Good afternoon, thank you for joining us today to discuss One Stop Systems' financial results for the second quarter, ended June 30th, 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. 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. I would like to turn the call over to OSS President and CEO, Mike Knowles. Sir, please go ahead.
Thank you, Daryl. 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 Nominating and Governance Committee, and Sita L. 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 to 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's 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, 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 that we have recently announced the addition of Robert Kalbaugh to the team as Vice President of Sales, reporting to me. Robert brings over 30 years of defense, business development, and domain experience in defense and commercial markets. I've had the privilege to work with Robert for a decade, and I'm confident that we will be able to leverage our experiences to enhance and improve our sales and marketing efforts to accelerate our strategy. Robert has taken leadership of our sales and marketing organization and is already active with customers, driving the team and updating tools and processes to create added efficiency, grow pipeline, and drive near-term and long-term bookings.
Jim Ison has retained a position as Chief Product Officer and now has the opportunity to focus his full attention and efforts within the product organization to ensure we continue to bring a roadmap of leadership products to the market. I appreciate his efforts over the past six months, having led both the sales, marketing, and product organization. Since assuming the position of CEO two months ago, I've had the opportunity to meet and engage with customers and companies in the defense and commercial markets. Through these engagements, I've been able to build my confidence and reaffirm the current company strategy and the opportunities in the AI Transportable space. Having done so, I don't need to see the need for a major adjustment to the strategy.
I'm confident the strategy and product focus remain valid because the markets continue to be backed by strong demand for AI, sensor fusion, and autonomy at the edge. I've observed how our products work across both defense and commercial applications and can serve as the underpinning for building a balanced defense and commercial business portfolio. I believe that our current business model will strategically serve our company and investors well. What I am focused on is leveraging my experience to further drive and accelerate the strategy and build greater momentum and pipeline. During these past two months, I've explored opportunities to create broader partnerships within our core markets and with artificial intelligence software providers.
We believe that these partnerships will unlock our ability to deliver fully integrated, higher-value solutions for our customers, so they can more successfully leverage artificial intelligence and machine learning operations for their direct mission or business objectives. OSS has established a good foundation for operations in the defense market, and as I've familiarized myself with the business and its operations, I will be implementing further improvements towards executing on our strategy. For example, AI and sensor fusion applications within the defense market are consistently moving more into the classified space where additional opportunity exists. To participate in this environment and capture these opportunities, we will need to have a security-cleared facility and create a cleared workforce. In this regard, I've already implemented actions on these efforts, and we expect to receive our facility clearance from the U.S. government by the end of the year.
In addition, we have already trained a facility security officer. We have also initiated discussions with our customers based on classified opportunities and will leverage these to add a secure classified information facility, referred to as a SCIF, and further broaden and enhance our opportunities in the classified space. From a business and organizational perspective, we will work to strengthen our operations to better execute the defense market, in the defense market. At the appropriate time, we will look to enhance our team by adding a contract specialist to deal with the complexities of defense contracting, auditing, and negotiating. We will move to certify our cost and accounting systems and further mature our International Traffic in Arms Regulations or ITAR process. To this end, we have the opportunity to leverage the Defense Mentor-Protege Program to assist and guide us in these areas through defense prime contractors.
We are actively engaged in discussions with multiple primes at this time. I also anticipate further developing our opportunity pipeline identification and forecast modeling process over the second half of this year. I've seen a need for improvement in the existing models and approach. This is consistent with the stage of maturation of OSS in the defense market. Improvement in these areas will allow for a better assessment of forecast and opportunity timing. Additional observations over the past two months indicate that we have a talented and motivated employee base. There are strong technical and product expertise in an innovation-driven environment that can deliver on products that will meet existing and future market requirements for rugged data center class edge processing. This will ensure we remain on the forefront of introducing the newest and highest level of performance for which OSS has made a reputation.
I'm also excited that we have an experienced operations team and facilities with capacity to meet projected growth and demand. Overall, the company has an energetic culture with a sense of urgency to succeed, reminiscent of environments I've worked in, where I've seen the greatest success and growth. I am pleased that my engagements with the customers have validated the capability and scale of the solutions we can bring to both defense and commercial markets. The scale from our high-end Rigel products to our mid-tier SDS products and lower-end Cernis and Donati products, give us the flexibility to deliver scalable performance at varying price points, which align to our customers' requirements. Additionally, our PCIe Express and storage products provide an added dimension of performance and value to our customers in attaining not only the highest levels of compute, but also the lowest latency and most flexible storage solution.
