A Transitional 2023 Sets Up 2024 For Growth

A New $1.3 Million AI Transportables Contract

A Changing of the Guard; CEO Raun to Step Down

New Military Contract

Joe Gomes

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Technology

Hardware

One Stop Systems Inc.

Record Second Quarter Revenue
Similar to the first quarter of 2022, strong momentum by One Stop System&#8217;s media and entertainment customer and strong sales growth at Bressner resulted in record second quarter revenue of $18.3 million, up 23% from $14.9 million a year ago and above management&#8217;s $17.3 million expectation. The&nbsp;year-over-year growth included a record second quarter for OSS&#8217;s top customer in the media and entertainment space as their large gathering business, that was impacted significantly by COVID, starts to layer back in on top of their newer virtual product success. Their revenues are now greater than the pre-COVID environment. Core OSS revenue increased 18% to $10.7 million, representing 59% of current quarterly revenue. With the revenue from Bressner increasing 31% to $7.6 million, the segment is representing 41% of total quarterly revenue.&nbsp;
While the significant increase in revenue from the media and entertainment customer and Bressner is positive, the greater proportion of that lower margined revenue did impact overall gross margin, although gross margin dollars continued to increase.&nbsp;Gross profit in the second quarter of 2022 increased $548,000 to $5.2 million. The 33.0% gross margin for the core OSS business decreased 3.7 percentage points from the prior year. Bressner&#8217;s gross margin percentage also declined from 22.6% in the prior year to 21.9% in the second quarter of 2022, primarily due to increases in material and transportation costs. Overall gross margin was 28.4% for the quarter compared to 31.2% in the year ago quarter.
Operating expenses totaled $4.8 million, up 16% from $4.1 million in the same period last year. Operating expenses as a percentage of revenue, however, decreased to 26.2% compared to 27.7% in the same year ago quarter. The increase in operating expense dollars is the result of investments in pursuing the AI Transportables market, with marketing and selling expenses rising $246,000, R&amp;D up $244,000, and G&amp;A expenses increasing $173,000.
OSS reported net income of $323,000, or $0.02 per share, in the second quarter of 2022, compared to net income of $1.7 million, or $0.09 per share last year, which includes a one-time benefit from the forgiveness of a PPP loan. Non-GAAP adjusted net income totaled $871,000, or $0.04 on a per share basis, as compared to non-GAAP adjusted net income of $812,000, or $0.04 per diluted share in the same year-ago period.
 Adjusted EBITDA for the second quarter was $1.2 million, or a 6.5% margin, compared to $1.4 million, or a 9.3% margin, in the second quarter of 2021. For the first six months of 2022, adjusted EBITDA totaled $2.6 million, compared to $2.5 million in the year ago period.
New Business Opportunity Pipeline and Operational Highlights 
 
