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Technology

Hardware

One Stop Systems Inc.

1Q20 Results
Revenue in the first quarter of 2020 increased 33% to a first quarter record $13.4 million from $10.1 million in the same year-ago quarter. Revenue came in above management&#8217;s late March estimate of $12.5-$12.9 million. The increase was primarily driven by sales of custom servers to be used in media and entertainment, as well as PCIe Gen 4 products and&nbsp;AI on the Fly&nbsp;technology for autonomous driving vehicles. The company&#8217;s Bressner subsidiary contributed $4.9 million or 36.8% of consolidated first quarter revenue, while CDI contributed $622,000 or 4.6%. Some quick notes on the quarter: Disguise revenue came close to forecast, in spite of the market falling out during the quarter as the COVID restrictions began to take hold and OSS generated little revenue from its Raytheon contract during the quarter, which is not unusual given the lumpiness of the Raytheon business.
Gross profit in the first quarter of 2020 was $3.4 million or 25.4% of revenue, compared to $2.4 million or 24.0% of revenue in the same year-ago quarter. Gross margin for the company&#8217;s core OSS business was down slightly to 28.1% in the first quarter of 2020 from 28.7% in the same year-ago quarter. Both Bressner and CDI gross margins improved, contributing 21.9% and 19.7%, respectively. Total operating expenses increased 10.4% to $4.9 million from $4.4 million in first quarter 2019. The increase was primarily due to increased (G&amp;A) expense that was primarily attributable to the accrual of severance benefits, as well as increased marketing and selling expense, which was partially offset by a decrease in R&amp;D expense. Overall operating expenses decreased as a percentage of revenue to 36.7% in the first quarter of 2020, as compared to 44.2% in the same year-ago quarter. Excluding one-time severance cost related to the change in CEOs, operating expenses would have been flat in the first quarter of 2020 compared to the same year-ago quarter. 
OSS reported a net loss on a GAAP basis of&nbsp; $1.1 million or $(0.07) per share in the first quarter of 2020 compared to a loss of $945,000 or $(0.07) per share in the year-ago period. Non-GAAP net loss totaled $714,000 or $(0.04) per share, as compared to $428,000 or $(0.03) per share in the same year-ago period. We estimate the CEO related severance cost negatively impacted EPS by $0.02 per share.
New Business Opportunity Pipeline 
One Stop System&#8217;s opportunity pipeline continued to grow in the quarter. Recall, in 2019 the Company significantly increased its focus on opportunities over $1 million. During the year, OSS closed 16 of 21 programs valued at $1 million or more. Of the 16 closed opportunities, 75% were new customers. And three have the potential to be valued at $10 million or greater over the next three to four years. At year end, OSS had 20 additional large opportunities in the pipeline, eight of which involve the Company&#8217;s high-margin PCI Express Gen 4 products.
 During the first quarter, OSS closed three new program wins exceeding $1 million each. Two of the three wins are with new customers, one military and one industrial OEM. As of yesterday, the Company had 27 large opportunities in the pipeline. Eight of these involve the Company&#8217;s PCI Express Gen 4 products and nine were for military/aerospace applications.
 Wins such as these should help drive long-term revenue growth for the Company. For example, the Company recently received $3.5 million in production orders for its new Gen 4 PCIe products from multiple OEM customers for delivery in 2020. These OEM orders represent highly desirable â€˜sticky&#8217; engagements, where OSS technology is built into customer designs. As designs go into mass production, demand for OSS products is likely to increase even further.
COVID-19 Impact 
OSS has taken a number of actions in response to the economic shutdown due to COVID. Steps taking during the last 90 days include expense reductions, a reorganization, and securing additional capital. While the objectives associated with most of these recently implemented changes will take time to yield the desired effect and propel the company to the next level, the benefit from the expense reductions will start to show in the current quarter and be fully realized in the second half of the year. OSS eliminated approximately $2.5 million to $3.0 million in annual spend.
 On a customer basis, OSS has experienced some delays and push outs of business. Most significantly, shipments to the Company&#8217;s largest customer, Disguise, are down significantly in the second quarter. A full return of the Disguise business is likely to be pushed out until live events are restarted around the globe. The Disguise outstanding receivable was $4.5 million at the end of the quarter, with the management teams from both companies in constant contact.
In addition, OSS has been impacted by supply chain issues, especially for high-end PCB boards, that affect multiple customer orders, which is only partly related to the COVID crisis.
Projections 
For the second quarter, the Company put a minimum baseline of $10 million in revenue. The y-o-y revenue decline is mostly related to the Disguise business which is down significantly so far in the second quarter. We are estimating second quarter revenue to be $11 million, down from our previous $13 million. We think the Company could see some gross margin improvement, modestly from the expense reduction program but more from a mix perspective. SG&amp;A expenses will benefit from the expense reduction plan but this will be mostly offset by severance costs. Our estimated GAAP net loss for the quarter is $0.05 per share.
For the full year, OSS will benefit from the back half of the year loaded Raytheon contract, and, if economic conditions improve, the potential for an improved Disguise contribution. We have trimmed our third and fourth quarter revenue estimates given the COVID uncertainty. For the full year, we are now at revenue of $56.9 million and EPS of $0.01. In 2019, OSS generated revenue of $58.3 million and a net loss of $0.06 per share.

One Stop Systems Inc. (OSS)

Solid Q1 Results but 2Q to be Impacted by COVID-19

Fundamental Analysis:

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A New Market (OSS)

A Step Back (OSS)

A New CEO Announced (OSS)

Lots of Promise, but Challenged 2023 (OSS)

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