15


 

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.  Provision for bad debt expense related to accounts receivable was $12,361 and $2,150 for the three month periods ended September 30, 2020 and 2019, respectively, and $10,950 and $495 for the nine months ended September 30, 2020 and 2019, respectively.

NOTE 4 – INVENTORIES

Inventories, net consist of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials

 

$

5,532,507

 

 

$

2,478,882

 

Sub-assemblies

 

 

197,524

 

 

 

1,857,004

 

Work-in-process

 

 

556,889

 

 

 

493,276

 

Finished goods

 

 

4,434,945

 

 

 

3,087,529

 

 

 

 

10,721,865

 

 

 

7,916,691

 

Less:  reserves for obsolete and slow-moving inventories

 

 

(722,185

)

 

 

(547,335

)

 

 

$

9,999,680

 

 

$

7,369,356

 

 

NOTE 5 – LONG-LIVED INTANGILE ASSETS

Definite lived intangible assets related to acquisition are as follows, as of September 30, 2020:

 

 

 

Expected

Life

 

Remaining

Months

 

Gross

Intangible

Assets

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Customer lists and relationships

 

36 to 60 months

 

13 to 35 months

 

$

2,084,515

 

 

$

(1,461,054

)

 

$

623,461

 

Drawings and Technology

 

36 months

 

0 months

 

 

760,207

 

 

 

(760,207

)

 

 

-

 

Trade name, Trademarks & other

 

24 to 36 months

 

13 months

 

 

447,274

 

 

 

(328,282

)

 

 

118,992

 

Non-compete

 

36 months

 

13 months

 

 

246,797

 

 

 

(163,093

)

 

 

83,704

 

 

 

 

 

 

 

$

3,538,793

 

 

$

(2,712,636

)

 

$

826,157

 

 

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 September 30, 2020, amortization expense of the definite lived intangible assets for the years remaining is as follows:

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

Total

 

$

163,900

 

 

$

556,872

 

 

$

63,231

 

 

$

42,154

 

 

$

826,157

 

 

Amortization expense recognized during the three months ended September 30, 2020 and 2019 was $197,984 and $190,970, respectively, and $520,035 and $809,540 for the nine months ended September 30, 2020 and 2019, respectively.

16


NOTE 6 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accrued compensation and related liabilities

 

$

764,876

 

 

$

1,621,177

 

Deferred revenue and customer deposits

 

 

1,406,683

 

 

 

1,260,126

 

Warranty reserve

 

 

438,685

 

 

 

424,011

 

Other accrued expenses

 

 

1,147,865

 

 

 

1,302,118

 

 

 

$

3,758,109

 

 

$

4,607,432

 

 

NOTE 7 – DEBT

Bank Lines of Credit

Bressner Technology GmbH has two revolving lines of credit with a German institution totaling €1,600,000 (US$1,875,805).  Borrowing under the lines of credit bear interest at variable rates of Euribor plus a stated rate.  The current rate is 3.89%.  There were no outstanding line of credit balances as of September 30, 2020 and December 31, 2019.

Foreign Debt Obligations

Bressner Technology GmbH has three term loans outstanding as of September 30, 2020 with a total balance outstanding of €1,132,519 (US$1,327,740) as follows:

Bressner entered into a note payable in April 2019 in the amount of €500,000 (US$586,189) which bears interest at 2.25% and matures on March 31, 2021 with monthly payments of principal and interest of €22,232 (US$24,960). The balance outstanding as of September 30, 2020 and December 31, 2019 is €132,519 (US$155,362) and €263,556 (US$290,534), respectively.

Bressner entered into a note payable in June 2019 in the amount of €500,000 (US$586,189) which bears interest at 1.70.% and matures on June 25, 2020 with a balloon payment of principal and interest.  This loan was subsequently extended to June 18, 2021, with an interest rate of 1.87% The amount outstanding as of September 30, 2020 and December 31, 2019 is €500,000 (US$586,189) and €508,679 (US$571,095), respectively.

On April 9, 2020, Bressner converted €500,000 of its line of credit from UniCredit Bank to a one year term loan at 1.9% interest with a balloon payment of principal and interest due upon maturity.  The balance outstanding as of September 30, 2020 is €500,000 (US$586,189).

Bressner entered into a note payable in September 2017, in the amount of €400,000 (US$436,272) which bore interest at 2.125% and matured on January 31, 2020 and has been paid in full.  Quarterly principal payments of €25,000 (US$28,068) were due in January, April, July and November of 2019.  The balance outstanding as of December 31, 2019 was €25,000 (US$28,068).

Bressner entered into a note payable in September 2019 in the amount of €300,000 (US$336,810) which bore interest at 1.65.% and matured on March  24, 2020, with a balloon payment of principal and interest.  The outstanding balance was paid in full as of March 31, 2020.  At December 31, 2019, the outstanding balance was €301,650 (US$338,663).

Notes Payable

In April 2019, the Company borrowed $350,000 from three individuals for a two year period at an interest rate of 9.5% which requires the Company to make monthly principal and interest payments of $16,100 per month.  These loans are secured by the assets of the Company.  In connection with these loans, the Company issued to the noteholders warrants to purchase shares of the Company’s common stock equal to 10% of the original principal at a price per share equal to $2.15 per share.  Accordingly, the Company issued to the noteholders warrants to purchase

17


16,276 shares of the Company’s common stock at an exercise price of $2.15 per share. The relative fair value of each warrant was $0.90.  The relative fair value of warrants was estimated using Black-Scholes with the following weighted-average assumptions: fair value of the Company’s common stock at issuance of $2.15 per share; five year contractual term; 44.60% volatility; 0.0% dividend rate; and a risk-free interest rate of 2.307%.  The total relative fair value of the warrants issued is $14,037.  The balance outstanding as of September 30, 2020 and December 31, 2019 is $109,262 and $241,054, respectively.

Notes Payable – Related Parties

In April 2019, the Company borrowed $1,150,000 from three individuals who serve on the Company’s board of directors for a two year period at an interest rate of 9.5% which requires the Company to make monthly principal and interest payments of $52,900 per month.  These loans are secured by the assets of the Company.  In connection with these loans, the Company issued to the noteholders warrants to purchase shares of the Company’s common stock equal to 10% of the original principal at a price per share equal to $2.15 per share.  Accordingly, the Company issued to the noteholders warrants to purchase 53,490 shares of the Company’s common stock at an exercise price of $2.15 per share. The relative fair value of each warrant was $0.90.  The relative fair value of warrants was estimated using Black-Scholes with the following weighted-average assumptions: fair value of the Company’s common stock at issuance of $2.15 per share; five year contractual term; 42.60% volatility; 0.0% dividend rate; and a risk-free interest rate of 2.3067%.  The relative fair value of warrants issued is $46,121. The balance outstanding as of September 30, 2020 and December 31, 2019 is $358,077 and $791,170, respectively.

Debt Discount

The relative fair value of warrants were recorded as debt discount, decreasing notes payable and related-party notes payable and increasing additional paid-in-capital on the accompanying consolidated balance sheets.  The debt discounts are being amortized to interest expense over the term of the corresponding notes payable using the straight-line method which approximates the effective interest method.

For the three month periods ended September 30, 2020 and 2019, total debt discount amortization was $72,372 and $7,520, respectively, and such amounts are included in interest expense in the accompanying consolidated statements of operations.  For the nine month periods ended September 30, 2020 and 2019, total debt discount amortization was $139,221 and $13,786 respectively, and such amounts are included in interest expense in the accompanying consolidated statements of operations.

Paycheck Protect Plan Loan

On April 28, 2020, One Stop Systems, Inc. received authorization pursuant to the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) as administered by the U.S. Small Business Administration (the “SBA”) for a “PPP” loan. On May 11, 2020, the Loan was funded and the Company received proceeds in the amount of $1,499,360 (the “PPP Loan”).

The PPP Loan, which took the form of a two-year promissory note (the “PPP Note”), matures on April 28, 2022 and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), was initially to commence on October 28, 2020. The Company did not provide any collateral or guarantees for the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The PPP Note provides for customary events of default, including, among others, those relating to failure to make payment, breaches of any term, obligation, covenant or condition contained in the PPP Note and payment of unauthorized expenses or use of proceeds contrary to CARES Act rules. The Company may prepay the principal of the PPP Loan at any time without incurring any prepayment charges.

Under the original rules, all or a portion of the PPP Loan may be forgiven by the SBA and lender upon application by the Company beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities during the eight week period beginning on the date of loan approval. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 25% of the

18


forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal.

However, the original rules governing loans granted under the PPP have been subsequently updated.  The time period to spend the received funds has been extended from the original eight weeks to twenty-four weeks.  Payroll is only required to be 60%, and the commencement date for the repayment has also been extended accordingly.  As of the filing date of this Quarterly Report on Form 10-Q, the Company has not submitted an application with the lender to forgive the PPP Loan, but intends to do so in accordance with SBA Procedural Notice, Control No. 5000-20057, effective October 2, 2020.

