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spk00: Hello and welcome to the Gigatronics fourth quarter and fiscal year 2022 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. To ask a question, please press 01 on your touchtone phone. As a reminder, this conference is being recorded. I will now turn the call over to John Ragazzi so you may begin.
spk03: Thank you. Good afternoon, and thank you for joining our fiscal 22 fourth quarter and year-end earnings call. I'm John Rigazzi, the company's CEO, and I'm joined today by Mr. Rishi Mehta, our Vice President of Finance, 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, cancellations or deferrals of existing orders, the company's capital needs, the trading of our common stock, and the volatility in the marketplace 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 26, 2022, Part 1, under the headings 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. Lutz Henkels. Lutz?
spk02: Thank you, John. Welcome to our fourth quarter fiscal 2022 conference call. Our fourth quarter and fiscal year 2022 performance was very disappointing. The fundamental problem is related to the performance of the EW test divisions. which had only $770,000 worth of revenue in fiscal 2022 as compared to 3.7 million in fiscal 2021. The EW Test Division did not receive certain large anticipated military orders which have long approval cycles and processing cycles and vary significantly from period to period. However, Since March 22nd, 2022, we are now part of a military contract called IDIQ that greatly reduces the long approval cycles and uncertainties associated with military procurement. And as a result of that, following the close of the fourth quarter, we received our first order under this new contract vehicle in May of this year which totaled $783,000. We are encouraged by this order and believe that this signals a return to a more normalized level of contract award activity. Now, let us look at the detailed results. For the fiscal fourth quarter 2022, we reported revenue of 1.4 million which compares to $2.7 million for the same period in the prior fiscal year. That is a 48% reduction in the fiscal fourth quarter of 2021. For the fiscal year 2022, we reported revenue of $9 million compared to $13.1 million for the fiscal year 2021, a decrease of 31% over the prior period. As always, we report two components of revenue. The first component is for goods, which represents the radar electronic warfare test business. For the fiscal fourth quarter 2022, we reported revenue of $260,000 as compared to $180,000 for the same period in the prior fiscal year. That's an increase of 43%. from the fiscal fourth quarter 2021. However, basically we shipped mostly spare parts during the fourth quarter of fiscal 2022 and fiscal 2021, but no threat emulation system. So both quarters were basically doing poorly. For the fiscal year 2022, for the year, we reported revenue of 0.8 million dollars compared to $3.7 million for the fiscal year 2021. So in the threat emulation business, we saw a reduction of 78% over the prior period. The second component is for services, which represents our Microsoft product line, namely for the radar filters, which are used in the F-15, the F-16, and the F-18 fighter jets. For the fiscal fourth quarter 2022, we reported revenue of $1.2 million as compared to $2.5 million for the same period in the prior fiscal year. That's a 52% decrease from the fiscal fourth quarter of 2021. The Microsoft business typically receives very large orders which swing in quarterly revenue, which is what occurred in Q4 FY22 versus Q4 FY21. For the fiscal year 2022, we reported service revenue of $8.3 million compared to $9.4 million for fiscal 2021. That's a decrease of 12% over the prior period for the Microsource Division. Let me now go to the gross margins. The gross margins for the fourth quarter of fiscal 2022 where 28% compared to 30% for the same period in the prior fiscal year. The decrease of 2% in gross margins was due to product mix as well as lower revenue, which caused higher variances to absorb manufacturing overhead. For the fiscal year 2022, we reported gross margins of 36% compared to 38% for the fiscal year 2021, a decrease of 2% over the prior period. Now let us look at operating expenses. Our operating expenses consist of R&D expenses, selling expenses, G&A expenses, and one-time transaction costs related to the combination with Gresham Worldwide. For the fiscal fourth quarter 2022, we reported operating expenses of 1.56 million as compared to 1.65 million for the same period in the prior fiscal year. That's a decrease of $90,000 from the fiscal fourth quarter of 2021. This is mainly due to $306,000 reduction in R&D expenses because some of our engineering expenses were charged to cost of revenue, and also some of our engineering hours were charged to the capitalization of software, and we also had lower consulting expenses and had a reduction in personnel expenses. This was offset by $210,000 of one-time transaction costs associated with the announced combination with Gresham. For the fiscal year 2022, we reported operating expenses of $5.9 million as compared to $6 million for the fiscal year 2021, a decrease of $100,000 from the prior fiscal year. This is mainly due to a $1 million reduction in R&D expenses, which, as expressed earlier, we have charged expenses to cost of goods sold because of engineering contracts. And we also charged engineering hours to the capitalization of software. And we had also lower consulting expenses and a reduction in personnel expenses. This $1 million reduction in R&D expenses for the year was offset in part by from a $100,000 increase in sales expenses due to increased personnel-related expenses, including the addition of staff and sales. And it was also offset in part due to additional stock-based compensation expenses of $200,000, and then the $610,000 increase in one-time transaction expenses associated with the announced combination with Gresham. Looking at interest expenses for the fiscal fourth quarter 2022, our interest expenses net and others increased from $12,000 to $17,000 because of the $800,000 loan from the affiliate of VidNile. For the fiscal year 2022, we reported interest expenses net and others of $117,000 as compared to $97,000 for the fiscal year 2021. That's an increase of $20,000. In addition, in fiscal year 2021, we also reported a one-time gain of $791,000 on the extinguishment of the PPP loan. Now, summarizing that in the net loss For the fiscal fourth quarter 2022, we reported a net loss of $1.2 million as compared to $0.8 million for the same period of the prior fiscal year. This is an increase in losses of $400,000 from the fiscal fourth quarter of fiscal of 2021. For the fiscal year 2022, we reported a net loss of $2.7 million as compared to $390,000 for the fiscal year 2021. That's an increase of $2.3 million for all the reasons that I explained earlier. However, to more truly show you the actual performance of the company, we calculate 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, which in this case are the transaction expenses. We separated out the transaction expenses, which for the fourth quarter was $210,000 and for the fiscal year was $611,000. For the fiscal fourth quarter 2022, we reported an adjusted EBITDA of $740,000 loss and as compared to an EBITDA loss of $610,000 for the same period in the prior fiscal year. That's an increase in losses of $130,000 from the fiscal fourth quarter of 2021. For the fiscal year 2022, we reported an adjusted EBITDA loss of 1.3 million as compared to 0.5 million for the fiscal year 2021. That's an increase of 0.8 million dollars over the prior fiscal year period. So even though we incurred a reduction in revenue of four million dollars, we managed to hold the increase in adjusted EBITDA loss to 0.8 million dollars. We firmly believe in the potential of the EW test business, particularly the threat emulation business, which we call TEMPS. In fact, the 783,000 order that we received after the close of the fourth quarter was for a TEMPS system. Our technology will play a mission-critical role in the development, testing, and fielding of a new advanced weapon system program of record for the U.S. Air Force F-35 program. We have invested an additional $1.2 million in the inventory for the TAM system since the beginning of fiscal year 2022 in anticipation of orders and to mitigate any supply chain issue. However, it is challenging as a small public company to continue to make these type of investments. 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 investment in this market. That brings me to the balance sheet. You notice the increase in inventory of $1.2 million, which I just explained. The other point regarding the balance sheet is the total shareholder equity. which decreased from $4.2 million at the end of last fiscal year, 2021, to $3.7 million at the end of the fourth quarter of fiscal 2022. Basically, we were able to offset the investments that we made in the EW test business by raising both debt and equity funds. In conclusion, this was a very challenging, difficult year for our business particularly in the EW test division. However, with a new contract vehicle from the Department of Defense in place and the resulting renewed order activity which we have seen at the start of the fiscal year 2023, we believe we will see a more normalized contract award activity. Coupled with our unique threat emulation system capability, we are optimistic about the prospect of winning new orders. Our technology is a proven and mission critical component of multiple military applications. To date, we have invested more than $24 million in the EW test business. With this investment, we expect to play a critical role in the development, testing, and fielding of the advanced weapon system for the F-35 program. However, being a small company, We are too limited in resources. We therefore decided to combine with Gresham. This transaction is continuing on track. We expect the combination will provide a broader management team, stronger sales and marketing capabilities, and larger investments in R&D. We look forward to bringing these businesses together to create a public company focused on growth markets that will have over $40 million in annual revenue. with resources to grow both organically as well as inorganically. Thank you.
spk03: Okay, we'll now open the call for questions.
