One Stop Systems, Inc.

Good afternoon, and thank you for joining us today to discuss One Stop Systems financial results for the fourth quarter and four year ended, December 31st, 2020. With us today are the company's President and Chief Executive Officer, David Ron, 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 President and CEO, David Rahn.

Thank you, Jenny, and good afternoon. And good afternoon, everyone. We're grateful you could join us today, and I hope you've been all able to stay safe, healthy, and virtually productive. Before addressing the financial, operational, and strategic progress we've made during the fourth quarter, I'd first like to thank our shareholders, existing and new, for their tremendous support. We hope your patience has been rewarded by the strengthening performance in the stock over the past several months. In 2020, we seized the opportunity to take several transformative steps and have laid the cornerstones for a stronger foundation on which to build our future growth. These steps include a new senior leadership and corporate reorganization, reduced spending, three new independent board members, which also added to the board diversity, and we directed more focus on our long-term strategic vision to increase shareholder value over time. Regarding our financials, we are pleased to announce that we were able to exceed our Q4 2020 revenue outlook by $900,000. This was a direct result of our continued efforts to drive existing OEM business and our success in expanding our customer base, offsetting some of the downside from the pandemic. We see early indications of improvements with customers impacted by COVID. While we anticipate the impact will continue for some time in 2021, our energies are focused on a return to normalcy and the opportunities inherent in that improved environment. As previously stated, the pandemic impacted our top-line revenue growth in 2020 with several of our key customers. We identified about $14 million in lost or delayed business compared to our annual plan due to COVID-related matters. More than half of this loss or delayed revenue in 2020 was from our largest customer in the media entertainment industry. During the fourth quarter, we saw an encouraging rebound by this customer as their 3D virtual product line continues to develop traction in the market. Their product premiered last year on American Idol as the virtual performance stage in a Katy Perry music video. We expect their virtual platform to drive increased sales in the current and future quarters. The eventual return of live events should contribute additional revenue from their core products in the second half of the year. Earlier this month, we announced a direct offering which further fortified our cash position. In addition to this offering, we achieved significant cash gains through a combination of lower expenses, increased efficiency, and improvements in working capital. The result is we currently have a cash position of approximately $19 million. This gives us the ability to invest in key strategic initiatives that should fuel future growth. Now, before I provide additional color and the outlook for Q1, I'd like to turn the call over to our CFO, John Morrison, who will take us through the financial details for the fourth quarter and the full year 2020. Following John will be Jim Isen, our Chief Sales and Marketing Officer, who will share some information on exciting new products and discuss customer activity. John?

