UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2021

OR

 

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

For the transition period from __________ to ________________

Commission File Number: 001-38371

 

One Stop Systems, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

33-0885351

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

2235 Enterprise Street #110

Escondido, California  92029

(Address of principal executive offices including Zip Code

 

(760) 745-9883

(Registrant’s telephone number, including area code)

 

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

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

 

Title of each class

Trading symbol

Name of exchange on which registered

Common Stock, $0.0001 par value per share

OSS

The Nasdaq Capital Market

 

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

 

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

 

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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

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

As of April 30, 2021, the registrant had 18,510,415 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 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

 

40

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

 

41

Item 1A

 

Risk Factors

 

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

Item 3.

 

Defaults Upon Senior Securities

 

42

Item 4.

 

Mine Safety Disclosures

 

42

Item 5.

 

Other Information

 

42

Item 6.

 

Exhibits

 

42

 

 

Signatures

 

45

 

2


 

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements.

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

Unaudited

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,614,315

 

 

$

6,316,921

 

Accounts receivable, net

 

 

5,733,675

 

 

 

7,458,383

 

Inventories, net

 

 

9,548,960

 

 

 

9,647,504

 

Prepaid expenses and other current assets

 

 

889,043

 

 

 

655,708

 

Total current assets

 

 

35,785,993

 

 

 

24,078,516

 

Property and equipment, net

 

 

3,368,959

 

 

 

3,487,178

 

Deposits and other

 

 

45,136

 

 

 

81,709

 

Deferred tax assets, net

 

 

3,638,073

 

 

 

3,698,593

 

Goodwill

 

 

7,120,510

 

 

 

7,120,510

 

Intangible assets, net

 

 

498,357

 

 

 

662,257

 

 

 

$

50,457,028

 

 

$

39,128,763

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,735,695

 

 

$

976,420

 

Accrued expenses and other liabilities

 

 

3,585,102

 

 

 

3,481,444

 

Current portion of notes payable, net of debt discount of $292 and

$2,047, respectively (Note 7)

 

 

1,190,065

 

 

 

1,365,204

 

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

of $962 and $6,726, respectively (Note 7)

 

 

50,685

 

 

 

199,943

 

Current portion of senior secured convertible note, net of debt discounts of $165,731 and $256,242, respectively (Note 7)

 

 

2,288,814

 

 

 

1,789,212

 

Total current liabilities

 

 

9,850,361

 

 

 

7,812,223

 

Senior secured convertible note, net of current portion and debt discounts of $0 and $14,107 (Note 7)

 

 

136,364

 

 

 

531,347

 

Paycheck protection program note payable (Note 7)

 

 

1,499,360

 

 

 

1,499,360

 

Total liabilities

 

 

11,486,085

 

 

 

9,842,930

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

   18,502,902 and 16,684,424 shares issued and outstanding, respectively

 

 

1,850

 

 

 

1,668

 

Additional paid-in capital

 

 

40,652,472

 

 

 

30,758,354

 

Accumulated other comprehensive income

 

 

37,159

 

 

 

287,547

 

Accumulated deficit

 

 

(1,720,538

)

 

 

(1,761,736

)

Total stockholders’ equity

 

 

38,970,943

 

 

 

29,285,833

 

 

 

$

50,457,028

 

 

$

39,128,763

 

 

See accompanying notes to consolidated financial statements

3


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Revenue

 

$

13,315,752

 

 

$

13,359,637

 

Cost of revenue

 

 

8,882,968

 

 

 

9,963,950

 

Gross profit

 

 

4,432,784

 

 

 

3,395,687

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative

 

 

2,157,619

 

 

 

2,514,065

 

Marketing and selling

 

 

1,167,901

 

 

 

1,189,351

 

Research and development

 

 

832,233

 

 

 

1,203,425

 

Total operating expenses

 

 

4,157,753

 

 

 

4,906,841

 

Income (loss) from operations

 

 

275,031

 

 

 

(1,511,154

)

Other income (expense), net:

 

 

 

 

 

 

 

 

Interest income

 

 

5,300

 

 

 

24,637

 

Interest expense

 

 

(149,982

)

 

 

(68,784

)

Other income (expense), net

 

 

(28,629

)

 

 

(8,029

)

Total other income (expense), net

 

 

(173,311

)

 

 

(52,176

)

Income (loss) before income taxes

 

 

101,720

 

 

 

(1,563,330

)

Provision (benefit) for income taxes

 

 

60,522

 

 

 

(467,298

)

Net income (loss)

 

$

41,198

 

 

$

(1,096,032

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

 

$

(0.07

)

Diluted

 

$

0.00

 

