Good day, and. welcome to the One Stop Systems second quarter 2024 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later you will have opportunity to ask questions. During the question-and-answer session. As a reminder, this conference is being recorded. As part of the discussion today, the representatives of OSS will be making certain forward-looking statements regarding the company's future financial and operating results as well as their business plans, objectives and expectations. These statements are based on the company's current beliefs and expectations. And should not be regarded as a representation of OSS, that any of these plans or expectations will be achieved. Please be advised that these forward-looking statements are covered under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. And that OSS desires to avail itself to the protections of the safe harbor for these statements. Please also be advised that the 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 from Form 10-K, subsequent quarterly reports on Form 10-Q and the recent press releases. These three is reports and the future filings that OSS will be making with the SEC. OSS disclaims any duty to update or revise its forward-looking statements except as required by the 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, John. Good afternoon, everyone, and thank you for joining today's call. I'm pleased with the progress we made during the 2024, second quarter as we continue transitioning our business to pursue emerging opportunities within large and growing defense and commercial markets. Second quarter performance was aligned with our plan as we continue to pursue opportunities in AI, machine learning and edge computing. Highlights for the 2024 second quarter include: Positive segment orders; which have outpaced quarterly revenue in three of the last four quarters; sequential revenue growth of 4.3%, expanded customer development revenue; and year-over-year OSS segment revenue growth of 8.3% as adjusted to exclude revenue attributable to a former media customer. We believe these favorable trends are positioning OSS for continued sequential revenue growth throughout the remainder of 2024. This year, we've been focused on two important objectives to take advantage of favorable market dynamics and the healthy pipeline we have developed. First, we are focused on converting our pipeline to orders in our OSS segment. And second, we are pursuing customer-funded development opportunities that we believe will establish OSS as an incumbent on platforms driving future multiyear production contracts. Across our global defense and commercial markets, customers are looking for technology partners like OSS to support their expanding needs for rugged enterprise-class compute solutions. Driving these trends are the emerging requirements for AI, machine learning, autonomy and sensor processing at the edge. The company's best-in-class hardware and software platforms bring the latest data center performance to harsh and challenging applications that we believe will allow OSS to take advantage of future -- current and future demand trends. Our underlying performance during the second quarter and first half of the year is aligned with our plan. We continue to believe 2024 is creating a strong foundation for…

Thank you, Mike, and good afternoon, everyone. Our 2024, second quarter results reflect the ongoing transformation of our business model and continued improvements in orders. As a reminder, the company is comprised of two operating segments. Our OSS segment operates in the United States that is primarily focused and involved in the design and manufacture of high-performance ruggedized edge processing, compute, storage and connectivity systems. Our Bressner segment operates throughout Europe and as a system integrator with standard and custom all-in-one hardware systems and components. Bressner also serves as a channel for OSS products to the European and Middle East markets. The following comments are based upon comparison of second quarter 2024 results to the second quarter of 2023. For the second quarter, we reported consolidated revenue of $13.2 million, which exceeds our guidance of $13 million. The 23.3% year-over-year decline in consolidated revenue was primarily attributable to a $3.2 million reduction in revenue related to our former media customer and a $1.3 million decline in Bressner revenue associated with slower economic activity in Europe. Lower second quarter revenue was partially offset by a new customer funded -- by new customer-funded development orders and revenue growth to new and existing customers. Looking at our OSS settlement and backing out the $3.2 million impact from a former media customer revenue at our OSS segment grew 8.3%, reflecting revenue growth from new and existing customers and the initial success adding new customer-funded development project. As Mike mentioned, in the first quarter of 2024, we started to separately disclose revenue and cost of sales line items associated with customer-funded development work in our financial statements. Customer-funded development typically represents non-reoccurring design and development work associated with the introduction of new products paid for by the customer, we expect customer funded development to grow…

Yes, sir. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you for waiting. We now have our first question. And this comes from the line of Tony Felling from Lake Street Capital. Please go ahead. Your line is now open.

