One Stop Systems, Inc.

Good day and welcome to the one stop systems first quarter 2025 conference call and webcast. At this time, all participants are in the listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. As a reminder, this call is being recorded as part of the discussion today. The representatives from will be making certain forward looking statements regarding the company's future financial and operating results, including those relating to revenue growth as well as business plans bookings. The company's multi year strategy business objectives and expectations. This statements are based on the company's current beliefs and expectations and should not be regarded as a representation by that any of its plans or expectations will be achieved. Please be advised that this forward looking statements are covered under the safe harbor provisions of the private securities litigation reform act of 1995 and that always as desires to avail itself of the protections of the safe harbor for this statement. Please also be advised that actual results could differ materially from those stated or implied by the forward looking statements due to certain risks and uncertainties. Including those described in the company's most recent annual report on form 10 K subsequent quarterly reports on form 10 Q and recent press releases. Please read these reports and other future filings that will make with the SEC. Always as this claims any duty to update or revise its forward looking statements, except as required by applicable law. It is now my pleasure to turn the conference over to always as president and CEO. Mr. Mike novels. Please go ahead, sir.

Thank you, Angeline. Morning

everyone. And thank you for joining today's call. I'm pleased to report on the progress we made during the twenty twenty five first quarter highlighted by both year over year and sequential improvements in gross margin stable year over year revenue and strong segment bookings and demand trends. For the first quarter of twenty twenty five consolidated gross margin increased year over year three hundred twenty basis points to thirty two point six percent driven by a strong gross margin of forty five point five percent within our segment. We also announced the single record contract award of six point five million with a large defense prime as well as new order multi year relationship with an innovative medical imaging and two renewals with a combined value of six million dollars from existing US Department of Defense programs. As expected near term market conditions affected the timing of certain segment orders anticipated for the first and second quarters of twenty twenty five. However, based on recent orders as well as future booking expectations, we believe we are on track to achieve our twenty twenty five annual guidance, which includes consolidated revenue of fifty nine to sixty one million dollars and even a break even for the full year. We believe the second half of twenty twenty five is setting up the period of growth and transformation and I want to use my time to review our expectations for twenty twenty five and beyond. As I mentioned before, we are pursuing strategic growth opportunities that leverage our high performance edge compute solutions to meet the growing demands of a machine learning, autonomy and sensor fusion at the edge. Over the past two years, we have invested in our organization technology and team, which has created the necessary platform to pursue a large multi year pipeline of commercial and defense sales. We have a strong and growing pipeline of opportunities across leading defense organizations and advanced commercial enterprises. They're looking for partners like to support their need for high performance edge compute solutions. Our sales approach has been focused on driving adoption of our products through three main business development initiatives. Our first strategy aims at identifying applications and customers early in the engineering cycle to pursue collaborative relationships through customer funded development programs. We believe this will establish incumbent positions on platforms that will lead to follow on production and long term sustainment positions. We believe development relationships will take one to two years before leading to production orders. As a result, we expect certain development programs that we worked on during twenty twenty four to transition to orders and sales in twenty twenty five and beyond. Our second key business development initiative is focused on land and expand strategy. This is supported by the best in class ruggedized enterprise class compute solutions we offer and our differentiated engineering capabilities. We've engineered solutions that compress data center scale performance into compact ruggedized systems that are capable of thriving in harsh environments at significant size, weight, power and cost advantages to competing solutions. In fact, our solutions are three hundred and fifty percent faster, can run twenty eight times the number of AI applications and have a hundred thirty times better computational performance than competing offerings. As a result, we are developing meaningful relationships with customers and engineering teams who are looking for the types of enterprise class solutions we provide. For example, a couple of