One Stop Systems, Inc.

trends are positioning OSS for continued sequential revenue growth throughout the remainder of 2024. This year we've been focused on two important objectives to take advantage of favorable market dynamics and the healthy pipeline we have developed. First, we are focused on converting our pipeline to orders in our OSS segment and second we are pursuing customer-funded development opportunities that we believe will establish OSS as an incumbent on platforms driving future multi-year production contracts. Across our global defensive commercial markets customers are looking for technology partners like OSS to support their expanding needs for rugged enterprise-class compute solutions. Driving these trends are the emerging requirements for AI, machine learning, autonomy, and sensor processing at the edge. The company's best in class hardware and software platforms bring the latest data center performance to harsh and challenging applications that we believe will allow OSS to take advantage of current and future demand trends. Our underlying performance during the second quarter and first half of the year is aligned with our plan. We continue to believe 2024 is creating strong foundation for sustainable -over-year revenue growth and profitability in 2025. Even as we navigate growing economic uncertainty and continued weakness in our European markets through 2024 with expected recovery in 2025. So with this introduction let's take a look at the progress we made during the second quarter in more detail starting with our efforts to convert our pipeline to orders. Our un-factored pipeline at the end of the second quarter remained over a billion dollars. Approximately 70 percent of our current pipeline is comprised of platform opportunities which we believe will help drive predictable multi-year revenue and backlog to OSS. I'm pleased with the growth and transformation of our pipeline reflecting the positive contribution of our sales organization, the strategic investments we are making in product development, and the growing demand for our hardware and software platforms. As we continue pursuing opportunities to grow our pipeline our operating plan in 2024 remains focused on increasing orders within our OSS segment. For the 2024 second quarter we saw orders outpace revenue by over 20 percent for the second quarter in a row. Order growth over the past three months was driven by existing customers in the ground intelligence, surveillance, and reconnaissance market known as the ISR market and from customers in the commercial aerospace market. In addition we had new customer rewards in the air ISR market. We expect many of these new engagements will evolve into multi-year follow-on revenue opportunities in future periods. Second important objective we are pursuing this year is focused on growing our presence on customer funded development programs. As we mentioned on our first quarter call we started to disclose separate revenue and cost lines in our financial results associated with customer funded development projects to show our potential and track new wins. We have defined program related development work as customer funded development on our financial statements. Through customer funded development programs we are typically providing a more integrated solution compared to the company's historic offerings. In addition it establishes OSS as a platform incumbent on what is almost always a follow-on production and multi-year support contract. As a result we expect our business model to benefit from a higher mix of annual recurring revenue and contracted multi-year backlogs in the future. Development relationships are expected to take one to two years before leading to production orders. So as business scales we expect to benefit from steady quarter over quarter revenue growth while building a solid foundation of potential large scale program opportunities. I'm pleased to report that customer funded development revenue increased to 1.4 million in the 2024 second quarter compared to $365,000 just three months ago. This growth was driven principally by the expansion of an existing relationship with a commercial aerospace customer for fielding of a new product and follow-on production. As expected we are seeing increased interest from customers to support their development programs and we have multiple proposals currently submitted. As a result we believe we will continue to experience sequential growth throughout the remainder of 2024 in customer funded development revenue. We also have expanded our product development efforts this year and currently have five product efforts under development in the OSS segment focused on edge computing for both defense and commercial applications. We expect to announce and demonstrate these products in the second half of this year and the first half of 2025. Our second quarter results also reflect strategic investments we are making to support current and future growth. Over the past 12 months we have added new program management personnel with experience managing large complex development and production programs for government and defense customers. We believe their experience will allow us to pursue even larger programs for development and production in defense and commercial markets. As I mentioned last quarter we are developing a new growth-focused multi-year strategic plan. Our markets are rapidly evolving which has required additional time to finalize our three-year strategic plan. We expect to communicate the growth strategies we are pursuing in a presentation later this year. As we look to the remainder of 2024 I'm excited by the long-term growth strategies we are pursuing to scale our business and drive profitable growth. Though it has taken some time I'm encouraged by the growing progress underway as we establish ourselves in our markets. We continue to execute against our near-term transformation plan as we focus on driving orders, building backlog, growing revenue, and improving profitability. While the timing of orders will remain a factor as we get to scale I'm confident we are building a strong foundation to achieve our long-term growth objectives. I want to thank our team for their continued hard work and dedication as we pursue compelling growth strategies aimed at building greater value for our shareholders. Looking forward we anticipate consolidated revenue of approximately $13.3 million in the third quarter of 2024 which accounts for approximately $1.6 million of orders that we pushed to the fourth quarter. Our guidance for the third quarter of 2024 also includes expected OSS revenue of $6.3 million representing 15% -on-year growth in the OSS segment, partially offset by lower Bresner revenue due to continued softness in the company's European markets. While uncertain economic conditions and softness in Europe may negatively impact our consolidated second half performance we believe our leading enterprise class compute solutions, strong balance sheet, and committed team are well positioned to take advantage of positive shareholders. With this overview I'd like to turn the call over to our CFO John Morrison to review our 2024 second quarter financial results in more detail. John please go ahead.