Good afternoon, guys. This is Tony Felling filling in for Eric Martinuzzi. Appreciate the time for question. Yeah. So do we feel the company is properly staffed for a tighter focus on the defense customers?

Yeah, Tony, I do. And we've made some really, really good progress over the year to where we are. I think we're very well set to actually scale really well too with the people we have. So going back over the course of the year, just a quick summary. Of course, myself, joined the team, run commercial and defense, but defense background of 30-plus years. And then we brought on a VP of Sales and Marketing, Robert Kalebaugh. He and I worked for a decade together in the defense market. He has over 35 years' experience selling marketing into, not in the U.S. but global defense. And then as I mentioned in the script, we wanted to augment the team with experienced program managers who are used to running large-scale defense programs that have development, production, sustainment, fielding, et cetera. So we added two program managers to the staff. Each, who, in their own right, have experienced running $100 million-plus programs on the defense side. So we're really well situated there. In addition, as AS9100 certified company, and ISO 9001 certified. We're really well set in policy process quality, et cetera, to meet the standards required for defense and commercial. So I think we're in a really good place to execute against defense programs.

That's great. And I mean, do you think there's any risk in terms of revenue concentration with more focus on the defense customers going forward? Or is that kind of where we're headed?

Can you maybe repeat the front end of that, Tony?

Just revenue risk concentration -- with risk in terms of revenue concentration with more focus on defense customers?

Yeah, I don't think so. When I showed up to the company, we were primarily a larger value on the commercial side. So as we've kind of increased up to about a 50-50 ratio right now. As we're projecting and we're looking at our pipeline for the next three to five years, we see that same ratio in our pipeline. So I don't think we'll get a revenue concentration specifically that would become a risk. If anything, we've seen quite a deep success here in the first year in broadening out that revenue across more defense customers in addition to the commercial customers that we've had. So I don't see a risk in the concentration in defense.

Appreciate you taking the question. I’ll jump back.

Thank you.

Thanks, Tony.

Thank you. And we now have our next question, and this comes from the line of Brian Kinstlinger from AGP. Your line is now open. Please go ahead.

Great. Thanks so much. Can you speak to the government procurement environment? Are you seeing reasonable sales cycles? Are they still elongated? And then as we enter the new fiscal year for the federal government, which always brings a set of budget delays, what can the company do to ensure a steady flow of orders, if at all?

Yeah, Brian, the bane of existence, doing the business with the U.S. government and defense actually, it's the same in most global MODs also. So the interesting thing we've seen is the, I would say, the normal acquisition cycles from markets like I mentioned, the ISR market, their kind of technology road map time frames have generally been consistent. So not really concerned there in terms of where the markets are going, their needs. The biggest factor really has been -- and this has kind of been a trend over the last three to five years is, we're just seeing the procurement arms on the contract side, taking exorbitantly longer time to award and contract out the contracts that have already been selected as winners or awarded as sole source. And when I say extensions, right, it used to be, you might -- when a winner was selected or they're getting to the end of a procurement, it might be three to four weeks for them to process it's not uncommon now to see those sometimes take 12 to 14 weeks, which has really gotten a bigger impact now on timing. So we worked through some timing issues a little bit. That's probably our biggest risk. In terms of their demand, the market needs and the technology and the process they've gone through, those are still remain fairly consistent. And then as for next year, yes, we always get concerned about CRs. The benefit you get on winning programs the year prior is the CRs usually affect new starts. So the more we win this year, the more stability we have in business into next year. But we do keep an eye on the CRs. We work with customers, the best you can to plan for those. We did have two or three programs this year that were delayed close to seven months past when we thought they would hit just because of the longer CR we had this year and then the follow-on impact of them having to get the money appropriated. So the timing issues, definitely we have to deal with. Not much we can do rather than work closely with our customers, have things aligned and ready to go. We have seen some large primes. Have taking on considerations of funding smaller companies to protect schedules for awards they know they're going to get but are waiting on award. And then the last thing we've been doing is we use some of our lobbying efforts just to help facilitate programs and timing and movement. Ultimately, if it's a CR, right, there's not much we can do. But we do work through our lobbying office to help resolve our [Indiscernible] or put in place anything we can.