weeks ago, we announced the third program win over the past eight months with a defense customer that is embedding our enterprise class compute and storage products deeper into next generation US Department of Defense initiatives. On the commercial side, as we previously announced, we are further extending our relationship with a customer in the medical field to transition their medical sensing solution to an enterprise class solution. Our hardware will process sensor data and use AI applications to bring significantly better medical information to the doctors and patients to address cancer treatment. Our third sale strategy underway leverages the company's integration of compute and storage architecture capabilities, which is allowing us to address more integrated solutions. Providing integrated solutions helps us solve additional customer problems and creates opportunities to expand beyond just supporting prime contracts by delivering products directly to end customers. As momentum builds, our expanding pipeline and recent awards reinforce our belief in the scalability and long term value or business model. Higher OSS segment orders are particularly encouraging amid ongoing uncertainty in business and government spending. Longer term, we believe our sales strategies will build highly valuable, predictable and recurring revenue streams as we pursue a growing number of platforms and program opportunities across our commercial defense markets. This creates an attractive business model where in any given year we have platform programs in development, others transitioning or in production in a backlog of programs and sustainment and support. We experienced strong bookings within our OSS segment during the first quarter with a book to bill ratio of 2.0 which contributed to a trailing 12 month book to bill ratio of 1.33. Recent award highlights within our OSS segment include an initial $1.4 million contract award for radar processing systems on the P-8 Poseidon aircraft, including a five year support agreement. An initial $1.6 million in contract awards to upgrade sonar sensor processing for the Virginia class submarine, including enhancements to PCI accelerator systems with next generation technology that extends program viability for at least another 10 years. A $500,000 contract with a leading medical OEM with anticipated follow on production orders valued at over $25 million over the next five years. And a record $6.5 million reward from a leading defense and technology solutions company to support next generation mobile intelligence platform. Order activity remains strong, supported by growing demand for our enterprise class compute solutions and we anticipate further commercial and defense announcements in the coming months. While the German and EU economies were challenged in 2023 and 2024, we are starting to see more stability in the region. Recent bookings and revenue within our Bresner segment have been in line with our targets and Bresner remains on track to achieve consistent sales and profitability for 2025 compared to last year's results. We do not currently expect terrorists to have a material impact on our operations or cost structure. In fact, we are seeing potential in both our OSS and Bresner segments. In the OSS segment, terrorists provide a competitive advantage against lower cost Asian manufacturers in many of our markets. We are actively pursuing opportunities to displace these competitors in the US markets. Additionally, we are exploring partnerships with international companies seeking US based manufacturing options, leveraging our access capacity and technical capabilities. Within our Bresner segment, we see opportunities to capture new business as European customers reassess supply chain dependencies and prioritize partners with secure tariff resilient logistics. We are also targeting OEMs that are shifting production strategies due to geopolitical and cost pressures, positioning Bresner as a trusted integration and distribution partner. In addition, the newly heightened desire within NATO and the EU to increase defense spending could create expanded defense opportunities for Bresner and OSS products in 2026 and beyond. Indications are that while budgets are likely to show significant increase, it will take some time for those budgets to work through procurement channels to actual awarded efforts. While tariffs and shifts in government spending have delayed certain programs to the second half of 2025, underlying demand trend remains strong. We continue to see solid engagement across key programs and remain confident in our ability to meet our full year 2025 guidance. Looking ahead, we believe OSS is uniquely positioned to capitalize on a multi-year growth opportunity driven by accelerating adoption of artificial intelligence, machine learning, autonomy and sensor fusion at the edge. As these requirements become increasingly central to the defense and commercial innovation, customers are turning to trusted partners with proven expertise and rugged enterprise class compute solutions. With the right products, a highly capable team and a focused strategy, we remain well positioned to capture growing demand across our core markets and we are energized by the scale of the opportunities ahead. So with this overview, I'd like to turn the call over to Dan. Dan?