Senior Secured Convertible Note:

On April 20, 2020, the Company, entered into a Securities Purchase Agreement with an institutional investor, providing for the issuance of the Company’s Senior Secured Convertible Promissory Notes with a principal face amount of up to $6,000,000.   The notes are, subject to certain conditions, convertible into shares of the Company’s common stock, par value $0.0001 per share, at an initial conversion price per share of $2.50. The notes will be issued with a 10% original issue discount.

At the initial closing of this offering, the Company issued notes of $3,000,000, and can consummate additional closings of up to $3,000,000, subject to the prior satisfaction of certain closing conditions. The initial investor purchased the notes for an aggregate purchase price of $2,700,000 at the initial closing.  The notes bear no interest rate (except upon event of default) and, unless earlier converted or redeemed, will mature on April 1, 2022.

The Notes are convertible at any time, in whole or in part, at the option of the investors, into shares of common stock at the initial conversion price of $2.50 per share. The conversion price is subject to adjustment for issuances of securities below the conversion price then in effect and for stock splits, combinations or similar events. If immediately following the close of business on the six month anniversary of the issuance date of each note, the conversion price then in effect exceeds 135% of the volume weighted average price VWAP (the “Market Price”), the initial conversion price under any such note will be automatically lowered to the Market Price.

Commencing July 1, 2020, the Company made monthly amortization payments equal to 1/22nd of the initial principal, any accrued and unpaid interest and late charges and any deferred or accelerated amount, of such note, which may be satisfied in cash at a redemption price equal to 105% of such installment amount (110% of such installment amount on notes issued at additional closings).

Subject to the satisfaction of certain equity conditions set forth in the notes, installment amounts may be satisfied in shares of our common stock, with such installment conversion at a conversion price equal to the lower of (i) the conversion price then in effect and (ii) the greater of (x) the floor price of $1.00 (80% of the Nasdaq market price at date of purchase agreement) and (y) the lower of (I) 82.5% the volume weighted average price of our common stock on the trading day immediately before the applicable installment date and (II) 82.5% of the lowest volume weighted average price in the 20 days prior to the installment date. Shares of our common stock to be issued with respect to any such installment will be pre-delivered on the 2nd trading day after the applicable installment notice date as defined in the notes) with a true-up on the applicable installment date. The market value of any installment amount below the floor price will be cash settled on the applicable installment date.  

Management evaluated the embedded conversion feature to determine whether bifurcation was required as a separate derivative liability.  Management first determined that the conversion feature was not within the scope of ASC 480. It then determined that the embedded derivative should be separated from the host instrument and accounted for as a derivative instrument because it met the criteria of ASC 815-15-25-1, primarily because the contract provides for delivery of an asset that puts the recipient in substantially the same position as net settlement.  However, in part due to the Company’s adoption of ASC 2017-11 on April 1, 2020, which allowed management to disregard the down round provisions of the conversion feature, management determined that a scope exception to derivative accounting existed by satisfying the additional conditions necessary for equity classification specified by ASC 815-10-15-74 and ASC 815-40-25.  As a result of management’s analysis, the conversion feature

19


was not accounted for separately from the debt instrument and the Company will recognize the contingent beneficial conversion feature when, or if, such is triggered.

The original issue discount of 10% on the Senior Secured Convertible Note was recorded as a debt discount, decreasing the note payable.  This debt discount is amortized to interest expense using the effective interest rate method over the term of the loan.  For the three and nine month periods ended September 30, 2020, total debt discount amortization was $61,518 and $110,659 respectively, and such amount is included in interest expense in the accompanying consolidated statements of operations.

Debt issuance costs in the amount of $316,274 related to this indebtedness were deducted from the face value of the note.  Such costs are amortized to interest expense using the effective interest rate method over the term of the loan.  Total debt issuance costs amortized during the three and nine month period ended September 30, 2020 was $64,855 and $116,662 respectively, and such amount is included in interest expense in the accompanying consolidated statements of operations.

A summary of outstanding debt obligations as of September 30, 2020 is as follows:

 

Loan Description

 

Current

interest rate

 

 

Maturity

date

 

Balance

(Euro)

 

 

Balance ($)

 

 

Current

Portion

 

 

Long-term

Portion

 

Domestic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable - third party

 

9.50%

 

 

April-21

 

 

-

 

 

$

105,460

 

 

$

105,460

 

 

$

-

 

Related party notes payable

 

9.50%

 

 

April-21

 

 

-

 

 

 

345,586

 

 

 

345,586

 

 

 

-

 

Convertible senior secured

   note

 

OID

 

 

April-22

 

 

-

 

 

 

2,201,956

 

 

 

1,299,117

 

 

 

902,839

 

PPP loan

 

1.00%

 

 

April-22

 

 

-

 

 

 

1,499,360

 

 

 

-

 

 

 

1,499,360

 

 

 

 

 

 

 

 

 

 

-

 

 

$

4,152,362

 

 

$

1,750,163

 

 

$

2,402,199

 

Foreign:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uni Credit Bank AG

 

1.87%

 

 

June-21

 

500,000

 

 

$

586,189

 

 

$

586,189

 

 

$

-

 

Uni Credit Bank AG

 

2.25%

 

 

March-21

 

 

132,519

 

 

 

155,362

 

 

 

155,362

 

 

 

-

 

Uni Credit Bank AG

 

1.90%

 

 

April-21

 

 

500,000

 

 

 

586,189

 

 

 

586,189

 

 

 

-

 

 

 

 

 

 

 

 

 

1,132,519

 

 

$

1,327,740

 

 

$

1,327,740

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,480,102

 

 

$

3,077,903

 

 

$

2,402,199

 

 

Outstanding debt obligations as of September 30, 2020 consist of the following:

 

Period Ending September 30,

 

Related

Parties

 

 

Third

Parties

 

 

Convertible

Note

 

 

PPP Loan

 

 

Foreign

 

 

Total

 

Current portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

$

358,077

 

 

$

109,262

 

 

$

1,636,364

 

 

$

-

 

 

$

1,327,740

 

 

$

3,431,442

 

Less discount

 

 

(12,491

)

 

 

(3,802

)

 

 

(164,171

)

 

 

-

 

 

 

-

 

 

 

(180,464

)

Less loan origination costs

 

 

-

 

 

 

-

 

 

 

(173,076

)

 

 

-

 

 

 

-

 

 

 

(173,076

)

Net liability

 

 

345,586

 

 

 

105,460

 

 

 

1,299,117

 

 

 

-

 

 

 

1,327,740

 

 

 

3,077,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term portion:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

 

-

 

 

 

-

 

 

 

954,545

 

 

 

1,499,360

 

 

 

-

 

 

 

2,453,905

 

Less discount

 

 

-

 

 

 

-

 

 

 

(25,171

)

 

 

-

 

 

 

-

 

 

 

(25,171

)

Less loan origination costs

 

 

-

 

 

 

-

 

 

 

(26,536

)

 

 

-

 

 

 

-

 

 

 

(26,536

)

Net liability

 

 

-

 

 

 

-

 

 

 

902,839

 

 

 

1,499,360

 

 

 

-

 

 

 

2,402,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

 

358,077

 

 

 

109,262

 

 

 

2,590,909

 

 

 

1,499,360

 

 

 

1,327,740

 

 

 

5,885,348

 

Less discount

 

 

(12,491

)

 

 

(3,802

)

 

 

(189,341

)

 

 

-

 

 

 

-

 

 

 

(205,634

)

Less loan origination costs

 

 

-

 

 

 

-

 

 

 

(199,612

)

 

 

-

 

 

 

-

 

 

 

(199,612

)

Net liability

 

$

345,586

 

 

$

105,460

 

 

$

2,201,956

 

 

$

1,499,360

 

 

$

1,327,740

 

 

$

5,480,102

 

 

20


Total future principal payments under notes payable and related-party notes payable as of September 30, 2020 are as follows:

 

Period Ending September 30,

 

Related

Parties

 

 

Third

Parties

 

 

Convertible

Note

 

 

PPP Loan

 

 

Foreign

 

 

Total

 

 

Discount / Loan Originaion Costs

 

2021

 

$

358,077

 

 

$

109,262

 

 

$

1,636,364

 

 

$

-

 

 

$

1,327,740

 

 

$

3,431,442

 

 

$

(353,540

)

2022

 

 

-

 

 

 

-

 

 

 

954,545

 

 

 

1,499,360

 

 

 

-

 

 

 

2,453,905

 

 

 

(51,707

)

Total minimum payments

 

 

358,077

 

 

 

109,262

 

 

 

2,590,909

 

 

 

1,499,360

 

 

 

1,327,740

 

 

 

5,885,348

 

 

 

(405,246

)

Current portion of notes

   payable

 

 

(358,077

)

 

 

(109,262

)

 

 

(1,636,364

)

 

 

-

 

 

 

(1,327,740

)

 

 

(3,431,442

)

 

 

353,540

 

Notes payable, net of

   current portion

 

$

-

 

 

$

-

 

 

$

954,545

 

 

$

1,499,360

 

 

$

-

 

 

$

2,453,905

 

 

$

(51,707

)

 

NOTE 8 – STOCKHOLDERS’ EQUITY

The Company’s amended and restated certificate of incorporation filed on December 14, 2017, authorizes the Company to issue 10,000,000 shares of preferred stock and 50,000,000 shares of common stock.

