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 defense and 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 year-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've made during the second quarter in more detail, starting with our efforts to convert our pipeline to orders. Our unfactored pipeline at the end of the second quarter remained over a billion dollars. Approximately 70% 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% 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 awards 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 multiyear support contract. As a result, we expect our business model to benefit from a higher mix of annual recurring revenue and contracted multiyear 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 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 segment revenue of $6.3 million, representing 15% year-on-year growth in the OSS segment, partially offset by lower Bresna 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 fundamentals across global markets and create long-term value for 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 improvements in orders. As a reminder, the company is comprised of two operating segments. Our OSS segment operates in the United States. It is primarily focused and involved in the design and manufacture of high-performance ruggedized edge processing, compute, storage, and connectivity systems. Our Brezner segment operates throughout Europe and is a system integrator with standard and custom all-in-one hardware systems and components. Regner 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 23.3% year-over-year decline in consolidated revenue was primarily attributable to a $3.2 million reduction in revenue related to our former media customer and a $1.3 million decline in revenue associated with slower economic activity in Europe. Lower second quarter revenue was partially offset 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%, 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 gross profit in the second quarter was 25.2% compared to 27.9% for the same period last year. The decline in our consolidated gross margin was primarily attributable to our underabsorption of our OSS segment production capacity and additional inventory reserves. Total second quarter operating expenses decreased 31.9% 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 of 2023 were impacted by a $2.7 million charge related to the impairment of goodwill and a $1.3 million charge related to the employee retention, excuse me, $1.3 million benefit related to the employee retention tax credit. For the second quarter, the company reported a GAAP net loss of $2.3 million or $0.11 per share compared to a net loss of $2.4 million or $0.12 per share in the prior year. The company reported a non-GAAP net loss of $1.8 million, or $0.09 per share, compared to a non-GAAP net loss of $84,000, or $0.00 per share. Adjusted EBITDA, a non-GAAP metric, was a loss of $1.3 million compared to a positive adjusted EBITDA of $520,000 in the prior year's 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 pressure operations had a consolidated balance outstanding on its term loans of June 30, 2024, of $1.1 million, down from $2.3 $1 million at December 31, 2023 and $3 million at June 30, 2023. For the six-month end of June 30, 2024, OSS generated $1.2 million in cash from operating activities compared to $2 million for the six-month end of June 30, 2023. This completes our financial review for the quarter. We would like to now open the call to questions. Open the call to questions.

Operator, John?