One Stop Systems, Inc.

Ladies and gentlemen, good afternoon and thank you for joining us today to discuss One Stop Systems financial results for the third quarter ended September 30, 2020. With us today are the company's President and Chief Executive Officer, David Rahn, and Chief Financial Officer, John Morrison. Also joining today is the company's Chief Sales and Marketing Officer, Jim Eisen. Following their remarks, we will open the call to your questions. Before we conclude today's call, I will provide some important cautions regarding the forward-looking statements made by management during this call. I would also like to remind everyone that today's call will be recorded and will be made available for replay via the instructions in today's press release in the Investors section of the company's website. Now, I would like to turn the call over to OSS's President and CEO, David Rohn.

Thank you, Abby, and good afternoon, everyone. We're grateful you joined us today, and I trust you and your families are staying safe, healthy, and virtually productive. Before addressing the solid financial and operating progress we made during the third quarter, I would like to acknowledge our team's continued effective response to the COVID pandemic. The safety and the health of our employees continues to be a top priority. Our implementation of recommended CDC guidelines has kept our team healthy, and products have shipped without disruption. The pandemic has impacted several of our key customers and suppliers, limiting our top-line revenue growth over the past two quarters. As of Q3, we've identified $9.9 million in lost or delayed revenue compared to our internal annual plan, attributed to COVID-related matters. More than half of the shortfall was from our largest customer in the media and entertainment space. Despite lower revenues, our dedicated team produced better bottom line results for the quarter versus a year ago. They made great strides to cut expenses, improve efficiency, and strengthen one-stop systems in the short term, and more importantly, for the future. As John will outline shortly, our operating margin EBITDA, net income, all improved over the same quarter last year. I'm proud how the employees executed the expense reduction plan implemented in April and layered in new customers during this period. These efforts resulted in reducing our operating expenses by over $1.2 million year-to-date and we remain on track and committed to our target $2.5 to $3 million in cost reductions on an annual basis. We exceeded our minimum guidance of $11.8 million that we provided our last earnings call, coming in at $13 million for the third quarter, while also producing strong gross margins of 38 percent. Before I provide additional color and our outlook for the remainder of the year, I'd like to turn the call over to our CFO, John Morrison, who will take us through the financial details for the quarter. Following John will be Jim Isen, our Chief Sales and Marketing Officer, who will share some information on our exciting new products and discuss customer activity. John?

