UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2019

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

 

(877) 438-2724

(Registrant’s telephone number, including area code)

 

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

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

 

Title of each class

Trading symbol

Name of exchange on which registered

Common Stock, $0.0001 par value per share

OSS

The Nasdaq Capital Market

 

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

 

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

 

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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

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

As of July 31, 2019, the registrant had 15,516,646 shares of common stock (par value $0.0001) outstanding.

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Page

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

Unaudited Consolidated Balance Sheets

 

3

 

 

Unaudited Consolidated Statements of Operations

 

5

 

 

Unaudited Consolidated Statement of Comprehensive Loss

 

6

 

 

Unaudited Consolidated Statement of Stockholders’ Equity

 

7

 

 

Unaudited Consolidated Statements of Cash Flows

 

9

 

 

Notes to Unaudited Consolidated Financial Statements

 

11

Item 2.

 

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

 

35

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

51

Item 4.

 

Controls and Procedures

 

51

PART II. OTHER INFORMATION

Item 1.

 

Legal Proceedings

 

53

Item 1A.

 

Risk Factors

 

53

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

53

Item 3.

 

Defaults Upon Senior Securities

 

53

Item 4.

 

Mine Safety Disclosures

 

53

Item 5.

 

Other Information

 

53

Item 6.

 

Exhibits

 

54

 

 

Signatures

 

55

 

2


PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash  and cash equivalents

 

$

4,944,853

 

 

$

2,272,256

 

Accounts receivable, net

 

 

8,341,412

 

 

 

10,540,150

 

Inventories, net

 

 

8,859,281

 

 

 

6,823,930

 

Prepaid expenses and other current assets

 

 

778,629

 

 

 

666,330

 

 

 

 

22,924,175

 

 

 

20,302,666

 

Property and equipment, net

 

 

2,840,239

 

 

 

1,759,086

 

Deposits and other

 

 

42,088

 

 

 

49,966

 

Deferred tax assets, net

 

 

3,050,854

 

 

 

2,505,632

 

Goodwill

 

 

7,120,510

 

 

 

7,914,211

 

Intangible assets, net

 

 

1,711,687

 

 

 

3,525,257

 

 

 

$

37,689,553

 

 

$

36,056,818

 

 

See accompanying notes to consolidated financial statements

3


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED BALANCE SHEETS - CONTINUED

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,143,232

 

 

$

3,708,865

 

Accrued expenses and other liabilities

 

 

6,017,251

 

 

 

3,930,718

 

Borrowings on bank lines of credit (Note 8)

 

 

1,062,352

 

 

 

422,960

 

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

   $0, respectively  (Note 8)

 

 

1,729,369

 

 

 

1,156,915

 

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

   of $23,061 and $0, respectively  (Note 8)

 

 

534,084

 

 

 

-

 

Total current liabilities

 

 

12,486,288

 

 

 

9,219,458

 

Notes payable, net of current portion and debt discount of $5,556 and

   $0, respectively  (Note 8)

 

 

387,066

 

 

 

265,038

 

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

   of $18,256 and $0, respectively  (Note 8)

 

 

487,595

 

 

 

-

 

Total liabilities

 

 

13,360,949

 

 

 

9,484,496

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

   14,497,647 and 14,216,328 shares issued and outstanding, respectively

 

 

1,450

 

 

 

1,422

 

Additional paid-in capital

 

 

27,717,796

 

 

 

27,424,113

 

Noncontrolling interest

 

 

500

 

 

 

500

 

Accumulated other comprehensive income

 

 

3,076

 

 

 

1,142

 

Accumulated deficit

 

 

(3,394,218

)

 

 

(854,855

)

Total stockholders’ equity

 

 

24,328,604

 

 

 

26,572,322

 

 

 

$

37,689,553

 

 

$

36,056,818

 

 

See accompanying notes to consolidated financial statements

4


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

For The Three Months

Ended June 30,

 

 

For The Six Months

Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

$

14,886,236

 

 

$

5,892,666

 

 

$

24,944,135

 

 

$

13,012,378

 

Cost of revenue

 

 

9,473,078

 

 

 

4,252,484

 

 

 

17,119,354

 

 

 

9,159,330

 

Gross margin

 

 

5,413,158

 

 

 

1,640,182

 

 

 

7,824,781

 

 

 

3,853,048

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

3,931,478

 

 

 

1,097,552

 

 

 

5,975,413

 

 

 

2,170,600

 

Marketing and selling

 

 

1,237,003

 

 

 

702,474

 

 

 

2,374,936

 

 

 

1,571,489

 

Research and development

 

 

1,225,157

 

 

 

958,775

 

 

 

2,487,121

 

 

 

1,931,406

 

Total operating expenses

 

 

6,393,638

 

 

 

2,758,801

 

 

 

10,837,470

 

 

 

5,673,495

 

Loss from operations

 

 

(980,480

)

 

 

