Title

Presentation

One Stop Systems, Inc. misses on earnings expectations. Reported EPS is $-0.07 EPS, expectations were $-0.04.

Operator: Good day, and welcome to the One Stop Systems First Quarter 2025 Conference Call and Webcast. At this time, all participants are in a 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 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 multiyear 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 or expectations will be achieved.

Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation 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 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.

Mike Knowles: Thank you, Angeline. Good morning, everyone, and thank you for joining today’s call. I’m pleased to report on the progress we made during the 2025 first quarter, highlighted by both year-over-year and sequential improvements in gross margin, stable year-over-year revenue and strong OSS segment bookings and demand trends. For the first quarter of 2025, consolidated gross margin increased year-over-year, 320 basis points to 32.6%, driven by a strong gross margin of 45.5% within our OSS segment. We also announced a single record contract award of $6.5 million with a large defense prime as well as new order multiyear relationship with an innovative medical imaging OEM and two renewals with a combined value of $6 million from existing U.S. Department of Defense programs.

As expected, near-term market conditions affected the timing of certain OSS segment orders anticipated for the first and second quarters of 2025. However, based on recent orders as well as future booking expectations, we believe we are on track to achieve our 2025 annual guidance, which includes consolidated revenue of $59 million to $61 million and EBITDA breakeven for the full year. We believe the second half of 2025 is setting up a period of growth and transformation, and I want to use my time to review our expectations for 2025 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 AI, machine learning, autonomy and sensor fusion at the edge.

Over the past two years, we have invested in an organization, technology and team, which has created the necessary platform to pursue a large multiyear pipeline of commercial and defense sales. We have a strong and growing pipeline of opportunities across leading defense organizations and advanced commercial enterprises that are looking for partners like OSS 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 position.

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 2024 to transition to orders and sales in 2025 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 as significant size, weight, power and cost advantages to competing solutions. In fact, our solutions are 350% faster, can run 28x the number of AI applications and have 130x 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 U.S. Department of Defense initiatives. On the commercial side, as we previously announced, we are further extending our relationship with the 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 sales 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 OSS solve additional customer problems and create opportunities to expand beyond just supporting prime contracts by delivering OSS products directly to end customers. As momentum builds, our expanding pipeline in recent awards reinforce our belief in the scalability and long-term value of our 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 and defense markets.

This creates an attractive business model where in any given year, we have platform programs in development, others transitioning or in production and 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 PCIe 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 award 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 Bressner segment have been in line with our targets and Bressner remains on track to achieve consistent sales and profitability for 2025 compared to last year’s results.

We do not currently expect tariffs to have a material impact on our operations or cost structure. In fact, we are seeing potential in both our OSS and Bressner segments. In the OSS segment, tariffs 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 U.S. markets. Additionally, we are exploring partnerships with international companies seeking U.S.-based manufacturing options, leveraging our excess capacity and technical capabilities. Within our Bressner 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 Bressner 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 Bressner and OSS products in 2026 and beyond. Indications are that while budgets are likely to show a 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 for 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 multiyear 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 defense and commercial innovation, customers are turning to trusted partners with proven expertise in 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?

Dan Gabel: 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 focus 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 gross margins of 45.5% in the quarter demonstrates 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 3.1% year-over-year decrease in consolidated revenue was a result of approximately $330,000 of lower OSS segment revenue and $66,000 of lower Bressner segment revenue. As we mentioned last quarter, we expect revenue and profitability to improve at a higher rate in the second half of 2025. Consolidated gross margin in the first quarter expanded to 32.6% compared to 29.4% 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 45.5% compared to 34.2% for the same period a 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 $212,000 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 Bressner 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 19.2% 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 GAAP net loss of $2 million or $0.09 per share compared to a net loss of $1.3 million or $0.06 per share in the prior year quarter. The company reported a non-GAAP net loss of $1.4 million or $0.07 per share compared to a non-GAAP net loss of $931,000 or $0.04 per share in the prior year quarter.

