Giga-tronics Incorporated

Thank you, Heather. First, I would like to read our Safe Harbor statement.

This conference call contains forward-looking statements concerning profitability, backlog of order, shipments and the likelihood of realizing certain tax benefits.

Actual results may differ significantly due to risks and uncertainties, such as future orders, cancellations or deferral of orders, disputes over performance, the ability to collect receivables and general market conditions.

For further discussions, see the most recent annual report filed by Giga-tronics on Form 10-K for the financial year ended March 30, 2013, Part I, under the heading Certain Factors which may Adversely affect Future Operations or an Investment in Giga-tronics; and Part II, under the heading Management's Discussion and Analysis of Financial Conditions and Results of Operations.

I will now turn the call over to John Regazzi, our Chief Executive Officer. John?

Thank you, Steve. Good afternoon, and thank you for joining our quarterly earnings conference call.

I'll make some brief remarks and then open the call for questions.

Net sales were $3.4 million this quarter as compared with $3.9 million in the third quarter a year ago. Net sales for the first 9 months of the current fiscal quarter were $10.4 million as compared to $11.4 million for the first 9 months of the prior fiscal year.

The decreases in net sales were primarily due to the fulfillment of a large order for our legacy switching products last year prior to selling the product line to Teradyne early in this fiscal year.

Gross margin percentage for this quarter was 38% as compared to 41% for the third quarter a year ago. Gross margin percentage for the first 9 months of the current fiscal year was 36% as compared with 40% for the first 9 months of the prior fiscal year.

The decreases in gross margin percentage are primarily due to the less favorable product mix, with additional shipments of lower margin legacy products.

Operating expenses were $2.1 million this quarter as compared to $2.5 million in the third quarter a year ago. Operating expenses for the first 9 months of the current fiscal year and for the first 9 months of the prior fiscal year were $7.1 million.

The company is spending between $1 million and $1.1 million in research and development per quarter. The majority of these expenses are associated with the development of the company's new product platform that is forecast to start shipping in the first quarter of fiscal 2015.

Net loss this quarter was $718,000 or $0.14 per fully diluted share, as compared to a net loss of $865,000 or $0.17 per fully diluted share for the third quarter a year ago.

Net loss for the first 9 months of the current fiscal year was $2.5 million or $0.49 per fully diluted share, as compared to a net loss of $2.6 million or $0.52 per fully diluted share for the first 9 months of the prior fiscal year.

During our third quarter of this fiscal year, the company's Microsource business unit received a $1.1 million order for additional radar filter components, and the Giga-tronics instrument division received a follow-on order of $190,000 from a large aerospace company associated with the new product platform.

With that, I'd like to ask Heather, our operator, to handle any questions you might have.

So here's a few questions of mine. I know that you'll be shipping this new product platform in the first quarter of fiscal 2015 and that runs from April till June, correct?

Yes.

Or April through end of May?

No, it's the June quarter, yes.

The June quarter, right. Now do you know when in that quarter you'll be shipping it?

Like April, May, June?

That's pretty hard to predict, Larry -- Lawrence. I'm hoping to hit the middle of the quarter and not go to the very end, but the platform is completely new from the ground up, and there's been a lot of technical complexity to it.

So it's not something that I could answer for sure.

Okay. And now we've received about $700,000 in orders for this new platform, product platform?

It's -- I think, Lawrence, it's closer to $500,000.

Lawrence, this is Steve. It's $520,000.

$520,000. Now we're spending on R&D about $1 million a quarter.

Now do you expect in the fourth quarter, which we're in now, to spend about another $1 million?

I would say that's accurate. We would expect the trend to be very similar.

And also in 2015, fiscal 2015, is the R&D going to be coming down, or do you still expect to spend another $1 million a quarter on R&D?

Yes, we actually would see it coming down. The main driver behind that is the materials we've had to purchase for the new product platform.

So we -- right now we're purchasing materials in R&D. And going forward, those will be cost of sales.

Okay. And I see that our cash and cash equivalents has gone from $1.8 million to $956,000.

Is that due to the R&D?

It -- the main reason is we have continued to run losses. And the R&D spending is substantial, especially for a company of this size.