Thank

you, Mike,

and good morning to everyone on today's call. Since joining OSS in November 2024, I've been continuously impressed by the company's differentiated technology, customer focused and by the momentum that we're seeing across the business. In the first quarter of 2025, I was particularly pleased by the momentum that we achieved toward two of our key financial objectives, growth and profitability. On growth, our OSS segment 2.0 book to bill in the quarter and 1.33 trailing 12 month book to bill demonstrates that our technology is resonating with customers and positions us to achieve our growth objectives for the second half of the year. On profitability, OSS segment growth margins of .5% in the quarter demonstrate the value that customers place on our differentiated products as well as our continued commitment to operational efficiency. There's always work to do, but we're off to a strong start and we're well positioned both operationally and financially to execute against our 2025 goals and to unlock long term value for our shareholders. And now for a quick overview of Q1 2025 financial performance. For the first quarter, we reported consolidated revenue of 12.3 million. The .1% year over year decrease in consolidated revenue was a result of approximately 330K of lower OSS segment revenue and 66K of lower Bregner segment revenue. As we mentioned last quarter, we expect revenue and profitability to improve at a higher rate in the second half of 2025. The consolidated gross margin in the first quarter expanded to .6% compared to .4% in the prior year quarter. The 320 basis point improvement reflects the more profitable mix of revenue in the OSS segment. On a segment basis, gross margins for the company's OSS segment improved to .5% compared to .2% for the same period of the year ago. The increase was primarily due to a larger volume of certain higher margin products shipped in the quarter. OSS gross margins also benefited from a 212K reduction in inventory reserves in the segment, due primarily to the usage of certain previously reserved inventory items to satisfy a new customer order received in the quarter. On a full year basis, we continue to expect OSS segment margins to be in the mid to upper 30% range. The company's Bregner segment had gross profit margin of 23.1%. The 260 basis point decrease from the same period last year was primarily due to product mix. Total first quarter operating expenses increased .2% to 5.9 million compared to the year ago quarter. This increase was predominantly attributable to higher marketing and selling costs due to an increase in personnel costs from the additions in headcount made during the course of 2024, as well as an increase in research and development costs driven by higher engineering labor to support new product development. For the first quarter, the company reported a gap net loss of $2 million, or 9 cents per share, compared to a net loss of $1.3 million, or 6 cents per share in the prior year quarter. The company reported a non-gap net loss of $1.4 million, or 7 cents per share, compared to a non-gap net loss of $931K, or 4 cents per share in the prior year quarter. Adjusted EBITDA, a non-gap metric, was a loss of $1.1 million compared to an adjusted EBITDA loss of about $500K in the prior year first quarter. Turning to the balance sheet. As of March 31, 2025, OSS had total cash and short-term investments of $9.1 million, no borrowings outstanding on our $2 million revolving line of credit, and a consolidated balance outstanding on our term loans of $1.1 million. For the three months ended March 31, 2025, OSS used $1.1 million in cash from operating activities, compared to operating cash flow of $2 million for the three months ended March 31, 2024. The change from the prior year quarter was primarily due to the timing of working capital. As Mike mentioned, we believe we are on track to achieve our 2025 annual guidance. We expect bookings to remain strong throughout the year within our OSS segment, which we believe will support profitable revenue growth in the second half of 2025 and into 2026. As we guided last quarter, we expect our revenue and profitability growth to accelerate in the second half of 2025, with first half roughly flat to the prior year. This completes our prepared remarks. Operator, please open up the call to

questions.

Thank you. We are now open for Q&A.

And at this point, Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone, and you will hear a prompt that your hand has been erased. Should you wish to decline from the polling process, please press the star followed by the number two. If you use the speakerphone, please lift the handset before pressing any keys. One moment please for your first question. The first question comes from Brian Kinslager with Alliance Global Partners. Please go ahead.

My first question relates to the visibility on the 30 million dollars of core OSS revenue expect this year. How much of that is coming from contracts or orders that have already been signed versus new business you still need to win this year?

Yeah, it's a little bit of mix and mope Brian. Thanks for the question. As we noted in the comments, we're generating bookings now here in the first half that would lead to expected revenue in the second half of the year. And we had a smaller percentage of backlog left over from the end of 2024 that's looking

at deliveries more in the second half of the year.

Okay, and then the announcement for the 80 best in class high performance servers for snap million dollars. I couldn't tell based on the press release. Will all of that be delivered in 2025 or if not over what time period will that be?