Adjusted EBITDA, a non-GAAP metric was a loss of $1.1 million compared to an adjusted EBITDA loss of about $500,000 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.

Operator: Thank you. [Operator Instructions] The first question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Brian Kinstlinger: My first question relates to the visibility on the $30 million of core OSS revenue expected 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?

Mike Knowles: Yes, it’s a little bit of mix of both, Brian. Thanks for the question. As we noted in the comments, right, 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.

Brian Kinstlinger: Okay. And then the announcement for the 80 best-in-class high-performance servers for $6.5 million, 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?

Dan Gabel: Yes, Brian. 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.

Brian Kinstlinger: Great. And then in terms of the pipeline, can you share with us maybe how many opportunities are of size and maybe $20 million? And will any be adjudicated this year?

Mike Knowles: Yes. Brian, I don’t have an exact number here in front of me, but the pipeline is made up of a number of opportunities and programs that weigh in value from a 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 build out of 2025 into 2026, that we’ll start to see more program values representative of our most recent announcement.

Brian Kinstlinger: Great. Lastly, maybe touch on in your open letter, I didn’t hear you talk about it. You discussed a $200 million opportunity with the Army for situational awareness. Maybe take us through that opportunity and how you are situated in terms of competitiveness? And then separately, talk about the data center opportunity, which I think is more of a market opportunity as opposed to one customer.

Mike Knowles: Yes. Thank you. So highlighting both of those in our open letter, we wanted to really identify based on questions and interest we have 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 U.S. 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 labs and under review from multiple combat vehicle types inside the U.S. Army.

U.S. Army will evaluate that. Should they determine a final requirement for that, then they would transition to an acquisition and fielding plan. Across any combat vehicles, we know the U.S. 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 to support on the back end of that. So transformational opportunities like that. Again, nothing certain or fielded or 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 launched and noted some recent products in our GPU expansion product line, where we achieved 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 vendors and customers. And so we see a similar market opportunity there that we believe could lead to multiyear contracts for those products.

Brian Kinstlinger: Just one last follow-up. In terms of that Army contract are 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 2.0 based on $10 million over the revenue for core OSS. How did you get to 1.33?

Mike Knowles: Yes. On the first one, Brian, right now, we’re the only solution for the U.S. Army, they’re evaluating 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 allow 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 directives. And we have also now been able to implement a few of the noted standards that the Army is 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 that.

And then the book-to-bill ratio, the 2.0 was for this quarter. So you’re correct, it was the OSS segment bookings against the revenue. And the 1.33 is the OSS segment book-to-bill ratio for the trailing 12 months. So we go back and took – yes.

Brian Kinstlinger: Thank you so much.

Mike Knowles: Thank you, Brian.

Operator: Thank you. The next question comes from Scott Searle with ROTH Capital. Please go ahead.

Scott Searle: Hey Mike, maybe just to dive in on the data center opportunity. Can you give us some time line that might be attached to that when will we see the first revenues from that? And then maybe following up on some of the tariff-driven partnerships with international players, what’s the time line associated with that? How actively engaged? When can we start to see that impacting the pipeline and ultimately, the P&L?

Mike Knowles: Yes. Great. Thanks, Scott, and I appreciate the call and the question. So, on the data center stuff of the expansion that I was talking about, so 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 4UP product line range. We have also announced a 6U unit that increases the density of GPUs and those expansions. That product is available now this year. So we’re looking to extended sales across both the 4U and 6U product line in the second half of the year. So we have some existing contracts we announced one last year with a customer that we would look to pull down orders in the second half of the year with these product lines against theirs 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 late Q2 and into Q3 and Q4.

On the tariff and adjustment on the question for manufacturing. So we’re in discussions with a couple of companies, one particularly further along. 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.

Scott Searle: Okay. Very helpful. Thank you. And maybe to 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 and how active things are on that front?