Stock Options

On June 23, 2020, the Company awarded 412,125 stock options to a member of senior management.  The awards contain a market condition whereby the awards will vest based on increases in the stock price measured at June 30 and December 31 over the three year period following the grant date.  The awards will become fully vested when the stock price meets or exceeds $5.50 per share on any measurement date.

A summary of stock option activity under each of the Company’s stock option plans during the nine months period ended September 30, 2020:

 

 

 

Stock Options Outstanding

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Life (in years)

 

 

Aggregate

Intrinsic

Value

 

Outstanding at January 1, 2020

 

 

1,686,444

 

 

$

1.30

 

 

 

4.22

 

 

$

1,535,987

 

Granted

 

 

432,125

 

 

$

2.71

 

 

 

 

 

 

 

 

 

Forfeited / Cancelled

 

 

(38,197

)

 

$

2.51

 

 

 

 

 

 

 

 

 

Exercised

 

 

(744,951

)

 

$

0.87

 

 

 

 

 

 

 

 

 

Outstanding at  September 30, 2020

 

 

1,335,421

 

 

$

1.81

 

 

 

6.66

 

 

$

616,432

 

Exercisable at September 30, 2020

 

 

845,649

 

 

$

1.53

 

 

 

5.01

 

 

$

616,323

 

Vested and expected to vest at September 30, 2020

 

 

1,320,728

 

 

$

1.81

 

 

 

6.63

 

 

$

616,429

 

 

21


The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stock options granted by the Company:

 

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Expected term (in years)

 

5.04

 

 

4.65 - 5.87

 

Expected volatility

 

43.5 - 47.80%

 

 

43.7 - 44.4%

 

Risk-free interest rate

 

 

0.33

%

 

2.49 - 2.55%

 

Weighted average grant date fair value per share

 

$

0.83

 

 

$

1.07

 

Grant date fair value of options vested

 

$

545,388

 

 

$

574,524

 

Intrinsic value of options exercised

 

$

917,625

 

 

$

551,134

 

 

As of September 30, 2020, the amount of unearned stock-based compensation estimated to be expensed from 2020 through 2025 related to unvested common stock options is $370,072, net of estimated forfeitures. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 2.38 years.

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

Restricted Stock Units

Restricted stock units may be granted at the discretion of the compensation committee of the Board of Directors under the Company’s 2017 Equity Incentive Plan that was adopted on October 10, 2017 (the “2017 Plan”) in connection with the hiring and retention of personnel and are subject to certain conditions.  Restricted stock units generally vest quarterly or semi-annually over a period of one to three years and are typically forfeited if employment is terminated before the restricted stock unit vest.  The compensation expense related to the restricted stock units is calculated as the fair value of the common stock on the grant date and is amortized to expense over the vesting period and is adjusted for estimated forfeitures.

The Company’s restricted stock unit activity for the nine months ended September 30, 2020 is as follows:

 

 

 

Restricted Stock Units

 

 

 

Number of

Shares

 

 

Weighted

Average Grant

Date Fair Value

 

Unvested at January 1, 2020

 

 

216,670

 

 

$

3.02

 

Granted

 

 

554,251

 

 

$

2.51

 

Vested

 

 

(148,751

)

 

$

3.15

 

Cancelled

 

 

(38,333

)

 

$

2.41

 

Unvested at September 30, 2020

 

 

583,837

 

 

$

2.54

 

 

As of September 30, 2020, there was $1,048,715 of unrecognized compensation cost related to unvested restricted stock units which is expected to be recognized over a weighted average period of 2.42 years.

22


Stock-based compensation expense for the three and nine month periods ended September 30, 2020 and 2019 was comprised of the following:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

Stock-based compensation classified as:

 

2020

 

 

2019

 

 

2020

 

 

2019

 

General and administrative

 

$

171,636

 

 

$

120,188

 

 

$

373,667

 

 

$

357,679

 

Production

 

 

15,118

 

 

 

18,140

 

 

 

50,856

 

 

 

52,131

 

Marketing and selling

 

 

15,696

 

 

 

15,011

 

 

 

50,062

 

 

 

44,472

 

Research and development

 

 

7,830

 

 

 

11,518

 

 

 

28,834

 

 

 

35,858

 

 

 

$

210,280

 

 

$

164,857

 

 

$

503,419

 

 

$

490,140

 

 

Warrants

The following table summarizes the Company’s warrant activity during the nine months ended September 30, 2020:

 

 

 

Number of

Warrants

 

 

Weighted

Average

Exercise Price

 

Warrants outstanding – January 1, 2020

 

 

630,947

 

 

$

4.16

 

Warrants granted

 

 

-

 

 

$

-

 

Warrants exercised

 

 

(78,948

)

 

$

0.76

 

Warrants outstanding – September 30, 2020

 

 

551,999

 

 

$

4.65

 

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Legal

On September 29, 2020, the Company’s former Chief Executive Officer Stephen D. Cooper commenced an action entitled Stephen D. Cooper v. One Stop Systems, Inc. et al, in San Diego County Superior Court, Case No. 37-2020-00034492-CU-BC-CTL alleging claims for (1) breach of written contract and (2) violation of California Labor Code Sections 201 and 203 and seeking unspecified compensatory damages and statutory penalties.  The Company’s responsive pleading is due on or before December 9, 2020, and the Company intends to vigorously defend the allegations.

Guarantees and Indemnities

The Company has made certain indemnities, under which it may be required to make payments to an indemnified party, in relation to certain transactions.  The Company indemnifies its directors, officers, employees and agents to the maximum extent permitted under the laws of the State of Delaware.  In connection with its facility lease, the Company has indemnified its lessor for certain claims arising from the use of the facilities.  Also, in connection with its Credit Agreement (Note 8), the Company has agreed to indemnify its lender and others related to the use of the proceeds and other matters.  The duration of the indemnities varies, and in many cases is indefinite.  These indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make.  Historically, the Company has not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities in the accompanying consolidated balance sheets.

23


Leases

The Company leases its offices, manufacturing, and warehouse facility in San Diego County under a non-cancelable operating lease. Our corporate headquarters are in a leased space comprising approximately 29,342 square feet in Escondido, California under a lease that was renewed in August 2018 and expires in August 2024.  The Company also leases a 3,208 square foot facility in Salt Lake City, Utah that houses our Ion software development team. The Company is the lessee of a leased space comprising approximately 12,000 square feet located in Irvine, California with the lease expiring in March 2021.  Bressner Technology GmbH, leases space comprising 8,073 square feet on a month to month basis.

For the three month periods ended September 30, 2020 and 2019, rent expense was $162,262 and $154,029, respectively.   For the nine month periods ended September 30, 2020 and 2019, rent expense was $528,418 and $493,045, respectively.

Purchase Commitments

In the normal course of business the Company enters into purchase commitments for inventory components to be delivered based upon pre-established delivery schedules over a period that may exceed one year.

Customer Concentration

During the three and nine month periods ended September 30, 2020 the Company had two customers and in 2019, one customer that had approximately 23.3%, and 35.2% and 14.7%, and 35%, respectively of net sales that represent customers which are each greater than 10% of our consolidated annual revenue.  As of September 30, 2020, the Company had three customers and as of December 31, 2019, two customers that had approximately 67% and 90%, respectively of net trade accounts receivables that represent customer balances which are each greater than 10% of our consolidated trade accounts receivable balance.  

As a result of the recent worldwide economic impact attributable to COVID-19, disguise, the Company’s largest customer, has been experiencing a slowdown in its business as the entertainment and media markets have been required to scale back or cancel large group gatherings and as a result the Company has implemented a modified payment plan for this customer for the collection of outstanding accounts receivables which are being paid as scheduled.

During the three and nine month periods ended September 30, 2020 and 2019, approximately 31%, and 32% and 24%, and 11%, respectively, of net purchases represent vendors/suppliers which are each greater than 10% of our consolidated purchases.

NOTE 10 – RELATED PARTY TRANSACTIONS

In April 2019, certain members of the Company’s Board of Directors executed definitive agreements to commit funds of up to $4,000,000 as a credit facility. The Company initially borrowed $1,150,000 from members of the Board of Directors and $350,000 from other shareholders for a two year period at an interest rate of 9.5% which requires the Company to make monthly principal and interest payment of $69,000 per month. In connection with these loans, the Company issued to these note holders warrants to purchase shares of the Company’s common stock equal to 10% of the original principal at a price per share equal to $2.15 per share.  Accordingly, the Company issued to these note holders warrants to purchase 69,766 share of the Company’s common stock.  The relative fair value of the warrants issued was $60,158. Interest expense on all related-party notes payable for the three months ended September 30, 2020 and 2019 totaled $17,156 and $0, respectively. The remaining unfunded commitments expired as of April 1, 2020, and the Company has not received any additional funding commitments from members of the Board of Directors as of the date of filing of the Quarterly Report on Form 10-Q.

