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spk00: 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.
spk04: 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.
spk02: 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.
spk00: Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touchtone phone. If you are using your speakerphone, you need to pick up your handset first before pressing any numbers. Once again, if you have a question, please press star then 1 on your touchtone phone. Standing by for questions. And our first question comes from Walter Belger, hometown capital. Your line is now open.
spk01: Yeah, hi. I was just wondering, could you provide any additional color on what you guys are focused on in the product development front?
spk04: Sure. This is John, Walter. The hardware that we have has a lot of capability that requires a digital system to take advantage of it, and our thread emulation system takes advantage of our upconverter hardware and we're working on a solution that's now taking advantage of our down converter hardware. So that's one product. And the next thing that we're working on, it's kind of going on in parallel, those two systems are being connected. So the way you test these complex machines that the Defense Department uses, you stimulate them, you listen to what they respond, And then you adjust what you stimulate them with. So you're trying to put them through all the paces that they would go through when they're deployed in a battle space. That's very difficult to do with a static machine that's only playing back a prerecorded scenario. Our scenarios are active, and they essentially do a dance with the device under test. And that's a very complex thing to simulate. So that's what we're working on.
spk02: And let me enhance that a little bit, because that was very much the original work that John started out with, and that is our system is architected like a radar but built like a test system, but it's also real-time. So to be able to drive out a radar signal to a jammer, for the jammer to jam the signal, and then for the radar to adjust itself because it is being jammed, is an extremely difficult problem. And with our unique architecture, with John's unique architecture, we have that capability. So we are enhancing our system to provide for that closed-loop capability. In addition to that, we are also enhancing our system to improve the performance speed by a factor of 100. So there is some major stuff going on.
spk01: Okay, great. Yeah, thank you. That's helpful. That's it for me. So, yeah, good luck, guys.
spk04: Thank you, Walter.
spk00: Thank you. Our next question comes from Franz from Ameriprise. Your line is now open.
spk03: Okay. Hey, I'm sorry, guys. I missed a lot of the call. I had problems, and then I accidentally got cut off somehow. But I heard, Lutz, you talked about – an order, a very important order? Was it received from a national lab, you said?
spk02: Yes. But John will answer that because it's a unique application.
spk04: Well, he was talking about a recording system, playback and recording system that we've invented that's called Compass. That's our trade name that a national lab has purchased. They're developing a mapping radar, and this digital system is characterizing the stuff that they're working on. They're eventually going to add RF hardware to that, so we expect a second order for additional equipment. But the nice thing about the lab is that they have multiple programs going on at any one time, and we actually have received orders from two separate programs because one program heard about the other using our stuff. And we're expecting an order from a third program within the same lab. So we've got quite a good reference site building at that location.
spk03: Okay. And these will be, did you say like you didn't have, they only ordered part of the system? Because you were saying that they were going to add the radar component? Yes.
spk04: Frank, they work on things in a sequence themselves, so they don't need the RF hardware right now. They only bought the digital piece, and they will be adding the RF hardware later when they get to that point in their program.
spk03: Okay. And they – so – I thought Lutz said something about three systems. You're referring to, I guess, the three different programs?
spk04: No. I think one of the programs has purchased two systems, and then the second program purchased one, and we expect another one from the third system this quarter, actually.
spk03: Okay. And this has nothing to do with welfare. I don't know what mapping, you mean like mapping the ground software? Yes.
spk04: Well, it's a synthetic aperture radar that's used for a variety of things, but one of them is ground mapping.
spk03: Okay. And then you're still expecting, I guess, a lot of training, you know, systems for the training on the range, but have those been delayed too?
spk04: The contract that the Air Force was negotiating with the Department of Defense got delayed, and that was the source of funding for these systems. But I believe, maybe I should let Lutz answer this, I believe that those contracts are now in place, and we're waiting for the PO to wend its way through the government's bureaucracy.
spk03: Okay. Okay. And so, I mean, are there many of these systems that you expect to be ordered near-term, the training systems?
spk02: The answer to that is yes. I mean, it's a question of the word many and near-term. But yes, there are multiple opportunities in at least five or six different, you know, ranges or bases that we are addressing. And so, Five different programs. So, yes, and each program will need multiple of our products. So the answer is yes.
spk03: Okay. Yeah, and I'm sorry. I had problems with my phone. That's why I missed. So I heard parts of these. So you've got the mapping systems, which will lead to complete orders at some point. some point and the training systems, you know, I mean, those, was that, is this, at one point early on, I think you referred to that there's a new procurement method, was it, that you're going to have? Correct.
spk02: This is, so the procurement method that we went through over time was initially what's called GSA, General Service Administration, which takes a long time. That then got switched whereby they engage a third party, the military, to buy the equipment, but that costs them 15% to 20% more but reduces the overall procurement cycle. So the concept of reducing the procurement cycle and not paying 15% or 20% gets us to the third domain, which is called IDIQ. Indetermined... Indefinite... Quantity.
spk04: That's the Q. And indefinite delivery.
spk02: Okay, indefinite delivery, indefinite quantity. And so that, once that is in place, that's a funded program under which government can then quickly order, you know, material without paying the 15 or 20%. And so that is what we are looking at for the IDIQ.
spk03: And that's happened then? I mean, this new contract, it's in place, the Air Force has with, I don't know, the IDIQ is in effect so they can start to order systems for the ranges?
spk02: Yes. The answer to that is yes, but we have not yet physically seen the order as a result of that.
spk03: Okay. And that'll be a standing order going forward. So it'll be, I guess, hopefully a lot simpler.
spk02: It should be vastly simpler. As a matter of fact, in the military space, if you talk to somebody, IDIQs are the ideal way of purchasing.
spk03: Right. Okay. Okay. And so these... And then you hired a new, you also mentioned you hired a new TEMS, you know, somebody to just sell these TEMS systems. Is that something you said also?
spk02: Yeah, I know. This is a gentleman who comes from the military who has run programs in this very space. So he's very familiar. He knows all the people. He knows the procurement process. And so we hired that experienced person. in florida so basically on the east coast because uh our vice president of sales on the west coast and there's a lot of military business on the east coast so that's uh where we hired him okay okay so we're very excited about that but all of that takes a little time because that's only since the beginning of this fiscal year
spk03: And I guess the filter business you expect to continue steadily for the balance of the year? Correct. Okay. Well, I'll listen to the replay and maybe later have some other questions. Sorry about that. I just wanted to try to ask questions about what I thought.
spk02: Okay. Thank you, Frank. Thank you for supporting the company.
spk00: Thank you. And we have no further questions in queue.
spk02: So I'd like to sort of make a conclusion. While our performance has been really inconsistent, it's important to stay focused on the big picture. First, as Frank just mentioned, the strength of the microwave filter business, which I call, by the way, our rock, it provides us with a steady cash generation capability. Secondly, With an improved pipeline in electronic warfare radar testing, we expect to be positioned for a better second half of this fiscal year. Third, with over $23 million invested in the radar EW technology and a growing list of patents, there is a considerable unrealized value in what we have, a truly unique disruptive product capability. Longer term, the market opportunity for EW testing is very attractive, and we are improving our go-to-market strategy to gain market share. With a tight capital structure and high profitability on incremental revenue, especially in the EW testing business, the economics are very attractive as we grow this business. Thank you for your support, and we look forward to speaking with you the next quarter. Thank you.
spk00: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect.
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