Giga-Tronics Inc

Welcome to the Gigatronics Fiscal 2022 Third Quarter Earnings 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. Please press star then one on your touchtone phone to be placed in the queue. Please note that this conference is being recorded. I will now turn the call over to John Ragazzi, sir, you may begin.

Thank you. Good afternoon, and thank you for joining our fiscal 22 third 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 everyone 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 and services, receipt or timing of future orders, cancellation 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 for 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 Fiscal Condition and reports of operation. With those reminders in place, I will now turn the call over to Dr. Henkels. Lutz.

Thank you, John. Welcome to our third quarter fiscal 2022 conference call. The third quarter of fiscal 2022 was very disappointing. The fundamental problem is the performance of the EW test division. which had only $500,000 of revenue in the first nine months of fiscal 2022, as compared to 3.5 million in the first nine months of fiscal 2021. The EW testing division did not receive certain large anticipated military orders, which have long approval and processing cycles and vary significantly from period to period. We believe that during the first half of calendar 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 results. First, let us look at sales. Net revenue for the third quarter of fiscal 2022 ended December 25, 2021 was $2 million as compared to 4.1 million for the same period in the prior fiscal year 2021. We always show two components for the revenue and did so in Q3 of fiscal 2022. The first component is for goods. of $164,000, which is for our radar EW test business. This $164,000 compares to $1.6 million for the same Q3 period of the prior fiscal year 2021. So basically, we shipped only one advanced signal generator during the third quarter of fiscal 2022 as compared to one temp system and two compass systems, which we shipped in the third quarter of fiscal 2021. I also should note that due to supply chain issues, we were unable to ship the backlog of $390,000. The second component is for services of $1.8 million, which is for our microsource product line, namely for the radar filters which are used in the F-15, the F-16 and F-18 fighter jets. This $1.8 million compares to $2.5 million for the same Q3 period of the prior fiscal year 2021. The Microsoft business typically receives very large orders, which can swing in quarterly revenue as it occurred in Q3 FY22 versus in Q3 FY21. We're now getting to gross margins. The gross margins for the third quarter of fiscal 2022 were 37.3%. The gross margins for the third quarter of fiscal 2021 were 38.1%. This slight change in gross margins is due to product mix. Now, operating expenses. Our operating expenses increased by $20,000 in Q3 FY22. when compared to Q3 FY21. R&D expenses decreased by $339,000. This is primarily due to increased software capitalization costs of engineering expenses, reduced consulting costs, reduced personnel costs, and a greater portion of non-recurring engineering expenses for contract services, which were allocated to cost of goods sold. So saying it in a different way, we received a $726,000 engineering contract from a prime contractor, and engineering hours for this contract get charged to cost of goods sold. SG&A expenses increased by $359,000. This is primarily due to large transaction costs related to the announced combination with Gresham Worldwide, also due to higher stock-based compensation, and to an increase in headcounts in sales. Looking at interest expenses, our interest expenses declined from $21,000 to $13,000, and that's basically due to the fact that we paid off the PFG loan at the end of March in 2021. Now, the net loss as a result of all of that, the net loss for the third quarter of fiscal 2022 was $793,000. And this compares to a net income for the third quarter of fiscal 2021 of $833,000. And that's for the reasons that I explained earlier. However, to more truly show you the actual income, we also show you what we call adjusted EBITDA. We define adjusted EBITDA to exclude income taxes, interest expenses, other income and expenses, share-based compensation, depreciation and amortization, and certain one-time income and expenses. We separated out the transaction-related expenses of $402,000 associated with the share exchange agreement with Gresham Worldwide. The EBITDA loss for the third quarter of fiscal 2022 was $213,000 versus an income of $187,000 in the prior fiscal year quarter. So with $2 million less in sales, we were able to limit the loss of adjusted EBITDA to $213,000. Looking at the nine-month period, The revenue of the EW test business was $512,000 in fiscal 2022 versus $3.5 million for fiscal 2021. As I mentioned earlier, the poor performance of the EW division is a fundamental cause of our disappointing quarterly results. But despite the $3 million drop in sales, we were able to limit the adjusted EBITDA loss to $582,000 in the nine months of fiscal 2022, versus a gain of $130,000 for the nine months of fiscal 2021. Without hesitation, we firmly believe in the potential of the EW test business. And we indeed invested nearly a million dollars in its inventory since the beginning of this fiscal year starting in April of this year in anticipation of orders and also to mitigate any supply chain issues. However, it is challenging as a small public company to continue to make these type of investments, a million dollars in nine months. We believe the combination with Gresham Worldwide will allow us to continue to build on our EW test investment and reap the benefits of our large investments in this market. This brings me to the balance sheet. The item on the balance sheet worth noting is the increase in the EW test inventories of roughly $1 million since the beginning of this fiscal year on March 27, 2021, which I just explained. The other point regarding the balance sheet is the total shareholder equity, which increased from $4.2 million at the end of last fiscal year to $4.7 million at the end of the third quarter of fiscal 2022. This increase is due to the $1.5 million investment in pre-funded warrants made by one investor who now owns over 20% of our company. While we strengthen the balance sheet, it needs to be understood that our cash is mostly tied up in inventories totaling $4.6 million. We need the orders for our EW test business to free up that inventory and with it generate cash. So in summary, as we have said, our business is lumpy, particularly in the EW side and this quarter amplifies that. That said, these results in no way change our confidence but there is a great opportunity on the EW side of our business. Our technology is extraordinary. It's unique, it's proven, and has multiple applications across the armed forces. In order to best leverage the over $24 million that we have invested over the last several years in the EW side of our business, we would benefit from more scale a broader management team, stronger sales and marketing capability, and larger investments in R&D. The combination with Gresham delivers that. By bringing these two businesses together, we create an attractive public company focused on growth markets. The company will have over $40 million in revenue with resources to grow both organically and as well as inorganically. The electronic warfare market is a multi-billion dollar industry. The total growth rate in this sector is in the mid single digits, but we are addressing a part of that market which supports a much faster growth and where we can gain market share. Gresham also has a $10 million EW business in Israel with complementary technology and capabilities and we will be able to leverage those capabilities. Israel is indeed a great market opportunity for us because they have the F-35, they have the U.S. equipment, and therefore it's a great opportunity for our company. This deal with Gresham provides us with a much stronger platform, a better balance sheet, and cross-selling opportunities that will truly help accelerate our ability to grow our revenue on the EW side of our business and to drive sustained shareholder value. Thank you for your support, and we look forward to speaking with you again. We now would like to take questions.