One Stop Systems, Inc.

Good day and welcome to the One Stop Systems second quarter 2026 conference call and webcast. At this time, all participants are in a listen-only mode. Later, we 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 OSS 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. These statements are based on the company's current beliefs and expectations and should not be regarded as a representation by OSS that any of its plans and expectations will be achieved. Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Legislation Reform Act of 1995 and that OSS desires to avail itself of the protections of the safe harbor for these statements. 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, current reports on Form 8-K, and recent press releases. Please read these reports and other future filings that OSS will make with the SEC. OSS disclaims 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 OSS President and CEO, Mr. Mike Knowles. Please go ahead, sir.

Thank you, Sylvie. Good morning, everyone, and thank you for joining today's call. We believe our second quarter performance builds upon the strong start we established in the first quarter and demonstrates the continued success of our multi-year strategic growth plan and growing demand for rugged enterprise class compute at the edge. In fact, our year-over-year growth rate in revenue for the second quarter accelerated from what we delivered in the first quarter and we achieved the strongest quarterly bookings result in our history. Before discussing our second quarter performance in greater detail, I want to remind everyone that our second quarter results reflect the opportunistic sale of our wholly owned subsidiary, Bresner, in December of 2025 for proceeds of $22.4 million. As a result, Bresner's historical financial results are now reported as discontinued operations, and the results we are discussing today reflect the performance of the remaining core OSS business. Today, OSS is a pure-play provider of ruggedized AI and high-performance compute platforms for edge applications. We entered 2026 as a more focused and scalable company, fully aligned around delivering market-leading enterprise-class compute solutions to defense and commercial customers. We believe our performance during the first half of 2026 is already demonstrating the benefits of this transition and reinforcing the earnings potential of our go-forward strategy. Looking at our operational performance in the second quarter, we delivered strong results with revenue increasing 62.3% year-over-year to $9.3 million, reflecting growth across both our defense and commercial businesses. Second quarter revenue growth was primarily driven by increased sales of liquid-cooled server products to a medical imaging OEM supporting a breast cancer screening application. Sales of short-depth server products engineered for military applications aboard Naval Vessels and Aircraft, and Sales of Compute Products Supporting Autonomous Construction and Mining Equipment. Importantly, each of these programs began with development, engineering, and qualification work performed over the past several years and has now advanced into larger-scale, multi-year production and deployment orders. We are also seeing meaningful progress in expanding our customer base with multiple new customers contributing to revenue in Q2 2026. We believe the combination of an expanding customer base and a growing number of large multi-year programs provides evidence that our strategic plan is working. These positive trends have also built longer duration relationships that we believe are providing greater visibility into our business with more predictable recurring revenue. For the second quarter of 2026, customer funded development was also an important contributor to our revenue growth. increasing 145% year-over-year to approximately $944,000. These engagements allow us to work closely with customers early in the development of next generation platforms, designing and qualifying purpose-built compute solutions for their specific applications. While the timing and ultimate production opportunity associated with each engagement can vary, we believe this work strengthens our customer relationships, expands our technical position within their platforms, and creates a pathway to potential future production revenue. During the quarter, our revenue mix included a higher level of customer-funded development, early prototype and low-rate initial production activity. These earlier stage programs generally carry lower initial gross margins due to smaller production volumes and higher levels of engineering and manufacturing activity. As these programs mature and transition into higher volume production, we believe they have the potential to generate both greater revenue contributions and improve gross margins over time. Progression from development to production that is contributing to our revenue growth is also evident in our strong bookings performance. During the quarter, we generated over $15 million in new bookings that we expect to deliver in 2026 and 2027. Year to date, we have secured more than $30 million in new bookings, resulting in a book-to-bill ratio of approximately 1.7. Bookings for both second quarter and year-to-date periods are record amounts for the company, and