 

$

(0.07

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

17,348,164

 

 

 

16,332,898

 

Diluted

 

 

18,642,061

 

 

 

16,332,898

 

 

See accompanying notes to consolidated financial statements

4


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Net income (loss)

 

$

41,198

 

 

$

(1,096,032

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

(250,388

)

 

 

(55,567

)

Total other comprehensive loss

 

 

(250,388

)

 

 

(55,567

)

Comprehensive loss

 

$

(209,190

)

 

$

(1,151,599

)

 

See accompanying notes to consolidated financial statements

 

5


 

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three Month Period Ended March 31, 2021

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-in-Capital

 

 

Noncontrolling

Interest

 

 

Comprehensive

income

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balance, January 1, 2021

 

 

16,684,424

 

 

$

1,668

 

 

$

30,758,354

 

 

$

-

 

 

$

287,547

 

 

$

(1,761,736

)

 

$

29,285,833

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

438,394

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

438,394

 

Exercise of stock options, RSU's and warrants

 

 

321,472

 

 

 

32

 

 

 

278,936

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

278,968

 

Proceeds from issuance of stock, net of issuance costs of $778,810

 

 

1,497,006

 

 

 

150

 

 

 

9,221,040

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,221,190

 

Taxes paid on net issuance of employee stock

   options

 

 

-

 

 

 

-

 

 

 

(44,252

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(44,252

)

Currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(250,388

)

 

 

-

 

 

 

(250,388

)

Net Income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

41,198

 

 

 

41,198

 

Balance, March 31, 2021

 

 

18,502,902

 

 

$

1,850

 

 

$

40,652,472

 

 

$

-

 

 

$

37,159

 

 

$

(1,720,538

)

 

$

38,970,943

 

 

See accompanying notes to consolidated financial statements

6


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three Month Period Ended March 31, 2020

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-in-Capital

 

 

Noncontrolling

Interest

 

 

Comprehensive

loss

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balance, January 1, 2020

 

 

16,121,747

 

 

$

1,612

 

 

$

30,537,015

 

 

$

500

 

 

$

(17,773

)

 

$

(1,755,192

)

 

$

28,766,162

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

207,761

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

207,761

 

Exercise of stock options

 

 

354,914

 

 

 

35

 

 

 

56,965

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

57,000

 

Return of capital upon dissolution of SkyScale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(500

)

 

 

 

 

 

 

 

 

 

 

(500

)

Taxes paid on net issuance of employee stock

   options

 

 

-

 

 

 

-

 

 

 

(656,845

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(656,845

)

Currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(55,567

)

 

 

-

 

 

 

(55,567

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

(1,096,032

)

 

 

(1,096,032

)

Balance, March 31, 2020

 

 

16,476,661

 

 

$

1,647

 

 

$

30,144,896

 

 

$

-

 

 

$

(73,340

)

 

$

(2,851,224

)

 

$

27,221,979

 

 

See accompanying notes to consolidated financial statements

 

 

7


 

 

ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

41,198

 

 

$

(1,096,032

)

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

 

 

 

 

 

 

 

 

Deferred benefit for income taxes

 

 

(59,290

)

 

 

(441,282

)

(Gain) on disposal of property and equipment

 

 

-

 

 

 

(1,542

)

Provision for bad debt

 

 

(16,590

)

 

 

(2,405

)

Warranty reserves

 

 

13,944

 

 

 

5,075

 

Amortization of deferred gain

 

 

-

 

 

 

(41,479

)

Amortization of intangibles

 

 

163,900

 

 

 

174,525

 

Depreciation

 

 

216,878

 

 

 

221,300

 

Inventory reserves

 

 

154,335

 

 

 

148,418

 

Amortization of debt discount

 

 

61,210

 

 

 

7,520

 

Stock-based compensation expense

 

 

438,394

 

 

 

207,761

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,697,901

 

 

 

2,530,072

 

Inventories

 

 

(223,160

)

 

 

(1,826,564

)

Prepaid expenses and other current assets

 

 

(152,561

)

 

 

(386,005

)

Accounts payable

 

 

1,795,141

 

 

 

(275,428

)

Accrued expenses and other liabilities

 

 

159,766

 

 

 

54,293

 

Net cash provided by (used in) operating activities

 

 

4,291,066

 

 

 

(721,773

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment, including capitalization of labor

   costs for test equipment and ERP

 

 

(121,759

)

 

 

(200,049

)

Proceeds from sales of property and equipment

 

 

-

 

 

 

1,542

 

Net cash used in investing activities

 

 

(121,759

)

 

 

(198,507

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options and warrants

 

 

278,968

 