Thank you Mike and good afternoon everyone. Our 2024 second quarter results reflect the ongoing transformation of our business model and continued improvement in orders. As a reminder the company is comprised of two operating segments. Our OSS segment operates in the United States and is primarily focused and involved in the design and manufacture of high performance ruggedized edge processing, compute, storage, and connectivity systems. Our Bresner segment operates throughout Europe and is a system integrator with standard and custom -in-one hardware systems and components. Bresner also serves as a channel for OSS products to the European and Middle East markets. The following comments are based upon comparison of second quarter 2024 results to the second quarter 2023. For the second quarter we reported consolidated revenue of 13.2 million which exceeds our guidance of 13

million.

The .3% -over-year decline in college consolidated revenue was primarily attributable to a 3.2 million dollar reduction in revenue related to our former media customer and a 1.3 million dollar decline in Bresner revenue associated with slower economic activity in Europe. Lower second quarter revenue was partially offset by a new customer funded by new customer funded development orders and revenue growth to new and existing customers. Looking at our OSS segment and backing out the 3.2 million impact from a former media customer revenue at our OSS segment grew 8.3 percent reflecting revenue growth from new and existing customers and the initial success at a new customer funded development project. As Mike mentioned in the first quarter of 2024 we started to separately disclose revenue and cost of sales line items associated with customer funded development work in our financial statements. Customer funded development typically represents non-recurring design and development work associated with the introduction of new products paid for by the customer. We expect customer funded development to grow throughout 2024. Consolidated growth profit in the second quarter was 25.2 percent compared to 27.9 percent for the same period last year. The decline in our consolidated growth margin was primarily attributable to our under absorption of our OSS segment production capacity and additional inventory reserves. Total second quarter operating expenses expenses decreased 31.9 percent to 5.6 million which was attributable to the elimination of prior costs associated with organizational restructuring and outside professional services and these were partially offset by planned program management and investments made during the quarter. In addition our financial results for the second quarter 2023 were impacted by a 2.7 million dollar charge related to the impairment of goodwill and a 1.3 million dollar charge related to the employee retention, excuse me, 1.3 million dollar benefit related to the employee retention tax credit. For the second quarter the company reported a gap net loss of 2.3 million or 11 cents per share compared to a net loss of 2.4 million or 12 cents per share in the prior year. The company reported a non-gap net loss of 1.8 million or 9 cents per share compared to a non-gap net loss of 84,000 dollars or 0 cents per share. Adjusted EBITDA, a non-gap metric was a loss of 1.3 million compared to a positive adjusted EBITDA of 520,000 in the prior year second quarter. Now looking at the balance sheet in more detail As of June 30, 2024, OSS had total cash, cash equivalents, and marketable securities of 11.8 million and total working capital of 32.6 million. This is compared to total cash, cash equivalents, and marketable securities of 11.8 million and total working capital of 35.6 million at December 31, 2023. OSS had no borrowings outstanding on its $2 million revolving line of credit on June 30, 2024 and December 31, 2023 respectively. The company's treasury operations had a consolidated balance outstanding on its term loans at June 30, 2024 of 1.1 million down from 2.1 million at December 31, 2023 and 3 million at June 30, 2023. For the six months ended June 30, 2024, OSS generated 1.2 million in cash from operating activities compared to 2 million dollars for the six months ended June 30, 2023. This completes our financial review for the quarter. We would like to now turn open the call to open the call

to questions. Operator John.