spk00: Okay, thank you. We will now begin the question and answer session. If you have a question, please press 01 on your touchtone phone. Again, if you'd like to ask a question, please press 01 on your touchtone phone. Our first question comes from Frank Jones from Washington. Your line is now open.
spk01: Hey, guys. So you mentioned that you expect a return to more normalized contract activity, and you recently announced a large TMS order associated with the DoD task order contract. So are you seeing continued order activity, and is it primarily from the USAF for range testing, or are you seeing orders from the DOD branches as well?
spk02: Okay, let me answer that. There are multiple branches of the services that the USAF, the U.S. Air Force, testing ranges use, and they are currently interested and planning to replicate our capability at other test ranges throughout the US and overseas for other missions. Additionally, these branches have the ability, now that we have this IDIQ in place, to add task orders to the existing contract vehicle that we just established and to further enhance the US Air Force test ranges at a faster pace. So yes, we are seeing multiple services and multiple ranges to add our capability.
spk01: Great. And then just so for range application, you obviously believe that you have a pretty compelling value proposition. Can you explain your key advantage for the range application?
spk02: Okay. The benefit or the advantage can be summarized in two simple words. There's more than that. But for this call, two words, reprogrammability and low cost alternative. Let me explain. Our system has three components. It has an RF system, we call it radio frequency system, that is architected like a radar, but built like a test system. That's the guts of our system. It has a digital front end making the system programmable, which is key. And then it has a threat emulation system software from a large prime contractor who has been building this threat emulation system over a 40 calendar year period. It's a very sophisticated system of software. This unique architecture, combined with the threat emulation software, allows us to be one-tenth of the cost of our competitor. So in summary, we are programmable by our architecture. They are not, and we are one-tenth of the cost of our competitors. Those are the key advantages.
spk01: Got it. Okay. Great. Thank you. That's all I have. That's helpful. Thank you.
spk00: Thank you. Our next question comes from Jeffrey Cohen from Mulholland Capital Management. Your line is now open.
spk04: Yeah. Good afternoon. What is the anticipated timing now expected for the Grisham acquisition and Can you explain what the slippage has been and sort of just walk us through the timeframes?
spk02: Yeah, I can do that. Obviously, putting this combination together has taken a lot longer than any of us anticipated. We were delayed to receive audited financial statements for Gresham, which are required for the proxy filing in order to get our shareholder vote. Gresham is a subsidiary of BitNile, and so putting audited financial statements together took more time than we anticipated. Do you have those now? Yeah, I was going to say that. We have received these now, and we expect to file the proxy in early August and to consummate the transaction in late August.
spk04: Okay. And what's your confidence level in the late August timeframe at this point?
spk02: It's very high because once we have the audited financial statement, we, you know, have already put the proxy together and is in review. So I think we are pretty comfortable.
spk04: Okay. And then maybe you could just sort of review the benefits you see of the combination and sort of what you might project, uh, you know, when the merger is consummated in terms of, you know, additional scale and leverage and that sort of thing?
spk02: Well, I mean, there are two divisions at Gigatronics, the EW test division and then the radar filter microsource division. And Gresham has similar two divisions. They call their microsource division MicroPhase. It's in Connecticut. They're making devices just like what we do that are used for military applications. And then we have the EW Test Division. They have such a group in Israel. So finding a company that has the exact sort of two divisions that we have is very powerful and it's rare to find that. So number one, there will be synergy. But number two, because we are a much larger company, $40 million and higher, we can, I think, really make better use in terms of resources in sales. We can make better use of resources in R&D. And I think we need to improve on our G&A expenses because they incur large expenses from BidNile We incur large expenses of being a public company, so we see synergies not only in terms of the two divisions, but also synergies in terms of overhead expenses. We do believe that, number one, our EW test business will be a growth driver, a significant growth driver, but we also believe that we can do inorganic growth, not just organic growth, in order to really build the company.
spk04: Okay, thank you. And again, you said the timing, you expect the proxies to go out in August, you said?
spk02: Correct.
spk04: Okay, thank you.
spk00: And presenters, we have no further questions at this time.
spk02: Okay, as we just discussed, I think being a small public company is too limiting. I think by combining with Gresham, I think we have a large opportunity to and we will create value both in terms of our EW test business as well as growing the company through inorganic type of applications or opportunities. So we look forward to being part of a larger company and to have good reports going forward for you. Thank you.
spk00: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.
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