One Stop Systems, Inc.

Good afternoon and thank you for joining us today to discuss One Stop System financial results for the second quarter ended June 30th, 2022. With us today are the company's President and Chief Executive Officer, David Rohn, and Chief Financial Officer, John Morrison, as well as the company's Chief Sales and Marketing Officer, Jim Eisen. Following their remarks, we will open the call to your questions. Then before we conclude today's call, I will provide some important questions regarding the forward-looking statements made by management during the call. I would like to remind everyone that the call will be recorded and made available for replay in the investors section of the company's website. Now, I would like to turn the conference over to OSS President and CEO, David Ron. Please go ahead, sir.

Thank you, Nash, and good afternoon, everyone. Q2 was another good quarter for One Stop Systems as we achieved record Q2 revenue of $18.3 million, up 7% sequentially, and up 23% over the same year-ago quarter. The strong growth of Q2 was largely attributable to two factors, continued strength of our customer and media and entertainment space, the revenue from which grew 135% to a record $6.4 million, and our European unit, Brezhner, also performed exceptionally well. Breschner continues to leverage strong inventory investments, driving market share increases with revenue up 31% to $7.6 million. If you've been following our growth, you likely noticed that we have a variability in our margins from quarter to quarter, primarily based on the revenue and product mix from the top three customers within a given quarter. The first half of the current year was marked by a higher volume of lower margin products in both our U.S. and European markets. That resulted in gross profit from the quarter totaling $5.2 million, which is up 12% from a year-ago quarter, yielding a gross margin percentage of 28.4%. Though our aggregate margin percentage was down by a few points, the higher overall revenue and margin dollars enabled investments in increased R&D and marketing for our higher margin businesses, namely AI transportables, in both the commercial and military markets throughout the world, including additions to the sales team and our new advisory board made up of industry experts. Supply chain constraints affecting our entire industry continue to be a challenge, occasionally impacting the profile of the product we ship in any given quarter. It only takes one inaccessible component out of hundreds of items in an assembly to delay a shipment. Compact this, our inventory management team constantly reviews the status of component availability, making strategic buys to ensure availability or fulfillment of customer orders, and to hedge against cost increases, all within the context of reducing risk to the business in both the short and long term. on some of the key components. Though we are mitigating the constraints imposed by supply chain issues, we expect these challenges to continue through the remainder of the year and likely into the first half of next year. Yet, despite the supply chain issues impacting the timing of many of our shipments, to the credit of our strong OSS team, our overall revenue growth has remained on track. Though we continue to invest in AI transportables, we have remained cautious regarding spending. This has resulted in operating expenses as a percentage of revenue improving to 26.2% versus 27.7% a year ago quarter. Being cash flow positive, we have been putting our cash to work with strategic and resourceful inventory purchases. At the end of the second quarter, we had approximately 20.4 million in inventory, of which 11.6 million is designated for our core OSS business and about 8.8 million for Brezhner. I am glad to be able to report that firm customer orders are associated with the vast majority of this inventory. Due to supply chain constraints, the higher inventory levels are expected to last at least through the end of the year. Now, before I review the outlook for the rest of the year, including an update on our autonomous truck and AI transportable strategies, I'd like to turn the call over to our CFO, John Morrison, who will take you through the financial details of the quarter. Then our Chief Sales and Marketing Officer, Jim Eisen, provide some additional insight into our new product introductions, program wins, and growing sales pipeline. John?