So I would not -- I think you're -- it's a major component of it.

Okay. And now in our line of credit, do we have a $2 million or $3 million line of credit?

It's a $3 million line, but it's tied to our accounts receivable. So we're able to borrow on eligible invoicing from accounts receivable.

So at the end of the quarter, we had AR of $1.7 million, and the line was $953,000. There's a little bit, maybe $100,000, $150,000, on the line that we could have still used at the end of the quarter.

Yes, so...

So we spent about how much money on that line of credit?

Right now, the line's in the $1 million range. At the end of the quarter, it was $953,000.

You can't -- I just want you to understand that it's limited not to -- the maximum is $3 million, but before we can even get to the maximum, it's a portion of AR, so it can never be higher than the AR, and it's all practical -- practically, it's going to be 70% to 80% of the AR dollars.

Okay. And my question is how are we going to finance our R&D when our cash is dwindling and our line of credit is dwindling?

Yes, that's something that we're -- we look at every day. And one thing that we have last -- since the end of the year, our inventories have gone from $4.6 million down to $3.3 million.

That's been a source of cash going forward. I mean, I can't guarantee that it's going to be a source in the future, but we are looking at all opportunities.

And John mentioned that gross margins were down and due to the sale of legacy products. We do have more legacy products in inventory, so we have relied on selling those maybe at a lower margin.

But it's a -- the materials are already in inventory.

So you think you can get to the next couple of quarters on the cash you have available and on the line of credit we have?

Yes, it's going to be -- it's something we evaluate and look at every week, and we're managing diligently to it.

Okay. I see that.

And also another question on the trading volume. In the last 10 days, Giga has been averaging roughly around 23,000 shares a day.

And usually -- I've been a longtime shareholder. It usually averages around 2,000, 3,000 a day, so that's almost 10 times normal volume.

And today, it traded around 136,000 shares. Is it -- do you know of any reason for this?

No, there's not anything that the company has announced or -- nothing driven from this. And it -- but I have talked to NASDAQ, just their analytics desk, to understand the trading recently, and from my understanding is that it's been on the retail side.

There hasn't been a large institutional investor. And what could happen is, if a substantial trade, given our -- the historic trading volumes that you discussed occur, it's something out of that normal range, considered large for us, it -- there won't be -- if someone puts an order in that's high, there's not -- it drives the price up as they fill the order.

And then if the price gets driven up, then it catches the folks out there that just kind of are looking for stocks that are -- have an increased volume or an increase. And given the relatively low volume of sales our stock has and the relatively low price, it doesn't take much for it to go up on a percentage basis.

Right, right. But it's mostly retail people getting in, right?

Yes, it is.

Okay. And now is Alara Capital still behind you guys and what you're doing?

Yes, they are.

Good. That's nice to see.

And are they another source of, maybe, of capital?

They -- I can't speak for them, but they are very supportive. John and I -- they're on our board of directors, and we have a lot of ongoing conversations with them.

I'll leave it at that.

Yes, okay. Because I know they have quite a bit of shares and the common outstanding shares keep going up.

I think, we're about 5 million shares now. And I'm just wondering, are we going to be -- is it going to be more diluted, then you might be issuing them more shares at a very low price, which would be around $1.30 here.

Is that a possibility?

Well, I think you -- we -- I think you've raised a good question at the beginning of the call regarding the cash situation of the company. And we do have to look at -- we do manage cash very closely on a weekly basis, but we do have to look at funding opportunities.

And the funding opportunity may or may not be the most attractive.

Yes. Now, have we repriced options?

No, we have not.

Okay. And is that a possibility, too?

We have looked at it and we continue to look at it. It's always a possibility.

But at this point, when we last looked at it, maybe a few months ago, it didn't seem useful.

All right, good. Because I hope we don't do that.

And with the stock being so low, and a lot of these people on the Board of Directors are well-to-do. And I think if they, maybe like the company, they can spend some of their money and buy shares on the open market, and so they're getting them through options all the time.

That's just a comment from a shareholder.

We understand, Larry.

Okay. Heather, thank you.

And thanks, everybody, for your interest in Giga-tronics. Have a good afternoon.