Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.:

Operator: 0:01 Welcome to the Giga-tronics Fiscal 2022 Third Quarter Earnings 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. [Operator Instructions]. Please note that this conference is being recorded. 0:23 I will now turn the call over to John Regazzi. Sir, you may begin.

John Regazzi: 0:28 Thank you. Good afternoon and thank you for joining our fiscal 22 third quarter earnings call. I'm John Regazzi, the company's CEO. And I'm joined today by Maya Chai (ph), our Corporate Controller, and Dr. Lutz Henckels, our Executive VP, CFO and Chief Operating Officer. 0:51 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 market price of our common stock; results of pending or threatened litigation and general market conditions. 1:35 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 fiscal condition and reports of operations. 1:58 With those reminders in place, I will now turn the call over to Dr. Henckels. Lutz?

Lutz Henckels: 2:03 Thank you, John. Welcome to our third quarter fiscal 2022 conference call. The third quarter of fiscal 2022 was very disappointing. The fundamental problem is the performance of the EW test division, which had only $500,000 of revenue in the first nine months of fiscal 2022 as compared to $3.5 million in the first nine months of fiscal 2021. The EW testing division did not receive certain large anticipated military orders which have long approval and processing cycles and very significantly from period-to-period. 2:51 We believe that doing the first half of calendar 2022, we will be part of military contract that greatly reduces the long approval cycles and uncertainties associated with military procurements. 3:09 Let us now look at the detailed results. First, let us look at sales. Net revenue for the third quarter of fiscal 2022 ended December 25, 2021, was $2 million as compared to $4.1 million for the same period in the prior fiscal year 2021. We always show two components for the revenue and did so in Q3 of fiscal 2022. 3:43 The first component is for goods of $164,000, which is for our RADAR/EW test business. This $164,000 compared to $1.6 million for the same Q3 period of the prior fiscal year 2021. So, basically, we shipped only one advanced signal generator during the third quarter of fiscal 2022, as compared to one TEmS system, and two COMPASS system, which we shipped in the third quarter of fiscal 2021. Also should note that due to supply chain issues, we were unable to ship the backlog of $390,000. 4:31 The second component is for services of $1.8 million, which is for our Microsource product line namely for the RADAR filters, which are used in the F-15, the F-16 and F-18 fighter jets. This $1.8 million compared to $2.5 million for the same Q3 period of the prior fiscal year 2021. The Microsource business typically receives very large orders which can swing in quarterly revenue as it occurred in Q3 FY 2022 Versus in Q3 FY21. 5:12 We're now getting to gross margins, the gross margins for the third quarter of fiscal 2022 were 37.3%. The gross margin for the third quarter of fiscal 2021, were 38.1%. This slight change in gross margins is due to product mix. 5:35 Now operating expenses, our operating expenses increased by $20,000 in Q3 FY2022, when compared to Q3 FY21. R&D expenses decreased by $339,000, this is primarily due to increased software capitalization, cost of engineering expenses, reduced consulting costs, reduce personnel cost, and a greater portion of non-recurring engineering expenses for contract services, which were allocated to cost of goods sold. So saying it in a different way, we received a $726,000 engineering contract from a prime contractor, and engineering hours for this contract get charged the cost of goods sold. 6:28 SG&A expenses increased by $359,000, this is primarily due to large transaction costs related to the announced combination with Gresham Worldwide. Also due to higher stock-based compensation, and to an increase in headcount in sales. 6:50 Looking at interest expenses, our interest expenses declined from $21,000 to $13,000 and that's basically due to the fact that we paid off the PFG loan at the end of March in 2021. Now, the net loss as a result of all of that, the net loss for the third quarter of fiscal 2022 was $793,000 and this compares to a net income for the third quarter of fiscal 2021 of $833,000 and that's for the reasons that I explained earlier. 