As I look at the company's forecasted performance, we will be met with revenue challenges due to opportunity delays. Fortunately, these delays, especially in the defense market, are not inconsistent with my experience and are not a reflection of the strategy, product offerings, or value of opportunity in this market. We are also seeing a softening in the timing of the commercial market, including consolidation and delays in autonomous trucking and a conservative approach to increasing hardware spending. Having said that, I have confidence in our strategy, our product offerings, and our ability to build a robust pipeline. As we execute in Q3 and Q4, our focus will be to build upon what I have discussed here today to grow and accelerate sales and revenue.
Before coming further, I'd like to ask John to provide the financial details for the quarter and Jim to expand further on customer wins and products. John?
Thank you, Mike. Good afternoon, everyone. Thank you for joining us today. Today, we issued a press release with our results for the second quarter ended June 30th, 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 entertainment business resulted from an 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 their 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 this low-margin legacy media business, which was partially 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 customers, our company's business is comprised of two segments, OSS Classic and OSS Europe.
OSS Classic is involved in the design and manufacture 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. In the second quarter, OSS Classic revenue declined 22.8% to $8.3 million due to the factors previously mentioned, while OSS Europe revenue increased 17.7% to $8.9 million. The OSS Europe increase was due to additional project-based business, including $1.2 million of OSS Core Products and an increase in the number of small accounts, as well as having more available inventory to ship as compared to the same year ago quarter. Overall, gross profit in the second quarter was $4.8 million.
The overall gross margin percentage was 27.9, as compared to 28.4 in the same period in 2022. The gross margin for our OSS Classic business decreased 3.8 percentage points to 29.2, which was attributable to the predominance of lower margin sales to the company's media customer and higher mix of third-party components. OSS Europe's gross margin % improved 4.8 percentage points to 26.7%, as compared to 21.9% in the same period in 2022, due to product mix, the sell of higher-margin OSS Core Products, and having sought-after products readily sold at a premium. Overall, quarterly operating expenses increased 71.1% to $8.2 million.
with operating expenses as a percentage of revenue increasing to 47.7%, compared to 26.2% in the same period in 2022. The most significant component of this increase was a $2.7 million write-down, attributable to an impairment of goodwill, resulting from the overall financial performance of OSS Classic as compared to plan, the transition of our focus to AI Transportables in the defense industry, and lastly, the deferment of certain orders. Another significant component was an increase of $1.3 million in general and administrative expenses, with $1.1 million attributable to increased costs associated with our organizational restructuring and strategic transitioning of senior management and outside professional services. Such transition costs include additional wages, legal fees, search fees, stock compensation, and additional compensation attributable to the Strategic Transition Committee.
This increase in operating expenses was partially offset by decreases of $241,000 in marketing and selling expenses and $297,000 in R&D expense. Loss from operations totaled $3.4 million, compared to income from operations of $402,000 in the same period in 2022. This reduction was predominantly attributable to lower revenue, the write-down attributable to the impairment of goodwill and transition costs. Net loss on a GAAP basis was $2.4 million, or a loss of $0.12 per share, as compared to net income of $323,000, or $0.02 per share. Net loss in the second quarter also included a one-time benefit of $1.3 million, attributable to the receipt of COVID-19 funds under the government's Employee Retention Credit program.
Non-GAAP net loss was $84,000 or $0.00 per share, compared to non-GAAP net income of $871,000 or $0.04 per share. Adjusted EBITDA, a non-GAAP metric, was $487,000 or 2.8% of revenue, a decrease from $1.2 million or 6.5% of revenue. Each of these non-GAAP metrics include adjustments of $2.7 million for the impairment of goodwill and $1.3 million for the Employee Retention Credit. Turning to the results for the first half of 2023 as compared to the first half of 2022. Our consolidated revenue decreased 3.9% to $34 million. The decrease in revenue in the first half of 2023 is due to the reasons discussed in reference to Q2.
Our OSS Classic revenue decreased 20.6% to $16.9 million. While OSS Core Products revenue is growing year-over-year, OSS Classic is experiencing delays in orders from the commercial and defense markets, which represent $5 million-$6 million of revenue, which we believe will be pushed from 2023 to 2024, and represents deferral only of revenue opportunities. OSS Europe revenue increased 21.5% to $17.1 million, inclusive of $2.4 million of OSS Core Products sales. As a reminder, OSS Classic is defined as all shipments from US operations delivered throughout the world. Similarly, OSS Europe is defined as all shipments originating from Europe operations. OSS Core Products are designed in the US and sold through both operations and tend to yield higher margins. Overall, gross profit was $9.9 million.