(1,118,619

)

 

 

(3,012,689

)

 

 

(1,820,447

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(53,013

)

 

 

-

 

 

 

(59,281

)

 

 

(55,661

)

Other, net

 

 

(3,068

)

 

 

54,430

 

 

 

(11,232

)

 

 

122,039

 

Total other (expense) income, net

 

 

(56,081

)

 

 

54,430

 

 

 

(70,513

)

 

 

66,378

 

Loss before income taxes

 

 

(1,036,561

)

 

 

(1,064,189

)

 

 

(3,083,202

)

 

 

(1,754,069

)

Provision (benefit) for income taxes

 

 

558,072

 

 

 

555,629

 

 

 

(543,839

)

 

 

772,752

 

Net loss

 

$

(1,594,633

)

 

$

(1,619,818

)

 

$

(2,539,363

)

 

$

(2,526,821

)

Net loss attributable to noncontrolling interest

 

$

-

 

 

$

(116,996

)

 

$

-

 

 

$

(229,581

)

Net loss attributable to common stockholders

 

$

(1,594,633

)

 

$

(1,502,822

)

 

$

(2,539,363

)

 

$

(2,297,240

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.11

)

 

$

(0.12

)

 

$

(0.18

)

 

$

(0.20

)

Diluted

 

$

(0.11

)

 

$

(0.12

)

 

$

(0.18

)

 

$

(0.20

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,442,291

 

 

 

12,773,419

 

 

 

14,341,560

 

 

 

11,464,246

 

Diluted

 

 

14,442,291

 

 

 

12,773,419

 

 

 

14,341,560

 

 

 

11,464,246

 

 

See accompanying notes to consolidated financial statements

5


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

 

For The Three Month Periods

ended June 30,

 

 

For The Six Month Periods

ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss attributable to common stockholders

 

$

(1,594,633

)

 

$

(1,502,822

)

 

$

(2,539,363

)

 

$

(2,297,240

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

43,803

 

 

 

-

 

 

 

1,934

 

 

 

-

 

Total other comprehensive income

 

 

43,803

 

 

 

-

 

 

 

1,934

 

 

 

-

 

Comprehensive loss

 

$

(1,550,830

)

 

$

(1,502,822

)

 

$

(2,537,429

)

 

$

(2,297,240

)

 

See accompanying notes to consolidated financial statements

 

6


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For The Three and Six Month Periods ended June 30, 2019

 

 

Series C Preferred

Stock

 

Series B Preferred

Stock

 

Series A Preferred

Stock

 

Common Stock

 

Additional

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-in-

Capital

 

Noncontrolling

Interest

 

Comprehensive

Income

 

Accumulated

Deficit

 

Total

Stockholders'

 

Balance, January 1, 2019

 

-

 

$

-

 

 

-

 

$

-

 

 

-

 

$

-

 

 

14,216,328

 

$

1,422

 

$

27,424,113

 

$

500

 

$

1,142

 

$

(854,855

)

$

26,572,322

 

Stock-based compensation

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

167,474

 

 

-

 

 

-

 

 

-

 

 

167,474

 

Exercise of stock options,

   RSU's and Warrants

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

54,098

 

 

5

 

 

14,196

 

 

-

 

 

-

 

 

-

 

 

14,201

 

Currency translation

   adjustment

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(41,869

)

 

-

 

 

(41,869

)

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

(944,730

)

 

(944,730

)

Balance, March 31, 2019

 

-

 

$

-

 

 

-

 

$

-

 

 

-

 

$

-

 

 

14,270,426

 

 

1,427

 

$

27,605,783

 

$

500

 

$

(40,727

)

$

(1,799,585

)

$

25,767,398

 

Stock-based compensation

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

157,809

 

 

-

 

 

-

 

 

-

 

 

157,809

 

Relative fair value of warrants

   issued with notes payable

   and notes payable to related

   parties

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

60,158

 

 

-

 

 

-

 

 

-

 

 

60,158

 

Exercise of stock options,

   RSU's and Warrants

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

227,221

 

 

23

 

 

6,925

 

 

-

 

 

-

 

 

-

 

 

6,948

 

Taxes paid on net issuance of

   employee stock options

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(112,879

)

 

-

 

 

-

 

 

-

 

 

(112,879

)

Currency translation

   adjustment

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

43,803

 

 

-

 

 

43,803

 

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

(1,594,633

)

 

(1,594,633

)

Balance, June 30, 2019

 

-

 

$

-

 

 

-

 

$

-

 

 

-

 

$

-

 

 

14,497,647

 

 

1,450

 

$

27,717,796

 

$

500

 

$

3,076

 

$

(3,394,218

)

$

24,328,604

 

 

See accompanying notes to consolidated financial statements

7


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - CONTINUED

For The Three and Six Month Periods ended June 30, 2018

 

 

Series C Preferred

Stock

 

Series B Preferred

Stock

 