7:24 However, to more truly show you, the actual income, we also show you what I would – we call 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. We separated out the transaction related expenses of $402,000 associated with the share exchange agreement with Gresham Worldwide. 8:05 The EBITDA loss for the third quarter of fiscal 2022 was $213,000 versus an income of $187,000 in the prior fiscal year quarter. So with $2 million less in sales, we were able to limit the loss of adjusted EBITDA to $213,000. 8:33 Looking at the nine months period, the revenue of the EW test business was $512,000 in fiscal 2022 versus $3.5 million in fiscal 2021. As I mentioned earlier, the poor performance of the EW division is a fundamental cause of our disappointing quarterly results. But despite the $3 million drop in sales, we were able to limit the adjusted EBITDA loss, the $582,000 in the nine months of fiscal 2022 versus a gain of $130,000 for the nine months of fiscal 2021. 9:21 Without hesitation, we firmly believe in the potential of the EW test business. And we indeed invested nearly $1 million dollars in this inventory since the beginning of this fiscal year starting in April of this year. In anticipation of orders and also to mitigate any supply chain issues. However, it is challenging as a small public company to continue to make these type of investments, $1 million in nine months. 9:59 We believe the combination with Gresham Worldwide will allow us to continue to build on our EW test investment and read the benefits of our large investments in this market. This brings me to the balance sheet. The item on the balance sheets worth noting is the increase in the EW test inventories of roughly $1 million since the beginning of this fiscal year on March 27, 2021, which I just explained. 10:30 The other point regarding the balance sheet is a total shareholder equity, which increase from $4.2 million at the end of last fiscal year to $4.7 million at the end of the third quarter of fiscal 2022. This increase is due to the $1.5 million investment in pre-funded warrants made by one investor who now owns over 20% of our company. 10:55 By we strengthen the balance sheet, it needs to be understood that our cash is mostly tied up in inventories, totaling $4.6 million. We need the orders for our EW test business to free up that inventory and with it generate cash. 11:17 So in summary, as we have said, our business as Lumpy, particular in the EW side and this quarter amplify set. That set these results in no way change our confidence, but there is a great opportunity on the EW side of our business. Our technology is extraordinary. It's unique. It's proven and has multiple applications across the armed forces. 11:48 In order to best leverage the over $24 million that we have invested over the last several years in the EW side of our business, we would benefit from more scale. The broader management team, stronger sales and marketing capability and larger investments in R&D. The combination that Gresham delivers that by bringing these two business together, we create an attractive public companies focused on growth markets. The company will have over $40 million in revenue, with resources to grow both organically as well as in organically. 12:36 The electronic warfare market is a multibillion dollar industry. The total growth rate in the sector is in the mid-single digits. But we are addressing a part of that market, which supports a much faster growth and where we can gain market share. Gresham also has a $10 million EW business in Israel with complementary technology and capabilities, and we will be able to leverage those capabilities. 13:06 Israel is indeed a great market opportunity for us because they have the F-35. They have the US equipment and therefore it's a great opportunity for our company. This deal with Gresham provides us with a much stronger platform, a better balance sheet and cross selling opportunities that will truly help accelerate our ability to grow our revenue on the EW side of our business and to drive sustained shareholder value. 13:44 Thank you for your support. And we look forward to speaking with you again, we are now would like to take questions.