24


NOTE 11 NET LOSS PER SHARE

Basic and diluted net loss per share was calculated as follows for the three and nine month periods ended September 30, 2020 and 2019:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Basic and diluted net income (loss) per share attributable

   to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

857,790

 

 

$

544,901

 

 

$

(250,404

)

 

$

(1,994,461

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding -

   basic

 

 

16,585,773

 

 

 

15,777,158

 

 

 

16,469,457

 

 

 

14,825,351

 

Effect of dilutive securities

 

 

432,841

 

 

 

613,048

 

 

 

-

 

 

 

-

 

Weighted average common shares outstanding -

   diluted

 

 

17,018,614

 

 

 

16,390,206

 

 

 

16,469,457

 

 

 

14,825,351

 

Net income (loss) per common share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.03

 

 

$

(0.02

)

 

$

(0.13

)

Diluted

 

$

0.05

 

 

$

0.03

 

 

$

(0.02

)

 

$

(0.13

)

 

NOTE 12 – REVENUE, SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in two reportable segments: the design and manufacture of high-performance customized computers and flash arrays, which is inclusive of in-flight entertainment & connectivity, and value-added reseller with minimal customization. The Company evaluates financial performance on a company-wide basis.  As of June 1, 2020, CDI’s operations became fully integrated and combined with the operation of OSS’ core business operations located in Escondido, California.  It is the Company’s intention to dissolve CDI as a standalone entity upon resolution of certain outstanding items.

Segment detail for the three and nine month periods ended September 30, 2020 and 2019 is as follows:

 

 

 

For The Three Month Ended September 30, 2020

 

 

For The Three Month Ended September 30, 2019

 

 

 

OSS

 

 

Bressner

 

 

Total

 

 

OSS

 

 

Bressner

 

 

Total

 

Revenues

 

$

8,976,539

 

 

$

3,999,519

 

 

$

12,976,058

 

 

$

9,735,630

 

 

$

5,203,334

 

 

$

14,938,964

 

Cost of revenues

 

 

(4,976,063

)

 

 

(3,098,382

)

 

 

(8,074,445

)

 

 

(5,937,592

)

 

 

(3,971,453

)

 

 

(9,909,045

)

Gross profit

 

 

4,000,476

 

 

 

901,137

 

 

 

4,901,613

 

 

 

3,798,038

 

 

 

1,231,881

 

 

 

5,029,919

 

Gross margin %

 

 

44.6

%

 

 

22.5

%

 

 

37.8

%

 

 

39.0

%

 

 

23.7

%

 

 

33.7

%

Total operating

   expenses

 

 

3,052,949

 

 

 

869,222

 

 

 

3,922,171

 

 

 

3,730,788

 

 

 

879,574

 

 

 

4,610,362

 

Income from

   operations

 

$

947,527

 

 

$

31,915

 

 

$

979,442

 

 

$

67,250

 

 

$

352,307

 

 

$

419,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Nine Month Ended September 30, 2020

 

 

For The Nine Month Ended September 30, 2019

 

 

 

OSS

 

 

Bressner

 

 

Total

 

 

OSS

 

 

Bressner

 

 

Total

 

Revenues

 

$

24,722,066

 

 

$

13,238,957

 

 

$

37,961,023

 

 

$

26,167,536

 

 

$

13,715,563

 

 

$

39,883,099

 

Cost of revenues

 

 

(15,899,150

)

 

 

(10,439,377

)

 

 

(26,338,527

)

 

 

(16,442,130

)

 

 

(10,586,269

)

 

 

(27,028,399

)

Gross profit

 

 

8,822,916

 

 

 

2,799,580

 

 

 

11,622,496

 

 

 

9,725,406

 

 

 

3,129,294

 

 

 

12,854,700

 

Gross profit %

 

 

35.7

%

 

 

21.1

%

 

 

30.6

%

 

 

37.2

%

 

 

22.8

%

 

 

32.2

%

Total operating

   expenses

 

 

9,883,997

 

 

 

2,676,097

 

 

 

12,560,094

 

 

 

12,703,649

 

 

 

2,744,182

 

 

 

15,447,831

 

Income (loss) from

   operations

 

$

(1,061,081

)

 

$

123,483

 

 

$

(937,598

)

 

$

(2,978,243

)

 

$

385,112

 

 

$

(2,593,131

)

 

25


Revenue from customers with non-U.S. billing addresses represented approximately 35% and 60% and 44% and 63% respective of the Company’s revenue during the three and nine month periods ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, substantially all the Company’s long-lived assets were located in the United States of America with the exception of assets of $219,627 located in Germany.

NOTE 13 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events after the consolidated balance sheet dated as of September 30, 2020 through the date of filing of this quarterly report.  Based upon the Company’s evaluation, management has determined that, other than as disclosed in the accompanying notes, no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto.

26


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis of our financial condition and operating results together with our financial statements and related notes included elsewhere in this Quarterly Report. This discussion and analysis contains forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Quarterly Report.

Overview

OSS designs, manufactures and markets custom high speed computing systems for high performance computing (HPC) applications on the edge. These applications require ultra-fast processing power and the ability to quickly access and store ever-growing data sets.  Systems are built using the latest GPU (graphical processing unit) and solid-state flash (memory) technologies.  We are a niche provider of HPC custom servers, compute accelerators, and flash storage arrays.  We deliver this technology through sale of equipment and software to customers.  

Concept Development Inc., (CDI) which was acquired on August 31, 2018, specializes in the design and manufacture of specialized high-performance in-flight entertainment systems for commercial aircraft.  CDI’s capabilities include electrical, mechanical and software design as well as extensive experience in test and certifications required for airborne systems. As of July 1, 2020, CDI has been fully integrated into the core operations of OSS.

Bressner Technology GmbH, (Bressner) which was acquired on October 31, 2018, provides standard and customized servers, panel PCs, and PCIe expansion systems. Bressner provides manufacturing, test, sales and marketing services for customers throughout Europe.

Business Developments

On February 15, 2020, Steve Cooper departed as President and CEO of One Stop Systems, Inc., and was replaced by David Raun who became the interim President and CEO of the Company.

On April 24, 2020, the Company consummated the initial closing of the offering (the “Initial Closing”) under the Purchase Agreement and issued a Senior Secured Convertible Promissory Note with an aggregate of $3,000,000 to an institutional investor (“Initial Note”). The investors purchased the Initial Note for an aggregate purchase price of $2,700,000, at the Initial Closing after a 10% original issue discount.  The Initial Note bears no interest rate (except upon event of default) and, unless earlier converted or redeemed, will mature on the date that is the twenty-three (23) month anniversary of the last day from the Initial Closing.

On April 28, 2020, the Company received a two year Paycheck Protection Plan loan in the amount of $1,499,360.

On June 24, 2020, David Raun became the President and CEO of the Company.

On July 1, 2020, three new members were added to the board of directors and as a result the Company now has a total of seven directors; six who are independent members, and one who is not independent.  The board consists of four male members and three female members consistent with directives for a public company in California.

Our Business Model

OSS designs, manufactures and sells specialized high performance computing (HPC) systems to customers world-wide in edge computing.  We differentiate ourselves from other suppliers of HPC solutions by utilizing our expertise in custom systems design and PCIe expansion to build systems with a greater quantity of PCIe add-in slots,

27


GPU-based compute cards and/or flash cards. Our systems offer industry leading capabilities that occupy less physical space and power consumption, and are ruggedized for harsh environments.

Concept Development, LLC focuses on engineering innovative products and solutions that enhances success for our clients in their design, manufacturing and life support cycle, with in-flight entertainment and connectivity of their processes enabling efficiencies and cost savings.

Bressner Technology GmbH is a leading provider of industrial IT solutions with long standing international contact to assist in leveraging markets around the world to our customers benefit and give them early access to innovative new products.  By continuing to forge strategic partnerships, we have significantly expanded our range of services.  With this, we offer consistent product portfolio at all integration levels, superior product quality, efficient logistics and excellent support.

Components of Results of Operations

Revenue

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.  For a more detailed description of our revenue recognition policies see the Company’s consolidated financial statements Note 2 – Significant Accounting Policies for the years ended December 2019 and 2018 as included in our 2019 Form 10-K.

Cost of revenue

Cost of revenue primarily consists of costs of materials, costs paid to third-party contract manufacturers (which may include the costs of components), and personnel costs associated with manufacturing and support operations. Personnel costs consist of wages, bonuses, benefits, stock-based compensation expenses. Cost of revenue also includes freight, allocated overhead costs and inventory write-offs and changes to our inventory and warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect cost of revenue to increase in absolute dollars, as product revenue increases.

Operating expenses

Our operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense, are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs.

General and Administrative - General and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources and fees for third-party professional services, as well as allocated operational costs.

Sales and Marketing - Sales and marketing expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel and entertainment expenses as well as allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications and brand-building activities. Sales and marketing expenses may increase in absolute dollars as we expand our sales force, increase marketing resources, and further develop sales channels.

