Executives: John Regazzi - CEO Steve Lance - CFO

Analysts: Jeff Porter - Porter Capital Management

Operator: Welcome to the Giga-tronics Fourth Quarter Earnings Conference Call. My name is Katie 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. Please note this conference is being recorded. I’ll now turn the call over to Steve Lance, CFO of Giga-tronics. Please go ahead, sir.

Steve Lance: Thank you, Katie. First, I’d 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 risks and uncertainties such as delays with manufacturing and orders of new products, receipt or timing of future orders, cancellations or deferrals of existing orders, the company’s potential need of additional financing, ability to be traded on NASDAQ, the volatility in the market price of our common stock and general market conditions. For further discussions, see Giga-tronics’ most recent Annual Report on Form 10-K for the fiscal year ended March 28, 2015, Part I under the heading Risk Factors, and Part II, under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations. I will now turn the call over to John Regazzi, our Chief Executive Officer. John?

John Regazzi: Thank you, Steve. Good afternoon and thank you for joining our quarterly earnings conference call. I’ll first recap the quarter and then the full year and then move to the discussion of recent developments relating to our Microsource and Threat Simulation business. Net sales for the fourth quarter of fiscal 2016 were 2.7 million, which is a decrease of 37% as compared to the fourth quarter of fiscal 2015. The two main components of the drop in revenue were associated with the GAAP and production of our RADAR filter within the company’s Microsource business unit of approximately $900,000 and a reduction of approximately $600,000 in production of our legacy Power Meters and Bench Synthesizers. The GAAP in Microsource filter production is related to the completion of an annual customer contract and the timing of the start of the next contract. The reduction in our legacy product revenue is associated with the sale of the product line Spanawave that we announced in January. Also sales of the Advanced Signal Generator were down from the fourth quarter of 2015 by approximately 100,000 due to delays in completing the down converter. Net sales for the fiscal year ended March 26, 2016 were 14.6 million, a decrease of 21% compared to revenue of 18.5 million for the fiscal -- prior fiscal year. The decrease in revenue was driven by many of the same factors just mentioned, but also due to the F-16 development contract and the end of life order for Precision Scalar Analyzer from the U.S. Navy that occurred in fiscal 2015 that were not expected to repeat in fiscal 2016. These decreases were partially offset by an increase of 1.3 million in sales of the advanced single generator. Sales from the Advanced Signal Generation increased from approximately 500,000 in fiscal 2015 to 1.8 million in fiscal 2016. The operating loss for the fourth quarter of fiscal 2016 was 1.5 million, compared to an operating loss of 48,000 in the same quarter of last year. Operating loss for the full year was 3.7 million, as compared to an operating income of 14,000 in the prior fiscal year. The increased losses for the fourth quarter of 2016 and for the full 2016 fiscal year as compared to last year was primarily due to the decrease in revenue and the impact this had on absorbing our fixed overhead costs. Also our margins were slightly better in fiscal 2015 due to the lower costs of sales associated with the F-16 development project that did not repeat in fiscal 2016. Please refer to the earnings release for more detail regarding the net losses, the earnings per share and our non-GAAP performance. I would now like to move to a discussion of the company’s Microsource and Threat Simulation business. Giga-tronics is continuing a shift and focused away from its traditional legacy product lines and towards higher margin and high growth opportunities by concentrating on the RADAR filter business through the Microsource business unit and the threat simulation market based upon the major investment the company has made over the last four years in the Advance Signal Generator platform. First let me discuss the Microsource operation. We expect RADAR filter production to return to normal volumes in the current quarter due to the receipt last month of the annual customer contract from the prime contractor. In May of 2016, we received a 4.5 million order for the F-15 filter variant which is a 50% increase over the order we received last year associated with this program. Shipments have already begun and will continue throughout fiscal 2017. In addition we will begin production this summer on the 10 million multi-year filter order we received last year associated with the F-16 development project. These shipments are expected to continue through fiscal 2020. We are also expecting a new development contract for approximately 1.7 million for addressing an obsolescence issue connected with one of the variants of these RADAR filters. The company expects revenue from its Microsource business unit during fiscal 2017 to return to levels achieved in fiscal 2015. Second, let me address the Advance Signal Generator opportunity. As you can see from today's announcement, we are receiving wide customer acceptance. Not only have we made in-roads at several prime contractors and research institutes, but now with end users within the services. Giga-tronics just received a 3.3 million order from the U.S. Navy based upon its Threat Emulation System which is a combination of our Advanced Signal Generator hardware and the software licensed to us from Lockheed announced last December. We expect to fulfill this order in the second half of this fiscal year. In addition our engineering team has made significant progress resolving the technical issues with the down-converter and it is expected that this component of the Advance Signal Generator platform will begin shipment in the current quarter. I would also like to announce that the company has hired a new Vice President of Operations, Mr. Suresh Nair. Mr. Nair comes to Giga-tronics with prior experience at General Motors and most recently at Danaher Corporation, both operation's focused companies. Suresh will be instrumental in assuring our Advance Signal Generators are delivered on-time and with the highest quality. And speaking of quality I'm happy to announce that the company is regaining both the ISO 9000 certification for its commercial products but also the more stringent AS9100 certification for the Microsource business unit covering the RADAR filters designed and manufactured for aerospace use. I'm very pleased with the performance of our teams in regaining these certifications. Finally, while it is taking longer than anticipated to complete the transfer of the legacy products to Spanawave, we continue to make progress and we'll maintain the effort to finalize this transfer by the end of the calendar year. In addition the company continues to look for opportunities to trim other product lines unrelated to the two focus areas just discussed. With that I'd like to open the call for questions.

