Good afternoon, and thank you for joining us today to discuss One Stop Systems Financial Results for the Second Quarter ended June 30, 2023. With us today are the Company's President and Chief Executive Officer, Mike Knowles; and its Chief Financial Officer, John Morrison. They are joined by the Company's Chief Product Officer, Jim Ison. Following their remarks, we will open the call to your questions. Then, before we conclude the call, I will provide some important information 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 call over to OSS, President and CEO, Mike Knowles. Sir, please go ahead.

Thank you, Darryl, and good afternoon, everyone. In the first half of 2023 OSS implemented strategic organizational changes designed to accelerate our growth, particularly focused on ramping up our defense business and our AI Transportable product sales. To support this strategy, on June 5th, the company appointed me President and CEO, allowing me to leverage my experience and expertise in the global defense and commercial markets to accelerate the implementation of our strategy and grow revenue. As an update to the Board of Director reprofiling that was previously disclosed, I'd like to announce that Jack Harrison, who has been serving as Chair of the Nominations and Governance Committee and Sita Lowman, who has been serving as Chair of the Compensation Committee, have resigned from the OSS Board of Directors effective as of the end of Q3. I want to thank Jack and Sita for their numerous contributions. In their place, I'm pleased announce that effective as of the end of Q3, Michael Dumont and I will be joining the OSS Board of Directors. Mr. Dumont is a retired three-star admiral whose career includes having served as the deputy commander of U.S. Northern Command and Vice Commander of North American Aerospace Defense Command, otherwise known as NORAD. Admiral Dumont currently serves as Interim President of The California State University Maritime Academy. He is also a licensed attorney with both defense and commercial experience and currently serves on the Board of Directors of the Marines’ Memorial Association, the board of advisors of Dataminr and the national security advisory council of the U.S. Global Leadership Coalition, as well as the OSS Advisory Board. We are actively pursuing additional reprofiling activities for Q4. I'd also like to note they've recently announced the addition of Robert Kalebaugh to the team as Vice President of Sales,…

Thank you, Mike, and good afternoon, everyone. Thank you for joining us today. Today, we issued a press release with our results for the second quarter ended June 30, 2023. The release is available in the Investor Relations section of our website at onestopsystems.com. Our consolidated revenue in Q2 totaled $17.2 million, up 2.3% sequentially, but declined 6% from the same year-ago period. As anticipated, the decline was due to decreased shipments to our legacy media and entertainment customer and a reduction in product shipments into the autonomous trucking industry, which is going through consolidation and financial hardships. We also experienced delays in defense orders. We have substantially fulfilled the remaining orders associated with our media customer, and we do not expect further measurable business from them. As covered in our previous calls, this drop in the entertainment business resulted from acceleration in our customer's investment in cloud technology and a drive towards less intelligent compute capability at the edge. This is particularly true of the virtual products, which do not require the same level of ruggedization as this system is not typically operated in harsh environments. Approximately $3.3 million of our quarterly decline in revenue was from the low margin legacy media business, which was partly offset in the quarter by our AI Transportable revenue. While we've experienced some delays in orders during the second quarter, it is important to note that our win rate has remained at previous levels. As you know, our company's business is comprised of two segments: OSS Classic and OSS Europe. OSS Classic is involved in the design and manufacturer of high performance ruggedized computers, flash arrays, and connectivity. OSS Europe primarily operates as a value-added reseller with minimum product customization and an increased focus on selling OSS core products into the European community.…

