One Stop Systems, Inc. (OSS) is a leading provider of specialized high-performance compute, high-speed switch fabrics, and storage hardware and software designed to target edge Artificial Intelligence (AI) and machine learning (ML) deployments. The company has undergone a significant transformation over the past year, shifting its focus from legacy media and niche enterprise customers to pursue emerging opportunities within the large and growing defense and commercial markets.

Leadership and Strategy

Under the leadership of newly appointed President and CEO Michael Knowles, OSS has made substantial progress in building a strong sales organization, expanding its 5-year unfactored pipeline to over $1 billion, and entering new multi-year and large-scale platform-based sales opportunities with new and existing customers. Approximately 70% of the company's current pipeline is comprised of platform opportunities, which management believes will help contribute predictable multi-year revenue and backlog.

Financials

In the first quarter of 2024, OSS reported consolidated revenue of $12.7 million, a 24.6% year-over-year decrease primarily due to the timing of orders from a large defense customer and the discontinuation of sales to a former media customer. Despite these headwinds, the company's consolidated revenue, gross margin, and EBITDA met or exceeded management's plans for the quarter.

Segment Performance

The OSS segment, which operates in the United States and focuses on the design and manufacture of high-performance rugged edge processing, compute, storage, and connectivity systems, saw a 35.9% year-over-year decline in revenue to $5.5 million. This was largely attributable to the discontinuation of sales to the former media customer and a reduction in revenue from a defense contract for data storage units. However, the company experienced approximately $2 million in incremental revenue from an existing aerospace customer and $600,000 in additional revenue from an existing autonomous truck customer.

The Bressner segment, which operates throughout Europe as a system integrator of standard and custom all-in-one systems and components, reported a 12.7% year-over-year decrease in revenue to $7.1 million, primarily due to the discontinuation and delays of certain programs.

Profitability and Expenses

Consolidated gross profit for the first quarter was 29.4%, compared to 30.2% in the same period last year. This slight decline was primarily due to under-absorption of the company's production capacity, partially offset by a more profitable mix of revenue at the Bressner segment. Compared to the fourth quarter of 2023, consolidated gross margin decreased by 430 basis points, again due to manufacturing absorption.

Total operating expenses for the first quarter decreased 5.4% to $5 million, driven by the elimination of higher costs associated with the company's organizational restructuring and outside professional services, as well as reduced research and development expenses, which were partially offset by higher marketing and selling expenses.

Net Income and EBITDA

For the first quarter of 2024, OSS reported a GAAP net loss of $1.3 million, or $0.06 per share, compared to a net loss of $401,000, or $0.02 per share, in the prior-year period. On a non-GAAP basis, the company reported a net loss of $931,000, or $0.04 per share, compared to non-GAAP net income of $90,000, or $0.00 per diluted share, in the same period last year. Adjusted EBITDA, a non-GAAP metric, was a loss of $456,000 compared to a positive EBITDA of $633,000 in the prior-year quarter.

Liquidity

As of March 31, 2024, OSS had cash, cash equivalents, and marketable securities of $12.9 million and total working capital of $34.3 million, compared to $11.8 million and $30.6 million, respectively, as of December 31, 2023. The company had no borrowings outstanding on its $2 million revolving line of credit as of March 31, 2024, and December 31, 2023. Bressner's consolidated balance on its loans decreased from $2.1 million as of December 31, 2023, to $1.4 million as of March 31, 2024.

For the three months ended March 31, 2024, OSS generated $2 million in cash from operating activities, compared to $24,000 in the prior-year period. The company's improved working capital efficiency allowed it to pay down term loans at Bressner and increase its cash position.

Outlook

Looking ahead, OSS expects revenue of $13 million in the second quarter of 2024, which includes anticipated program delays from certain defense customers due to the prolonged government budget process and continuing resolution for fiscal year 2024, as well as softer European customer demand in the near term. However, the company believes it will continue to experience sequential revenue growth throughout the year, supported by a positive book-to-bill ratio as it executes on converting its growing opportunity pipeline. Additionally, European demand is expected to improve in the second half of 2024, and higher bookings in the company's core business are expected to help support year-over-year revenue growth and positive consolidated EBITDA in the coming quarters.

Conclusion

Over the past year, OSS has made significant progress in transforming its business model and positioning the company for long-term growth in the defense and commercial markets. The company's focus on building a strong sales organization, expanding its pipeline of platform-based opportunities, and providing more integrated solutions to its growing customer base has laid the foundation for sustainable growth. As OSS continues to execute on its strategic plan, the company is well-positioned to capitalize on the increasing demand for edge computing solutions and deliver value to its customers, employees, and shareholders.