During the second quarter, One Stop Systems won four more $1 million + programs,&nbsp;including two in the AI Transportables space, one for a mobile shelter program and the other for an autonomous surface ship program. The other two program wins were in the commercial aerospace and medical imaging markets. OSS also added 5 new pending major programs during the quarter, two of these are AI transportable programs for telecommunications and military data storage units. Historically, pending major programs have a 60% or greater expectation of closing. OSS&#8217; current pipeline of pending major programs at the end of the quarter was 32 with 16 involving AI transportable applications.
In prior reports, we expanded on the Company&#8217;s opportunity in the autonomous truck and overall AI Transportable market. Following are some comments made by management on the earnings call that we believe add additional insight to the autonomous truck vertical.
<ul>
<li>This year, we validated the multibillion dollar opportunity for AI Transportables. 
 </li>
<li>Our objective is clear: leadership in the fast-growing AI Transportable market.</li>
<li> Currently, OSS is supplying compute and storage &#8212; and/or storage solutions to 3 of the leaders in the Level 4 and 5 long-haul hub-to-hub autonomous truck market. </li>
<li>We believe that all 3 of these customers could end up being in our top 10 customer list in 2022 and over time, could be some of our largest accounts. Top 10 list means that we believe each customer will bring revenue of $1 million approximately, maybe more.&nbsp;</li>
<li>We continue to learn and lead the market as we define next-generation products.</li>
<li>Beyond autonomous trucks, we&#8217;ve also seen interest and activity with other vehicles, including shuttles, buses and ships. 
 </li>
</ul>
To sum up, multiple customers are in the testing and prototype phase, with more customers on the way. There are multiple touch points for OSS equipment per truck, and the Company is making headway to transition to the production phase. We believe these are exciting times for One Stop.
But Where&#8217;s the Military?
OSS has a long-term relationship selling product to the military. While the military revenue, is often lumpy, is also of high margin. In the first half of the year, OSS had kind of a normal military type revenue profile. Going into the second half of the year, some of the large military customers are projected as very strong, but some of that forecast has gone out in time. Fortunately, the business has not been lost, just delayed. For example,&nbsp;one of OSS&#8217;s key military customers, with whom the Company has a multiyear contract,&nbsp;their initial plan was to buy everything they expected to within that contract, but they didn&#8217;t have all the orders from their end customer like the Navy and Air Force, so a delay occurred.
The multiyear contract is coming to a close this year. The Company is in the process of getting a new contract, and the good news is it looks like the remaining business is still somewhere between buying everything the Company has ever shipped in the contract to doubling that. As a result, next year could be a much stronger year, with the attendant giving higher gross margins.
Now, on the application of AI into the military space, on the design front OSS has more military activity than the Company has ever seen. These are very large programs. These applications will take significant time to close and even more time to generate revenue, but OSS is now engaged with multiple high-profile programs, which include drones, aircraft, ships and land vehicles. These applications are perfect for disruptive solutions from OSS, given the Company&#8217;s expertise in providing the highest performance without compromise and compact rugged form factors.
Challenges 
 
Supply chain issues continue to be a challenge. The Company is experiencing 52-week lead times, or greater, on some key components. The situation is expected to continue through the remainder of 2022 and may persist into 2023. One tack being taken by the Company is to see if customers are willing to &#8220;pay up&#8221; for the component to possibly speed up delivery of the product. OSS has done a fantastic job in pre-purchasing inventory. In fact, the Company invested an additional $4 million during the quarter in inventory. At the end of the second quarter, inventory totaled $20.5 million, up from $12.3 million at year-end. The majority of inventory has firm customer orders associated with it. We expect the higher inventory levels to persist at least through the end of the year. While product surprises continue to pop up, management is using the Company&#8217;s balance sheet strength to align inventory needs with product sales as closely as possible.&nbsp;
Liquidity and Balance Sheet 
 
The balance sheet remains a strength, in our view. OSS ended the quarter with cash and short-term investments of $14.4 million, down modestly from $15.8 million at the end of the first quarter. The only debt outstanding relates to $2.9 million of inventory financing at Bressner. The sequential decrease in cash is related to more aggressive inventory management in the face of ongoing supply chain issues. We believe the Company&#8217;s balance sheet is a strength.
Projections
With excellent growth prospects and an increasing number of opportunities across its verticals, we expect OSS to continue to show positive growth in 2022, but the growth likely is to be heavily weighted to the lower margin entertainment and media customer and Bressner. We do not see major gross margin improvement in the second half of the year. Nonetheless, we believe OSS is nearing an inflection point, where the Company will begin to see significant revenue increases at increasingly attractive margins.
For the third quarter, we are projecting revenue of $18.5 million, compared to $16.0 million last year. Gross margin is projected to improve sequentially, but is likely to remain below the year ago period. We are projecting net income of $393,900, or $0.02 per share, and adjusted net income of $844,000, or $0.04 per share. This compares to net income of $980,600 and EPS of $0.05 in the third quarter last year. Adjusted EPS for the third quarter of 2021 was $1.5 million of $0.08 per share.
For the full year, we are estimating revenue of $72.9 million, which would be a new annual record for the Company, and is up from our prior $71.4 million estimate. Net income for 2022 is projected to be $1.8 million, or $0.08 per share, and adjusted net income is projected to be $3.6 million, or $0.17 per share. We previously were at $0.16 and $0.25, respectively.

One Stop Systems Inc. (OSS)

Another Record Revenue Quarter

Fundamental Analysis:

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A Transitional 2023 Sets Up 2024 For Growth (OSS)

A New $1.3 Million AI Transportables Contract (OSS)

A Changing of the Guard; CEO Raun to Step Down (OSS)

New Military Contract (OSS)

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