Giga-tronics Incorporated

Temi Oduozor - Corporate Controller & Principal Accounting Officer Joey Thompson - Acting Chief Executive Officer John Regazzi - Chief Technical Officer Suresh Nair - Vice President of Operations

Frank Barresi - Ameriprise

Thank you, Kristine. Hello everyone and thanks for joining our quarterly earnings conference call.

I’m Temi Oduozor and I’m joined today by Joey Thompson, our Acting CEO; John Regazzi, our Chief Technology Officer; and Suresh Nair, our VP of Operations. Before we begin, I need to remind everyone that this conference call contains forward-looking statements concerning operating performance, future orders, long-term growth and shipments.

Actual results may differ significantly, due to risks and uncertainties such as delays with manufacturing and orders of new ASG, receipt of timing for future orders, cancellation or deferrals of existing orders, the company’s potential need of additional financing, ability to be traded on NASDAQ, uncertainty as to the company's ability to continue as a going concern, the volatility in the sub price of our common stock; results of pending or threatened litigation; and general market conditions. For further discussions, see our most recent Annual Report on Form 10-K for the fiscal year ended March 26, 2016, Part I, under the heading Risk Factors, and Part II, under the heading Management’s Discussion and Analysis of Financial Statements Conditions and Results of Operations.

With those reminders in place, I would now pass the call on to Joey. Joey?

Hi everyone. Today the company is reporting net sales for the fourth fiscal quarter of FY 2017 of $5.2 million that’s a 93% increase as compared to $2.7 million for the fourth quarter of fiscal 2016.

The increase in fourth quarter net sales over the prior year period was primarily due to the fulfillment of a $3.3 million order from the United States Navy for the company's Real-Time Threat Emulation System, part of the company's Advanced Signal Generator product line. Net sales for the fiscal year 2017, which ended on March 25 were $16.3 million, an increase of 12%, compared to $14.6 million for the fiscal year ended March 26, 2016.

As you know the company is now focused on the electronic warfare market with two major product lines from two separate divisions. The Microsource division produces YIG based filters and oscillators and the bulk of Microsource revenue is from Band Reject Filters used in radar upgrades for fourth generation US designed fighters.

The Giga-tronics division primarily produces electronic warfare test and emulation equipment that can be used to test radars, jammers, and related equipment for defense related applications. The company's Microsource business unit saw an increase of approximately $2.3 million in net sales from $5.9 million in fiscal 2016 to $8.2 million in fiscal 2017.

The increase in net sales for Microsource over the prior fiscal year was primarily due to an increase in YIG RADAR filter shipments and completion of certain related nonrecurring engineering services. The company's Giga-tronics division saw a decrease in sales from $8.7 million in fiscal 2016 to $8 million in fiscal 2017.

However, there is good news hidden in this decrease. We began divesting several legacy product lines before FY 2017 began and the decrease in net sales were driven by lower legacy product sales.

We’re happy to report that the net sales of our new ASG products were $5.2 million for the fiscal year, almost three times more than the $1.8 million recorded for the ASG product line in FY 2016. A substantial portion of this was due to sales systems for the U.S.

Navy and we expect the Navy to be a substantial portion of our revenue in FY 2018 as well. Looking forward, we expect to nearly double our ASG revenue for FY 2018, compared to FY 2017 results.

We have seen substantial improvements in the bottom line, but we aren’t yet where we want to be. Net loss for the fourth quarter of fiscal 2017 was $473,000.

This compares to a net loss for the fourth quarter of fiscal 2016 of $1.6 million. Net loss for the fiscal year ended March 25, 2017 was $1.5 million and this compares to a net loss of $4.1 million in the prior year.

The lower net loss for the year was due primarily to lower operating expenses, including lower personnel related costs, due to the divestiture of the switch and legacy product lines, a reduction in non-cash stock-based compensation and $802,000 gain associated with the sale of the switch product line during the first quarter of fiscal 2017. One issue that we are experiencing with the new ASG product line is that the average selling price for our ASG products in 2017 was about $1 million.

That is substantially higher than ASP's for our legacy products or even for ASG's sales in prior fiscal years. This increase in average selling price is indicative of the higher level of complexity of this type of product, compared to our legacy products, as well as the fact that a significant amount of our sales includes higher levels of integration, including Threat Emulation software, exclusively licensed from a major prime contractor for use with our hardware.

Overall, this increase in average selling price is a good thing; however, it is associated with longer sales cycles and more lumpy sales quarter-to-quarter. This presents a significant challenge for day-to-day operations.