Yes sir, thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question please press star followed by the number one on your touchtone phone. If you are using a speakerphone please pick up the handset before pressing any keys. Once again, start

and ask a question.

Thank

you for waiting.

We now have our first question and this comes from the line of Tony Filling from Lake Street, Capital. Please go ahead. Your line is now open.

Tony Filling Good afternoon guys. This is Tony Filling filling in for Eric Martinuzzi. Appreciate you taking my question. Do we feel the companies properly staffed for a tighter focus on the defense customers?

Eric Martinuzzi Yeah, Tony, I do. We've made some really, really good progress over the year to where we are. I think we're very well set to actually scale really well too the people we have. So going back over the course of the year, just quick summary. Of course, myself joined the team, run commercial and defense, but defense background of 30 plus years. And then we brought on a VP of sales and marketing, Robert Kaleball. He and I worked for a decade together in the defense market. He has over 35 years experience selling and marketing into the US, but global defense. And then as I mentioned in the script, we wanted to augment the team with experienced program managers who are used to running large scale defense programs that have development, production, sustainment, fielding, etc. So we added two program managers to the staff, each who in their own right have experienced running $100 million plus programs on the defense side. So if you were really well situated there, in addition as an AS9100 certified company and ISO 9001 certified, we're really well set in policy process quality, etc. to meet the standards required for defense and commercial. So I think we're in a really good place to execute against defense programs.

Tony That's great. And I mean, do you think there's any risk in terms of revenue concentration with more focus on the defense customers going forward? Or is that kind of where we're headed?

Can you maybe repeat the front end of that, Tony?

Just, you know, revenue risk, or risk in terms of revenue concentration with more focus on defense customers.

Yeah, I don't think so. When I showed up at the company, we were primarily on a larger value on the commercial side. So as we've kind of increased up to about a 50-50 ratio right now. As we're projecting and we're looking at our pipeline for the next three to five years, we see that same ratio in our pipeline. So I don't think we'll get a revenue concentration specifically that would become a risk. If anything, we've seen quite a deep success here in the first year in broadening out that revenue across more defense customers, in addition to the commercial customers that we've had. So I don't see a risk in the concentration in defense.

Great.

I appreciate you taking the questions. I'll jump back.

Thank you. Thanks, Tony.

Thank you. And we now have our next question.

And this comes from the line of Brian Kingslinger from AGP. Your line is now open. Please go ahead.

Great. Thanks so much. Can you speak to the government procurement environment? Are you seeing reasonable sales cycles? Are they still elongated? And then as we enter the new fiscal year for the federal government, which always brings a set of budget delays, what can the company do to ensure a steady flow of orders, if at all?

Yeah, Brian, you know, the bane of existence doing business with the U.S. government defense, actually, it's the same in most global .D.s also. So the interesting thing we've seen is the, I would say the normal acquisition cycles from markets like I mentioned, the ISR market, their kind of technology roadmap timeframes have generally been consistent. So not really concerned there in terms of where the markets are going, their needs. The biggest factor really has been, and this has kind of been a trend over the last three to five years, is we're just seeing the procurement arms on the contract side taking exorbitantly longer time to award and contract out the contracts that have already been selected as winners or awarded as sole source. And when I say extensions, right, it used to be, it might, when a winner was selected or they were getting to the end of a procurement, it might be three to four weeks for them to process. You know, it's not common now to see those sometimes take 12 to 14 weeks, which has really gotten a bigger impact now in timing. So we worked through some timing issues a little bit. That's probably our biggest risk in terms of their demand, the market needs and the technology and the process they've gone through. Those are still remain fairly consistent. And then as for next year, yes, we always get concerned about CRs. The benefit you get on winning programs the year prior is the CRs usually affect new starts. So the more we win this year, the more stability we have in business into next year. But we do keep an eye on the CRs. We work with customers the best you can to plan for those. We did have two or three programs this year that were delayed close to seven months past when we thought they would hit just because of the longer CR we had this year. And then the follow on impact of them having to get the money appropriated. So timing issues definitely we have to deal with. Not much we can do rather than work closely with our customers, have things aligned and ready to go. We have seen some large crimes have taken on considerations of funding smaller companies to protect schedules for awards they know they're going to get but are waiting on award. And then the last thing we've been doing is we use some of our lobbying efforts just to help facilitate programs and timing and movement. Ultimately if it's a CR, there's not much we can do. But we do work through our lobbying office to help resolve or supplant or put in place anything we can.

