Good afternoon, and thank you for joining us today to discuss One Stop Systems Financial Results for the Fourth Quarter and Year Ended December 31, 2022. With us today are the Company’s President and Chief Executive Officer, David Raun; and Chief Financial Officer, John Morrison, as well as the Company’s newly appointed Chief Product Officer, Jim Ison. Following their remarks, we will open the call to your questions. Then before we conclude this 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 Raun. Please go ahead, sir.

Thank you, Lara, and good afternoon, everyone. It’s good to be here with you. I’m pleased to report that revenue for OFS in the fourth quarter was up 2.7% over the previous year to $18.2 million and up 16.8% for the year to a record $72.4 million. Our adjusted EBITDA for the year was also a record at $5.2 million driven by increased sales of our continued -- increased sales and our continued controls on spending. Overall, gross margin for the year was 28.2% due to strong sales of lower margin products, and a midyear temporary reduction in sales to our largest military customer, during a successful re-qualification effort. Having completed this re-certification process, these higher margin shipments have now returned to normal. In 2023, we expect a reduction in low-margin media and entertainment business to be replaced with higher margin military product sales. If you’ve been following along with us, you are aware of the AI Transportable strategy that we put in place in 2021. For those less familiar, OSS designs and manufactures innovative edge computing modules and systems or AI Transportable applications, including on-location AI data capture, storage, training and large-scale inference. These products include ruggedized servers, compute accelerators, flash storage arrays, and data recording software. We take the latest high performance, commercially available products normally only used in the state-of-the-art, environmentally controlled data centers and bring them into these challenging, traditionally embedded edge markets. We are pleased with the progress this past year executing on this strategy, which leverages our unique strengths to enable AI and autonomous capabilities in anything that moves, delivering absolute highest performance without compromise in rugged compact form factors in these harsh environments. Earlier in the year, we announced that we partnered with three key autonomous truck companies, utilizing our Centauri, and SDS…

Thank you, David, and good afternoon, everyone. Thank you for joining us today. Today, we issued a press release with our results for the fourth quarter and the year ended December 31, 2022. The release is available in the Investor Relations section of our website at onestopsystems.com. The following results are for the fourth quarter and are compared to the same year-ago quarter. As David mentioned, our consolidated revenue in Q4 was up 2.7% to $18.2 million. During the quarter, we saw media and entertainment customer fall short of their projections, resulting in approximately $1 million less revenue than anticipated. This customer is projected to account for less than 10% of our consolidated revenue in 2023. Our core OSS revenue decreased 1.8% to $11.3 million, representing 62% of our total quarterly revenue. Conversely, revenue from OSS Europe increased 10.8% to $6.9 million, which represents 38% of total quarterly revenue. However, excluding our lower margin media and entertainment business, our core OSS revenue increased 16.8% for the quarter. Overall, gross profit decreased $58,000 to $5 million, despite the company realizing improved margins over 30% as a result of starting to ship a greater mix of AI Transportable products. However, a fourth quarter increase in our allowance for realization of inventory associated with the customers -- associated with the Company’s -- excuse me -- allowance for realization of inventory associated with the Company’s transition to higher margin edge AI Transportable military products resulted in an overall gross margin of 27.3% compared to 28.3% in the same year ago quarter. The gross margin for the core OSS business decreased 1.8 percentage points to 31.4% due to the recognition of additional allowances for inventory realization. OSS Europe’s gross margin percentage improved 1.1 percentage points to 20.5% compared to 19.4%. Overall, quarterly operating expenses decreased…