to put this performance into perspective, our bookings through the first six months of 2026 nearly equaled our total product revenue for the full year of 2025. Second quarter bookings were driven by several important program wins across both defense and commercial markets. First, we announced an $8.4 million initial contract from a leading defense and technology solutions company. We expect the first shipments to commence in 2026, and to contribute to revenue throughout the year. We believe this platform has the potential to contribute approximately $44 million in total revenue over the next four years. Second, we received an initial order valued at over $500,000 from a renewable energy technology company that focuses on generating clean energy for data center applications. Follow-on orders are expected to exceed $1 million year-over-year and anticipated to scale to $10 million opportunity over the next five years. Since announcing the initial order in April, we received an additional order of nearly $1 million as the customer prepares for the commercial launch of its renewable energy-powered data center solution. Third, we received a $1.4 million order for short-depth servers from a government systems integrator. This order from the second quarter was on top of a nearly $600,000 order in the first quarter. Our relationship with this customer is expanding and we expect continued demand into the future. Subsequent to quarter end in July, we announced a $2.2 million initial production order from a commercial robotics customer. This order followed an initial purchase order received in February and marked the successful transition of the program from prototype development into production deployment. Based on the customer's anticipated deployment plans, we believe this program could generate cumulative orders of approximately $10 million to $15 million over the next five years. Taken together, these program wins reflect a combination of expansion within existing customer platforms and the addition of new customers across defense and commercial markets. They also demonstrate a clear shift in the size, duration, and composition of our bookings. As I discussed in our first quarter call, our orders are becoming larger, more programmatic, and increasingly connected to multi-year deployments across a broader customer base. Since 2023, our average order size has nearly tripled. and during the past 12 months, we have added a growing number of programs with meaningful multi-year revenue potential. In fact, to date, OSS is supporting 14 programs with estimated multi-year revenue potential exceeding $42 million compared to just one program three years ago. Supporting the momentum we are seeing in revenue and bookings is a continued expansion and maturation of our pipeline of opportunities. We continue to take steps to build a more disciplined pipeline aligned with our defense and commercial go-to-market strategies, technology roadmap, and applications that we believe can scale into meaningful multi-year production programs. Within the defense market, we are pursuing a growing number of opportunities within the U.S. Department of Defense, research laboratories, and defense organizations that are evaluating future compute architectures for advanced AI, sensor processing, autonomy, and situational awareness applications. These engagements position OSS early in the development lifecycle and provide opportunities to work alongside customers as they define requirements, test new technologies, and prepare next generation platforms for deployment. We are also advancing a new classified program opportunity and pursuing additional programs across the U.S. Army, including applications that require high-performance compute and data processing in rugged and space-constrained environments. We believe this activity reflects growing awareness of OSS and increasing relevance of our enterprise-class compute capabilities across next-generation warfighting platforms. In parallel, we are seeing encouraging customer interest in commercial and defense applications designed to harness our PCIe Gen 6 architecture. PCIe Gen 6 represents an important advancement in data transfer performance and is expected to support increasingly demanding AI, machine learning, and sensor-intensive workloads. We are actively engaged with prospective customers on initial Gen 6 opportunities and expect the first customer programs to emerge in the near future. Underlying this pipeline growth are strong and durable market dynamics. AI and machine learning and sensor fusion workloads are increasingly moving beyond traditional data centers and into vehicles, aircraft, ships, and other edge environments. The combination of higher revenue, strong bookings, and stable gross margin provide OSS with greater capacity to invest in people, technology, and sales capabilities needed to support our continued growth. An important personnel addition during the quarter was Paul P.K. Averna, who joined OSS as Vice President of Business Development and Growth. P.K. brings more than 30 years of experience across defense, commercial technology, and mission critical applications. He will focus on expanding our market reach, deepening engagement with defense and commercial customers, and helping convert our growing pipeline into new development