Research and Development - Research and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for research and development, third-party engineering and contractor support costs, as well as allocated overhead. Research and development expenses may increase in absolute dollars as we continue to invest in new and existing products.

28


Other income (expense), net

Other income consists of income received for activities outside of our core business.  This includes interest income from investments and finance charges from customers.  Other expense includes expenses for activities outside of our core business.  These expenses consist primarily of loan amortization and interest expense.

Provision for Income Taxes

Provision for income taxes consists of estimated income taxes due to the United States and German governments and to the state tax authorities in jurisdictions in which we conduct business, as well as the change in our deferred income tax assets and liabilities.

Results of Operations

The following tables set forth our results of operations for the three and nine month periods ended September 30, 2020 and 2019 respectively, presented in dollars and as a percentage of revenue.

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

$

12,976,058

 

 

$

14,938,964

 

 

$

37,961,023

 

 

$

39,883,099

 

Cost of revenue

 

 

8,074,445

 

 

 

9,909,045

 

 

 

26,338,527

 

 

 

27,028,399

 

Gross profit

 

 

4,901,613

 

 

 

5,029,919

 

 

 

11,622,496

 

 

 

12,854,700

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

1,817,499

 

 

 

2,190,003

 

 

 

6,208,922

 

 

 

6,468,021

 

Impairment of goodwill

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,697,394

 

Marketing and selling

 

 

1,103,384

 

 

 

1,383,965

 

 

 

3,137,833

 

 

 

3,758,901

 

Research and development

 

 

1,001,288

 

 

 

1,036,394

 

 

 

3,213,339

 

 

 

3,523,515

 

Total operating expenses

 

 

3,922,171

 

 

 

4,610,362

 

 

 

12,560,094

 

 

 

15,447,831

 

Income (loss) from operations

 

 

979,442

 

 

 

419,557

 

 

 

(937,598

)

 

 

(2,593,131

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

143,931

 

 

 

10,149

 

 

 

267,911

 

 

 

23,424

 

Interest expense

 

 

(174,205

)

 

 

(52,182

)

 

 

(393,175

)

 

 

(111,463

)

Other income (expense), net

 

 

(33,625

)

 

 

116,326

 

 

 

(38,598

)

 

 

91,819

 

Total other income (expense), net

 

 

(63,899

)

 

 

74,293

 

 

 

(163,862

)

 

 

3,780

 

Income (loss) before income taxes

 

 

915,543

 

 

 

493,850

 

 

 

(1,101,460

)

 

 

(2,589,351

)

Provision (benefit) for income taxes

 

 

57,753

 

 

 

(51,051

)

 

 

(851,056

)

 

 

(594,890

)

Net income (loss)  attributable to common stockholders

 

$

857,790

 

 

$

544,901

 

 

$

(250,404

)

 

$

(1,994,461

)

 

 

29


 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue

 

 

62.2

%

 

 

66.3

%

 

 

69.4

%

 

 

67.8

%

Gross profit

 

 

37.8

%

 

 

33.7

%

 

 

30.6

%

 

 

32.2

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

14.0

%

 

 

14.7

%

 

 

16.4

%

 

 

16.2

%

Impairment of goodwill

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

4.3

%

Marketing and selling

 

 

8.5

%

 

 

9.3

%

 

 

8.3

%

 

 

9.4

%

Research and development

 

 

7.7

%

 

 

6.9

%

 

 

8.5

%

 

 

8.8

%

Total operating expenses

 

 

30.2

%

 

 

30.9

%

 

 

33.1

%

 

 

38.7

%

Income (loss) from operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

Interest income

 

 

1.1

%

 

 

0.1

%

 

 

0.7

%

 

 

0.1

%

Interest expense

 

 

-1.3

%

 

 

-0.3

%

 

 

-1.0

%

 

 

-0.3

%

Other income (expense), net

 

 

-0.3

%

 

 

0.8

%

 

 

-0.1

%

 

 

0.2

%

Total other income (expense), net

 

 

-0.5

%

 

 

0.5

%

 

 

-0.4

%

 

 

0.0

%

Income (loss) before income taxes

 

 

7.1

%

 

 

3.3

%

 

 

-2.9

%

 

 

-6.5

%

Provision (benefit) for income taxes

 

 

0.4

%

 

 

-0.3

%

 

 

-2.2

%

 

 

-1.5

%

Net income (loss)  attributable to common stockholders

 

 

6.6

%

 

 

3.6

%

 

 

-0.7

%

 

 

-5.0

%

 

Comparison of the three and nine months ended September 30, 2020 and 2019

Revenue, cost of revenue and gross profit:

 

 

 

For the Three Months Ended September 30, 2020

 

 

For the Three Months Ended September 30, 2019

 

Entity:

 

Revenue

 

 

Cost of

Revenue

 

 

Gross

Profit

 

 

Gross

Margin

%

 

 

Revenue

 

 

Cost of

Revenue

 

 

Gross

Profit

 

 

Gross

Margin

%

 

OSS

 

$

8,976,539

 

 

$

(4,976,063

)

 

$

4,000,476

 

 

 

44.6

%

 

$

9,735,630

 

 

$

(5,937,592

)

 

$

3,798,038

 

 

 

39.0

%

Bressner Technology GmbH

 

 

3,999,519

 

 

 

(3,098,382

)

 

 

901,137

 

 

 

22.5

%

 

 

5,203,334

 

 

 

(3,971,453

)

 

 

1,231,881

 

 

 

23.7

%

 

 

$

12,976,058

 

 

$

(8,074,445

)

 

$

4,901,613

 

 

 

37.8

%

 

$

14,938,964

 

 

$

(9,909,045

)

 

$

5,029,919

 

 

 

33.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2020

 

 

For the Nine Months Ended September 30, 2019

 

Entity:

 

Revenue

 

 

Cost of

Revenue

 

 

Gross

Margin

 

 

Gross

Margin

%

 

 

Revenue

 

 

Cost of

Revenue

 

 

Gross

Margin

 

 

Gross

Margin

%

 

OSS

 

$

24,722,066

 

 

$

(15,899,150

)

 

$

8,822,916

 

 

 

35.7

%

 

$

26,167,536

 

 

$

(16,442,130

)

 

$

9,725,406

 

 

 

37.2

%

Bressner Technology GmbH

 

 

13,238,957

 

 

 

(10,439,377

)

 

 

2,799,580

 

 

 

21.1

%

 

 

13,715,563

 

 

 

(10,586,269

)

 

 

3,129,294

 

 

 

22.8

%

 

 

$

37,961,023

 

 

$

(26,338,527

)

 

$

11,622,496

 

 

 

30.6

%

 

$

39,883,099

 

 

$

(27,028,399

)

 

$

12,854,700

 

 

 

32.2

%

 

Revenue

For the three month period ended September 30, 2020, total revenue decreased $1,962,906 or 13.1%, as compared to the same period in 2019. OSS had a reduction of $759,091 or 5.1 percentage points that was primarily driven by reduced revenue from OSS’ core media and entertainment business.  Bressner experienced a reduction of $1,203,815 or 8.0 percentage points of the decrease for the quarter as compared to the prior year, with the decrease attributable to select contracts coming to maturity in the prior year which were not continued in the current year.  

30


For the nine month period ended September 30, 2020, total revenue decreased $1,922,076 or 4.8%, as compared to the same period in 2019. During the nine months ended September 30, 2020, OSS had experienced a reduction in revenue of $1,445,470 or a decrease of 3.6 percentage points which is attributable to a decline in sales to its two largest customers that was largely due to the impact of the COVID-19 pandemic.  The impact of these declines has been partially offset by new business opportunities associated with the Company’s AI on the fly products.  Bressner had a reduction of $476,606 or a decrease of 1.2 percentage points of the total increase in revenue attributable to select contracts which came to maturity that were not continued in the current year.

Cost of revenue and gross margin

Cost of revenue decreased $1,834,600 or 18.5%, for the three month period ended September 30, 2020 as compared to the same period in 2019. OSS’ core business experienced a reduction of $961,529 or 9.7 percentage points of the decrease as a result of the reduction in media and entertainment sales.  Bressner’s cost of revenue decreased $873,071 or 8.8 percentage points of the total decrease in cost of revenue The decrease in cost of revenue was primarily driven by reduced sales for the period.

Cost of revenue decreased by $689,872 or a reduction of 2.5%, for the nine month period ended September 30, 2020 as compared to the same period in 2019. OSS experienced a reduction in the cost of revenue of 542,980 or 2.0 percentage points which was primarily driven by a reduction in revenue for the period and a change in product mix.  Bressner experienced a cost of revenue reduction of $1,083,839 or a reduction of 4.0 percentage points of the decrease. This decrease was primarily driven by reduced sales for the period.

The overall gross margin percentage improved from 33.7% for the three month period ended September 30, 2019 to 37.8% for the three month period ended September 30, 2020, an improvement of 4.1 percentage points.  The gross margin for the core OSS business for the three month period ended September 30, 2020 was 44.6%, which is an improvement of 5.6 percentage points in comparison to the prior year period of 39%, where such improvement is attributable to the increased sale of data storage units to military end-users and decreased sales of lower margin products into the media and entertainment market.  Bressner contributed gross margin at a rate of 22.5% as compared to 23.7% in the same year ago period attributable to product mix and sales volume.  