Thank you, John, and good afternoon, everyone. In Q2, we added six new major program wins. We expect these wins to yield about $3.3 million in revenue this year across both OSS Classic and OSS Europe. Three of these wins were in AI Transportables, including commercial autonomous watercraft and autonomous trucking server, and a defense submersible application. The remaining wins included an industrial IoT and two datacenter composable infrastructure applications. The autonomous watercraft application is our second customer win for commercial harbor patrol craft that combine several AI applications into a single OSS SDS server. These customers combine the self navigation functionality with the ability to fuse data from high resolution video, infrared imagery and various sensors to provide full spatial awareness. This sensor fusion allows the watercraft to perform vessel identification, escort, security, and other port services. The autonomous truck application is the first navigation server within a new customer providing autonomous company campus goods transportation. The third AI Transportable application was a defense customer win for submarine AI sonar processing. This win combines our highly capable SDS server platform with innovative OSS liquid cooling techniques to provide datacenter capabilities under the sea while reducing the noise signature well below that of our competition. During the quarter, we also announced the $3.5 million U.S. Air Force Electronic Warfare simulation program win through a new prime contractor for our SDS storage servers. Our ability to expand our footprint with various customers then win multiple designs within an account is key to our growth strategy and for strengthening our leadership position in AI Transportable applications. We also added seven new pending major programs during the quarter. We expect such pending major programs to each generate $1 million or more in revenue over four years with a 60% or greater likelihood of…

Thank you, Jim. We see OSS as a unique and promising inflection point with the growing adoption of our superior AI Transportable edge computing and storage technology. We believe our AI Transportable solutions can have a dramatic impact on warfighter readiness and commercial business objectives. In the defense market, edge computing is important because the U.S. and its allies have chosen a distributed or decentralized command and control strategy. This approach has been adopted by the Department of Defense and named The Joint All-Domain Command and Control or JADC2, and it has been driving the increased demand for AI-enabled edge processing sensor fusion autonomy and simulation. According to this strategy is ability for commanders at the battlefield edge to be able to integrate and fuse sensor, command and communications data to assess, decide, and act faster than the centralized command and control operations of its adversaries. Our capabilities and products are key to this strategy and our ability to implement AI processing in the most rugged environment. In the commercial market, AI is now considered part of the fourth industrial revolution, so we see implementation similar to the military being required at the edge where sensor and decision systems can interact to support rapid conversion from assessment to action. Most notably, we see this in commercial industries where the sensor fusion elements such as radar, lidar, laser, and infrared are collated and processed by AI to support workflow or autonomous operations. In all during the first half of this year, we continue to advance our market position in AI Transportables with our solutions contributing to the future of commercial and military ruggedized edge processing. I'm excited to build on our strategy driving growth in both defense and commercial markets and creating a powerful business model. OSS now has the right team, products and innovation to succeed in the global marketplace. I've had the opportunity to share some of the same thoughts I communicated today while meeting and talking with investors over the past two months, and I'm encouraged by the commitment to our company and strategy. I believe it reflects the strong position and forward path for the company. As I look at the near-term, however, for the third quarter of 2023, we'll witness the impact of the market delays we have discussed. As a result, we anticipate revenues of approximately $13.5 million. As stated earlier, this is a result of delays in the defense market and the forecasted timing expectations. In the commercial market it is a result of the consolidation and delays in autonomous trucking market and overall conservative approachment to investment in spend. I'm confident with the addition of Robert Kalebaugh and the support of the team will successfully work through these issues, and I reiterate that we have the strategy, products and team to execute and grow the business. Now, with that, we'd like to open the call to your questions. Darryl?

Thank you. [Operator Instructions] And we'll first go to Scott Searle from ROTH MKM. Go ahead, Scott.

Hey, good afternoon. Thanks for taking my questions. Mike, congrats again for coming on Board and thanks for all the color in the opening monologue. Hey, maybe just to dive in quickly on the third quarter, I want to clarify. I think I heard correctly that disguise will not be in the third quarter results. Just wanted to clarify that. And then sequentially, as you're looking into the fourth quarter, is there a little bit of a recovery there despite the push outs? And when do you expect some of that $5 million to $6 million to start to come into the P&L? Is it in the first half or does it slide a little bit further than that?

Scott, thanks for the question. So as to the Disguise business, we principally have moved on from that business. There's some small trailing bits that we'll see in Q3, but very small and negligible. As to the delays we're seeing and the push outs from this year, there is risk that we'll see that in the fourth quarter also. Robert Kalebaugh and I are now working through the pipeline and our modeling of that to get a better feel of what that looks like and the timing. And so we'll expect to be working on that in the coming months.