and production opportunities. PK will also assume the responsibility previously held by Robert Kalebaugh, our Vice President of Sales, who intends to retire following several years of dedicated service to OSS. We sincerely thank Robert for his leadership and significant contributions to the company. Robert will remain engaged with OSS on a part-time consulting basis, helping facilitate a seamless transition and supporting our continued growth initiatives. Given PK's extensive industry experience, familiarity with our team, and understanding of our markets, we believe he is a natural successor who will help us maintain our momentum and continue advancing our growth strategy. We are also continuing to invest in advancing our technology platform to support the next generation of AI-enabled systems operating at the edge. Research and development remains a critical component of our strategy, and we are increasingly working alongside customers through customer-funded development programs to design purpose-built compute architectures for emerging applications. These development programs position OSS early in the lifecycle of next-generation platforms, deepen our customer relationships, and create a potential pathway to future production programs. As we discussed earlier, a majority of our second quarter revenue and recent bookings can be traced back to internal research and development and customer-funded development efforts initiated two, three, or four years ago that have now progressed into deployment and production. That history reinforces why we intend to continue growing customer-funded development activity and investing in our technology roadmap during the second half of the year. The development work we undertake today is intended to create the next generation of test and pilot programs, production deployments, sustainment revenue, and future technology refresh opportunities. Following quarter end, we reached an agreement to resolve a commercial dispute involving a former customer relationship related to events dating back several years ago. While OSS disputed the claims, after evaluating the relevant business, financial, and other considerations, the company determined that resolving the matter for approximately $6.25 million was in the best interest of the company and its shareholders. The financial impact of this settlement is reflected in our second quarter fiscal 2026 results. Settlement does not constitute an admission of liability, is unrelated to our current operations and growth programs, and fully resolves the dispute. Importantly, we believe this resolution allows the management team to remain focused on executing our strategy and supporting the significant opportunities we see across our defense and commercial markets. I also want to briefly address a housekeeping matter, an upcoming renewal of our shelf registration statement, which is scheduled to expire later this month. Maintaining an effective shelf registration statement is a routine element of prudent corporate and financial planning and provides OSS with appropriate flexibility as we execute our strategic plan. The renewal itself should not be viewed as an indication that the company has decided to undertake a financing transaction. Overall, we continue to believe OSS is well-positioned for long-term sustained growth, and the first half of 2026 has exceeded our initial expectations. As a result, based on our current performance and business outlook, We are increasing our full-year 2026 revenue growth guidance. We now expect revenue growth in the range of 25% to 30%, up from our prior full-year guidance of 20% to 25%. Our higher revenue expectation is supported by our strong bookings, growing pipeline of platform opportunities, increasing in customer engagements, higher customer-funded development activities, and the continued transition of development programs into production deployments. We continue to expect full-year gross margins of approximately 40%, reflecting product mix and an increasing contribution from customer-funded development programs. At the same time, we expect to generate positive EBITDA and adjusted EBITDA, inclusive of planned strategic investments in personnel and research and development, to support continued growth and technology leadership. We encourage that 2026 has started stronger than we initially expected. with accelerating revenue growth, record quarterly and year-to-date bookings, and continued progress converting multiple development programs into larger multi-year production opportunities. With a strong balance sheet, expanding customer relationships, and a growing pipeline driven by the adoption of AI-enabled systems at the edge, we believe OSS is well positioned to build on this momentum through the second half of the year and beyond. Our strengthened financial position also provides the flexibility to continue investing in our people, technology, and go-to-market capabilities while selectively evaluating strategic acquisitions that could complement our technology platform, expand our customer base, and enhance our long-term growth opportunity. Finally, I want to thank our entire team for their dedication, innovation, and relentless focus on delivering results for our customers and shareholders. So with this overview, I'd like to turn the call over to Dan.