The overall gross margin percentage was 29%, as compared to 29.2% in the same period in 2022. OSS Classic gross margin percentage was 32.8%, a decrease of 1.5 percentage points as compared to 34.3%. This was due to the predominance of lower margin sales to our media customer and a higher mix of products with third-party content. OSS Europe contributed gross margin at a rate of 25.3% as compared to 21.5%, an increase of 3.8 percentage points due to product mix, an increased sale of OSS Core Products, and having sought-after products sold at a premium. Total operating expenses increased 45.1% to $13.5 million.
The increase was primarily due to an increase of a $2.7 million write-down attributable to an impairment of goodwill and $1.8 million in general and operating expenses, of which $1.4 million of the increase is due to increased non-recurring costs associated with the company's organizational restructuring and outside professional services. Such costs included wages, legal fees, search firm fees, equity compensation, and additional compensation attributable to the Strategic Transition Committee. The increase in operating expenses was partially offset by a decrease of $346,000 in R&D expense, resulting from more engineers being deployed on chargeable work, for which that expense is classified as a cost of revenue. Loss from operations totaled $3.6 million, compared to income from operations of $1.1 million.
Net loss on a GAAP basis was $2.8 million, inclusive of the $1.3 million Employee Retention Credit, or $0.14 per diluted share, compared to net income on a GAAP basis of $902,000 or $0.04 per diluted share. Non-GAAP net income totaled $6,000 or $0.00 per diluted share, as compared to $1.8 million or $0.09 per diluted share in the same year ago period. Adjusted EBITDA totaled $1 million or 3% of revenue, compared to $2.6 million or 7.3% of revenue. Both non-GAAP net income and Adjusted EBITDA included adjustments, including adjustments of the $2.7 million impairment of goodwill and the $1.3 million Employee Retention Credit. Turning to the balance sheet.
On June 30th, 2023, cash and cash equivalents totaled $6.1 million, with short-term investments of $9.3 million, for a combined total of $15.4 million. This combined total represents an increase of $2.7 million as compared to the prior quarter. This increase is primarily due to the Employee Retention Credit and a decrease in working capital requirements. Consistent with our prior Form S-3 shelf registration statement filing that expired in May 2022, we anticipate that we will renew such registration and file a new Form S-3 later this month. This completes our financial review for the quarter. I would like to now turn the call over to our Chief Product Officer, Jim Ison. Jim?
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 Transportable, including a commercial autonomous watercraft, an autonomous trucking server, and a defense submersible application. The remaining wins included an industrial IoT and two data center composable infrastructure applications. The autonomous watercraft application is our second customer win for commercial harbor patrol craft that combines 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 data center 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 US 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 and 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 closing. Our pipeline of pending major programs at the end of Q2 totaled 33, with 19 of those involving AI Transportable applications in the U.S., Asia Pacific, and Europe. On the product front, over the last year, we have expanded our AI Transportable product line to target applications in multiple domains, from the high-performance Rigel Edge supercomputer for government air and sea vehicle deployments, to the highly integrated 3U SDS compute and storage systems that bridge rugged, commercial, and government vehicles, and the ultra-rugged Cernis/Donati for government land vehicle deployments. This complete product line includes our core PCI Express switch fabric technologies that enhance storage and AI application performance while significantly reducing latency, which is critical to these edge deployments.
As we complete plans to evolve our well-positioned product line to the latest PCI Express Gen 5 switch fabric during the year, we continue to make improvements in cooling technologies and creating valuable software products to solve edge computing's challenges. These licensable software products include fast data movement, storage, and remote system management, monitoring, and control. The full product line and more complete software offering are attracting full system solution opportunities that tend to make for larger and more sticky deployments, where recurring higher-margin software revenue and longer-term customers in commercial and defense markets. On our previous quarterly conference call, I introduced our proprietary Unified Baseboard Management Controller or UBMC. Since introducing our UBMC, we have received initial orders for it to be used in composable infrastructure, autonomous truck, and edge government deployments.
Both Rigel and our Gen 5 4U Pro Accelerator system include UBMC, with additional SDS and vehicle-deployed products to be announced later in the year. With that, I'd like to turn the call back over to Mike.