In contrast, the Microsource business presents more stable quarter-to-quarter revenue since contracts for filter shipments often cover a year and could cover several years. However, we can experience ups and downs in this business as well depending on the timing of the beginning and end of certain contracts.

While we had strong shipments for both business units in the fourth quarter, we expect the current quarter to be substantially softer with the expected revenue of between $1.3 million and $1.7 million, depending on the timing upon shipments. This is in spite of our total backlog of $11.4 million.

This softening and expected revenue compared to last quarter is a combination of two factors. We are nearing the end of one contract for Microsource products and will have a low in shipments as we complete negotiations for new contract.

Meanwhile, despite our optimism for our ASG products, we acknowledge that recent bookings have been disappointing with no ASG-related bookings to date in calendar 2017. While we are expecting additional ASG bookings in the near future, these won't impact our first quarter results.

Now while we can't control the timing of customer orders, we can control costs and we’ve made substantial strides in that regard. Some of these cost reductions are reflected in the improvements in the bottom line for FY 2017.

Other cuts will only be realized in future quarters. Most notable is the move we completed this quarter.

The first quarter of FY 2018 to a new facility in Dublin, California, which is roughly half the size of the prior, outdated San Ramon facility. During the first quarter, we also have transitioned to an outsourced payroll benefits and HR provider, which is expected to further reduce our costs.

We’ve also recently implemented a temporary four-day work week for the summer months to further conserve our cash as we await specific anticipated large orders for the ASG product line and additional contracts for YIG filter products destined for fourth generation U.S.-designed fighter aircraft. Moving on to other news, it is with mixed emotions that I am reporting that for personal reasons I’m stepping down from the acting CEO role effective at the end of the day today.

It was always expected to be a temporary position to enable John Regazzi the original visionary behind the ASG product line to focus on some of the technology and market-related issues for the ASG product. John is here with me today and I’m also happy to introduce Suresh Nair.

Suresh has been with the company as Vice President of Operations for a little over a year and many of the company's improvement metrics are due to his leadership. The board has decided to name John and Suresh to because CEOs to lead the company forward because of their complementary skills.

Moving forward it is expected that John will be able to continue to focus on technology and market development issues, while Suresh will focus on driving the company on a day-to-day basis. At this point, I’m going to turn the call over to John to discuss progress that we’ve made over the past year in technology and market issues, and provide some expectations going forward.

Then we will hear from Suresh on some of the changes that have occurred over the past year and the metrics we will be focused on in the future. John?

Thank you Joey and good afternoon everyone. Joey's day-to-day involvement with Giga-tronics has freed me to spend nearly 100% of my time focused on product development and technical marketing issues associated with the company's ASG platform.

Our customers generally use the advanced signal generator and the analyzer together with their own products and products from other vendors. With over 40 units in use today, it was inevitable that a small number of previously undetected problems have been exposed.

These types of problems can be typical to drive to root cause, but I am able to report today that we have resolved all of the identified problems to our customer’s satisfaction and that the ASG is now a more robust product as a result. I will continue to oversee product development activities as we begin work on several derivative products or if new issues surface.

I have gotten involved with the strategic marketing activities over this past year as well. The company has added an industry insider to the marketing team who is an expert in radar and RADAR and Electronic Countermeasures.

This has provided two immediate benefits. First, we now speak the customer's language and we present a clear picture of how Giga-tronics is going to help solve their test and evaluation problems.

And second, this individual brings insight into the company regarding product attributes most needed by customers designing devices for this electronic warfare market. This will allow us to more precisely define follow-on products and to improve our market position in this chosen segment.

We have also hired an experienced technical marketing manager to help us better reach our customers. I believe we have a great story to tell and that we can drive sales growth with more exposure within this community.

We repeatedly receive very positive feedback when the features and benefits offered by the ASG are explained in detail. And I’m confident increased outbound marketing efforts to get to ASG's story out and to explain the new Giga-tronics company to the market will reap positive business results.

Now, I’d like to turn the call over to Suresh.

Thank you, John. Good afternoon everybody.

Firstly, I would like to thank Joey and the board in giving me this opportunity to support our continued journey in making Giga-tronics a profitable company. It has been a very exciting year for us.

We have worked at several fundamental aspects of the business to help at Giga's lean journey. There were three fundamental processes we prioritized and drove process changes.

One, sales and production transparency; two, manufacturing inventory and backlog management; and three, customer support. We built and enhanced our visibility and worked on a dynamic sales forecast and manufacturing build plan.