Series A Preferred

Stock

 

Common Stock

 

Additional

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-in-

Capital

 

Noncontrolling

Interest

 

Comprehensive

Income

 

Accumulated

Deficit

 

Total

Stockholders'

 

Balance, January 1, 2018

 

1,087,006

 

$

1,604,101

 

 

1,450,000

 

$

697,996

 

 

500,000

 

$

114,430

 

 

5,514,917

 

$

551

 

$

3,484,428

 

$

436,842

 

$

-

 

$

281,423

 

$

6,619,771

 

Conversion of preferred

   stock to common stock

   upon initial public offering

 

(1,087,006

)

 

(1,604,101

)

 

(1,450,000

)

 

(697,996

)

 

(500,000

)

 

(114,430

)

 

3,037,006

 

 

304

 

 

2,416,223

 

 

-

 

 

-

 

 

-

 

 

-

 

Stock-based compensation

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

35,318

 

 

-

 

 

 

 

 

-

 

 

35,318

 

Exercise of stock options

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

321,366

 

 

32

 

 

54,543

 

 

-

 

 

-

 

 

-

 

 

54,575

 

Taxes paid on net issuance of

   employee stock options

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(274,663

)

 

-

 

 

-

 

 

-

 

 

(274,663

)

Relative fair value of

   warrants issued to

   Underwriters with IPO

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

669,408

 

 

-

 

 

-

 

 

-

 

 

669,408

 

Proceeds from issuance

   of stock, net of issuance

   costs of $3,367,760

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

3,900,000

 

 

390

 

 

16,131,850

 

 

-

 

 

-

 

 

-

 

 

16,132,240

 

Noncontrolling interest

   in consolidated

   subsidiary (Note 1)

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(112,585

)

 

-

 

 

-

 

 

(112,585

)

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(794,418

)

 

(794,418

)

Balance, March 31, 2018

 

-

 

$

-

 

 

-

 

$

-

 

 

-

 

$

-

 

 

12,773,289

 

$

1,277

 

$

22,517,107

 

$

324,257

 

$

-

 

$

(512,995

)

$

22,329,646

 

Stock-based compensation

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

124,815

 

 

-

 

 

 

 

 

-

 

 

124,815

 

Exercise of stock options

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

5,921

 

 

1

 

 

4,574

 

 

-

 

 

-

 

 

-

 

 

4,575

 

Noncontrolling interest

   in consolidated

   subsidiary (Note 1)

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(116,996

)

 

-

 

 

-

 

 

(116,996

)

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,502,822

)

 

(1,502,822

)

Balance, June 30, 2018

 

-

 

$

-

 

 

-

 

$

-

 

 

-

 

$

-

 

 

12,779,210

 

 

1,278

 

$

22,646,496

 

$

207,261

 

$

-

 

$

(2,015,817

)

$

20,839,218

 

 

See accompanying notes to consolidated financial statements

 

 

8


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For The Six Months

Ended June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(2,539,363

)

 

$

(2,526,821

)

Net loss attributable to noncontrolling interest

 

 

-

 

 

 

(229,581

)

Net loss attributable to common stockholders

 

 

(2,539,363

)

 

 

(2,297,240

)

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

   operating activities:

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interest

 

 

-

 

 

 

(229,581

)

Deferred (benefit) provision for income taxes

 

 

(544,404

)

 

 

788,226

 

Unrealized gain on foreign currency transactions

 

 

18,743

 

 

 

-

 

(Gain) on disposal of property and equipment

 

 

(63,939

)

 

 

-

 

Provision for bad debt

 

 

1,358

 

 

 

94,431

 

Impairment of goodwill

 

 

1,988,701

 

 

 

-

 

Warranty reserves

 

 

4,818

 

 

 

(2,916

)

Amortization of deferred gain

 

 

(32,957

)

 

 

(57,675

)

Depreciation and amortization

 

 

886,982

 

 

 

528,494

 

Inventory reserves

 

 

136,609

 

 

 

244,399

 

Amortization of debt discount

 

 

6,266

 

 

 

24,830

 

Stock-based compensation expense

 

 

325,283

 

 

 

160,133

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,185,438

 

 

 

587,587

 

Inventories

 

 

(2,118,771

)

 

 

(349,512

)

Prepaid expenses and other current assets

 

 

(106,591

)

 

 

(325,450

)

Accounts payable

 

 

(559,831

)

 

 

(2,631,811

)

Accrued expenses and other liabilities

 

 

2,125,542

 

 

 

(382,004

)

Net cash provided by (used in) operating activities

 

 

1,713,884

 

 

 

(3,848,089

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment, including capitalization of labor

   costs for test equipment and ERP, (net)

 

 

(1,356,975

)

 

 

(60,210

)

Proceeds from sales of property and equipment

 

 

1,050

 

 

 

-

 

Net cash used in investing activities

 

 

(1,355,925

)

 

 

(60,210

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

21,149