Thank you, David, and good afternoon, everyone. I'm glad you can join us today. Earlier today, we issued a press release with our results for the fourth quarter and the year ended December 31, 2020. The release is available in the investor relations section of our website at onestopsystems.com. Our revenue in the fourth quarter was $13.9 million, which was up 7% from the third quarter, resulting from improved shipments to disguise and Raytheon. However, we were lower by 24% compared to the fourth quarter of last year, mainly due to pandemic-driven reductions. Most significant was the quarterly revenue for disguise, which was down $4.3 million, attributable to government restrictions on large group events. Approximately $1 million of flash storage array shipments Teraceon were delayed to the first quarter of 2021, and we also had a one-time program valued at $1.1 million in the prior year, 2019. These reductions were partially offset by $1.2 million in sales of our new 4U Pro GPU accelerator being supplied to the U.S. Army. Revenants for the year totaled $51.9 million. This was down 6.4 million, or 11% compared to the previous year. Most of the decrease is attributable to the reduction in shipments of 8.2 million to disguise due to COVID restrictions on large gatherings. As David mentioned, we are seeing encouraging signs with demand for their 3D virtual platform, and we should see a return of their core products in the second half of the year. Recently, the Carlyle Group purchased a 50% interest in disguise, providing them greater financial stability. Other reductions in revenue included Raytheon of $2.9 million, primarily due to the timing of different programs. Revenues were also down with other COVID-impacted customers and the elimination of a low margin $2.4 million project with a former customer. The noted reductions, however, were partially offset by favorable results from our diversification efforts, which included $2.6 million to a new test and measurement company for our new PCIe Gen 4 products. over $1.9 million direct with the Navy for our flash storage arrays, and the previously mentioned $1.3 million of our new 4U Pro to the Army. This was further supported by our ongoing project with Lyft, which saw $1 million of incremental revenue during 2020. The Q4 breakdown for our operating units. OSS business contributed $8.9 million as compared to $13.9 million in the same year-ago period. Bresner, our European subsidiary, contributed $5 million in the fourth quarter as compared to $4.5 million in the same year-ago period. For the full year, our core OSS business contributed $33.7 million of revenue as compared to $40.1 million last year. Regener was approximately flat at $18.2 million year-over-year. Since we fully integrated CDI into our core OSS operations in June of last year, we no longer report CDI as a standalone business unit. This integration was part of our reorganization and cost reduction program that we implemented in the second quarter of 2020. Now, turning to gross profit. During the fourth quarter, we had strong gross margins of 34.5%, though yielding a smaller gross profit as compared to the prior year based on reduced revenues and a higher mix of bread and sales. Our gross profit was $4.8 million as compared to $6.5 million or 35% gross margin in the same year-ago quarter. Gross margin for our core OSS business improved 42% in the fourth quarter from 40.1% in the same year-ago quarter. This increase was attributable to changes in product mix, customers, as well as an increased focus on margins in the organization. Brescia's gross margin decreased by 30 basis points to 21.3% in the fourth quarter, as compared to the same year-ago period based on product mix. For the year 2020, gross profit totaled $16.4 million, or 31.7% of revenue. This compares to $19.4 million, or 33.3% of revenue in 2019. Gross margin for our core OSS business was 37.3%, in 2020 as compared to 38.2% in the prior year. Residence gross margin decreased by 1.3 points to 21.2% in 2020 as compared to 2019. Our overall operating expenses decreased 9% to $4.3 million from $4.7 million in the fourth quarter of 2019. The decrease was primarily due to cost reduction initiatives that began in April, where our workforce was reduced and new cost containment programs were implemented. Overall, our operating expenses as a percentage of revenue increased to 30.9% in the fourth quarter compared to 25.7% in the same year-ago quarter. This is fully attributable to lower revenues. For the year December 31, 2020, our total operating expenses decreased 16% to $16.9 million as compared to $20.2 million in the previous 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 full year improved to 32.5% versus 34.6% in the prior period, resulting again from our expense reduction program. On a pro forma basis, excluding the prior year goodwill impairment charge, operating expenses as a percentage of revenue increased 80 basis points, largely due to reduction of revenue. On a pro forma basis, after adjusting for last year's goodwill impairment charge of $1.7 million, our operating expenses in 2020 decreased 8.8% or $1.6 million. Income from operations was $513,000 as compared to $1.8 million in the same year-ago quarter. For the year, Our loss from operations is $424,000 compared to a loss of $779,000 in the prior year. On a pro forma basis, excluding the goodwill write-off of $1.7 million in the prior year, our loss increased $1.3 million. Our net income on a GAAP basis totaled $244,000, or one cent per share, in Q4 2020. this compares to net income of $1.1 million, or $0.06 per diluted share, in the same year-ago period. For the year, net loss on a GAAP basis was $6,500, or $0 cents per share, compared to a loss of $900,000, or $0.06 per share, in 2019. On a pro forma basis, After giving effect to the before-mentioned goodwill impairment charge in the prior year, GAAP income was down $803,500 from $79,000, $797,000 in 2019. On a non-GAAP basis, net income totaled $636,000, or 4 cents per diluted share, in Q4 2020, as compared to $1.3 million or $0.07 per diluted share in the same year-ago period. For the year, non-GAAP net income totaled $1.4 million or $0.08 per share as compared to $2.3 million or $0.14 per diluted share in 2019. Adjusted EBITDA, which again is another non-GAAP metric, was $1.1 million in Q4 as compared to $2.4 million in the same year-ago quarter. For the full year, adjusted EBITDA was $1.8 million compared to $3.2 million in 2019. Now, turning to our balance sheet. Cash and cash equivalents totaled $6.3 million on December 31, 2020, as compared to $5.5 million on September 30, 2020. Our cash position as of today, as David mentioned, is approximately $19 million. This is the result of the combination of net proceeds of $9.2 million from our offering earlier this month, plus our recently improved operating cash position during the first quarter of 2021. This improvement from our year-end balance is mainly due to a reduction in working capital requirements resulting from collections on outstanding customer accounts receivable and management of inventory on hand. Most notably is the pay down in accounts receivable from Disguise to bring their account current and more closely aligning our day sales outstanding in accounts receivable with the payment terms for accounts payable. We are very pleased with our significant improved cash position, which provides security and sustainability for the company during periods of economic uncertainty. Most importantly, it means we have sufficient liquidity to meet our cash requirements for current operations, paying down debt, while also supporting the growth and strategic initiatives of the company. This completes our financial review. I would now like to turn the call over to our Chief Sales and Marketing Officer, Jim Issa. Jim?