This enables us to have a level notable plant for the quarter, allowing for several metric improvements, including cost of goods sold and lead time. The level loaded bill plant allowed us to have a more consistent and predictable delivery schedule.

This allowed us to reduce our backlog and commit to sales to a less than 30-day shipments schedule from time of booking. Further, we introduced an inventory management process that enabled us to improve our working capital spend.

Some of the key metrics we measured and drove by net inventory, inventory turns, purchase price variance, and lead time from our suppliers. Finally, we revitalized our process for documenting, problem-solving, and communicating to our installed customer base.

Through a dedicated portal, we are able to quickly and on a frequent basis evaluate issues as they identified and assigned resources have resolved the issues. The portal allows our customers to visualize the status of issues and have confidence that the problem has been resolved at an escalated pace.

Overall, I believe we have made significant progress in these three focus areas and many of the improvement in our metrics are confirmation that we are working at the right issues. Again, I would like to thank Joey and the board in their vote of confidence in me, and look forward to working with John and the entire Giga team in making it turn into profitability in fiscal year 2018.

Now, I’m turning the call back over to Joey for some closing remarks.

Thanks Suresh. So as we get to the end of our prepared remarks, I want to say that we are aware that many find investors are frustrated by the company's lack of profitability.

We are also frustrated. We’ve worked quite diligently during the last year to improve things, but we aren't yet where we need to be.

In addition to all of the things that are being done inside the company, the board has entered into a process to consider various strategic alternatives in an attempt to enhance shareholder value. As part of that process, the company has engaged James Kochman, Managing Director of Alliant Partners to provide advice to management and the board.

Jim has substantial experience advising companies in the military and aerospace markets and we welcome his help going forward. At this point, we’re happy to open the call for questions.

Joey, you mentioned you expect or you hope to double the sales of the ASG this year. So who would those prospects be and no orders have closed yet, you were saying this year, are there orders that are eminently closing?

Well the short answer to that is yes we believe so. The longer answer is that as you have made the text in our frustration and with our sales cycle is sometimes it takes longer than we expect, but we do believe that we have some orders that are in the immediate future, more broadly to your question, you asked, who would these customers be.

So, I don't think we have announced who are all the customers are for our products product line. However, if the world’s gallery of the electronic warfare companies out there, as well as the US Defense Department, and we did specifically mention the Navy, and the Navy has an extensive effort in electronic warfare.

So the Navy comprised a substantial amount of last year's revenue. We expect them to comprise a substantial amount of this year's revenue, but in addition, other major prime contractors that are involved in the electronic warfare market that are already our customers and we are optimistic that we will see follow-on orders from those customers.

Okay. Has the Navy put out any request for proposal or specifications at this time for more of your systems?

I’m hesitating because I’m trying to figure out how to interpret your question. I do want to point out that the - the issue here is, that we aren't competing typically with the very large scale segments where the Navy necessarily puts out a request for quotation and are looking for $20 million system.

There are those companies out there that provide those services. That’s not us.

We sold stuff that is commercially off the shelf, and so we - let me just say that we have strong reason to believe that we are receiving some orders, but it’s not necessarily true what you might expect as be request for quotation mechanism.

Okay. And so there would be - they are trying I guess to get money or whatever to buy, they want more, the Navy itself wants more of your systems.

Would it be in different locations or across the U.S. or the world or I’m just curious or is it mostly for development that they’d be buying the initial systems or?

I’m not sure how much I’m - I should be saying about this. Let me say that it is not all for one location, and I have just, I am not sure what I should say.

John do you have any comments?

Hi Frank, this is John. The Navy doesn't develop things on their own, but they do a lot of evaluations, so the equipment that our systems are used for are built by one of the prime contractors that Joey mentioned and the Navy is putting together evaluation equipment so that they can run this equipment through its faces and make sure it is ready for deployment that’s typically what the Navy does with their equipment.

So, once it’s delivered they wanted - they retested to be sure that the equipment works as specified or whatever?

First is, for some additional information, some of the Navy orders last year, one of the systems went to a Navy facility and the other system went to the prime contractor, so that they could do the same testing at their facility that the Navy wants to do, and the Navy at the air station.

Okay. So John would there be other systems that, I mean and I don't know what I can, but would there be other systems that are the contractors are working on who - is that the general idea?

Yes they wouldn't buy the exact same configuration that we sold to the Navy, but the Advanced Signal Generator and receiver are very useful pieces of gear for doing this kind of testing and if you're working on our RADAR, you're working on a jammer or direction finding equipment, the ASG would be something that you could - that would be really very helpful.