Got it. And Mike, given your background, I'm wondering what you could provide in terms of color of the level of interest for Rigel and other products within the defense opportunity. Is there a tremendous amount of interest? Are you encouraged by the signs that you're seeing? And what do you think the sales cycle looks like to try to start to get embedded and post some wins?

Yes. Scott, thanks. I'll try to address those. If I miss one of the kind of the questions there just let me know. Yes. So I've been very encouraged by the product line and not just Rigel. Rigel is a great leadership door opener and provides great capability. But as I mentioned in my notes in the earnings call, it is the scale of opportunities of products that we have from top to bottom. And while I was able to meet with existing customers that the company had before I joined. I've worked through my Rolodex over the past two months working through some 75 plus contacts and been able to turn some of those in meetings over the past two months. And I've seen general response in the same as we've been able to explore with a number of customers and prime contractors, additional areas where they have opportunities and programs they're going after. And just I've been excited by the scalability that we can bring to that. As I mentioned, top-end Rigel, we slate in very nicely at a price point for large productions with our short-depth server or the SDS. And as we're growing the entrance of Cernis and Donati at the next lowest level, it's really drawing a lot of attention in those areas. So I'm encouraged by the full breadth of pipeline and by the defense market and that – where those could be adopted really across air, land and sea platforms.

Got it. Very helpful. And if I could, it's interesting to hear you talk about potential AI opportunities and partnerships there. I'm wondering if you could flush that a little bit in terms of what we should expect over the next several quarters as we will be looking for some more formal announcements and relationships on that front. And along with that, building up the defense and military opportunity, does that require some new costs from an infrastructure standpoint on behalf of OSS?

Yes. Great. Scott, so on the artificial intelligence partnerships that we're looking at, so it's something new we've engaged in starting to build and develop here. As I understand the market and places I've worked and we spoke to customers, we've generally been offering a hardware-only solution by potentially partnering with some AI providers. We do a couple things. We can bring a more developed or targeted, more fully integrated solution that allows us to maybe get more direct access to the actual services themselves than going through a prime that creates additional opportunity for us. The additional thing it does is there's a lot of AI companies out there, software-only, that are doing the same thing. They're trying to find application for their software with no hardware solution to go in to provide an end-to-end integrated solution. So as we're starting to open and explore these partnerships, we're going to see opportunity not only to collaborate on programs and efforts, but obviously, potentially to develop more integrated products. I think that will span a range there of time and where we'll expect to see some of these provide positive impact to the growth of the company. There'll be near-term opportunities that ourselves or others maybe going after with stated programs and requests for proposal from the services. Those could provide near-term opportunity, as we build some partnerships and develop some concepts and more fully integrated solutions, we'll then – it'll look probably more so like a normal 18, 24, 36 month product line where you're developing and building in a specific capability. So we'll really win the range. We'll have more to say on that as, Robert, myself and Jim and the team start to explore and expand those over the coming quarters.

Very helpful. Thanks.

Yes. You had a question on infrastructure, Scott. Actually we're well suited now, not only just from a production operation standpoint, but even moving into the clear facility aspect, given the operational layout we have in the facility here in Escondido. We have opportunities to take advantage of things like mobile SCIFs that are really well priced and we have space and opportunity to bring those in. So it should be negligible facility or capital impact as a result of the strategy.

Got it. Very helpful. Hey, and two more quickly, if I could kind of sneak them in. With autonomous vehicle slowing down, I'm wondering what has you excited on the commercial side of the equation. And the reprofiling the Board is very encouraging to see some new military-based DNA coming on Board. It sounds like, I think you said there were some further changes to come in the fourth quarter. Just wanted to clarify, if I heard that correctly. And my assumption is that Dave Raun continues to be involved with the company from a Board level going forward. Just checking on the high level thoughts from that perspective? Thanks.