The overall gross margin percentage decreased from 32.2% for the nine month period ended September 30, 2019 to 30.6% for the nine month period ended September 30, 2020, a decrease of 1.6 percentage points.  The gross margin for the core OSS business for the nine month period ended September 30, 2020 was 35.7, which was 1.8 percentage points less in comparison to the prior year period of 37.2%.  The majority of the decline is attributable to the reduction of sales of data storage units (DSU) to military end users in the as compared to the prior year.  Military grade DSUs tend to command higher margins as compared to other products.  Bressner contributed gross margin at a rate of 21.1% as compared to 22.8% in the same year ago period attributable.  

Operating expenses

General and administrative expense

General and administrative expense decreased $372,504 or 17%, for the three month period ended September 30, 2020 as compared to same period in 2019.  The decrease is primarily driven by cost savings attributable to a cost reduction initiative that took effect in April 2020, in which the workforce was reduced and cost containment efforts were implemented.  Overall general and administrative expenses decreased as a percentage of revenue to 14% during the three month periods ended September 30, 2020 as compared to 14.7% during the same period in 2019.

General and administrative expense decreased $1,956,493 or 24%, for the nine month period ended September 30, 2020 as compared to same period in 2019.  The decrease is primarily driven by an impairment charge of $1,697,394 that was recognized in the prior year due to a write down in goodwill at CDI.  In addition, there were costs savings attributable to a cost reduction initiative that took effect in April 2020, in which the workforce was reduced and cost containment efforts were implemented.  A portion of these cost savings were more than offset by accruals for severance benefits attributable to the termination of our former president and chief executive officer.  Overall general and administrative expenses decreased as a percentage of revenue to 16.4% during the nine month periods ended September 30, 2020 as compared to 22.5% during the same period in 2019.

31


Marketing and selling expense

Marketing and selling expense decreased $280,581 or 20.3% during the three month periods ended September 30, 2020 as compared to the same period in 2019.  The decreases in marketing and selling expenses is primarily attributable to a cost reduction initiative that took effect in April 2020, in which the workforce was reduced and cost containment efforts were implemented. Additionally, as a result of COVID-19 there has been a reduction in travel and tradeshows.  Marketing and selling expense decreased as a percentage of revenue to 8.5% during the three month period ended September 30, 2020 as compared to 9.3% during the same period in 2019.

Marketing and selling expense decreased $621,068 or 16.5% during the nine month periods ended September 30, 2020 as compared to the same period in 2019.  The decreases in marketing and selling expenses is primarily attributable to a cost reduction initiative that took effect in April 2020, in which the workforce was reduced and cost containment efforts were implemented. Additionally, as a result of COVID-19 there has been a reduction in travel and tradeshows.  Marketing and selling expense decreased as a percentage of revenue to 8.3% during the nine month period ended September 30, 2020 as compared to 9.4% during the same period in 2019.

Research and development expense

Research and development expense decreased by $35,106 or 3.4% during the three month period ended September 30, 2020 as compared to same period in 2019.  The decrease is primarily attributable to a cost reduction initiative that took effect in April 2020, in which the workforce was reduced and cost containment efforts were implemented.  Overall, total research and development expense increased as a percentage of revenue to 7.7% during the three month period ended September 30, 2020 as compared to 6.9% during the same period in 2019 primarily because of the calculation based upon a smaller revenue number.

Research and development expense decreased by $310,176 or 8.8% during the nine month period ended September 30, 2020 as compared to same period in 2019.  The majority of the decrease is primarily attributable to a cost reduction initiative that took effect in April 2020, in which the workforce was reduced and cost containment efforts were implemented.  Overall, total research and development expense decreased as a percentage of revenue to 8.5% during the nine month period ended September 30, 2020 as compared to 8.8% during the same period in 2019.

Interest income

Interest income increased $133,782 for the three month period ended September 30, 2020 as compared to same period in 2019.  The increase is attributable to increased finance charges on outstanding accounts receivable balances from our largest customer in the media and entertainment industry.

Interest income increased $244,487 for the nine month period ended September 30, 2020 as compared to same period in 2019.  The increase is attributable to increased finance charges on outstanding accounts receivable balances from our largest customer in the media and entertainment industry.

Interest expense

Interest expense increased $122,023 for the three month period ended September 30, 2020 as compared to same period in 2019.  On April 24, 2020, the Company borrowed $3,000,000 through a senior secured convertible debt offering issued with a 10% original issue discount.  The interest and the professional fees incurred on securing the debt are being amortized on an effective interest rate basis to interest expense.

Interest expense increased $281,712 for the nine month period ended September 30, 2020 as compared to same period in 2019.  On April 24, 2020, the Company borrowed $3,000,000 through a senior secured convertible debt offering issued with a 10% original issue discount.  The interest and the professional fees incurred on securing the debt are being amortized on an effective interest rate basis to interest expense.

32


Other income (expense), net

Other income (expense), for the three month period ended September 30, 2020 resulted in a net decrease in other income and expense of $149,951 as compared to the same period in 2019, attributable to foreign currency transaction gains and losses.

Other income (expense), for the nine month period ended September 30, 2020 resulted in a net decrease in other income and expense of $130,417 and compared to the same period in 2019, attributable to foreign currency transaction gains and losses.

Provision for income taxes / Income tax benefits

We have recorded an income tax provision (benefit) of $57,753 and $(51,051), respectively, for the three month periods ended September 30, 2020 and 2019, and $(851,056) and $(594,890), respectively, for the nine month periods ended September 30, 2020 and 2019.  The three month and nine month periods ended September 30, 2020 include recording an additional interim tax benefit of $446,099 from the early adoption of ASU 2019-12.

The projected effective tax rate for the nine months ended September 30, 2020 differs from the statutory rate mainly due to permanent non-deductible goodwill amortization for Bressner Technology GmbH, income from the Global Intangible Low-Taxed Income inclusion, deductions related to expenses of OSS stock options, as well as projecting federal, foreign and state tax liabilities for the year.

In determining the periodic income tax expense, GAAP requires the Company to forecast its annual effective income tax rate (“AETR”) for the years December 31, 2020 and 2019.  Based on management’s projections, the Company expects income tax benefits related to research and development credits and equity compensation benefits to exceed our pretax earnings in 2020 and 2019.

Liquidity and capital resources

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 June 2019 sale of 1,546,732 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 Payroll Protection Program.

As of September 30, 2020, the Company’s cash and cash equivalents were $5,519,829 and working capital totaled $15,467,546.  Cash and cash equivalents held by Bressner totaled $1,224,020 (USD) at September 30, 2020, and Bressner’s debt covenants do not permit the use of those funds by its parent company. During the nine months ended September 30, 2020, the Company experienced an operating loss of $937,546 with cash used in operating activities of $1,385,390. Our largest customer who is engaged in the media and entertainment industry is having significant financial hardships attributable to the COVID-19 pandemic and as a result has reduced its orders from us and 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 during the year has slowed due to the effects of COVID-19.   However, resulting from a reduction in force and strict cost containment, the Company has been able to mitigate the effects, to some degree, of the reduced revenue.

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 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.

33


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. For example, 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.

The Company is complying with state mandated requirements for safety in the workplace to ensure the health, safety and welling-being of our employees.  These measures included personal protective equipment, social distancing, cleanliness of the facilities and daily monitoring of the health of employees in our facilities.  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 expected to be $1.5 to $2.0 million for the year ending 2020.

34


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 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 or 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 consummated the initial closing of the offering (the “Initial Closing”) under the Purchase Agreement and issued a Senior Secured Convertible Promissory Note with an aggregate of $3,000,000 to an institutional investor (“Initial Note”). 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 investors purchased the Initial Note for an aggregate purchase price of $2,700,000, at the Initial Closing after a 10% original issue discount.  The Initial Note bears no interest rate (except upon event of default) and, unless earlier converted or redeemed, will mature on the date that is the twenty-three (23) month anniversary of the last day from the Initial Closing in either cash or shares of the Company’s common stock.

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.  

The following table summarizes our cash flows for the nine month periods ended September 30, 2020 and 2019:

 

 

 

For the Nine Months Ended September 30,

 

Cash flows:

 

2020

 

 

2019

 

Net cash (used in) provided by operating activities

 

$

(1,385,390

)

 

$

388,347

 

Net cash used in investing activities

 

$

(662,843

)

 

$

(2,060,712

)

Net cash provided by financing activities

 

$

2,325,509

 

 

$

3,659,731

 

 

Operating Activities

During the nine month period ended September 30, 2020, the Company used $1,385,390 in cash from operating activities, a net change decrease of $1,773,737 in cash when compared to the cash provided by operating activities of $388,347 during the same period in 2019. The increase in cash used in operating activities was primarily a result of three components:  an improvement in the year to date net loss of $1,744,057 as compared to the prior period, offset by a reduction in the amount of non-cash expenses for the period $1,856,487 and a net increase in the use of working capital of $1,661,307 as compared to the prior period which combined contributed to the increase in the use of cash.  