 

 

57,000

 

Payment of payroll taxes on net issuance of employee stock options

 

 

(44,252

)

 

 

(656,845

)

Proceeds from issuance of stock

 

 

10,000,000

 

 

 

-

 

Stock issuance costs

 

 

(778,810

)

 

 

-

 

Net (repayment) borrowings on bank lines of credit

 

 

(80,117

)

 

 

(430,313

)

Net repayments on related-party notes payable

 

 

(155,022

)

 

 

(141,042

)

Net repayments on notes payable

 

 

(47,174

)

 

 

(42,919

)

Net cash provided by (used in) financing activities

 

 

9,173,593

 

 

 

(1,214,119

)

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

13,342,900

 

 

 

(2,134,399

)

Effect of exchange rates on cash

 

 

(45,506

)

 

 

(12,916

)

Cash and cash equivalents, beginning of period

 

 

6,316,921

 

 

 

5,185,321

 

Cash and cash equivalents, end of period

 

$

19,614,315

 

 

$

3,038,006

 

 

See accompanying notes to consolidated financial statements

8


ONE STOP SYSTEMS, INC. (OSS)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

83,392

 

 

$

22,369

 

Cash paid during the period for income taxes

 

$

80,629

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements

9


ONE STOP SYSTEMS, INC. (OSS)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For The Three Month Periods Ended March 31, 2021 and 2020

 

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Nature of Operations

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

Liquidity, Going Concern Considerations and Management Plans

 

Given our recurring 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; (v) receipt of approximately $1,500,000 on April 28, 2020 of government loan proceeds under the Paycheck Protection Program, and (vi) a receipt of approximately $9,221,000 on March 3, 2021 in a registered direct offering.

As of March 31, 2021, the Company’s cash and cash equivalents were $19,614,315 and working capital was $25,935,632.  Cash and cash equivalents held by Bressner totaled $1,263,430 (USD) at March 31, 2021.  Bressner’s debt covenants do not permit the use of these funds by its parent company.

During the three month period ended March 31, 2021, the Company experienced an operating income of $275,031, with cash generated by operating activities of $4,291,066.  During the year ended December 31, 2020, the Company experienced an operating loss of $424,281, with cash used in operating activities of $250,173.  

10


The Company’s revenue growth during the prior year 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 attributable to the economic impact of COVID-19.

In March 2020, the World Health Organization declared the outbreak of COVID-19, a global pandemic and the United States federal government declared it a national emergency. COVID-19 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 December 31, 2020 Annual Report on Form 10-K filed March 25, 2021, 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.

Presently, 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. 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 supply and demand factors, our cash flows, financial position and operating results for year 2021 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, and 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, 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.

11


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 continue to reduce costs, conserve cash, strengthen margins, and improve 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.  Savings from this effort are estimated to be $2.5 million on an annual basis.  

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 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 on 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 which have been satisfied.  The note is repayable in twenty-two installments beginning three months after closing in cash or shares of the Company’s common stock.

 

On March 1, 2021, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company agreed to issue and sell, in a registered direct offering, 1,497,006 shares of the Company’s common stock, par value $0.0001 per share, to the purchaser at an offering price of $6.68 per share. The registered offering was conducted pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-231513), which was initially filed with the Securities and Exchange Commission on May 15, 2019; and was declared effective on June 19, 2019.  As compensation for their services, the Company paid to the placement agents a fee equal to 7% of the gross proceeds received by the Company as a result of the registered offering, and reimbursed the placement agents for certain expenses incurred in connection with such offering. The net proceeds from the registered offering are approximately $9.2 million after deducting certain fees due to the placement agents’ and the Company’s transaction expenses. The net proceeds received by the Company will be used for general corporate and working capital purposes.

As a result of management’s cost reduction plans, the Company’s 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”).  

12


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, 2020.  Accordingly, note disclosures which would substantially duplicate the disclosures contained in the December 31, 2020 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 months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.  For further information, refer to the audited consolidated financial statements and notes for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 25, 2021.

Principles of Consolidation

The accompanying 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, 2020.

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 March 31, 2021, we had approximately $3.6 million in net deferred tax assets (DTAs). These DTAs include approximately $5.1 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.

 

On March 11, 2021, Congress passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which includes certain business tax provisions. At this point we do not believe that these changes will have a material impact on our income tax provision for 2021. We will continue to evaluate the impact of new legislation on our financial position, results of operations, and cash flows.

13


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

 

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”).  Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  ASU 2016-02 is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal year 2023.  Early application is permitted.  Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.  Lessees may not apply a full retrospective transition approach.  The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements and disclosures.  Based on our preliminary analysis, management expects the Company’s assets and liabilities to increase by the present value of the lease payments.