Yeah, Brian, so we expect all of that to be delivered and to convert to revenue within 2025. We'll see some spread between Q2 Q3 Q4, but we expect to finish all of those deliveries within the year.

Great. And then in terms of the pipeline, can you share with us maybe how many opportunities are of size and maybe 20 million dollars and what I need to be adjudicated this year?

Yeah, Brian don't have an exact number here in front of me, but the pipeline is, you know, is a meetup of a number of opportunities and programs that weigh in value from different size. Our expectation in growing the company really is along the lines of finding more programs like the one we've just recently announced where we have a longer run of development and larger production runs in the back end. So we expect, especially as we as we build out of 2025 and in 2026 that will start to see more program values representative of our most recent

announcement.

Great. Lastly, maybe touch on in your open letter. I didn't hear you talk about it. You discuss a 200 million dollar opportunity with the army for situational awareness. Maybe take us through that opportunity and how you are situated in terms of competitive and then separately talk about the data center opportunity, which I think is more of a market opportunity as opposed to one customer.

Yeah, thank you. So, highlighting both of those in our open letter, we wanted to really identify based on questions and interest we've gotten where there may be transformative opportunity in the pipeline of values that we are addressing. And so the first one was a program with the army where we had developed under customer funded NRE a rugged solution to bring processing switch capability and sensor processing capability to combat vehicle architectures for the US Army for a specific application in moving video or camera video from around the vehicle into the work centers workstations inside the vehicle. So, that system was delivered at the end of 2024. It's been under evaluation and test in the army evaluation lab and under review from multiple combat vehicle types inside the US Army. US Army will evaluate that should they determine a final requirement for that. And then they would transition to an acquisition and fielding plan across any combat vehicles. We know the US Army doesn't have tens or hundreds of vehicles. They have thousands of vehicles. So, for us, that would represent a transformative opportunity in that buying thousands of a system like that would create opportunities on the order of hundreds of millions of dollars across a three to five year period and then long term. So, support on the back end of that. So, transformational opportunities like that again, nothing certain or fielded or in the in the budget yet. But the fact that an existing solution is already under test and evaluation puts us in a good position to help influence that and move it forward. Similarly, on the commercial side, we've we've launched and noted some recent products in our GPU expansion product line where we achieve significantly high density of GPUs in a single expansion chassis. And what we're seeing is for some areas of the data center market where people have a smaller footprint or looking for mobile or extended data center capabilities. This high density of GPUs is highly attractive to be able to extend off of a single server rather than purchasing multiple servers. And so this market opportunity is we've been seeing growing increase in terms of its demand and application across multiple multiple vendors and customers. And so we see a similar market opportunity there that we believe could lead to multi year contracts for those products.

One last call in terms of that army contract. Is it other solutions being evaluated or is it just an OSS solution with your partners? And then the book to bill, I was confused. I thought it was two point zero based on 10 million over the revenue for core OSS. How did you get to one point three three?

Yeah, on the first one, Brian, right now we're the only solution for the US Army. They're evaluating on this on this system in part because they weren't able to solve the concept with the prior architectures that they were using the switch to enterprise class architecture. A lot allowed them to meet their system requirements and processing and latency. So that was very positive for us. So we're the only company right now with a system that achieves those those directives. And we have also been now been able to implement a few of the noted standards that the army's looking for in their network architectures. So our system is one of the first that embeds that into the overall processing architecture. So we feel good about our position there in terms of in terms of that. And then the book to bill ratio, the one, the two point. Oh, was for this quarter. So you're correct. It was the OSS segment bookings against the revenue and the one point three three is the OSS segment book to bill ratio for the trailing 12 months.

So we go back and. Yeah,

yeah, yeah, thank

you so much.

Thank you, Brian.

Thank you. The next question comes from Scott Cyril with the Roth capital. Please go ahead.

Taking my questions. Hey, Mike, maybe just to dive in on the data center opportunity. Can you give us some timeline that might be attached that when we would see the first revenues from that and then maybe following up on some of the tariff driven partnerships with international players. What's the timeline associated with that? How actively engage? When can we start to see that impacting the pipeline and ultimately the PNL?