In comparison to the prior year, non-cash adjustments which are added back to the net loss generated during the period decreased to $1,388,423 for the nine month period ended September 30, 2020 as compared to $3,244,910 for the same period in 2019, a decrease of $1,856,487.  This decrease in non-cash adjustments consists of increases of $797,296 comprised of gain on disposal of property and equipment, depreciation, inventory reserves and debt discount and stock compensation expense.  These increases were offset by $2,653,783 in decreases in non-cash

35


adjustments attributable to deferred benefit for income taxes, unrealized gain of foreign currency transactions, provision for bad debt, impairment of goodwill, warranty reserves, amortization of deferred gain, and amortization of intangibles.

Cash used by changes in working capital accounts as compared to the prior year increased overall by $1,661,307.  During the nine month period ended September 30, 2020 cash used for working capital requirements was $2,523,409 as compared to cash used by working capital of $862,102 in the same year ago period.

Our ability to generate cash from operations in future periods will depend in large part on our profitability, the rate and timing of collections of our accounts receivable, our inventory turns and our ability to manage other areas of working capital including accounts payable.

Investing Activities

During the nine month period ended September 30, 2020, the Company used cash of $662,843 in investing activities as compared to $2,060,712 used during the same period in 2019, a decrease of $1,397,869.  In the prior reporting period, the Company was expanding and remodeling its facility for increased capacity.  Such costs were not incurred in the current period.  Additionally, in the prior year, the Company was implementing phase I of its ERP system which included a team of external resources for which the costs were capitalized.  Though phase II is currently in process, the implementation team is significantly smaller and as a result we are not incurring comparable costs.  We do not anticipate any other significant purchases of equipment beyond that which is anticipated for use in the normal course of our core business activity.

Financing Activities

During the nine month period ended September 30, 2020, the Company generated net, $2,325,509 in financing activities as compared to the cash generated of $3,659,731 during the same period in 2019.  During the nine month period ended September 30, 2020, in addition to payments on term loans and outstanding lines of credit, the Company received proceeds of $124,467 through the exercise of stock options which was offset by a payment for taxes of $684,446 that were paid on behalf of those that exercised options and RSU’s on a net cashless basis.  Additionally, during April of 2020, the Company closed on a $3,000,000, 10% original issue discount, senior secured convertible debt offering which resulted in net proceeds after the payment of discount and professional fees of $2,383,726.

On April 28, 2020, the Company received a two year Paycheck Protection Plan loan in the amount of $1,499,360. Management believes that most of the loan, if not all, will likely be forgiven.  As of the filing date of this Quarterly Report on Form 10-Q, the Company has not submitted an application with the lender to forgive the PPP Loan, but intends to do so in accordance with SBA Procedural Notice, Control No. 5000-20057, effective October 2, 2020.

During the nine month period ended September 30, 2019, the Company raised $1,500,000 from individuals and related parties through the issuance of notes payable that bear interest at an annual rate of 9.5% and are repaid through 24 months monthly installments.  Bressner increased borrowing under its lines of credit for the purchase of inventories and also borrowed funds through term loans at interest rates of 2.125% - 2.150% that are repaid through monthly installments of up to 24 months.  The Company received proceeds of $29,149 for the exercise of warrants and stock options.

Off balance sheet arrangements

Other than lease commitments incurred in the normal course of business and certain indemnification provisions, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity.

We do not have any majority-owned subsidiaries that are not consolidated in the financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose entities.

36


Stockholder transactions

In April 2019, certain members of the Company’s Board of Directors executed definitive agreements to commit funds of up to $4,000,000 as a credit facility. The Company initially borrowed $1,150,000 from members of the Board of Directors and $350,000 from other shareholders for a two year period at an interest rate of 9.5% which requires the Company to make monthly principal and interest payment of $69,000 per month. In connection with these loans, the Company issued the note holders warrants to purchase shares of the Company’s common stock equal to 10% of the original principal at a price per share equal to $2.15 per share.  Accordingly, the Company issued to the note holders warrants to purchase 69,766 shares of the Company’s common stock.  The relative fair value of the warrants issued was $60,158.  The remaining unfunded loan commitments expired as of April 1, 2020, and the Company has not received any additional funding commitments from members of the Board of Directors as of the date of filing of this Quarterly Report on Form 10-Q.

Critical accounting policies and estimates

In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and our historical experience.

Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for our year ended December 31, 2019. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. There were no significant changes to our critical accounting policies during the nine months ended September 30, 2020.

Recently implemented accounting pronouncements

Per the Company’s consolidated financial statements Note 2 – Significant Accounting Policies, we have implemented a number of changes, as required by FASB.  See Note 2 of the accompanying financial statements for further details.

Interest rate risk

Our exposure to interest rate risk is primarily associated with borrowing on revolving lines of credit denominated in both U.S. dollars and Euros.  We are exposed to the impact of interest rate changes primarily through our borrowing activities for our variable rate borrowings.

Concentration of credit risk

Financial instruments that potentially expose us to concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable. We place our cash and cash equivalents with financial institutions with high credit quality. At September 30, 2020 and December 31, 2019, we had $5,519,829 and $5,185,321, respectively, of cash and cash equivalents on deposit or invested with our financial and lending institutions. We provide credit to our customers in the normal course of business. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary.

37


Customer Concentration

The Company’s largest customer is in the media and entertainment industry which has been adversely affected by the COVID-19 pandemic as a result of the guidelines limiting non-essential public gatherings.  As a result, sales to this customer have slowed and the collection cycle of accounts receivable has protracted and been limited by their available cash flow.  The Company has implemented a modified payment plan for this customer for the collection of outstanding accounts receivables which are being paid as scheduled.

Foreign currency risk

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 and acquired Bressner Technology GmbH in October 2018.  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 translated 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 statement of operations. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income in the consolidated statement of comprehensive income.

Derivative Financial Instruments

We employ derivatives on a periodic basis 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 may enter into foreign exchange contracts to provide currency at a fixed rate.

Non-GAAP Financial Measures

Adjusted EBITDA

We believe that the use of adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, is helpful for an investor to assess the performance of the Company.  The Company defines adjusted EBITDA as income (loss) attributable to common stockholders before interest, taxes, depreciation, amortization, acquisition expenses, impairment of long-lived assets, financing costs, fair value adjustments from purchase accounting, stock-based compensation expense and expenses related to discontinued operations.

Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles in the United States, or GAAP. Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company’s non-cash operating expenses, we believe that providing a non-GAAP financial measure that excludes non-cash and non-recurring expenses allows for meaningful comparisons between our core business operating results and those of other companies, as well as providing us with an important tool for financial and operational decision making and for evaluating our own core business operating results over different periods of time.

38


Our adjusted EBITDA measure may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. Our adjusted EBITDA is not a measurement of financial performance under GAAP, and should not be considered as an alternative to operating income or as an indication of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider adjusted EBITDA to be a substitute for, or superior to, the information provided by GAAP financial results.

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss) attributable to common stockholders

 

$

857,790

 

 

$

544,901

 

 

$

(250,404

)

 

$

(1,994,461

)

Depreciation and amortization

 

 

410,552

 

 

 

352,905

 

 

 

1,208,762

 

 

 

1,239,887

 

Amortization of deferred gain

 

 

-

 

 

 

(12,359

)

 

 

(53,838

)

 

 

(45,316

)

Impairment of goodwill

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,697,394

 

Stock-based compensation expense

 

 

210,280

 

 

 

164,857

 

 

 

503,419

 

 

 

490,140

 

Interest income

 

 

(143,931

)

 

 

(10,149

)

 

 

(267,911

)

 

 

(23,424

)

Interest expense

 

 

174,205

 

 

 

52,182

 

 

 

393,175

 

 

 

111,463

 

Provision (benefit) for income taxes

 

 

57,753

 

 

 

(51,051

)

 

 

(851,056

)

 

 

(594,890

)

Adjusted EBITDA

 

$

1,566,649

 

 

$

1,041,286

 

 

$

682,147

 

 

$

880,793

 

 

Adjusted EPS

Adjusted EPS excludes the impact of certain items and, therefore, has not been calculated in accordance with GAAP. We believe that exclusion of certain selected items assists in providing a more complete understanding of our underlying results and trends and allows for comparability with our peer company index and industry. We use this measure along with the corresponding GAAP financial measures to manage our business and to evaluate our performance compared to prior periods and the marketplace. The Company defines Non-GAAP (loss) income attributable to common stockholders as (loss) or income before amortization, stock-based compensation, expenses related to discontinued operations, impairment of long-lived assets and non-recurring acquisition costs.  Adjusted EPS expresses adjusted (loss) income on a per share basis using weighted average diluted shares outstanding.

Adjusted EPS is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses similar to the adjusted income from continuing operations and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring.

