Giga-tronics Incorporated

Thank you. Good afternoon, and thank you for joining our fiscal 2021 and fourth quarter earnings call.

I'm John Regazzi, the company's CEO, and I'm joined today by Dr. Lutz Henckels, 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 of 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 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 Financial Condition and Results of Operations. With those reminders in place, I will now turn the call over to Dr.

Henckels. Lutz?

Thank you, John. Welcome to our fourth quarter fiscal 2021 conference call.

With the fiscal year ended, I think this is the right time to review our progress and our plans going forward. As you know, we have two businesses: the sole source recurring revenue filter business, which delivered $9.4 million in revenue last fiscal year; and the RADAR/Electronic Warfare test business, which we expected to double every year, but did not do so last fiscal year.

It is this second business that has not performed to our expectations. The question is why and what are we doing about it?

Clearly, the pandemic had a major impact on our fiscal 2021 performance, because we could not travel to the military bases. The military bases were closed to any visitors.

And without entering the secret labs of military bases and discussing the secret pain points faced by Electronic Warfare managers, we have trouble getting orders, but that is not the whole story. Standing back and looking at the longer-term evolution of our Radar/Electronic Warfare test business, we started out in this business several years ago, selling a microwave subsystem.

Subsystem is very unique, because it is architected like a radar, but built as a test system. Early on, the customer saw true value in our unique test system approach, but at the same time, we experienced the fact that the market for subsystems is very small and that customers are looking for complete solutions rather than a piece of a solution.

That brought us to the second phase of our RADAR/Electronic Warfare test business, where we embarked on developing the band for our microwave subsystem. We architected the front end in such a way that it can easily be adapted to meet specific customer needs.

We successfully sold over $10 million of these complete solutions to military labs and to prime contractors over the past few years. But we learned that to penetrate this lab market is a slow process because the existing incumbent solutions offer extensive test capabilities with a record of success built over many years.

Even at a much lower cost and these novel features that we have, it will take time to displace the incumbent or by cumbersome installations. We are confident we will get there and we are making progress, but it will take time.

That brought us to the more recent third phase of our strategy for our RADAR/Electronic Warfare test business. During fiscal 2021, we moved beyond the laboratory environment and pursued opportunities for open air range applications for our threat emulation system.

Market incumbents for the open-air range applications offer basically a single radar solution. On the range, what you're doing is building up a threat signal to a plane flying overhead to determine whether the plane sees the RADAR threat signal and whether the pilot responds correctly to the threat signal.

This is a much simpler requirement. In the lab, you are evaluating a Gemma [ph] by testing all corner cases to see whether the Gemma still works.

The incumbent is a golden standard there, but extensive data, they have surrounded their test system with. On the range, you are sending a threat signal to a plane flying overhead.

There's no golden standard, no extensive data, much simpler. During 2021, Giga-tronics one sales into applications for air crew training and air-to-ground missile testing because our system is architected like a RADAR, but it is one-tenths of the cost of the incumbents, it's much easier to use and it offers several novel features.

However, the success in applications for air crew training and air-to-ground missile testing leads us to believe that we can grow our market share much faster than this segment as compared to the laboratory segment. With a pandemic fundamentally behind us with our initial market success on the ranges, we believe we have found our sweet spot.

And therefore, we have increased our sales staff to take advantage of our opportunity in front of us. So, we are excited about our growth opportunity in fiscal 2022.

I hope this overview helps you understand better [Technical Difficulty] At this point, I will go into the detailed financials of last quarter. If you look at last quarter, net revenue for the fourth quarter fiscal 2021, which ended on March 27, 2021, was $2.7 million.

As always, we show two component revenue. The first component is for goods of $180,000, which is for the RADAR/Electronic Warfare test business.

This $180,000 compared to $945,000 for the same Q4 period in the prior fiscal year 2020. Basically, as I mentioned, the pandemic blocked us from meeting our potential customers and therefore from getting bookings of new orders.

The second component is for $2.55 million. This is for our Microsoft product line, namely our RADAR filters, which are used in the F-15, the F-16, and F-18 fighter jets.

This $2.55 million compared to $1.66 million for the same Q4 period of the prior fiscal year 2020. In this business, in Q4, we had a backlog on hand to deliver the revenue.

So the pandemic did not negatively impact the performance of the Q4 FY 2021 revenue. But the pandemic did negatively impact the performance of the Q4 FYI 2020 revenue because in March of 2020, we were shut down due to the pandemic and, therefore, we lost $800,000 worth of revenue in March and should have to absorb all the overhead.

Going now to Gross margins, gross margins for the fourth quarter of fiscal 2021 were 30%. Gross margins for the fourth quarter of fiscal 2020 were 27%.

The gross margins in the fourth quarter of fiscal 2021, were negatively impacted by a one-time cost of labor adjustment. The gross margins of the fourth quarter of fiscal 2020, were negatively impacted by the March shutdown, that I mentioned earlier.

Now, let's look at Operating expenses. We were at substantially higher in Q4 FY '21, when compared to Q4 FY '20.

R&D expenses increased by 33% because the company is investing in its advanced threat emulation business with increased personnel and consulting costs. SG&A expenses increased by 22% in part, due to higher legal costs as a result of an abandoned effort to acquire sole source products, for the Microsoft's division.

We tend to increase personnel costs, including higher salaries and incentive for companies. Going to Interest expenses, interest expenses declined by 80% from $66,000 to $13,000.

And this is basically due to the PFG loan, the 16% loan, which we paid off in the fourth quarter of the fiscal year. That brings me to Net losses.

net loss for the fourth quarter of fiscal 2021 was $830,000. This compares to $662,000 for the fourth quarter of fiscal 2020, for the reasons that I mentioned above.