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.

 

Recently Implemented Accounting Pronouncements

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 became effective for the year ended December 31, 2020 (and interim periods in 2021).  ASU 2018-07 did not materially impact the Company’s consolidated financial statements.

 

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.  Accordingly, the adoption of this standard did not significantly impact our revenues.  

14


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.

  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 are 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 no adjustments. 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 intra-period 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 early adoption resulted in the Company recording an additional interim tax benefit of $446,099 for the three months ended September 30, 2020.  The adoption did not impact the Company’s annual income tax benefit or expense for the year ended December 31, 2020 or the amount of net deferred income tax assets as of March 31, 2021. 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:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accounts receivable

 

$

5,749,660

 

 

$

7,491,397

 

Unbilled receivables

 

 

4

 

 

 

106

 

 

 

 

5,749,664

 

 

 

7,491,503

 

Less:  allowance for doubtful accounts

 

 

(15,989

)

 

 

(33,120

)

 

 

$

5,733,675

 

 

$

7,458,383

 

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 ($16,590) and ($2,405) for the three month periods ended March 31, 2021 and 2020, respectively.  

NOTE 4 – INVENTORIES

Inventories, net consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Raw materials

 

$

4,014,408

 

 

$

5,210,327

 

Sub-assemblies

 

 

208,453

 

 

 

255,699

 

Work-in-process

 

 

768,473

 

 

 

407,328

 

Finished goods

 

 

5,218,864

 

 

 

4,424,603

 

 

 

 

10,210,198

 

 

 

10,297,957

 

Less:  reserves for obsolete and slow-moving inventories

 

 

(661,238

)

 

 

(650,453

)

 

 

$

9,548,960

 

 

$

9,647,504

 

 

 

NOTE 5 – LONG LIVED INTANGILE ASSETS

Definite lived intangible assets related to acquisition are as follows, as of March 31, 2021:

 

 

 

Expected

Life

 

Remaining

Months

 

Gross

Intangible

Assets

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Customer lists and relationships

 

36 to 60 months

 

7 to 29 months

 

$

2,084,515

 

 

$

(1,695,302

)

 

$

389,213

 

Drawings and technology

 

36 months

 

0 months

 

 

760,207

 

 

 

(760,207

)

 

 

-

 

Trade name, trademarks & other

 

24 to 36 months

 

7 months

 

 

447,274

 

 

 

(383,202

)

 

 

64,072

 

Non-compete

 

36 months

 

7 months

 

 

246,797

 

 

 

(201,725

)

 

 

45,072

 

 

 

 

 

 

 

$

3,538,793

 

 

$

(3,040,436

)

 

$

498,357

 

 

Definite lived intangibles assets related to acquisitions are as follows, as of December 31, 2020:

 

 

 

Expected

Life

 

Remaining

Months

 

Gross

Intangible

Assets

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

Customer lists and relationships

 

36 to 60 months

 

10 to 32 months

 

$

2,084,515

 

 

$

(1,578,178

)

 

$

506,337

 

Drawings and technology

 

36 months

 

0 months

 

 

760,207

 

 

 

(760,207

)

 

 

-

 

Trade name, trademarks & other

 

24 to 36 months

 

10 months

 

 

447,274

 

 

 

(355,742

)

 

 

91,532

 

Non-compete

 

36 months

 

10 months

 

 

246,797

 

 

 

(182,409

)

 

 

64,388

 

 

 

 

 

 

 

$

3,538,793

 

 

$

(2,876,536

)

 

$

662,257

 

 

As of March 31, 2021, amortization expense of the definite lived intangible assets for the years remaining is as follows:

2021

 

 

2022

 

 

2023

 

 

Total

 

$

392,972

 

 

$

63,231

 

 

$

42,154

 

 

$

498,357

 

 

Amortization expense recognized during the three months ended March 31, 2021 and 2020 was $163,900 and $174,525, respectively.

16


NOTE 6 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accrued compensation and related liabilities

 

$

992,810

 

 

$

932,988

 

Deferred revenue and customer deposits

 

 

1,281,663

 

 

 

1,096,672

 

Warranty reserve

 

 

425,377

 

 

 

425,636

 

Deferred rent

 

 

292,890

 

 

 

312,909

 

Other accrued expenses

 

 

592,362

 

 

 

713,239

 

 

 

$

3,585,102

 

 

$

3,481,444

 

 

NOTE 7 – DEBT

Bank Lines of Credit

Bressner Technology GmbH has two revolving lines of credit with German institutions totaling €2,200,000 (US$2,578,904).  Borrowing under the lines of credit bear interest at a variable rate of Euribor plus a stated rate.  The current rates for the lines of credit are 3.89% and 4.0%. One million euros of the credit line expires in January 2024, with the remaining balance being open indefinitely or until occurrence of a defined change of control event.  There were no outstanding lines of credit balances as of March 31, 2021 and December 31, 2020.