Operator: Thank you. [Operator Instructions] And we have a question from Ken Janeski [ph], she's is a private investor. Please go ahead.

Unidentified Analyst: This is Ken Janeski, I'm a private investor. I read your press release and I have a question regarding the ASG sales, the complexity issues you described in the delays. Has that now all been solved? So we should not expect any further delays of that kind?

John Regazzi: On a hardware side Ken yes, the answer is yes. We still are in the process of integrating the software and we're making very good progress with Lockheed in that respect and I believe that we should be able to fulfill that order by the end of this fiscal year.

Unidentified Analyst: What is the current cash runway of the company?

Steve Lance: I think in general we'll maintain the levels of cash we have over, we just released and that we've had at the end of the last, prior quarter.

Unidentified Analyst: So, you don't -- I read that to be -- and you don't expect to have any possible additional delays in receiving parts or anything you need from your suppliers as a result of cash shortfall?

Steve Lance: We do not anticipate that. I think what you're referring to is, in the January time period we had to defer the receipt of parts and ordering parts because of cash flow. And in late January we did raise 3.5 million of proceeds and we're able to get parts flowing by mid-February timeframe.

Unidentified Analyst: So, at this time you don't expect to, again throughout the summer and fulfilling these contracts that you expect to ship during the summer, you don’t expect to have any delays as a result of your cash position?

Steve Lance: We’re not expecting it. I mean you could look at our balance sheet as we’re -- we’re not flushed with cash, so it has to be managed on a weekly basis. But I am not anticipating those type of issues.

Unidentified Analyst: And with respect to NASDAQ requirements, do you continue to expect to meet the capital requirements and not have them issue some kind of a letter again?

Steve Lance: So, we’re finishing the quarter just below 3 million and the requirement for NASDAQ is at 2.5 million. So we still are running pretty darn close to it. I am not anticipating it, but given how close we are to the 2.5 million equity requirement of NASDAQ there can’t be any guarantees. If we did, we would answer their -- we would work with NASDAQ like we did when we got a notification a year and half ago, actually two years ago. We’d work with them to try to remain on the exchange like we did before.

Unidentified Analyst: One last question is, how much of your expected summer shipments that you’re looking at now, have you already received cash and that’s in deferred revenues? Is there any of it or is that deferred revenue expected to roll through this summer and the cash has already been received, so that doesn’t represent the cash pipeline for you?

Steve Lance: A percentage of the shipments to have a deferred revenue component associated with -- we’ve received a $10 million order last year for the F-16 and it's a multiyear contract with guaranteed pricing. So the prime contractor agreed to let us go out and buy the inventory upfront. And so, we’ve bought the inventory, built the customer and those amounts are in deferred revenue. As we work off the inventory and ship those amounts will come out of deferred revenues, but it's not per unit, it's not all the revenue or is not all the billings, it's more like 70% something -- 30% and then we still bill 70% of it.

Unidentified Analyst: Okay, so in my [Multiple Speakers].

Steve Lance: Of the F-16 order.

Unidentified Analyst: Okay, let me go through that in my mind. So what you’re saying is, for the shipments you expect to have over this next few months, a portion of it has been received in cash already and you said that was 30% and you’d still get 70% of the cash associated --.

Steve Lance: [Multiple Speakers] associated with the F-16, so that’s if you take the whole part, than it gets lower than 80% and it's -- we’ve received less than 20%. So we bill over 80% of total shipments.

Unidentified Analyst: Okay, so --.

Steve Lance: And then these are all rough numbers.

Unidentified Analyst: Yes, I get it. So, at least during the shipments that you’re expecting to have over the next quarter or two, you don’t expect to have any cash flow problems in getting the deliveries made because of non-payment of the payables?

Steve Lance: I think I’ve already answered that question.

Operator: [Operator Instructions] And we have a question from Jeff Porter from Porter Capital Management. Please go ahead, Jeff.

Jeff Porter: With regards to the Advanced Signal Generation, the order that you announced today for 3.3 million. Is that sort of a typical size of order for that product? And could you elaborate on the marketing activities and what the pipeline looks like in that area?

Steve Lance: It's our largest order to-date and what we anticipate is, for our Advanced Signal Generator, that we will receive orders for hardware only. None of the Lockheed software that are going to be smaller, like we announced the -- back in the fall we announced I believe $1.2 million order from Raytheon. So these bundled orders are going to -- we do expect them to be larger and in some cases as large as this order. But I think the majority of the pipeline is orders from the size of maybe 600,000 to just a single unit to multiple solution like the 6.3 million order we just received.

Jeff Porter: And can you elaborate on sort of the depth of the pipeline and sort of what a normal sales cycle is?

Steve Lance: I think a normal sales cycle is, I'd say 9 to 12 months because we are dealing with institutional buyers or the defense department, it’s the Navy in this case. The pipeline itself we typically don’t comment on it but we do see, we do have a robust pipeline and we expect to be able to continue our business at a growing rate with the pipeline that we have in place.

Jeff Porter: Okay, thanks.

Operator: [Operator Instructions] And we have no further questions at this time.

John Regazzi: Okay, I appreciate everyone's participation, and I thank for your interest in Giga-tronics. Have a good afternoon.

Operator: Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.