Thank you, Jim. We see OSS at 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 has been driving the increased demand for AI-enabled edge processing, sensor fusion, autonomy, and simulation. Core to this strategy is the 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 adversary.
Our capabilities and products are key to this strategy and our ability to implement AI processing in the most rugged environments. We see implementations 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 continued 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 innovations 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 their commitment to our company and strategy. I believe it reflects a strong position and forward path for the company. As I look at the near term, however, for the third quarter of 2023, we will 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 and spend. I'm confident with the addition of Robert Kalbaugh and the support of the team, we will successfully work through these issues. 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. Daryl?
Thank you. If you would like to ask a question at this time, please press star followed by the 1 on your telephone keypad. If you're calling from a speakerphone, please make sure your mute function is off to ensure your signal can reach our equipment. Again, it's star, then 1 to ask a question. 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, thanks for all the color in the opening monologue. Hey, maybe just to dive in quickly on the third quarter, want to clarify, I think I heard correctly that the Disguise will not be in the third quarter results. Just wanted to clarify that. Sequentially, as you're looking into the fourth quarter, is there a little bit of a recovery there despite the pushouts? When do you expect some of that $5 million-$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?
Yeah, Scott, thanks for the question. As to the Disguise business, we're principally of 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 pushouts from this year, there is risk that we'll see that in the fourth quarter also. Robert Kalbaugh 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. We'll expect to be working on that in the coming months.
Gotcha. Mike, given your background, I'm wondering what you, you could provide in terms of color of the, 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? What do you think the sales cycle looks like, to try to start to get embedded and, and post some wins?
Yeah, Scott, thanks. I'll try to address those. If I miss one of the kinda the questions there, just let me know. Yes, I've been very encouraged by the product line. And it's, 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's the scale of opportunities of products that we have from top to bottom. 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+ contacts and been able to turn some of those in meetings over the past two months.
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 where they have opportunities and programs they're going after. Just I've been excited by the the scale of buildability that we can bring to that. As I mentioned, top-end Rigel, we slayed in very nicely at a price point for large productions with that, with our short depth server or the SDS. As we're growing the the entrance of Cernis and Donati at the next lowest level, it's really it's really drawing a lot of attention in those areas. I'm encouraged by the full breadth of pipeline and by the defense market and that where those can be adopted really across air, land, and sea platforms.
Got you. Very helpful. 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 out a little bit in terms of what we should expect over the next several quarters? Should we be looking for some more formal announcements and relationships on that front? Along with that, you know, building up the defense and military opportunity, does that require some new costs from an infrastructure standpoint on behalf of OSS?
Great, Scott. On the on the artificial intelligence partnerships that we're looking at, it's something new we've engaged in starting to build and develop here. As the, as I understand the market and places I've worked, and we've, 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 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. As we're starting to open and explore these partnerships, we're gonna see opportunity not only to collaborate on programs and efforts, but also 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 may be going after with stated programs and request 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 look, look, probably more so like a normal 18, 24, 36 month product line where you're developing and building in a specific capability. We'll really run 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.
Great. Very, very helpful, thanks.
Yeah, 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 you. Very, very helpful. Hey, and, and two more quickly, if I could kind of sneak them in. You know, with autonomous vehicle slowing down, I'm wondering what has you excited on the commercial side of the equation? The reprofiling of 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, to, to clarify if I heard that correctly? My assumption is that David 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.
Yeah, thanks, Scott. I'll maybe go this reverse order. Yeah, commitment to, to reprofile the board has been stated. You know, we're pleased to announce with the two, two changes being made here in Q3. The board continues to look to those reprofiling activities with some more planned for Q4, and they're, they're actively working on those. David 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, you know, 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.
We're still interested in where that'll be and when that'll happen, and we remain engaged with 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 gonna spend a little bit more time here, extra time here now in the coming months, building out the commercial. As you will have noticed or read, seen in the notes we just presented, you know, we've seen some commercial move in harbor and maritime. We've seen some of that in Europe, we have some commercial movement there. We're doing some stuff in the commercial aerospace area. There's a number of areas where the composable infrastructure...
We're seeing a number of areas where people are still are showing interest, and so that still gives us promise. As I mentioned, Robert and I are gonna really work through that pipeline and definition here with some added focus now that Robert's on board. We've kind of, I would say, gotten the first gig, big kickoff on defense.
Great. Thanks so much.
Thank you, Scott.
Thank you, Scott.
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 OSS Classic, 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. Then, how much pressure are you seeing on autonomous trucking and, or commercial?