And my understanding is, you do I guess a lot more of the - you have a lot from the last call, you know you have a lot of capabilities, I don't know if they’ve been developed or are they being developed that make your system unique, and you have come up with this idea of, I guess you're thinking of hopefully selling $15 million of the ASG this year, something in that neighborhood or?

No. Let me be very clear.

We sold $5.2 million last year and we’ve said roughly doubling that is what our expectations are.

Okay. And so, and I guess it will probably tend to be more in the second half of the year probably that doubling that $5.2 million I suppose?

Well almost by definition given where we are right now, yes.

It is only the first quarter of the fiscal year, so we still have three quarters to go.

And is there, you know the inventory that you show on your balance sheet is much of that dedicated to the ASG, I mean if you get some large orders, how long would it take to fulfill them?

Suresh, you want to address that?

Sure yes. Some of the inventory is dedicated towards ASG.

Our commitment for big system orders is to book and shift within the same quarter.

Okay, good. Well, I guess we will see and one last thing though, from your comments on the filters I didn’t recall, you don't say when do you start, you would start to see those pick up again or did you, I mean how long did we start?

No.

Okay.

We didn’t say that. Right now, if you go back and look through the filings you will see that we have one contract that’s going to last for roughly 3 more years, 2.5 more years something like that.

We are continuing to ship on. And we are at a low between other contracts and so we are negotiating on those now, but just to be clear when we actually do get a new contract it takes some amount of time between getting the contract and actually producing new units because as opposed to the ASG where we’re trying to book and ship within a month for simple orders and within three months let’s say for the larger orders, for the filter units typically what we do to maintain both quality and pricing regularity, we buy the inventory for that up front and then start producing them.

And so it takes, there is some lag time of some period of time between when we get the order and when we will start producing. And that’s a few months kind of a lag time let's say.

So, I don't want to be too specific there because it depends on exactly what we are talking about, but we’re negotiating, actively negotiating things now and it would be a while, quite a few months before we would start shipping just once we get the contract.

Okay. A lot of this, I mean, if you listen to the conference calls you kind of put together what was going on, but I mean the F-16 order is now pretty much you are producing a little bit all of that time, you know the $10 million over three to five years whatever, whereas I guess there is still a lot more of these F-15, the F-15 to upgrade to be the RADAR on those, isn't there, I mean you are not halfway through that program are to you or…?

So, I don't want to speak for our end customer. What I would say is that there is basically three fourth generation US fighters that are deployed these days; the F-15, the F-16, and the F-18.

And they are deployed both in the U.S. Military and in foreign militaries.

And so it really depends as to who's upgrading what, but in general when people upgrade the RADARs on these aircrafts, the most cost-effective solution, I mean I don’t want to speak in absolutes, it seems to be the most cost-effective solution is to use a RADAR blanking filter to preserve the functionality of the existing electronic warfare system, and so there are a lot of these aircrafts out there. It doesn't take too much fooling around in Wikipedia or whatever to figure out how many there are, but it is an open question as to how many get upgraded and how they get upgraded?

And yes, we believe there is substantial opportunity going forward for these products that we don't believe for the end of this, but it depends on exactly what the different government’s do and how the prime contractors implement these upgrades.

Okay. And John it is like - because I don't know six months ago or so you were talking about this, the change in developing a digital system for the F-15 that is still a ways off isn’t it, you talked about, you thought it would be quite a ways off, is that still you're feeling or…?

I don't recall if I said it was F-15 or F-16, but the reason you need to filter is that if you put a brand new RADAR on an older airplane with older electronics you cause interference, there is an interference problem that’s generated and our filter solves that problem. If you upgrade all the electronics than you typically would - you know you would have that problem pre-solved.

You wouldn't need a filter. So if down the road the upgrades include the other electronics on the airplane, I don't believe they would need a filter.

As far as I know, the F-15 is going to go forward with using our filter for those upgrades. The F-18’s all of them are built new, including our filter and I think the open question is what’s going to happen to some of these F-16s.

It appears that many of the foreign-owned airplanes will get a RADAR only, and I think the question is whether the domestically owned, the U.S. owned F-16’s whether they are going to upgrade all the electronics or just the RADAR and it all depends on what the planners are thinking.

Okay. Well that helps thank you.

Thanks for the information.

Thank you Frank for your questions.

Sure thanks.

Okay. Well Kristine thank you very much.

Thank you, Frank. And I think we’re done.

So thank you for joining us for the call this year.

Good afternoon.