 

Foreign Debt Obligations

Bressner Technology GmbH has two term loans outstanding as of March 31, 2021 with a total balance outstanding of €1,000,000 (US$1,174,343) as follows:

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 March 31, 2021 and December 31, 2020 is €500,000 (US$587,171, $611,406, 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 matured 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 March 31, 2021 and December 31, 2020 is €500,000 (US$587,172, $611,406, respectively);

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 30, 2021 with monthly payments of principal and interest of €22,232 (US$24,960). The balance outstanding as of March 31, 2021 and December 31, 2020 is €0 (US$0) and €66,446 (US$81,251), respectively;

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; and

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.

17


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 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 March 31, 2021 and December 31, 2020 is $16,014 and $63,188, 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 March 31, 2021 and December 31, 2020 is $51,647 and $206,669, respectively.

 

Paycheck Protection Program 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 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.

18


However, the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), enacted on June 5, 2020, amended the original rules governing loans granted under the PPP, among others, as follows: (i) the time period to spend the received funds was extended from the original eight weeks to twenty-four weeks from the date the PPP Loan was originated, during which PPP funds need to be expended in order to be forgiven; (ii) at least 60% of PPP funds must be spent on payroll costs, with the remaining 40% available to spend on other eligible expenses; (iii) payments are deferred until the date on which the amount of forgiveness determined is remitted to the lender, and if a borrower fails to seek forgiveness within 10 months after the last day of its covered period, then payments will begin on the date that is 10 months after the last day of the covered period; and (iv) the PPP Flexibility Act modified the CARES Act by increasing the maturity date for loans made after the effective date from two years to a minimum maturity of five years from the date on which the borrower applies for loan forgiveness. Existing PPP loans made before the new legislation retain their original two-year term, but may be renegotiated between a lender and a borrower to match the 5-year term permitted under the PPP Flexibility Act.

The Company has submitted an application with the lender to forgive the PPP Loan, in accordance with SBA Procedural Notice, Control No. 5000-20057, effective as of October 2, 2020.  Because the Company expects the PPP loan to be forgiven in full, all related amounts have been presented as noncurrent liabilities (See Note 13).

 

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 which have been satisfied. 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 has 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).  As of March 31, 2021, the holder has elected to defer receipt of three installment payments as allowed per the agreement.

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 quotient of (A) the sum of the volume weighted average price of our common stock for each of the three (3) trading days with the lowest volume weighted average price of our common stock during the twenty (20) consecutive trading day period ending and including the trading day immediately prior to the applicable installment date, divided by (B) three (3). Shares of our common stock to be issued with respect to any such installment will be pre-delivered on the second 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.

19


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 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 months ended March 31, 2021, total debt discount amortization was $50,928, 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 months ended March 31, 2021 was $53,690, and such amount is included in interest expense in the accompanying consolidated statements of operations.

Debt Discount

The relative fair value of warrants issued in connection with the notes payable described above 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 March 31, 2021 and 2020, total debt discount amortization was $7,519 and $7,520, respectively, and such amounts are included in interest expense in the accompanying consolidated statements of operations.

A summary of outstanding debt obligations as of March 31, 2021 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

 

-

 

 

$

16,014

 

 

$

16,014

 

 

$

-

 

Related party notes payable

 

9.50%

 

 

April-21

 

 

-

 

 

 

51,647

 

 

 

51,647

 

 

 

-

 

Convertible senior secured

   note

 

10% OID

 

 

April-22

 

 

-

 

 

 

2,590,909

 

 

 

2,454,545

 

 

 

136,364

 

PPP loan

 

1.00%

 

 

April-22

 

 

-

 

 

 

1,499,360

 

 

 

-

 

 

 

1,499,360

 

 

 

 

 

 

 

 

 

-

 

 

$

4,157,930

 

 

$

2,522,206

 

 

$

1,635,724

 

Foreign:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uni Credit Bank AG

 

1.87%

 

 

June-21

 

500,000

 

 

$

587,171

 

 

$

587,171

 

 

$

-

 

Uni Credit Bank AG

 

1.90%

 

 

April-21

 

 

500,000

 

 

 

587,172

 

 

 

587,172

 

 

 

-

 

 

 

 

 

 

 

 

 

1,000,000

 

 

$

1,174,343