Thank you, John, and good afternoon, everyone. In Q4, we added three new major program wins across three market segments, military, commercial aerospace and autonomous commercial vehicles. The military win is for a new compact airborne storage server for the Navy that quickly and easily transports mission data to ground stations and to the cloud. The commercial aerospace win involves an upgrade to aircraft network systems used in satellite communications and in-flight entertainment. The autonomous vehicle win with a tier one OEM in Germany continues to highlight OSS’s strength in commercial data logging and storage applications in the U.S. and Europe. These wins brought our total new major program wins for the year to 19, which tops our 14 wins from 2021. Of the 19 winds, 13 were in the AI Transportable space, including 7 autonomous vehicles, 4 vehicle storage systems, and 2 military AI programs. We expect these new wins to generate approximately $10 million in 2023 and more in the following years. We added three new pending major programs during the fourth quarter. Two of the three opportunities are AI Transportable programs that include an agriculture AI solution and an autonomous vehicle data logging system. The third opportunity is for our latest Gen-5 acceleration systems. Our current pipeline of pending major programs totals 31 with 14 of these involving AI Transportable applications and 8 of those in military applications. Turning to products and certifications. Our Rigel Edge Supercomputer recently attained NVIDIA certified systems endorsement, simplifying our sales process. It is the only edge certified AI system using four of the most powerful PCI express Gen 4 HGX A100 GPUs. NVIDIA certified systems are tested and evaluated by NVIDIA engineers for peak performance, functionality, scalability, and security, providing extra confidence in our AI workflow performance. In addition, last year…

Thank you, Jim. 2023 will be a transitional year for OSS on many fronts, ranging from bringing our inventory levels down, reducing the low-margin business, while increasing the high-margin AI Transportable business, delivering more military proof points and the addition of new talent. With current visibility, I anticipate that the revenue will likely be consistent with the prior year, but we expect to see a multiple point improvement in margins, driving higher margin dollars due to the stronger mix. We are projecting growth from our industrial portion of the business, including autonomous trucks, cellular carrier trucks, agricultural equipment and autonomous baggage equipment. While we expect the military AI Transportables to lead the growth and are targeting a 40% increase in 2023, this portion of the growth will be driven by the return of our largest military customer after the certification delays we experienced last year as well as new business layering in. Over the past several months, you’ve seen OSS announce several accomplishments in the defense market, including a $3 million defense order, the extension of our storage contract with the Navy and the breakthrough announcement, where we won the program working directly with the Army. OSS has been contracted to design and deliver a much needed capability for Army ground vehicles, which may get deployed in thousands of Strykers, Bradley’s and Abram Tanks. This exposure has led to multiple additional opportunities with the Army as well as with a large defense prime contractor. In the case of the prime, which we had not previously worked with, they reached out to us and informed us that, they had also bid on this Army program and are interested in working with us on some other opportunities, leveraging our technology and expertise. For years, OSS has provided storage product shipments to the…

[Operator Instructions] Your first question comes from the line of Scott Searle from Roth Capital. Please go ahead.

Guys, I appreciate all the color, a lot of color in there. So, I’ll cut through to a couple of things quickly, but first on the mundane front, just from a gross margin standpoint, John, I want to go back and clarify a couple things in the fourth quarter. Even with the decline in Disguise contribution, it sounds like that we didn’t have a lot of the higher end military product revenue that was going through re-certification. Is that correct? And could you quantify the allowances? And then as we look into the first quarter here, how much of a recovery in gross margin do we see or because of seasonality and absorption issues, it’s still a little bit of headwinds until we ramp up through the course of this year?

So, we saw a little over 2.5% on margin erosion as a result of the additional allowances that we recorded. It basically tied directly to our media -- more of our business that we are -- leaving, which is our lower margin business as we move into the more profitable military business. And we did a detailed analysis of our inventory and took a look at the realization of that and based upon that, we booked the digital adjustments for slow moving or obsolete inventory.

I think -- also, Scott, I’d just add that during the fourth quarter, although we had seen the military start to rebound, it has not rebounded as far as it will -- as far as like the current quarter. In addition to that, although our media and entertainment customer was down and lower than expected, it was still a significant number and you’ll see quite a bit further drop moving forward, which is built into the 16.6 number…

Got it.

Which implies -- we should be able to continue to see -- yes, we should continue to see margin improvement.

So sequential margin improvement into the March quarter?

