Giga-Tronics Inc

Welcome to the Gigatronics Fiscal 2022 Second Quarter Earnings Conference Call. My name is Cheryl and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then 1 on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to John Ragazzi so you may begin.

Thank you, Cheryl. Good afternoon, and thank you for joining our fiscal 22 second quarter earnings call. I'm John Ragazzi, the company's CEO, and I'm joined today by Maya Chai, our corporate controller, and Dr. Lutz Henkels, our executive VP, CFO, and chief operating officer. Before we begin, I need to remind everybody that this conference call may include forward-looking statements, including statements about future results of operations and margins, future orders, growth, and shipments. Actual results may differ significantly due to risks and uncertainties, such as delays with manufacturing and orders for our products, receipt or timing of future orders, cancellations or deferrals of existing orders, the company's capital needs, the trading of our common stock, and the volatility in the market price of our common stock. Results of pending or threatened litigation and general market conditions. For further discussion, see our most recent annual report on Form 10-K. The fiscal year ended March 27, 2021, Part 1, under the heading Risk Factors, and Part 2 under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations. With those reminders in place, I will now turn the call over to Dr. Henkels.

Lutz? Thank you, John. Welcome to our second quarter fiscal 2022 conference call. The second quarter of fiscal 2022 was encouraging with a 33% growth in revenue and 2% net income. The growth was primarily driven by the Microwave Radar Filter Division or Microsource, which received a large order for radar filters from a prime contractor. The EW testing division received its third order for a campus system for a synthetic radar application from a large military research lab. These three initial systems are for the digital front end and are expected to be upgraded to full systems in the future. So we are very encouraged to receive these multiple orders for this application. At the same time, the EW Test Division did not receive certain large anticipated military orders which have long approval cycle and processing cycles and vary significantly from period to period. We believe that during the second half of fiscal 2022, we will be part of a military contract that greatly reduces the long approval cycles and uncertainties associated with military procurements. Let us now look at the detailed financial results. First, let's look at sales. Net revenue for the second quarter of fiscal 2022, ending September 25, 2021, was $3.6 million, as compared to $2.7 million for the same period in the prior fiscal year 2021. we show two components for the revenue for Q2 of fiscal 2022. The first component is goods of $297,000, which is for our radar slash AW test business. This $279,000 compares to $822,000 for the same period of the prior fiscal year 2021. Basically, we shipped a digital compass system during the second quarter of fiscal 2022, which is lower in revenue than our TEMPS system, which we shipped in the second quarter of fiscal 2021. The second component is for services of $3.3 million, which is for our microsource product line, namely for the radar filters, which are used in the F-15, the F-16, and the F-18 fighter jets. This $3.3 million compares to $1.9 million for the same period of the prior fiscal year 2021. As I have mentioned earlier, the Microsoft business typically receives large orders, which can cause swings in quarterly revenue. As you can see here, Q2 was very good in fiscal 2022, but not so good in fiscal 2021. But overall, that business is a very steady business. regular business over a year of roughly $9 million a year. Gross margins. The gross margins for the second quarter of fiscal 2022 were 37%. The gross margin for the second quarter of fiscal 2021 were 38.6%. The gross margin in the first quarter of fiscal 2022 were negatively impacted by the product mix, namely much lower EW radar test revenue. The radar EW test business has better gross margins than the microsource business, and so given that mix, the gross margin changes a little bit from 38.6% to 37%. Looking at the operating expenses now, they decreased by $197,000 in Q2 2020, FY22 when compared to Q2 FY21. R&D expenses decreased by $320,000, primarily due to increased capitalization of software engineering expenses, reduced consulting expenses, reduced personnel costs, and a greater portion of non-recurring engineering expenses for contract services, which were allocated to cost of revenue. As I mentioned in my last conference call, we had received a $726,000 engineering contract from a prime contractor. We are charging engineering hours for this contract to cost of goods sold. Looking now at the SG&A expenses, they increased by $123,000. This is primarily due to higher stock-based compensation, an increase in the headcount in sales, As I mentioned in the last conference call, we believe that our success in range applications, and with the pandemic issues largely behind us, we have a unique opportunity with our TEMS product, and so we added to sales personnel to take advantage of it. Looking at interest expenses, they declined from $32,000 to $12,000, and this is basically due to the PFG loan, which we paid off in March 2021. During that last quarter, we also recorded a non-cash gain of the pre-funded warrant of $46,000, which I will talk in a minute about when we address the balance sheet. Net income. Net income in the second quarter was $64,000. This compares to a net loss in the second quarter of fiscal 2021 of $474,000, so a significant improvement for the And that's all due to the reasons that I stated just earlier. Looking at EBITDA, which is an important measure in our industry, adjusted EBITDA excludes interest expenses, income taxes, other income and expenses, share-based compensation or stock-based compensation, and depreciation and amortization. Adjusted EBITDA income was $216. $38,000 in the second quarter of fiscal 2022 versus a loss of $308,000 in the prior year. This brings me now to the balance sheet. The two items worth noting on the balance sheet are the following. There's an increase in inventory of roughly $800,000 since the beginning of this fiscal year 2021. which is really March 28, 2021. This increase is primarily driven by an increase in the radar EW test division inventories. We anticipated last orders for temp system in the second quarter of fiscal 2022, which were delayed, as I had explained earlier. The other point on the balance sheet is the total shareholder equities. which increased from $4.2 million at the end of March 2021 to $5.3 million at the end of the second quarter of fiscal 2022, September 25. So during those six months, the equity increased from $4.2 million to $5.3 million. This increase is due to the $1.5 million investment in pre-funded warrants made by one investor who now owns over 20% of the company. This is also, by the way, for the first time that the shareholder equity is above $5 million since March of 2012. While we strengthen the balance sheet, it needs to be understood that the cash is mostly tied up in the inventory totaling $4.4 million. We need the orders for our EW test business to free up that inventory and generate needed cash. So in summary, we saw improvements during the second quarter over the first quarter of fiscal 2022 and over the second quarter of fiscal 2021. We have demonstrated how the business can run profitably at a modest revenue level. Now, the goal is to build on that progress we have made in the second quarter. Our EW division has a large market opportunity. However, that said, as a company, we need to do a better job gaining market share. We have invested over $23 million in this product. We have a disruptive solution for the market, and we are confident that we can gain market share over time. To that end, We are focused on five key points. First, expanding our application for the radar EW test products. We started out in the lab and we have made inroads with our product now for air crew survivability training and range testing. And this work is expected to secure multiple long-term revenue streams that should result in exponential growth over the next two to 10 years. Second, we have been expanding from the Navy to the other armed forces. We have broadened our sales initiative to additional parts of the armed forces, namely the Army, the Air Force, and the Marines. Third, we are developing more strategic wins at various centers of excellence of the Department of Defense. We have done so at NAVAIR with our TEMPS system, and we have now done so with our COMPASS system for the advanced radar development system at the National Laboratory. Fourth, we continue to improve our product. We continue to make major investments in R&D to enhance the product and to develop new applications to meet critical test requirements for next-generation weapon systems that currently have a void in the test capability. And then finally, the fifth point, we are improving our sales and marketing strategy. We have an enhanced sales team by having added an electronic warfare officer and Air Force program manager, and we will continue to invest in our sales and marketing strategy to improve our ability to broaden our customer base and the end market. I should point out there is a large military trade show in late November called the 58th Annual AOC Convention in Washington, D.C., where we will be exhibiting. So as you can see, incremental revenue are very profitable, and so we are focused on scaling the business. Thank you. We are now ready to take questions.