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.

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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