Correct.

And then, David, it sounds like Disguise is rolling off pretty quickly. I think the number that you said was less than 10% of revenue contribution in 2023. Just want to clarify that. And then also, I think you talked about the military AI Transportable is growing 40% this year. I was wondering if you could calibrate us what it was in ‘22. I guess you’re including some of the Raytheon into that as well, or it’s not clear to me. I just want to know what numbers I’m working off of.

Yes, Raytheon is part of that. And basically the military portion of the business is growing from -- from an overall company, it’s growing from about 20% to 30% year-to-year. If you look at just the OSS classic, it’s going from something like in the 30s to over half of about 55% of the business, during that period of time. On the media and entertainment customer front, yes, it’s fallen off faster than we projected, when we were visiting back in November. And so, we are just moving forward. And fortunately, the hard work we’ve been doing on the military front is starting to pay off for us.

Got you. And then, to dive in on the outlook, the pipeline is really building on the military front in a very short period of time. It seems like it’s accelerating. I’m surprised to see that you are so comfortable talking about 25% to 30% growth in 2024. I just want to confirm that in terms of total revenues, because it implies you are basically back talking about $90 million in sales. And then if I was to strip out Bressner, if I was to strip out Disguise, it looks like you are growing into 2024, 60% to 70% on the core OSS business. Am I doing that correctly? Am I looking at it from a proper standpoint?

No. So, what we basically -- what we are trying to communicate is that 2023 as far as overall revenue compared to ‘21 is approximately flattish, let’s call it, but we are replacing the low-margin media business with military AI Transportable business. So, I mean that -- and we are seeing growth out of Bressner. So, did I answer your question? If not, please let me know.

No. I’m sorry, Dave. I was talking about ‘24 and you said one of the things. So ‘23 revenue is comparable to ‘22 or is it comparable to ‘21?

‘22 is -- I’m sorry, ‘23 is comparable to ‘22. Sorry if I said that wrong...

Yes. Okay. No, perfect.

Yes. And 24, it’s hard to know exactly, but that is what we’ve been striving for, and the activity is so broad on the military spectrum right now, if we do what we think we are going to do in addition to things we’ve already closed, that’s our expectation. We will update you more on that as the year progresses.

Okay. Big numbers. Just two more questions and I’ll get back in the queue. So, then looking at that growth into 2024, obviously, there’s a tremendous amount of far along design activity and discussions. You talked a little bit about the pipelines. You talked about some contracts. But I was wondering if there is some sort of number otherwise that you could quantify to help us understand the magnitude of some of this opportunity as we look out two or three years. And then also on the Rigel side, I was wondering who you are bidding against. Who’s on the shortlist in terms of the competition that you’re coming up against with Rigel? Thanks.

Well, we’re -- I know we’ve been replacing people in some designs. So far in the designs customers I’ve been involved, we are not hearing competitors coming up because we are being told we are the only guy that has something at this level of performance. Jim, any additional comments you want to add?

So typically what we are doing is -- the military comes out with the traditional -- we kind of mentioned it in the call, an opportunity that they think is good for their VPX and ablated architecture and everything the way they’ve been doing it before. When we get this back and we show them what we could do with Rigel, it totally changes their philosophy on how they approach the problem. So, instead of ablated architecture they use Rigel and it’s 10 times to 40 times more powerful than what they were considering before. And their eyes light up and they get their forward body lean, Dave like to say. And the customers are like, okay, we want to change our spec to be like what you have. And that’s really the momentum that we’re building in these accounts. So, we’re not really -- we take ourselves away from bidding head to head with VPX when we bring these in.

Great. I’ll get back in the queue. Thanks. And really excited to hear what’s going on as we look out into 2024. Thanks.

Your next question comes from the line of Eric Martinuzzi from Lake Street.

Just a clarification, Dave, when you said the military, the 30% to 55%, was that 2022 to 2023? Just OSS classic excluding Bressner?

Yes. So, I gave you two sets of numbers, when you have the whole thing with including OSS Europe, then we’re going from 20% to about 30%. When you pull that out and just look at OSS classic, we’re going from the mid-30s to like 55% from ‘22 to ‘23.

Got it. I appreciate the clarification. The media and entertainment customer, what was that customer in 2022 as a percent of total revenue?

We’re looking up here? It was one of our top 10

Over 20%. It’s in the -- he’s looking, I’m just doing number that I have -- 22%, 23%. Yes. So, I think we’re on the same page.

25%.

25%.

Okay. And that 25%, you’re saying that becomes less than 10% in 2023?

That is correct.

Okay. All right. And then, as I look out to -- you’ve given us a couple of numbers here for 2023, the revenue comp for Q1, you’re talking about at 16.6, that’d be a minus 3% revenue comp. You’re talking about roughly 0% for the year. So, how do we think about the out quarters -- is it they’re roughly kind of 0 to 2% in the out quarters, or is the front half of the year we’re expecting a contraction, and then really kind of growth in the back half, a better way to think about it?

I just kind of visualize it, kind of a steady step word -- upward to get to approximately flat. And to give you a little more color on Q1, for example, if we were still doing the same kind of business levels, the higher business levels, the media and entertainment customer, we would have set a new record -- all time record for revenue for a quarter and it would’ve been -- for Q1, would be -- and we’ve never ever had a big Q1. So, I think it kind of tells you that the rest of the business is pretty strong, because the number’s pretty small for them. In Q1, the number is much lower than it was in Q4. And Q4 was lower than Q3.

Yes, that’s what I asked about the first question, or I guess it was my second question, where you’re kind of fighting at least a 15% headwind and still coming up flat is how I was -- is another way to frame that 25%...

Flat -- assuming those things materialize we’re seeing additional margin points. So margin dollars should be up for the year.

Yes. And then, I don’t know if you’re willing to comment on it, but gross margin dollars up for the year. What about adjusted EBTIDA? You finished out 2022 with adjusted EBITDA $5.2 million and a 7% adjusted EBITDA margin. What are we thinking about for 2023?

So, it’ll be very consistent with that which -- that which we reported in 2022 as a result of some additional expenses that we’ll be incurring. It’s going to be flat right around $5 million.

And then, Dave, you said the CEO search is underway, got some good candidates, and we should think about kind of a mid-year hire. Is that correct?

Yes. It may happen sooner because we’ve got really good candidates we’re talking to right now, but that’s what internally we’re targeting, and I’m just staying flexible. So, if it’s quicker, fine; if it takes longer, I’m here.

Your next question comes from the line of Joe Gomes from Noble Capital. Please go ahead.

I wanted to start, maybe you could just kind of walk us through a little bit more, I understand the military opportunity. But a year ago, Dave, we were all about autonomous trucks and how that market was the real one that we’re going after. And we’ve kind of made the big switch here now to the military. Just trying to get a better handle as to what caused that and what is now the plan on the autonomous truck side. Where do you see that business growing? I know you talked about two of the clients were the top 10 in revenues for 2022. How do you see that going into 2023?

Yes. So Joe, thanks for this question. It’s a great question. And I understand why you’re asking it. What -- I don’t think this is apparent to some people because of that great contrast is that when we launched AI Transportables in 2021, we said we were going after the military and industrial markets. I could even share with you the fact that originally we thought of only doing the military market, because we thought it was the biggest opportunity, but then we said, you know, anything industrial is going to be quicker. So, let’s put the heaviest focus on military, but we’re just not going to be able to talk about it much for a while until things start to develop. Because it just takes longer. So, that’s really what happened. And we pitched AI Transportables. We were making some progress. The truck guys came alive. We shared that with the marketplace as proof points. And now that we feel good about what’s going on in the military, we feel like we can talk more about that. So, then that brings, okay, where are the trucks? We still believe the trucks are the same place that the last couple calls. And how I communicate that it’s a good business, it ends up being in our top 10 kind of customers. We expect growth out of it. And it is something that at some point in time could be a very strong inflection point on revenue as things go into production. And our intent is to stay in that market and be at production solution. But at the same time, as we’ve said before, we did not want to bet the farm on it because of the higher risk reward aspect of it. So, it’d be great if it happens. We’re going to try to make it happen. I think we will. But I think the building blocks of the Company as we layer in just dependable businesses that are going to build year after year, high margin, rack and stack them is going to be on the military side. And I believe that will drive a lot of the value of the company in my opinion.

