Giga-tronics Incorporated

Steve Lance – VP of Finance and CFO John Regazzi – President and CEO

Dan Gardner – Emerging Equity Group

First I would like to read our Safe Harbor Statement. This conference call contains forward-looking statements concerning operating performance, future orders, long term growth, and shipments.

Actual results may differ significantly due to risk and uncertainties such as delays with manufacturing and orders for new products, receipt or timing of future orders, cancellations or deferrals of orders, the company’s going concerns, needs for additional financing, ability to be traded on NASDAQ and the volatility in the marketplace for our common shares, and the general market conditions. For further discussions see Giga-tronics’ most recent annual report on Form 10K for the fiscal year ended March 29, 2014 part one under the heading risk factors, and part two, 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.

Thank you for joining our quarterly earnings conference call. I’m very pleased to again be able to report positive news regarding the company’s operating performance this quarter.

Net sales increased 32% to $4.5 million this quarter from $3.4 million in the same quarter a year ago. Net sales for the nine months ended December 2014 increased 36% to $14.1 million as compared to $10.4 million for the same December period a year ago.

Net income for the third quarter of fiscal 2015 was $67,000 or $0.01 per fully diluted share as compared to a net loss of $718,000 or $0.14 per fully diluted share in the third quarter of last fiscal year. Net loss for the nine months ended December 2014 was $283,000 or $0.05 per fully diluted share as compared to a net loss of $2.5 million or $0.49 per fully diluted share for the nine months ended December 2013.

The increases in net sales and the improvements to net income and loss were primarily due to revenues associated with two large customer orders we received within the first quarter of this fiscal year along with higher gross margins and lower operating expenses. Looking at non-GAAP performance which excludes non-cash expenses recorded in connection with the warrants granted as part of our debt agreement as well as stock-based compensation, net income for the third quarter was $239,000 or $0.03 per fully diluted share as compared to a non-GAAP net loss of $651,000 or $0.13 per fully diluted share in the third quarter a year ago.

The non-GAAP net income for the nine month period ended December 2014 was $361,000 or $0.04 per fully diluted share as compared to a non-GAAP net loss of $2.1 million or $0.41 per fully diluted share for the nine months ended December 2013. I’m very pleased with two consecutive quarters of profitability.

Our employees have worked diligently to help the company improve its efficiency which has led to higher gross margins and lower operating expenses. In addition, our R&D spending has come down due to reduced material spending on product prototypes as the new advanced signal generation system moves into production.

I’m also encouraged to see the continued deliveries of the advanced signal generation system into customer’s systems which is validating its performance in complex applications. The long term success of and growth of Giga-tronics will be driven by the success of the advanced signal generation system.

With that, I’d like to open the call for questions.

Congratulations on a good quarter, guys. Regarding the NASDAQ trading cessation that might occur coming into February, have there been any further discussions with NASDAQ about forbearance, or is there a chance of that at this point?

Let me just kind of go over the issues. Back in February 2014 we received a notification letter from NASDAQ advising us that we did not comply with the minimum shareholders’ equity requirement of $2.5 million.

Since then NASDAQ has granted us two extensions with the latest expiring on February 16, 2015. For the quarter just completed our equity increased from about $900,000 at the end of September to $1.3 million at the end of December.

We’re still short of the required $2.5 million. We are still working on a way to meet the $2.5 million equity requirement and if we do not meet that requirement by the 16th arrangements are being made for us to be traded on the OTCQB marketplace on or about the same day or shortly thereafter.

Another question, when do the Alara Capital warrants expire?

A portion of them expire in August and another portion expire in January of ’16.

It seems like since they’re in the money that might be a source of capital to meet this requirement. Have you had any discussions with Alara Capital about that?

We do realize that and we are, as I said, looking at ways to meet the $2.5 million requirement.

On the NRE orders and the expected or potential follow on production order, do you have any update on discussions regarding those follow on orders?

We are in discussion ongoing daily. The NRE program has gone very well and it’s helped us achieve profitability over the last couple of quarters.

The supplier is very happy with it and we do not see any reason why they would not want us to go into production especially, given the amount of money they’ve spent to get us this far.

I’d like to know if you can tell us a little bit more about the advanced signal generation system, the new product platform? What does it do, how large is the market it addresses, and how do you expect to penetrate that market, and are here any significant competitors that we need to be concerned about?

The advanced signal generation system is the name we’ve given our new product platform which is a modular system that is aimed at applications that require multiple signal generators in one system. The applications that require this fall into several categories.

One is the evaluation of high performance radar equipment and the way the generator does this is by simulating echoes that a radar would normally experience when it’s deployed so that you can test it in the laboratory. Another application is in the electronic warfare area.

The advanced signal generator is able to simulate multiple radar emitters to test the ability of an electronic warfare system to sort out which threats are the most important to pay attention to. Then the last major area that the system applies is in the area of surveillance in calibrating direction finding systems so that emitters can be spotted and located on the ground.

I would categorize the whole thing as more of a high end signal simulation market. This is a space where the average selling prices are in the $250,000 to $400,000 range as opposed to the $30,000 range of our current products.

The market that it addresses, we’ve estimated to be about $180 million growing over the next several years to $215 million. Within that market there’s a faster growing segment that relates to some of the disruption that’s going on in the market from new threats that are emerging from around the world.

A lot of our existing equipment needs to be reevaluated and also the introduction of new radar systems that have much wider modulation bandwidth that the new product does address, so we’re addressing the fastest growing segment within this $180 million market. Competitors, when I first looked at this opportunity I was gratified that a lot of the competitors in this space are closer in size to Giga-tronics as opposed to the much larger players that we’re up against in the general purpose test equipment market so I believe the company can win there.

I think the last thing I would say is when I look at the market and I look at the competitors we’re coming off of the most recent significant investment in this area, so we’ve got the best technology and I’m very gratified at the acceptance we’re seeing at potential customers.

Thank you very much for your interest in the company and I look forward to keeping you posted with our progress as time goes on.