Yeah, great. Thanks guys and appreciate the call and the question. So on the on the on the. Data center stuff of the expansions that are talking about. So we've we've had a consistent expansion capability there. So we have been delivering some of our existing standard products in our what we call our for you P product line range. We have also announced a 6U unit that that increases the density and of GPS and those expansions. That product is available now this year. So what we're looking to extended sales across both the for you and 6U product line in the second half of the year. So we have some existing contracts. We announced one last year with a with a customer that we would look to pull down orders in the second half of the year with these product lines against there. And then we have active engagements with multiple customers now going on to look to place orders on those systems as they would roll into production viability here in the Lake Q2 and into Q3 Q4. On the on the on the tariff and adjustment question for manufacturing. So we're in discussions with a couple companies, one particularly further along with the with the decision to move forward with that concept. Again, we would probably see something late Q2 early Q3 is where we start generating revenue from that concept.

Very helpful. Thank you. And maybe shift gears over to AI for a second. You've been working with some different vendors on software partnerships to try and develop more of that channel. Could you give us an update on that front? What you're seeing? How active things are on that front?

Yes, continue, continue down those paths actively engaged. Again, we we meet with we meet with AI companies generally for two reasons. One, a lot of AI companies are looking to standardize their AI processing on set of hardware. And then secondly, it allows us to identify more integrated solutions we can offer our offer and customers so we can deliver more fully fully capable system. So we continue that effort of finding new opportunities, developing existing ones. We've we've reached some capabilities where we've expanded our ability to work with customers to actually test and validate their AI or processing algorithms and actually provide them an output on optimizing their software on a hardware platform specific to their application. We've engaged with a number of companies on the first model where they're looking to standardize their processing on our hardware. We have a couple extended relationships there that we're hoping could lead to product releases and program positions and it'll back half of this year and into next year.

Okay,

great. Thank you. And lastly, if I could just just two more the current government discretionary budgets. I'm wondering how that impacts you or doesn't impact you. I'm sure you've had an opportunity to peruse it in terms of your program exposure. And also in terms of customer funded opportunities, I'm wondering if there's a rule of thumb to look at that in terms of the multiplier effect. Once you look out then two years in terms of what 500,000 of customer development funded translates into in terms of products longer term.

Yep, sure. So, um, watching the budgets on the defense side for this year, you know, the government is still working on our under a full year of continuing resolutions. It does allow for program new starts. So there's there's still a little bit of a greatness, if you will, inside the defense budgets and how they're allocating their discretionary budgets across that. So it's requiring a little bit more work and effort rather than normal advised budgets would roll down through program element line numbers specifically to end programs on new starts. So a little bit of a little bit of extra work around the D. O. D. To move budgets and elements out. We're seeing some of that is resulting in delayed program awards this year. So we're we're working through that. But we are seeing now that the 2026 budget cycle is accelerating back to on schedule. It had a slow start. But in the last six weeks, the efforts inside the process have have accelerated to work to get the 2026 budgeting plan back on track. So, um, hopeful that that will will prove to make 2026 a a normal year, maybe even see a budget without a continuing resolution. We could only hope. And then the last part on customer funded leading the program. I think a great way to look at that is maybe to look at an example program that we have have had the company for a number of years now. The P eight program, you know, that program we started with with a small dollar value, like around a million dollar customer funded development effort lasted about a year and in development and then led itself into low rate initial production, full rate production. And it's now transitioning into a sustainment support that program we've generated about 40 million dollars in revenue since it started in 2018. And we just signed a five year extension for sustainment and support on that on that program. So that's kind of representative of how we see platform positions, especially on D. O. D. Platforms and the scalability of size of those would just depend on the overall compute system and or the number of platforms in the inventory for that.

Gotcha. Very helpful. And lastly, if I could just on the gross margins for the O. S. S. Front, certainly a high number this quarter. I'm just wondering if you could remind us in terms of what was the upside, because it looks like you're talking about 38 to 40% is or high 30s is the ongoing number. But customer funded R and D is in there as well. So I'm wondering what the O. S. S. component without customer funded programs looks like on a sustainable ongoing basis. Thanks.