Okay, great. Thank you for that. And then, just wanted to clarify. You talked that you are now engaged with 8 of the top 10 largest prime contractors in the military side. You mentioned something about if one of these programs hit, it could be equivalent to the P-8 program, which is let’s call it $30 million over a five-year period. Did I hear that correct? I mean, you are still talking about that same type of timeframe for the revenue?

Yes. I really was saying that just one of those primes and some of the stuff because it’s so broad. If we just close what we had, it would be a larger account. So, for example, I think the one I made that comment on, we have more activity today in the short period of time on more programs than we had at our biggest customer. So, it’s just a broader -- we are hitting on more cylinders there than we do on our biggest account. But John, I don’t want to mislead anybody. It’s going to take some time to turn that into revenue and everything, but you are going to see some of it in 2023 as they do different funding or they buy a couple of this or whatever at high ASPs. And that’s part of the revenue growth during the year in addition to the clients we already have.

Okay. And then, one last one for me. You guys have always stated that the long-term margin objective was in that 35% to 40% range. Given kind of Disguise now falling off and hope for significant growth on the military side, which carries margins up to that 60% level, are you still targeting that 35% to 40% level? Is that something that maybe you will see creep up over time here?

We definitely believe it’s very doable. And part of the reason is the OSS classic business today when you remove the media and entertainment is in that kind of range.

Thanks for taking the questions.

Yes. The OSS classic business fluctuates when you pull out the media and entertainment somewhere between 35% and 45% on average. And we have contributors from customers anything from as high as 70% and we have other ones that are lower.

Thank you.

Your next question comes from the line of Brian Kinstlinger from Alliance Global Partners. Please go ahead.

Good afternoon. This is Shervin [ph] on for Brian. Thanks for taking my questions. Could you -- I also had a question about autonomous trucking. Last quarter, you mentioned about multiple times in the prototype phase. I wonder, if over the last quarter had any more entered the prototype phase, and when or what does the next phase look like? When do you see -- if you have any sort of visibility of when these customers will move into it and the impact it will have on your business from a revenue point of view?

Yes. The prototype phase is -- it’s a long period of time. Fortunately, the ASPs are high. We may be introducing another account in -- this quarter we are in right now. So there is more opportunities there. As far as a production part, depending on who you talk to, it could range anywhere from people’s belief that’s ‘24 to people’s belief that’s 2030, depending on how they look at it. But, what I believe will happen is that they buy, say 25 of them at a time, they do all their work. I believe what’s going to happen next is the FedExs, the Amazons, all these companies that have planned to use autonomous trucks will want to start to work on the logistics of this. And so, they’ll say, hey, we want to buy 25 -- we want to get 25 trucks even though a man still has to be in there because we need to start working the logistics of it. And maybe they limit it to a hub, to another hub or something like that. And we believe that could generate business to increase the size of these accounts over time. It wouldn’t be that inflection point type revenue, but it would be nice growth for us.

All right. Thank you. Next question, in regards to Rigel. I remember last quarter you mentioned that you were in the talks with the DOD to integrate Rigel into large airframe drones and land vehicles for combat. What has -- has there been any progress in those specific instances? And in Rigel in general, when can we start to see meaningful revenue start to ramp? Do you guys have visibility there?