Great. And then when you talk about customer funded development, I assume growth in these programs are leading indicators of larger awards. If that's the case, how do you think about the average time of a customer funded development program and how long might it take or typically take until it turns into something that I might call production or I'm not sure how to describe it?

Yeah, I know Brian. I think what you could say now for the kinds of programs that we're bidding and we've started to win, we'll generally see the NRE or the development period beyond the order of 6 to 12 or 18 months. So we're in that 6 to 18 month range depending on the size and scope of the development and the system we're developing. Usually at the end of that 18 months, you have the first fieldings. Usually that's the the low rate initial production. That's usually the first 4, 5 or 6 prototypes. That's usually delivered within the first kind of 3 to 6 months after that development period. And then you roll into a production period. That can usually run anywhere from 1 to 2 to 3 to 5 years. And then you usually have a technology refresh cycle that rolls up on the back end of that. So a perfect example is the Raytheon P8 program we have. There was initial front end development. We've been on that program for the better part of 7, 8 years now. And we're on I think our second or third tech refresh. We're just finishing some development right now for the next technology refresh update for our system there. So that's the benefit of getting in on these front end customer development programs. So a little bit of a long answer, but between 6 to 18 months depending on the scope is what I would say is average for us on those front end developments.

Thank you. Last question I have is we start to think about the revenue expectations that we like to think about from the OSS segment. Is there any way you can quantify either the first 6 months or the trailing 12 months book to bill?

Yeah, so we've

been tracking it this year. So as I mentioned in the earnings call, the bookings have been outpacing revenue in that OSS segment by a little over 20%. So those would be like book to bill.

So

maybe like 1.2 in this last quarter is kind of the initial... Yeah,

for the trailing 6 months for this year, we've been probably a little bit closer to 1.26. The last quarter here was a little bit stronger. We were upwards of a little over 1.3. So we're starting to see some pick up on the booking side from a lot of work we initiated last year. And then we're forecasting that to see that continued positive book to bill ratio greater than 1 through the next two quarters based on where we see things. The biggest impact will be timing on some, making sure the awards come in as planned. But based on where we're sitting, the majority of the pipeline that we have bid right now, we're waiting on awards, is either competitions we've won or sole source work. So we're feeling pretty confident in the scope and the value that we could potentially pull through. We're working the timing, as I mentioned, on processing it through the systems.

Let me squeeze one more in. Back to we're headed to the end of the government fiscal year. Some businesses in government obviously have a budget flush at the end of the year. Obviously, that also helps for the year after because you've had some budget this year and it protects against CR. Do your business have a budget flush in September, generally, a benefit from that? Or is that not typically the case?

So not much last year. So generally on the government side, when they get to year end and they're trying to use up a budget at the end of the year, they will generally go for buying additional production buys or spare buys. So generally, if you're incumbent on a platform, you'll see a better return on those year end sweep up funds. So we've started to position ourselves in some of those programs so we could start to take advantage of that. Because of some of the positioning work we did last year, the other way we can grab sweep up funds is usually if some labs or organizations are interested in some early technology fielding so they can work them in their lab or try them in exercises, we can sometimes see those pickups. So we've expanded our relationships across the defense so that we try to pursue opportunities where we can for people who might want to buy something for their lab or for some experiment in anticipation of a program in the following year. So as we get a bigger market share in defense, sweep up money will definitely be a lever that we can pull. We just need a little bit more penetration and come to see across a few more platforms. And then I think we'll start to see that really add more to our opportunities.

Thanks for answering all

my questions.

Thank

you,

Brian. Thanks, Brian.

Thank you. And there are no further questions at this time, sir. Please continue.

Okay, John. Thank you very much. We appreciate it.

Thank you. This concludes our conference

for today. Thank you all for participating. You may now disconnect.