Now, let's look at the fiscal year results as opposed to the quarter results. So, when comparing fiscal year results comparing fiscal 2021 to 2020, then the fiscal year results look better than the quarterly results.

Revenues grew by 11%, Gross profit grew by 8%, but operating expenses grew by 20%, which then caused an operating loss of $1.08 million versus $433,000 for fiscal 2020. As I mentioned before, the high operating expenses included one-time legal and consulting expenses, associated with that abandoned strategic development effort that the Company made.

Fortunately, we obtain forgiveness of our PPP loan of $791,000. And so therefore then that resulted at loss of $393,000 in fiscal 2021 as compared to $687,000 in fiscal 2020.

And then, if we look at adjusted EBITDA, which is a measure in the Electronic Warfare business it was positive income of $311,000, which compares with positive $185,000 in fiscal 2020. Let's take a quick look at the balance sheet.

Looking at the balance sheet, we see that working capital position has improved slightly. The ratio was 2.19 current assets over current liability.

That compared to 2.09 in the fourth quarter of fiscal 2020. This was primarily driven by the reduction in loan balances, which reduced from $1.32 million at the end of March 2020 to $683,000 at the end of March 2021 and due to the PPP loan forgiveness of $791,000.

So, let me summarize fiscal 2021 and then we go for questions. All things considered, they made considerable progress during the year.

As most of you know, we have invested over $23 million in developing this radar test technology and we have IP protection including six patents granted and one on its way. During the past year, what became increasingly apparent is that our technology can be applied across multiple applications, which expands our long-term market opportunity.

The new customers using our product for pilot training and field testing are a great example of that expansion. We have delivered systems to two programs and are targeting several more products, with each program having the opportunity for approximately $15 million over a three to five-year period.

As we grow our business, the economics are attractive. As the RADAR/Electronic Warfare revenue grows, our margins will improve both because of volume and because the margins of the RADAR/Electronic Warfare business are higher than the margins of the filter business.

We're poised, therefore, to be very profitable business over time. We will continue to invest in R&D and engineering, while driving down other costs as a percentage of sales.

Finally, our balance sheet has improved over the past year. We paid off that expensive 16% interest loan of PFG, and we have a firmer base to drive growth.

Our capital structure is tight with very modest amount of shares outstanding, meaning that they have significant leverage cover earnings per share as we grow revenue and profitability. The pandemic is now mostly behind us.

Since April 19, 2021, we have been able to visit again the military bases. Recognizing our opportunity in front of us, we have also added a Senior Vice President, Business Development in April of 2021.

His name is Al Circelli. Al was an Electronic Warfare Officer.

He commanded 23 combat mission in desert storm. Not only did he plan these missions, but it flew and led those missions.

Later, in his 20-year career in the military, he oversaw a core government team of 10 contractors and government program managers for a fleet of 15 aircraft valued at over $1 billion. More recently, he directed for many years, large DOD development programs for the prime contractor, L3/Harris.

In conclusion, there's a pandemic behind us since April of 2021. And with Al on Board, we expect to see substantial growth in the RADAR/Electronic Warfare business, starting this summer and accelerating in the second half of our fiscal year 2022.

And with that, I would like to open up for questions.

Hey, guys, thanks for taking my questions. So, how should we think about the Microwave Filter business for this fiscal year?

Do you expect revenues to be in the $7 million to $9 million range?

We expect better than that. As I mentioned, it's a business that's growing.

And so if it was $9 million, that would be much in the low end.

Okay. And then, so you continue to invest in engineering.

Could you provide some insight into what enhancements you're making to the technology?

Okay. I mean, clearly, we don't want to necessarily tell our competitors exactly what we are doing.

But I mentioned to you the Threat Emulation product, and we constantly improve upon it, especially in terms of absolute performance of bandwidth. But we don't want to unnecessarily divulge exactly what we are doing.

We're also coming out with a new product that combines multiple capabilities that we have developed, including Threat Emulation and including what we call playback and then of what we call receiving. And so we -- coming out with new products and improve existing products and hiring people do so.

Okay, great. And I just have one more question.

Could you provide like a little bit more insight into the size of the range market for you?

Okay. I mean, as I explained, targeting multiple programs, we're involved already in two programs.

We expect to get at least three or four more and each program in principle. So, when you have to -- you have to think about it.

Maybe I need to back up a little bit, and that is what is it that we are doing on the range. We are trying to recreate what would be called an integrated air defense system, that consists of multiple radars that are networked together.

And so, our system, one system is equals to four radars. And in addition to that, it generates a better field background.

And we can do a lot more than what the installation is, which is a single radar, very expensive and very cumbersome. We can also generate what we call white signals that are unclassified signals or classified signals.

We are lot easier to use. We have one-tenths of the cost and we are much smaller and end-to-end.

So we see a large opportunity in this establishing an integrated air defense system on a large range. And that's typically involves like 10 systems or more on one range to create this integrated air defense system.

And so – and each system is - by the time you're completely done, it's about $1.5 million. And so we see - you can do the multiplication, you have five of those as $75 million over a five-year period.

So that's what we see as the market opportunity.

Okay, great. Well, that's it for me.

Thanks a lot and best of luck.

Thank you.

Thank you.

Okay. Thank you.

So in closing, yes, the pandemic impacted us in fiscal 2021. But with the pandemic mostly behind us, we believe that we are on track to deliver a strong fiscal 2022.

Our Microsource filter business, our rock is delivering 8% growth and the question was, is it between $7 million to $9 million? The low end should be no lower than $9 million.

Our Radar/Electronic Warfare business demonstrated a strong market interest for our new products from new customers, especially from the implication of pilot training and field testing. So we are confident in our ability to achieve double-digit annual growth and with it to deliver higher gross margins.

Thank you.