Well, we continue to get more activity on Rigel at new opportunities and ones you mentioned are progressing. As far as revenue, we’ll ship revenue in 2023. But, it’s -- even the numbers I’m talking about, stuff, you’ve got our current customer and other ones layering in. It’s not tens of millions of dollars of Rigel or anything for this year, but it’s likely single digits of millions this year.

All right. Thank you. One last question that…

But just to add on to that, but that is where these things start to go, and deploy them into multiple vehicles and everything. That’s where the numbers start to add up pretty quick and is what has the possibility to grow -- fuel that kind of growth rate in 2024 we’re talking about.

And it’s also -- if you take what Rigel has brought us into several of these opportunities that we’ve actually closed with other programs. So, the autonomous trucks, a lot of people saw Rigel first out and said that’s what we want. And we gave them that capability maybe with something like the SDS server. And even the Army opportunity that we had announced last -- I guess it was this quarter, was something that started off because of the capabilities inside Rigel that they wanted slightly different. And we are doing the design based on that. So, Rigel is opening a lot of doors, even if it’s not producing its own revenue in those ranges that Dave was talking about yet as we close these deals.

That’s really good to hear. One last question in regards to your guidance for Q1, close to down 3% year-over-year is what I’m seeing. Is this just due to the faster drop off from Disguise or is there also a slower ramp of military demand that are working together to cause this drop-off? And then moving on from there, if there’s a steeper drop-off now from Disguise, which will mean a less steep drop-off later on in the year, should we expect revenue to be down for the first couple quarters, maybe flatten in the second and then growth in the back half?

So, first of all, if you -- what I tried to communicate earlier, if you looked at first quarter of 2022 and first quarter of 2023, and you pulled out the media and entertainment business, you would see very solid growth of our other core business. So, because the media and entertainment numbers dropped so much and it’s not a big part of our number anymore. So what we said is we think this quarter is where it’s at and we think the next several quarters step up quarter-after-quarter. Am I answering your question?

Yes. But so -- just to confirm, in terms of military demand ramping back up, is it going back up as you expected or are you still seeing longer like delays? And I know you said that it’s typically a cautionary business, but the past three quarters and even fourth quarter now have been relatively weaker. And I know there’s going to be more strength, but you don’t see that strength teetering towards the back.

We’re having a good Q1 in military.

There are no further questions at this time. I’d now like to turn the call over back to Mr. David Raun for closing remarks.

Thank you, everybody, for joining us today. We’ve enjoyed sharing the latest progress at OSS with you today, and believe the Company’s strategy is solid and its future is bright. We look forward to speaking with you again in May, if not sooner. In the meantime, as always, feel free to reach out to John or myself at any time. And with that, let’s go ahead and wrap up the call.

Thank you, sir. Now, before we conclude today’s call, I would like to provide the Company’s safe harbor statement that includes important cautions regarding forward-looking statements made during today’s call. One Stop Systems cautions you that statements in the presentation that are not a description of historical facts are forward-looking statements. These statements are based on company’s current beliefs and expectations. Such forward-looking statements include, for example, those regarding the Company’s expectations for revenue growth generated by new products, future changes to its business objectives and design wins amongst other things. The inclusion of such forward-looking statements and others should not be regarded as a representation by OSS that any of its plans will be achieved. Actual results may differ from those set forth in the presentation due to the risks and uncertainties inherent in our business, including, without limitation, that the market for our products is developing and may not develop as we expect, military conflicts, global pandemics and other disasters or public health concerns, including COVID-19 in regions of the world where we have operations, customers or source material or sell products may affect such market. Our operating results could be negatively impacted by inflationary pressures, supply chain constraints, increased interest rates or other economic conditions. Our operating results may fluctuate significantly, which would make our future operating results difficult to predict and could cause operating results to fall below expectations or guidance. If we are unable to offset anticipated future decreases in revenue in our media and entertainment space with other business, our operating financial results may be adversely affected. Our ability to successfully integrate the operation systems, technologies, product offerings and personnel with acquired companies, if any, may prove difficult and adversely affect our financial results. Our products are subject to competition, including competition from the…