Thank you, David, and good afternoon, everyone. Thank you for joining us today. Earlier today, we issued a press release with our financial results for the second quarter ended June 30, 2022. The release is available in the investor relations section of our website at onestopsystems.com. As David mentioned, our second quarter revenue was $18.3 million, which was up 23% from the same year-ago period. Our core OSS business revenue increased 18% to $10.7 million in the second quarter, representing 59% of total revenue. Revenue from Breschner, our European subsidiary, increased 31% to $7.6 million, which represented 41% of total second quarter revenue. Breschner's increase was attributable to increased market share made possible by strong sales efforts and strategic inventory buys. Gross profit in the second quarter increased $548,000 to $5.2 million, The gross margin for our core OSS business decreased 3.7 percentage points from the same year ago quarter to 33%. This was largely due to the strength of our record media and entertainment revenue, which was lower margin. Bresher's gross margin percentage also decreased slightly to 21.9% in the second quarter compared to 22.6% in the same year-ago quarter primarily due to increased material and transportation costs. Overall, our gross margin was 28.4% in the second quarter compared to 31.2% from the same year-ago quarter. As David mentioned previously, our aggregate 2.8 percentage point decrease from the prior year quarter was primarily due to increased revenue from our lower margin media and entertainment customer and strong Brezhne revenue. It is important to note that in addition to focusing on increasing revenue from higher margin product sales, we are working to improve our margins through providing more standard products with unique OSS value-added content, we are increasing prices, we are enhancing our quoting capabilities that reflect real-time parts pricing and greater manufacturing efficiencies. Our overall quarterly operating expenses increased 16% to $4.8 million, while operating expenses as a percentage of revenue improved to 26.2% compared to 27.7% in the same year-ago quarter. This increase in operating expense was primarily due to our investment in pursuing the AI transportable market, resulting in increases of $246,000 in marketing and selling, $244,000 in R&D, and $173,000 in G&A. GAAP net income totaled $323,000 or two cents per diluted share. decreasing from net income of $1.7 million, or $0.09 per diluted share, in the same year-ago period. That included a one-time benefit of $1.5 million, or $0.08 per diluted share, for forgiveness of our PPP loan and related interest. On a non-GAAP basis, net income was $871,000, or $0.04 per diluted share for the quarter up from $812,000 or $0.04 per diluted share in the same year-ago period. Adjusted EBITDA, a non-GAAP metric, was $1.2 million or 6.5% of quarterly revenue as compared to $1.4 million or 9.3% of quarterly revenue in the same year-ago quarter. Both of our non-GAAP net income and adjusted EBITDA excluded the PPE loan and interest forgiveness. Now, turning to the results for the first half of 2022 as compared to the first half of 2021. Revenue increased 25% to a record $35.4 million. Our core OSS business increased 20% contributing $21.3 million of total revenue and Breszner contributing $14.1 million, an increase of 34%. Our overall gross profit improved $1.3 million to $10.3 million or 29.2% of revenue. This compares to $9.1 million or 32.2% of revenue in the first half of 2021. Gross margin for our core OSS business decreased to 34.3% as compared to 37.3%. This is largely due to the 80% year-over-year revenue increase from our media and entertainment customer. Bresher's gross margin decreased to 21.5% due to a higher transportation and material cost as compared to 23.6% a year ago. For the second half of 2022, we expect margins to be slightly above, but substantially consistent with the first half. Our total operating expenses increased 12% to $9.3 million. This increase is primarily due to an increase of $549,000 in selling and marketing expense resulting from marketing, trade shows, and travel, and an increase in R&D expense of $656,000 for the development of new standard products for the AI transportable market. And these expenses were partially offset by a decrease of $210,000 in G&A expenses. Operating expense as a percentage of revenue decreased to 26.3% compared to 29.4% reflecting ongoing cost containment efforts. Income from operations increased $260,000 to $1.1 million compared to $792,000 in the first half of 2021. Net income on a GAAP basis was $902,000 or 4 cents per diluted share compared to $1.7 million or $0.09 per diluted share, which included a one-time benefit of $1.5 million, or $0.08 per diluted share, due to forgiveness of our PPP loan and related interest. After giving effect to this one-time benefit on a pro forma basis, this results in a year-over-year increase of $618,000. Non-GAAP net income totaled $1.8 million or $0.09 per diluted share as compared to $1.5 million or $0.08 per diluted share in the same year ago period. Adjusted EBITDA totaled $2.6 million or 7.3% of revenue compared to $2.5 million or 8.7% of revenue in the first half of 2021. Both non-GAAP net income and adjusted EBITDA excluded the PPP loan and interest forgiveness. Now, turning to our balance sheet. On June 30, 2022, cash and cash equivalents totaled $2.9 million with short-term investments of $11.5 million for a combined total of $14.4 million. This compares to $15.8 million on March 31, 2022. During the second quarter, we invested an additional $4 million in inventory. Our cash position provides the stability and flexibility to be responsive to supply chain issues with investments in inventory, changes in our business, and issues imposed by external global economic influences such as inflationary pressures and the Federal Reserve's interest rate increases. This completes our financial review for the quarter and the first half of the year. I would like to now turn the call over to our Chief Sales and Marketing Officer, Jim Isen. Jim?