Mike Knowles: Yes. Continue down those paths actively engaged. Again, we meet with AI companies generally for two reasons. One, a lot of AI companies are looking to standardize their AI processing on a set of hardware. And then secondly, it allows us to identify more integrated solutions we can offer end customers so we can deliver a more fully capable system. So we continue that effort of finding new opportunities, developing existing ones. 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 of extended relationships there that we’re hoping could lead to product releases and program positions in the back half of this year and into next year.

Scott Searle: Okay. Great. Thank you. And lastly, if I could, 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 prove 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?

Mike Knowles: Yes. Sure, Scott. So watching the budgets on the defense side for this year, the government is still working under a full year continuing resolution. It does allow for program new starts – so there’s still a little bit of grayness 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 advise budgets would roll down through program element line numbers specifically to end programs on new starts. So a little bit of extra work around the DoD to move budgets and elements out. We’re seeing some of that is resulting in delayed program awards this year. So 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 accelerated to work to get the 2026 budgeting plan back on track. So hopeful that will prove to make 2026 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 to program. I think a great way to look at that is maybe to look at an example program that we have – had in the company for a number of years now, the P-8 program. That program we started with a small dollar value, like around $1 million customer-funded development effort lasted about a year – in development and then let itself into low rate initial production, full rate production, and it’s now transitioning into sustainment support.

That program, we’ve generated about $40 million in revenue since it started in 2018, and we just signed a five-year extension for sustainment and support on that program. So that’s kind of representative of how we see platform positions, especially on DoD 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.

Scott Searle: Got you. Very helpful. And lastly, if I could, just on the gross margins for the OSS 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&D is in there as well. So wondering what the OSS component without customer-funded programs looks like on a sustainable ongoing basis? Thanks.

Dan Gabel: Yes. So overall, we continue to expect gross margins in the mid to upper 30% range. The way I would model that is product gross margins in the low – high 30s to low 40s and then customer-funded development in the 15% to 20% range.

Scott Searle: Great, thanks so much.

Dan Gabel: Thanks Scott.

Operator: Thank you. The next question comes from Eric Martinuzzi with Lake Street. Please go ahead.

Eric Martinuzzi: Yes. I wanted to better understand the near-term market conditions that pushed out the first half orders. Can you give me either an example or maybe just an overall industry commentary that helps better understand that because I had flat OSS for Q1, and obviously, that was a misfire in my model?

Mike Knowles: Yes, Eric. Good morning. Thanks for the question. I guess example maybe on both sides, really on the Department of Defense side. As I mentioned, when the year started, we – government was 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 we’re opportunities to book and ship in the quarter. So those have delayed into Q2 or Q3 for this year. And then on the commercial side, we had an existing contract and that we had planned a couple of deliveries on in the quarter that the customer decided to realign with their end customer later in the year, back half of Q2 into Q3.

Eric Martinuzzi: Okay. And then the $6.5 million 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?

Mike Knowles: Yes. So this one came with a little bit less customer-funded NRE. It’s 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.

Eric Martinuzzi: Okay. And then you talked about a more profitable product mix for the higher margin data storage units and componentry. Any verticals that we should be – to better understand that. Was that a defense, was that enterprise side, a mix of both?

Dan Gabel: Yes. 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.

Eric Martinuzzi: Got you. 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 is a 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.

Mike Knowles: Yes. Eric, a little bit of a log jam into the second half. As we noted, the forecast and the view we have into the year still gives us confidence to achieve the plan. We had a strong Q4 in terms of revenue in 2024. So the revenue values and the shipment values of what we need to do in Q3 and Q4 are all definitely achievable. We have more than enough staff, more than enough capacity 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 and the forecast we should still be able to achieve our objectives.

Eric Martinuzzi: 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?

Mike Knowles: Yes, Eric, because of the effect that we’re doing in commercial and defense work, we’ve got a fairly diversified supply chain inside and outside the U.S. in both the 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 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 impact to customers. And 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.

Eric Martinuzzi: Got it, thanks for taking my questions.

Mike Knowles: Thank you very much, Eric.

Operator: Thank you. There are no further questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.