Thank you, Mike, and good morning to everyone on today's call. The performance of the business exceeded our expectations in Q2, reflecting both strong customer demand and disciplined operational execution. Q2 results reflect a number of key accomplishments. First, we achieved accelerated top line growth of 62%. Second, we achieved record bookings of $15.1 million for the second quarter and $30 million year to date. Third, revenue and bookings have diversified across a growing number of programs, customers, and end markets, reflecting growing adoption for our rugged enterprise-class compute solution. And fourth, profitability, excluding the legal settlement charge Mike previously mentioned, is in line with our 2026 expectations, reflecting operational improvement and prudent expense management. Currently, variation in gross margin reflects a higher mix of customer-funded development and early prototype and first-time production awards. We believe this company has never been in a stronger position and with a strong cash position, a solid backlog and a robust pipeline, we believe we are on track to achieve our expanded 2026 revenue guidance and to execute on our growth and profitability objectives. Now for a quick overview of Q2 2026 financial performance. For the second quarter, we reported total revenue from continuing operations of $9.3 million compared to $5.8 million last year. The 62.3% year-over-year increase in total revenue was primarily due to higher sales to a medical imaging OEM of liquid-cooled server products to support a breast cancer screening application as the customer moved from initial prototypes in 2025 to production in 2026. sales with a new customer for short-depth server products engineered for military applications onboard naval vessels and aircraft, and sales with another new customer for compute products to support autonomous construction and mining equipment. Gross margin from continuing operations in the second quarter was 39.1%, compared to 41.3% in the prior year quarter. The 2.2 percentage point decrease from the prior year was primarily driven by product mix, including a higher level of customer-funded development, early prototype, and low-rate initial production activities, partially offset by more favorable manufacturing absorption due to higher production volume and higher usage of reserved inventory to fulfill customer orders. We continue to expect some level of variability in gross margins quarter-to-quarter based on absorption, product mix, and program lifecycle. On a sustaining basis, we continue to target margins in the mid-30s to mid-40s. We expect full-year 2026 gross margins of approximately 40%. Total Q2 operating expenses from continuing operations increased 129.8% to $11.3 million and included the $6.25 million legal settlement charge. Excluding this charge, total operating expenses from continuing operations increased 2.9% to $5.1 million driven primarily by higher general and administrative and marketing and selling expenses partially offset by lower R&D expenses. Not including the legal settlement charge, operating expenses were 54.3% of total revenue compared to 85.5% in Q2 of last year. The 31.2 percentage point year-over-year improvement reflects significant operating leverage on higher revenue levels. For the second quarter, the company reported a gap net loss from continuing operations of $7.3 million, or $0.29 per share, compared to a net loss from continuing operations of $2.5 million, or $0.11 per share in the prior year. The company reported a non-gap net loss from continuing operations of $0.2 million, or $0.01 per share, compared to a non-gap net loss from continuing operations of $2 million, or $0.09 per share in the prior year quarter. Adjusted EBITDA loss from continuing operations, a non-GAAP metric, was $0.3 million compared to an adjusted EBITDA loss from continuing operations of $1.8 million in the prior year's second quarter. Turning to the balance sheet and statement of cash flow. Our balance sheet remains strong with $31.4 million of total cash, cash equivalents, and short-term investments, and no debt outstanding at June 30, 2026. Working capital was $38.1 million at June 30, 2026. compared to $45.3 million at December 31, 2025. For the six months ended June 30, 2026, we used $629,000 in cash from continuing operations compared to net cash used in continuing operations of $2.8 million in the prior year period. The use of cash during the 2026 six-month period was primarily driven by a $7.1 million investment in inventory in the second quarter to support expected sales growth as well as our efforts to prudently navigate supply chain constraints affecting certain components, including memory. As Mike mentioned, based on higher than expected sales and bookings, we're increasing our revenue guidance for the year from a prior range of 20% to 25% to a new range of 25% to 30%. We continue to expect full year gross margin of approximately 40% and Positive EBITDA for the full year, inclusive of planned strategic investments in personnel and research and development to support continued growth in technology leadership. As we enter the third quarter, we remain focused on disciplined execution, including managing our supply chain to convert customer demand into revenue, profit and cash. We also remain focused on continuing to drive growth by investing in our technology, pursuing M&A opportunities and securing new platforms that may provide sustained multi-year revenue streams. This completes our prepared remarks. Operator, please open the call for questions.