Yep, so, you know, overall, we continue to expect gross margins in the mid to upper 30% range. The way I would model that is is product gross margins in the low high 30s to low 40s and then customer funded development in the 15 to 20% range.

Thanks so much. Thanks, Scott.

Thank you. The next question comes from Eric Martin. Newsy with Lake Street. Please go ahead.

Yeah, I wanted to better understand the, the near term market conditions that pushed out the, the first half orders. Can you give me either an example or maybe just overall? Industry commentaries that helps better understand that, because I had flat for Q1 and obviously that was a misfire on my model.

Yeah, Eric. Good morning. Thanks for the question. Yeah, I guess a sample of maybe on both sides really on the Department of Defense side. As I mentioned, when the year started, we government still struggling with budgets. And so it wasn't until the end of Q1 before they settled in on a full year continuing resolution. So we just saw a delay in some DOD programs that were smaller in value, but were opportunities to book and ship in the quarter. So those those have delayed into Q2 or Q3 for this year. And then the commercial side, we had a, we had an existing contract and that we had planned a couple deliveries on in the quarter. That the customer decided to realign with their end customer later in

the year, you know, back half of Q2 into Q3.

Okay.

And then the, the six and a half million dollar contract that you got from the leading defense and tech company. Was there a large element of the design work first? If you could give me just kind of a size and term that you've been working. If that was the case.

Yeah, so this one came with a little bit less customer funded NRE as a fractional amount of that value. Some modest adjustments to some standard product that we have similar to what they've used in the past contracts with that we've done with them. So this one is the majority of it really is production. And as Dan noted, we'll

be able to deliver all of that this year.

Okay. And then the,

you talked about a more profitable product mix for the higher margin data storage units and componentry. Any verticals that we should be better to better understand that? Was that a defense? Was that enterprise side? A mix of both?

Yeah, the, the, the high margin data storage products were for a defense customer. But in general across defense and commercial, we see variability. But overall, those two markets, we target similar margins for products.

Gotcha. Okay. And then the,

it's just, it is a pretty steep ramp in the second half. Do we have any kind of just recent history with where there's complete follow through here? Because if bookings was revenue, we'd be rolling in it. It just seems like it's a log jam where it's about to burst upon us here. So just trying to get a better sense for your confidence in the second half.

Yeah, yeah, a little bit of a log jam into the second half is, as we noted, the forecast and the view we have into the year still gives us confidence to achieve the plan. The, we had a strong Q4 in terms of revenue in 2024. So the, the revenue values and the shipment values of what we need to do in Q3 and Q4 are all, are all definitely achievable. We have, we have more than enough staff, more than enough capacity to, to be able to achieve that amount of revenue and shipments in those two quarters. So I'm not worried about availability or capacity to meet that. We've got insight and view. We can continue to manage the supply chain. So as long as we can maintain on the bookings run with the identified customers and plan in the forecast, we should still be able to

achieve our objectives.

Okay. Lastly, you did talk about tariffs and actually having a potential positive impact on the revenue side. Just curious on the supply chain side, anything even on the margin where you guys maybe are sourcing something from overseas where you might not be able to get that domestically?

Yeah, because of the fact we're doing commercial defense work, we've got a fairly diversified supply chain inside and outside the U.S. and in both component supply and in contract manufacturing for board bills and all. So while our days for our procurement team have gotten much busier as they try to work the open market on where to, where to source supply, we've done, they've done a pretty admirable job in managing tariffs and managing supply chain and where we move things in from. And then it's long been a policy in the terms and conditions of the work that we do for OSS that we pass on tariff impacts to customers. And we have not, we have not seen a pushback on that as we work through the system. But to be fair, we've done a very good job at working supply chain and keeping tariff impacts to a minimum and within a range that's been acceptable to our customers.

Got it. Thanks for taking my question.

Thank you very much.

Thank you. There

are no further questions of this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.