Thank you, David, and good afternoon, everyone. I am glad you can join us today. Earlier today, we issued a press release with our results for the third quarter and nine months ended September 30, 2020. The release is available in the investor relations section of our website at onestopsystems.com. Our statement of operations shows that our revenue in the third quarter was $13 million, up 12% from $11.6 million in the previous quarter, and lower by 13% compared to $14.9 million in the third quarter of last year. The sequential improvement in Q3 as compared to our previous quarter was due to increased sales into the military as expected for the second half. As we highlighted in our Q2 earnings report, much of the decrease in revenue as compared to a year-ago quarter was attributable to a key customer's media and entertainment business being down by approximately $1.8 million as a result of the COVID-19 pandemic. This industry is expected to be impacted well into 2021. Revenue for the nine months ended September 30, 2020 was $38 million, a decrease of 5% as compared to the $39.9 million in the same year-ago period. The decrease was due to a reduction in revenue of $3.8 million in our media and entertainment business mentioned before, as well as a reduction of $1.9 million from historic military contractors and other reductions due to COVID impacted customers. These reductions were primarily offset by year-over-year growth of new business from the Navy, autonomous vehicle customers, and PCI Express Gen 4 test equipment suppliers. That new revenue totaled $5.9 million. In terms of the revenue breakdown between our operating units, in Q3, our core OSS business contributed $9 million, as compared to $9.7 million in the same year-ago period. Our European subsidiary, Breschner, with several customers there also being affected by the pandemic, contributed $4 million in the third quarter. This compares to the $5.2 million in the same year-ago period. For the first nine months of the year, our core OSS business contributed $24.7 million of revenue as compared to the $26.2 million of revenue in the same period last year. Breschner, they contributed $13.2 million of revenue in the first nine months as compared to $13.7 of revenue in the same period last year. We are no longer reporting CDI as a standalone business unit as we completed the integration of CDI into our core OSS operations as of July 1, This was part of our reorganization and cost reduction program that we implemented earlier this year. Now, turning to gross profit. During the third quarter, we had strong gross margins of 37.8%, yielding a smaller gross profit as compared to the prior year on reduced revenues of $1.9 million. A gross profit was $4.9 million compared to $5 million on 33.7% gross margin in the same year-ago quarter. Gross margin for our core OSF business increased to 44.6% in the third quarter from 39% in the same year-ago quarter. This improvement of 5.6 percentage points was attributable to higher margin military sales combined with a decrease of the lower margin media and entertainment business. Aggressionary units gross margin decreased to 22.5% in the third quarter as compared to 23.7 in the same year-ago period on reduced sales. For the first nine months of 2020, Gross profit totaled $11.6 million, or 30.6% of revenue. This compares to the $12.9 million, or 32.2% of revenue, in the same year-ago period. Gross margin for our core OSS business was 35.7% in the first nine months of 2020, as compared to 37.2%. in the same year-ago period. Revenue's gross margin decreased to 21.1% in the first nine months compared to 22.8% in the nine months of last year. Our overall operating expenses decreased 15% to $3.9 million from $4.6 million in the third quarter of 2019. The decrease was primarily due to the cost reduction initiative that we began in April where our workforce was reduced and new cost containment efforts were implemented. Overall, our operating expenses as a percentage of revenue improved slightly to 30.2% in the third quarter compared to 30.9% in the same year-ago quarter on lower revenue. This improved expense level. does reflect the $2.5 million to $3 million in annual savings we expect to realize from our expense reduction program. For the nine months ended September 30, 2020, our total operating expenses decreased 19% to $12.6 million as compared to $15.8 million in the same period last year. The decrease is primarily attributable to the reorganization and expense reduction program executed by the team, along with the non-recurring goodwill impairment charge of $1.7 million in the prior year. Operating expenses as a percentage of revenue for the nine-month period improved to 33.1 versus 38.7 in the prior year period. This change, again, reflects the success of our expense reduction program and improved efficiency. On a pro forma basis, after adjusting for last year's goodwill impairment charge of $1.7 million, our operating expenses in the first nine months of 2020 decreased 8.6% or $1.2 million to $12.3 million as compared to a year ago. Despite lower revenue, income from operations was $979,000, an improvement of $560,000 compared to the same year-ago quarter. For the first nine months of 2020, our loss from operations was $938,000 compared to $2.6 million loss in the prior year. After adjusting, For the prior year's goodwill impairment charge on a pro forma basis, the operating loss in the first nine months of 2020 was $938,000 as compared to $896,000 in the prior year. And our net income on a GAAP basis totaled $858,000, or five cents per share, in Q3 2020. This compares to an income of $545,000, or 3 cents per share, in the same year-ago period. For the first nine months, net loss on a GAAP basis improved to $250,000, or a loss of 2 cents per share, compared to a loss of $2 million, or 13 cents per share, in the first nine months of last year. On a pro-flora basis, After giving effect for an adjustment for a goodwill impairment charge in the prior year, GAAP income was relatively flat for the prior year, even on lower revenues. On a non-GAAP basis, net income totaled $1.2 million, or $0.07 per diluted share in Q3 2020, as compared to $900,000, or $0.05 per diluted share in the same year-ago period. For the nine months of 2020, non-GAAP net income totaled $773,000, or $0.05 per share, compared to our non-GAAP net income of $1 million, or $0.06 per diluted share, in the nine months of 2019. Adjusted EBITDA, which is another non-GAAP metric, was up to $1.6 million in Q3 as compared to $1 million in the same year-ago quarter. For the nine months of 2020, adjusted EBITDA was $682,000 compared to $881,000 in the same year-ago period. Now, let's turn over to our balance sheet. Cash and cash equivalents total $5.5 million on September 30, 2020 as compared to $4.7 million as of June 30, 2020. Our cash position as of today is approximately $5.4 million. We believe our cash position and available funds provides us with sufficient liquidity to meet our cash requirements for current operations. This completes our financial review for the quarter. and for the first nine months of the year. I now would like to turn the call over to Jim.