One Stop Systems, Inc.

Good afternoon, and thank you for joining us today to discuss One Stop Systems financial results for the third quarter ended September 30th, 2021. 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 Ison. Following their remarks, we'll open the call to your questions. Before we conclude today's call, I'll provide some important cautions regarding the forward-looking statements made by management during the call. I would also like to remind everyone that the call will be recorded and made available for replay in the investor section of the company's website. Now, I'd like to turn the call over to OSS's President and CEO, David Rohn. Please go ahead, sir.

Thank you, Justin, and good afternoon, everyone. It was another strong quarter for OSS, exceeding our earlier stated expectations and closing the quarter with revenue of $16 million. This represents an increase of 23% over the same year-ago quarter and 7% over our previous quarter. These results reflect a record for any OSS third quarter, with exceptional performance by our European-based Brezhner Organization and increasing revenue from our large media and entertainment customer. Our revenue for the first nine months was also a record for the company at $44.2 million. Revenue from our largest customer grew to $3.2 million, quadrupling from its low of $800K in the year-ago quarter. Most of this growth was from the sales of their new innovative virtual products, and we are seeing indications that revenue from their concert venue products will layer on next year. As noted previously, this business and the Bresna revenue tends to be lower margin, decreasing our margins 3.3 percentage points as compared to the year-ago quarter. But our margins were up over the previous quarter by 3.3 percentage points. For the first nine months of the year, our margins increased 2.4 percentage points. This was due in large part to the strong growth in the high margin military business, a fundamental corporate focus which is gaining strength and a key emphasis of our newly expanded sales team. Our core OSS business contributed an additional 2.9 percentage points of margin and our Breschner organization was also up by 3.3 percentage points. While we face increasing supply challenges, as do most companies, our team continues to minimize the impact during this unusual period, working closely with our customers and suppliers and carefully making strategic purchases. Our strong top-line performance in Q3 was accompanied by bottom-line improvements with a net income of 981K. Looking at our adjusted EBITDA, we generated $1.8 million, or 11% of revenue. In a moment, I'll provide some additional operational highlights and our outlook for the rest of the year. But first, I'd like our CFO, John Morrison, to take us through our financial details for the quarter. Following John, Jim Isen, our Chief Sales and Market Officer, will provide some insights into our AI transportable strategy and related customer activities. John?

Thank you, David, and good afternoon, everyone. Thank you for joining us for this call. Yesterday, we issued a press release with our results for the third quarter and for the nine-month period ended September 30, 2021. The release is available in the investor relations section of our website at onestopsystems.com. The metrics that follow are for the three-month period ended September 30, 2021, and as compared to the prior year quarter. Reviewing our statement of operations, we recognize third quarter revenue of $16 million, which was up 23% from the same year-ago period and up 7% from the second quarter of 2021. Our core OSS business contributed $9.3 million, up 3%. As David mentioned, this was attributable, in part, to a quarterly increase in shipments to our large media and entertainment customer as their new virtual products are gaining momentum. Breschner revenue increased 68%, contributing a record $6.7 million. This unprecedented growth for Breschner is traceable to its maturing leadership and the implementation of pre-planned inventory strategies and aggressive sales efforts resulting in expansion of our European customer base. For our combined business, gross profit was 5.5 million as compared to 4.9 million, an increase of 615,000, primarily driven by increased sales. We had strong gross margins of 34.5%. This was a decrease of 3.3 percentage points due to the sales mix over the same year-ago period, but an increase of 3.3 percentage points over the second quarter of 2021. Gross margin for our core OSS business was 41%, a decrease of 3.6 percentage points. In contrast, Breschner's gross margin increased to 25.6% as compared to 22.5. Overall, operating expenses increased 14% to 4.5 million, although operating expenses as a percentage of revenue decreased to 28% compared to 30%. The increase in operating expenses was primarily due to increased strategic investments which included adding personnel to our engineering, product marketing, and sales teams to drive our strategic plan. Despite the ongoing supply-related challenges, income from operations improved to $1.02 million compared to $979,000. Net income on a GAAP basis was $981,000 or $0.05 per share. This compares to net income of $858,000 or $0.05 per share. This improvement was predominantly contributed by income before taxes and reduced taxes due to a discrete tax benefit received from stock-based compensation deductions. On a non-GAAP basis, quarterly net income improved to $1.5 million. or $0.08 per basic and diluted share as compared to $1.2 million or $0.07 per basic and diluted share. Adjusted EBITDA, another non-GAAP metric, increased to $1.8 million or 11.3% of quarterly revenue as compared to $1.6 million. The following metrics are for the first nine months for the first nine-month period ended September 30, 2021, and are compared to the same year-ago period. Revenue was $44.2 million, a new company record which was up 16%. Our core OSS business increased 9% and contributed $27 million of revenue as compared to $24.7 million. Breschner contributed $17.2 million of revenue, an increase of 30% compared to $13.2 million. Gross profit improved $3 million on incremental revenue of $6.2 million to $14.6 million, or 33% of revenue. This compares to $11.6 million, or 30.6% of revenue. With the continued focus on gross margins, our core OSS business improved 2.8 percentage points to 38.5% as compared to 35.7%. Residence gross margin increased to 24.4 as compared to 21.1. Our operating expenses increased 2% to $12.8 million. This increase is again primarily due to investments we have made in marketing and sales, which costs were partially offset by engineering costs being reclassified to cost of goods sold. Operating expenses as a percentage of revenue decreased to 29% compared to 33% on increasing revenue and success of our expense containment efforts and improved efficiencies. Income from operations improved to $1.8 million, a $2.7 million increase compared to a loss from operations of $938,000. Net income on a GAAP basis was $2.7 million or 14 cents per diluted share. This is compared to a loss of $250,000 or a loss of $0.02 per share. These numbers reflect the net income in 2021, which includes a $1.5 million PP loan and interest forgiveness, which occurred in the second quarter. Non-GAAP net income was $3 million or $0.15 per diluted share as compared to $773,000 or 5 cents per share. Adjusted EBITDA was 4.3 million or 9.6% of revenue compared to 682% or 1.8%. This adjusted EBITDA improvement was due to higher margin and cost containment efforts. Non-GAAP net income and adjusted EBITDA both exclude the $1.5 million PPP loan and interest forgiveness, which took place in the second quarter of 2021. Now, turning to our balance sheet. On September 30, 2021, cash and cash equivalents totaled $4 million, with short-term investments of $14.5 million totaling $18.5 million in capital resources. This was flat to our cash and cash equivalents and short term investments on June 30, 2021, but are up by $13.2 million compared to the $6.3 million that we ended at December 31, 2020. Our strategic investment balances increased in response to supply chain constraints and product availability. We have elected to make additional investments leveraging our strong cash position on this front to assure steady product shipments. We will likely continue to experience scarcity in some products, limited supplies, protracted delivery dates for componentry, increasing product costs and changes in minimum order quantities to secure product. Additionally, work in process and finished goods inventory have been increasing as the timing of availability of certain componentry to the production line has varied from vendors' previously committed delivery dates. As David mentioned, we are managing our way through this unusual period of supply challenges by working closely with our customers and suppliers, carefully making strategic purchases and raising prices as needed. This completes our financial review. I would like to now turn the call over to our Chief Sales and Marketing Officer, Jim Eisen.