Great. And then when you talk about customer funded development, I assume growth in these programs are leading indicators of larger awards? And if that's the case, how do you think about the average time of a government -- a customer-funded development program? And how long might it take or typically take until it turns into something that I might call production or I'm not sure how to describe it?

Yeah. No, Brian, I think what you could -- it's safe to say now for the kinds of programs that we're bidding and we've started to win. We'll generally see the NRE or the development period beyond the order of 6 to 12 or 18 months. So we're in that 6 to 18-month range depending on the size and scope of the development in the system we're developing. Usually, at the end of that 18 months, you have the first fieldings. Usually, that's the low risk -- the risk, the lower rate initial production. That's usually the first 4, 5 or 6 prototypes, that's usually delivered within the first, kind of, 3 to 6 months after that development period. And then you roll into production period. That can usually run anywhere from 1 to 2 to 3 to 5 years and then usually have a technology refresh cycle that rolls up on the back end of that. So a perfect example is the Raytheon P8 program we have. There is initial front-end development. We've been on that program for the better part of 7-8 years now. And we're on, I think, our second or third tech refresh. We're just finishing some development right now for the next technology refresh update for our system there. So that's the benefit of getting in on these front-end customer development programs. So a little bit of a long answer, but between 6 to 18 months depending on the scope is what I would say is average for us on those front-end development.

Thank you. Last question I have, as we start to think about the revenue expectations that we like to think about from the OSS segment. Is there any way you can quantify either the first 6 months or the trailing 12 months book-to-bill?

Yeah. So we've been tracking this year. So the -- as I mentioned in the earnings call, right, the bookings have been outpacing revenue in that OSS segment by a little over 20%. Right? So that -- those would be like book-to-bill ratio --

1.2?

I'm sorry, Brian?

So 1.2 maybe -- So maybe like 1.2 in this last quarter is kind of the initial valuation?

Yeah. For the trailing 6 months. For this year, we've been probably a little bit closer to 1.26. The last quarter here was a little bit stronger. We were upwards of a little over 1.3. So we're starting to see some pickup on the booking side from a lot of work we initiated last year. And then we're forecasting that to see that continued positive book-to-bill ratio greater than 1 through the next two quarters based on where we see things. The biggest impact would be timing on some, making sure the awards come in as planned. But based on where we're sitting, the majority of the pipeline that we have bid right now, we're waiting on awards, is either competitions we've won or sole-source work. So we're feeling pretty confident in the scope and the value that we could potentially pull through. We're working the timing, as I mentioned, on processing it through the systems.

Let me squeeze one more in. Back to -- we're had to do the end of the government fiscal year, some businesses in the government obviously have a budget plus at the end of the year. Obviously, that also helps for the year after because you've had some budget this year and it protects you against CR. Do your business have a budget flush in September, generally, a benefit from that? Or is that not typically the case?

So not much last year. So generally, on the government side, when they get to year-end and they're trying to use up a budget at the end of the year. They will generally go for buying additional production buys or spare buys. So generally, if you're incumbent on a platform, you'll see a better return on those year-end sweep-up funds. So we've started to position ourselves in some of those programs, so we could start to take advantage of that. Because of some of the positioning work we did last year, the other way you can grab sweep up funds is, usually, if some labs or organizations are interested in some early technology fieldings so they can work them in their lab or try them in exercises. We can sometimes see those pickups. So we've expanded our relationships across the defense so that we try to pursue opportunities where we can for people who might want to buy something for their lab or for some experiment in anticipation of a program in the following year. So as we get a bigger market share in defense, sweep-up money will definitely be a lever that we can pull. We just need a little bit more penetration and incumbency across a few more platforms. And then we'll -- I think we'll start to see that really add more to our opportunities.

Great. Thanks for answering all my questions.

Thank you, Brian.

Thanks, Brian.

Thank you. And there are no further questions at this time, sir. Please continue.

Okay. John, thank you very much. We appreciate it.

Thank you. This concludes our conference for today. Thank you all for participating. You may now disconnect.