Yes. Thanks, Scott. I'll maybe go to this reverse order. Yes. Commitment to reprofile the Board has been stated. We're pleased to announce with the two changes being made here in Q3. The Board continues to look to those reprofiling activities with some more plans for Q4, and they're actively working on those. Dave Raun is currently on the Board and continues to serve. So we're in a good position there. Your other question on the commercial side, we're still interested in the autonomous trucking space. We're still getting some orders. We're seeing some timing delays, I would say, in that large scale deployment or big move to production, what that inflection point looks like. So we're still interested in where that'll be and when that'll happen and we remain engaged with the customers. Ancillary to that, while I've spent kind of the majority of my two months really getting a lot of the defense stuff moving, Robert and I are going to spend a little bit more time here – extra time here now in the coming months, building out the commercial. But as you all have noticed or seen in the notes we just presented, we've seen some commercial move in harbor and maritime. We've seen some of that in Europe, so we have some commercial movement there. We're doing some stuff in the commercial aerospace area, so there's a number of areas where the composable infrastructure. So we're seeing a number of areas where people are still are showing interest and still gives us promise. But as I mentioned, Robert and I are going to really work through that pipeline and definition here with some added focus now that Robert's on Board and we've kind of, I would say, gotten the first big kickoff on defense.

Great. Thanks so much.

Thanks, Scott.

Thank you, Scott.

And our next question comes from Brian Kinstlinger from Alliance Global Partners. Go ahead, Brian.

Great. Thanks so much. Mike, welcome aboard. I'm hoping you can give some more detail on the decline in revenues in the third versus the second quarter for Classic OSS, obviously, specifically. Maybe from a high level, if you can help me with a couple of buckets. How much was defense revenue in 2Q? I assume it's zero in 3Q, maybe I'm wrong. How much was Disguise revenue in 2Q? And I assume it's close to zero in 3Q. And then how much pressure are you seeing on autonomous trucking and/or commercial?

Yes. Brian, I wouldn't say we have those breakouts right now. We could clearly follow-up with you on the specific numbers and those buckets that you would be looking for. As we kind of mentioned in the call, as we've seen right in the defense side, if you will, those delays have been identified as existing opportunities that we had to have just moved back in time. The customers just haven't moved to the actual placement of the order. And then, well, on the commercial side, very similar – very similar actions across a number of different vendors. Maybe if there's something specific to ask.

A different way to ask, in some past quarters there's already been delays in defense side. So I'm curious, was defense a meaningful revenue contributor in the second quarter?

So the answer there is yes. I mean, we're still tracking to that 25% of total company revenue being in defense that we're looking to move and more into the 50-50 range in the next two to three years.

Okay. Now listening to your comments, fourth quarter sounds like it's going to probably be similar to the third quarter, and assuming we don't see a hockey stick recovery in 2024, but knowing defense, it's gradual. Looking at expenses on the other side from the previous caller, what are you thinking in terms of right sizing the business? How do you balance as a new CEO investing, which doesn't sound like you have to make a lot of investments in growth, but you're keeping your current investments versus trying to manage to at least breakeven on the lower revenue?

Yes. I think as we had mentioned, we don't see a number of large investments coming. The opportunity in the pipeline that's there should give us room for growth. And that's what Robert and I are working through now. I feel confident and good in the pipeline as I've gone through it. The first set, I think with Robert on Board, we'll have opportunity to actually grow that pipeline in both the commercial and defense. And so we'll be able to leverage the existing investments products and strategies that we have just to build that growth.

And sorry, to be clear, because the heart of the question is, you're not thinking at this point with the much lower revenues than you've had in the first half of the year to be rightsizing expenses. Is that what I'm gathering? You'll be holding SG&A and operating expenses where they are, there's not going to be significant cuts?

That's correct, yes. I'm sorry if I missed that in first part of your question, Brian.

No worries.

And manage those prudently.

Okay. And then my last question is, as revenue in Classic OSS lacks the scale that it's had in the last several quarters. Are there a significant number – a significant scale of fixed cost that will need to get absorbed? And so now you'll see significant pressure on the gross margin line until you see that recovery.

Yes. The risk will be there for that with the fixed facilities and manufacturing overhead that we have with the declining revenue. We are taking internal even cost actions now to help manage that prudently against the delays in revenue.

Okay. Those are all my questions. Thank you.

Thank you, Brian.

And up next we have Joe Gomes from Noble Capital. Go ahead, Joe.

Good afternoon. Thanks for taking my questions. So I'm going to hit you guys up with the question of the day here about the outlook on revenues from a different angle. If I’m calculating here correctly from reading the releases, the first half of the year Disguise was accounted for about $6.3 million of revenue. But you also got 13 new wins that are supposed to contribute about $8.3 million of revenue in 2023, I think. So I'm just trying to wrap my head around how we go from that to the sharp decline in projected revenue definitely for the third quarter. And again, the previous caller said sounds like in the fourth quarter also.

So I can help answer some of that. The Disguise revenue is – there were 25% customer right then the prior years, and they're going to zero here, negligible in the next two quarters. At the time that's tailing off our OSS core product revenue is actually growing. That's what is – where we're coming in with the third quarter number. It's just not growing at the same rate that we had hoped it would be that we had planned for and that's where we're at.

Okay. On the autonomous truck customer that exited, was that one of your top 10 customers that you talked about in past calls? And with the slowing – that exit and the slowing growth there, is there the concern about any types of inventory write-off that would be necessary?

So that was one of our top 10 was one of the companies that left. And at this point, no, we're not concerned with the inventory write-off across the product we had for that market.

Okay. And one more for me. You talked about kind of moving into some of the classified work, and getting the secured facility. And I think you're going to need some secure on the labor side. And some of the other defense companies that I cover, people with security clearances are unicorns these days in terms of trying to get them costing an arm and a leg because there's so much demand for them. How are you guys set from a labor market on employees would have – that have current security clearances or will you need to ramp hiring up to bring more people on that have security clearances?

Yes. Joe, thanks for that question. So we have a couple people with security clearances right now. With the arrival of our facility clearance, we'll be able to start to process some additional people. I think – and you're correct, there is a market especially at those with special compartmentalized tickets that are difficult to find those employees and bring them in. I think what you're going to see in our journey is that at the secret level and that level of classification, we'll be able to do initial operation and find opportunities of where we're going and we'll be able to – as I mentioned here, we'll be able to put in very quickly a number of our employees to do just that. So I'm confident we can pull that. There's a couple of us that have had the higher tickets and security clearance that'll allow us to open up the doors to find opportunities. And then the nice thing about it we can secure those types of programs. If we'll either find people or have find it, time to transition them to get those tickets or those types programs that we're able to move those costs to bring the higher priced employees in if we needed to go find them. So we'll be able to make that happen. But for the market we'll be going and the initial opportunities we'll be going at, we'll be able to operate well at the lower classified level and we'll need a couple people to help translate mission applications. But we'll be able to most likely operate the product development, especially in our commercial products, still in the unclassified level. So the SCIF and the clearances will allow us to communicate more directly for requirements and customer understanding of implementation to start, and we'll be able to use our products and develop in the unclassified space.

Okay. Great. Thank you.

Thanks, Joe.

Thanks, Joe.

And our next question comes from Max Michaelis from Lake Street Capital. Go ahead, Max.

Hey guys. Thanks for taking my question. First one from me, just with the exit of one of your autonomous trucking customers, what gives you the confidence that you won't potentially lose another one, and then some other things you've been hearing from your economist trucking customers as well?

Sure. I'm going to let, Jim, who's been doing some recent work in that area, take you through some wins and where we stand in some place in that market.

Yes. So the market in general has had the Silicon Valley type of feel to it and the consolidation that's going on in there. So while there's some that are exiting, like too simple and embark were ones that were announced. There are still many like those that are backed by the large trucking companies like Daimler who owns Torc Robotics, and those are robust, and those are the types of customers that we also have. And those are the ones that you heard there was another design win that we had in a new autonomous truck customer. That's the type of a player in the market that we keep designing our products towards and keep bringing in.

Okay. Thanks guys. That's it for me.

Thank you.

Thanks, Max.

And we have no more questions at this time. I'd like to turn the conference back to Mike for closing remarks.

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

Thank you. 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 made in this presentation that are not a description of historical facts are forward-looking statements. These statements are based on company' 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 members of management and the board, design wins and M&A activity 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, and economic instability in regions of the world where we have operations, customers or source material or sell products may affect such markets. 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.…