39


The following table sets-forth Non-GAAP net income attributable to common stockholders and basic and diluted earnings per share:

 

 

 

For The Three Months

Ended September 30,

 

 

For The Nine Months

Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss) attributable to common stockholders

 

$

857,790

 

 

$

544,901

 

 

$

(250,404

)

 

$

(1,994,461

)

Amortization of intangibles

 

 

170,985

 

 

 

190,970

 

 

 

520,035

 

 

 

809,540

 

Impairment of goodwill

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,697,394

 

Stock-based compensation expense

 

 

210,280

 

 

 

164,857

 

 

 

503,419

 

 

 

490,140

 

Non-GAAP net income attributable to common

   stockholders

 

$

1,239,055

 

 

$

900,728

 

 

$

773,050

 

 

$

1,002,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

 

$

0.06

 

 

$

0.05

 

 

$

0.07

 

Diluted

 

$

0.07

 

 

$

0.05

 

 

$

0.05

 

 

$

0.06

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,585,773

 

 

 

15,777,158

 

 

 

16,469,457

 

 

 

14,825,351

 

Diluted

 

 

17,018,614

 

 

 

16,390,206

 

 

 

16,902,298

 

 

 

15,438,400

 

 

Free Cash Flow

Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by or used in operating activities less capital expenditures for property and equipment, which includes capitalized software development costs for the implementation of the Company’s ERP system. We believe free cash flow provides investors with an important perspective on cash available for investments and acquisitions after making capital investments required to support ongoing business operations and long-term value creation.   We believe that trends in our free cash flow can be valuable indicators of our operating performance and liquidity.

Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies.

We expect to continue to incur expenditures similar to the free cash flow adjustments described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash.  The following table reconciles cash provided by or used in operating activities, the most directly comparable GAAP financial measure, to free cash flow:

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

Cash flow:

 

2020

 

 

2019

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(1,385,390

)

 

$

388,347

 

 

$

(1,773,737

)

Capital expenditures

 

 

(664,385

)

 

 

(2,061,762

)

 

 

1,397,377

 

Free cash flow

 

$

(2,049,775

)

 

$

(1,673,415

)

 

$

(376,360

)

 

40


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Limitation on Effectiveness of Controls

The design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals. The inherent limitations in any control system include the realities that judgments related to decision-making can be faulty, and that reduced effectiveness in controls can occur because of simple errors or mistakes. Due to the inherent limitations in a cost-effective control system, misstatements due to error may occur and may not be detected.

Evaluation of Disclosure Controls and Procedures

Management is required to evaluate our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Disclosure controls and procedures are controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at a reasonable assurance level as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2020, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

41


PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of our material pending legal proceeding, please see Note 9, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, Item I A. of our Annual Report on Form 10-K for the year ended December 31, 2019, which  could materially affect our business, financial condition or future results. In evaluating our business, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K, as updated by our subsequent filings under the Exchange Act. The occurrence of any of the risks discussed in such filings, or other events that we do not currently anticipate or that we currently deem immaterial, could harm our business, prospects, financial condition and results of operations. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

We must successfully navigate the demand, supply and operational challenges associated with the ongoing coronavirus (COVID-19) pandemic.

Our business has 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.

The impacts of COVID-19 on our business, customers, partners, suppliers, employees, markets and financial results and condition are uncertain, evolving and dependent on numerous unpredictable factors outside of our control, including:

 

the spread, duration and severity of COVID-19 as a public health matter and its impact on governments, businesses and society generally and our clients, partners, suppliers and our business more specifically;

 

the measures being taken by governments, businesses and society in response to COVID-19 and the effectiveness of those measures, including our suppliers in China experiencing delays due to the Chinese government’s response to COVID-19;

 

the scope and effectiveness of fiscal and monetary stimulus programs and other legislative and regulatory measures being implemented by federal, state and local governments in response to COVID-19;

 

the duration and impact of the numerous measures implemented by governmental authorities throughout the country to contain COVID-19, including travel bans and restrictions, quarantines, shelter-in-place orders, restrictions and limitations on public gatherings, and business limitations and shutdowns;

 

the increase in business failures or slowdowns among our customers, suppliers, and other businesses;

 

the pace and extent to which our customers and other businesses are able to operate and/or reduce their number of employees and other compensated individual; the willingness of current and prospective clients to invest in our products and services;

 

the satisfaction of customers with product and service remote delivery and support

42


If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.

At present, it is clear the global economy has been negatively impacted by COVID-19, and demand for some of our products and services has 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. For example, 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 and commercial airlines industries, demand for the use of outdoor media equipment has been impacted due to restrictions on public gatherings and the airlines industry has been impacted by reduced travel. 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.

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.

43


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

44


Item 6. Exhibits.

 

Exhibit

Number

 

Description

 

 

 

    2.1 (1)

 

Agreement and Plan of Merger and Reorganization, dated August 22, 2018, with Concept Development Inc.

 

 

 

    2.2 (2)

 

Share Purchase Agreement, dated October 31, 2018, with Bressner Technology GmbH.

 

 

 

    3.1 (3)

 

Amended and Restated Certificate of Incorporation (currently in effect).

 

 

 

    3.2 (4)

 

Bylaws, as amended (currently in effect).

 

 

 

    4.1 (5)

 

Second Amended and Restated Investors’ Rights Agreement, dated January 2007.

 

 

 

    4.2 (5)

 

Common Shareholder Piggyback Registration Rights Agreement, dated July 15, 2016.

 

 

 

  10.1+ (6)

 

Form of Indemnification Agreement between One Stop Systems, Inc. and each its directors and executive officers.

 

 

 

  10.2+ (5)

 

One Stop Systems, Inc. 2000 Stock Option Plan and related form agreements.

 

 

 

  10.3+ (5)

 

One Stop Systems, Inc. 2011 Stock Option Plan and related form agreements.

 

 

 

  10.4+ (5)

 

One Stop Systems, Inc. 2015 Stock Option Plan and related form agreements.

 

 

 

  10.5+ (5)

 

One Stop Systems, Inc. 2017 Stock Equity Incentive Plan and related form agreements.

 

 

 

  10.6 (12)

 

Amendment No. 1 to the 2017 Stock Equity Incentive Plan.

 

 

 

  10.7 (6)

 

Lease Agreement dated October 21, 2004, as amended.

 

 

 

  10.8 (1)

 

Piggyback Registration Rights Agreement by and between One Stop Systems, Inc. and James M. Reardon, dated August 31, 2018.

 

 

 

  10.9 (7)

 

Form of Binding Commitment Letter.

 

 

 

  10.10 (8)

 

Executive Employment Agreement between One Stop Systems, Inc., and David Raun, dated March 24, 2020.

 

 

 

  10.11 (9)

 

Form of Senior Secured Convertible Promissory Note.

 

 

 

  10.12 (9)

 

Form of Securities Purchase Agreement, dated April 20, 2020, by and between the Company and the investors.

 

 

 

  10.13 (9)

 

Form of Security Agreement, dated April 20, 2020, by and between the Company, certain of its subsidiaries and the investors.

 

 

 

  10.14 (9)

 

Form of Intercreditor Agreement, dated April 20, 2020, by and between the Company, the investors and certain secured parties.

 

 

 

  10.15 (10)

 

Senior Secured Convertible Promissory Note, dated April 24, 2020, by and between the Company and the investor.

 

 

 

  10.16 (11)

 

Promissory Note, dated as of April 28, 2020, by and between One Stop Systems, Inc., as Borrower, and Cache Valley Bank, as Lender.

 

 

 

  10.17 (12)

 

Employment Agreement between One Stop Systems, Inc., and David Raun, dated June 24, 2020.

 

 

 

  31.1*

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **.

 

 

 

  31.2*

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **.

 

 

 

45


  32.1*

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **.

 

 

 

  32.2*

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **.

 

 

 

101.INS*

 

XBRL Instance Document

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

(1)

 

Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on September 6, 2018.

 

 

 

(2)

 

Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on November 6, 2018.

 

 

 

(3)

 

Incorporated by reference to Amendment No.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 21, 2018.

 

 

 

(4)

 

Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on February 6, 2018.

 

 

 

(5)

 

Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-222121) filed with the SEC on December 18, 2017.

 

 

 

(6)

 

Incorporated by reference to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-222121) filed with the SEC on January 16, 2018.

 

 

 

(7)

 

Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 9, 2019.

 

 

 

(8)

 

Incorporated by reference to the Registrant’s Current Report on Form 8-K/A filed with the SEC on March 25, 2020.

 

 

 

(9)

 

Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on April 21, 2020.

 

 

 

(10)

 

Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on April 24, 2020.

 

 

 

(11)

 

Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on May 15, 2020.

 

 

 

(12)

 

Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on June 25, 2020.

 

 

 

+

 

Indicates management contract or compensatory plan.

 

 

 

*

 

Filed herewith.

 

 

 

**

 

These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

46


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Company Name

 

 

 

 

Date: November 12, 2020

 

By:

/s/ David Raun

 

 

 

David Raun

 

 

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

Date:  November 12, 2020

 

By:

/s/ John W. Morrison Jr.

 

 

 

John W. Morrison Jr.

 

 

 

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

47