Yeah, Brian, I, 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 just move back in time. The customers just haven't moved to the actual placement of the order. Why on the commercial side, very similar actions across a number of different vendors. Maybe there's something specific.
A different way to ask. In, in, in some past quarters, there's already been delays in the defense side. I'm curious, was defense a meaningful revenue contributor in the second quarter?
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 more into the 50/50 range in the next 2 to 3 years.
Okay. Now, listening to your comments, the fourth quarter sounds like it's gonna probably be similar to the third quarter. 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 break even on the lower revenue?
Yeah, I, I think as we had mentioned, we don't see a number of large investments coming needed. 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, we'll have opportunity to actually grow that pipeline in both, in both commercial and defense. So we'll be able to leverage the existing existing investment products and strategies that we have to, to build that growth.
Sorry, to be clear, 'cause 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 right-sizing expenses. Is that what I'm gathering? You'll be holding SG&A and operating expenses where they are, there's not gonna be significant cuts?
That's correct. Yes. I'm sorry if I missed that.
Okay.
In the first part of your question, Brian. Yes.
No worries.
Manage those prudently.
Then my last question is, as, revenue and OSS Classic lacks the scale that it's had in the last several quarters, are there a significant number, a significant scale of fixed costs 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, I. The risk will be there for that, with, 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, manage that prudently against the delays in revenue.
Okay. Those are all my questions. Thank you.
Thank you, Brian.
Up next, we have, Joe Gomes from Noble Capital. Go ahead, Joe.
Good afternoon, thanks for taking my questions. I'm gonna, I'm gonna hit you guys up with the, the, the question of the day here about the outlook on revenues from a, from a different angle. If, if I'm calculating here correctly, you know, from reading the, the releases, the first half of the year, Disguise was accounted for about $6.3 million of revenue. You also got 13 new wins that are supposed to contribute about $8.3 million of revenue in 2023, I think. I'm just trying to wrap my head around how we, we go from that to, you know, the, the, the sharp decline in projected revenue, you know, definitely for the third quarter, and again, as the, the previous caller said, sounds like in the fourth quarter also.
I, I can, I can help answer some of that. The, you know, the Disguise revenue is, you know, they were 25% customer, right, in the pre- prior years. You know, they're going to, to zero here, negligible in the, in the next two quarters. At the time that that's tailing off, our OSS Core Products revenue is actually growing. That's what is, you know, where we're coming in with the, 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 the, your top 10 customers that you talked about in past calls? With the slowing of that exit and the slowing, growth there, is there the, concern about any types of inventory write-offs that will be necessary?
Yeah. That was one of, one of our top 10, was one of the companies that, that left. At this point, no, we're not concerned with, with inventory write-offs 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 you know, getting the secure facility, and I think you're gonna need some secure on the labor side. You know, in a some of the other defense companies that I cover, the people with security clearances are unicorns these days in terms of trying to get them, costing an arm and a leg, because there is so much demand for them. How are you guys set from a labor market on employees that have current security clearances or that you will you need to ramp hiring up to bring more people on that have security clearances?
Yeah, Joe, thanks for that question. 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, yeah, and, and you're correct, there is a market for, especially at those with special compartmentalized tickets that are difficult to find those employees and bring them in. I think what you're gonna see in our journey is that at the at the secret level and, and that level of classification, we'll be able to do initial operation and find find opportunities of where we're going. 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 to do just that.
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. The nice thing about if we can secure those types of programs, with if we'll either find people or time to transition them, to get those tickets or those type of programs that we're able to move those costs, to bring the higher-priced employees in if we needed to go find them. We'll be able to make that happen. 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.
We'll be able to most likely operate the product development, especially in our commercial products, still in the unclassified level. 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.
Our next question comes from Max Michaelis from Lake Street Capital Markets. 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? Some other things you've been hearing from your autonomous trucking customers as well.
Sure. I'm gonna let Jim, who's been doing some recent work in that area, take you through some, some wins and where we stand in some places in that market.
So, so the market, in general, has, you know, had the Silicon Valley type of feel to it, and there's the consolidation that's going on in there. While there are some that are exiting, like TuSimple 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. Those are the ones that you, 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, and keep bringing in.
Okay. Thanks, guys. That's it for me.
Thank you.
Thanks, Max.
We have no more questions at this time. I'd like to turn the conference back to Mike for closing remarks.
Thank you, Daryl, and thanks, everyone, 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. OSS management looks 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. Daryl?
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