Operator: 13:54 Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Walter Bellinger. Your line is now open.

Walter Bellinger: 14:19 Yeah, hey, thanks for taking my questions, guys. So I know revenues haven't been as robust as you wanted. Are you seeing any shift in the industry that could be impacting sales? Or is this just mostly a matter of making sure more customers are educated about the solution?

John Regazzi: 14:37 I mean, they see actually a shift in the industry, which favours us. Because our equipment used on the base is much more flexible, much lower in cost, and really ideally targeted for it. So the shift in the industry has taught us. So the fact that we haven't received the orders relates basically to the what we called the contract vehicle. So we are waiting for our new procurement setup that got delayed in part by the holidays, and in part by the COVID resurgence. But we are waiting for that new procurement vehicle to overcome delays in procurement. But so it's not a shift in the industry is really a contract vehicle delay.

Walter Bellinger: 15:27 Got it? Okay. And then how should we think about the Gresham acquisition? Can, how could that kind of help drive testing sales and it mostly be the broader engineering in Salesforce or their, meaningful cross selling opportunities for testing?

John Regazzi: 15:44 Well, I mean, there are many benefits that come from it. Number one, we will be financially much stronger company. And that's important when we, you know, want to build and grow the business, we will have the capability to grow also in organically, not just organically, we will definitely strengthen the sales team. And as I mentioned, we have a great opportunity of cross selling in Israel, and really in Europe as well. But more broadly, being a bigger, more stable company gives a lot more confidence to a military program to commit to Giga-tronics. Because they're making huge commitments with our equipment. 16:26 And to do that with a little company like us, makes it more challenging, but being a much bigger company, a much more stable company, will give them confidence and I think that will also help our sales.

Walter Bellinger: 16:42 Okay, great. That's all my questions. Thanks a lot, guys.

John Regazzi: 16:47 Thank you.

Operator: 16:51 Thank you. Our next question comes from [Indiscernible] from Second Line Capital. Your line is now open.

Unidentified Analyst: 16:57 Good afternoon Lutz. The new contract vehicles, so what – do you have a good sense on the timing of it? And if possible, can you describe what that looks like?

Lutz Henckels: 17:09 Yes, we are – what we consider to be in the final phase of this award and so in the final phase, you have what, like a Purchasing Group, which we actually call Dittrich. And they do all the legal checkups and, you know, the environmental checkups before they award the new procurement vehicle. We expected it actually. It well, I should say we expected it originally the end of September and the end of December, then we expected it on the 15th of January. We have some indication actually yesterday that it's coming. But so we expected really any time, surely this quarter.

Unidentified Analyst: 18:02 Okay. And in terms of question and just go through what we're waiting for. I know we're waiting for the products filing any idea what the timeline is on that and whatever else. The steps in that process are?

Lutz Henckels: 18:15 Yeah, I can give you some highlights there. So originally, we were expecting to have the proxy filed in time, so that we actually can close the transaction this quarter. However, because of a required audit of a European Entity of Gresham, that was not achieved timely enough and so we had to add another period to the proxy, another financial period, another quarter. And so we are now expecting to send out the proxy in March and expect to have a shareholder vote in April.

Unidentified Analyst: 19:01 Okay. And the Gresham business was that audited on historical basis?

Lutz Henckels: 19:10 It's – it has to be audited. So basically, when you have a proxy, you must have at least two years of – completed years of financial audits and so they are providing that for the Gresham Entity, yes.

Unidentified Analyst: 19:27 But historically, it was a subsidiary without an audit. So now they're creating an audit for the purposes of this transaction?

Lutz Henckels: 19:34 Correct or better said it, it was as a subsidiary that was not isolated or carved out and so their large auditing firm has now provided the audit for the Gresham Entity, as a separate entity.

Unidentified Analyst: 19:52 Okay. And…

Lutz Henckels: 19:52 That's the required for the –for the – for the proxy.

Unidentified Analyst: 19:55 Understood. And from a business standpoint, I may have missed it. But in terms of the filter business, so why was that less predictable this quarter than historically, if you will?

Lutz Henckels: 20:08 Actually, when you look back at swings quite a bit, okay? Because it relates in part to new orders. And so, under the method that we take revenue, when a new order comes in, and we buy material, we then take revenue on it, we are required to do that and so we are waiting for some new orders and so it's – it that swing is quite normal. Actually, if you look back at quarter-by-quarter.

Unidentified Analyst: 20:33 Okay.

Lutz Henckels: 20:34 We had a fifth quarter that just before and so I think on average, if you look at the nine months, P&L, it was slightly higher in the nine months of this fiscal year than last fiscal year.

Unidentified Analyst: 20:50 Okay. And in terms of the filter business, and more importantly if the electronic warfare business, was there any competitive bids that were lost or things are just deferred, and the orders didn't take place?

Lutz Henckels: 21:05 No, nothing was lost that we are aware of. So it's a matter of delay in the procurement process, but nothing lost the competition that leads that they're not aware of any.

Unidentified Analyst: 21:17 Okay. And then the past, you've talked about some of the supply chain challenges in this COVID environment? Is that chain – is it the same supply chain issue we had before with respect to components or is it different? Or is it well, what is the nature of the…

Lutz Henckels: 21:35 It's a little bit different? So number one, we at Giga-tronics actually had three cases at our company, while a year ago we had zero. Okay, so that's one which impacted us, it also has impacted somewhat supply chain issues, and which is not insignificant, including in Microsource, okay, so we have some challenges of producing F-15 filters, because of supply chain issues. However, in terms of orders, we since we are now more at the process of the procurement vehicle, as opposed to demonstrating our system because we are past that stage. They love our equipment, they want our equipment, they need our equipment. So we are now dealing more with procurement vehicle. 22:23 Now within that group that executes on that, they had COVID cases, they are working now from home and so they have fewer staff members because of COVID cases. So there is an impact in that part, because of COVID. But it's not so much that we can't go to the basis, but rather that the other side from a procurement viewpoint has fewer resources and has to work remotely.

Unidentified Analyst: 22:50 Okay, so you answered my next question, which is because in the past, we had trouble getting to the basis for demoing, but at this point, the bases are open from a marketing standpoint.

Lutz Henckels: 22:59 Well, I mean, right now, that's not our problem, because we already did all the demos. So however, no appointment grew right now is close, but that's okay right now, it doesn't bother us. And I don't think there will be very long because the cases are coming rapidly down, and I think that will be a change. But at the moment in the appointment grew, for example, you can get to this moment, but it's not bothering us. It's not causing a problem.

Unidentified Analyst: 23:25 Okay. And lastly, I know conceptually, you have an idea of the funnel for electronic warfare systems and the opportunity over one, two, three, four, and five years but do you have a good number you want to talk about in terms of quantifying, if you will what you feel the pipeline is for the next 12 months or so?

Lutz Henckels: 23:44 I mean, we have a very significant forecast, I'm not sure that it is proper for me to speak about that in this situation. But actually, our funnel has significantly increased. It looks really good.

Unidentified Analyst: 24:00 Okay, well, that was my question, though. So why has it increased? Maybe you don't want to talk about the magnitude increase. But what has happened such that the pipeline has increased over the last…

Lutz Henckels: 24:10 Basically, the military is if you want a small community and people realize now, who we are and what we offer. And so there are other people that are jumping in that want to be part of it. Maybe John, he want to talk about [Indiscernible].

John Regazzi: 24:31 Right. So Larry (ph), this is John, we have a very compact threat emulation system, unlike the very large ones, that are used in the laboratories and it's just ideal for operation on a base. So we've been doing some demonstrations and we've the Air Force is looking like they are going to be buying several systems. For one program, the Navy has already bought several and we just managed to get into the army at Fort Huachuca with some demonstrations there, and they, they see the value of it on the range. So I think it's an awareness thing and the funnel is growing.

Unidentified Analyst: 25:18 Okay. And John, as long as you're speaking to this, in terms of feedback, obviously, the technology has evolved dramatically to satisfy what the customer needs. Is there another significant evolution in the technology in terms of what the customer be looking for? Or is this a very complete system at this point? Or is it things that need to be – should be added down the road?

John Regazzi : 25:40 That's a very good question, Larry. No, we definitely have to continue evolving it. The information bandwidth in the signals is growing. So we have a relatively narrow bandwidth signal, which is just fine for now. But the instantaneous bandwidth has to grow. That's one, one increase and the simulation that we do, it needs to be put in a remote location and so we're teaming up with another company that is providing an antenna solution for us and a tracking solution that allows us to operate the equipment away from the action. So, on the range, you're training pilots, as they fly over, and they see – they see our simulations, but they're also firing missiles and you don't really want to blow the equipment up, you maybe just blow up the antenna, so you have to get the equipment away from that. So that's another innovation that we're working on.

Unidentified Analyst: 26:50 Okay. Great, thank you.

Operator: 26:56 Okay and presenters, I show no further questions in queue. So I will turn it back to you for closing comments.

John Regazzi : 27:03 Well, thank you for your support. And I look forward to speaking to you next quarter, hopefully, with better information. Thank you very much.

Operator: 27:17 Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect.