Giga-tronics' CEO Discusses F3Q2014 Results - Earnings Call Transcript

Giga-tronics, Incorporated (NASDAQ:GIGA)

F3Q2014 Earnings Conference Call

February 06, 2014 04:30 PM ET

Executives

Steve Lance - Chief Financial Officer

John Regazzi - Chief Executive Officer

Analysts

Operator

Welcome to the Giga-tronics Third Quarter Earnings Conference Call. My name is Heather and I’ll 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 that this conference is being recorded.

I will now like to turn the call over to Steve Lance, Chief Financial Officer. Steve, you may begin.

Steve Lance

Thank you, Heather. First I’d like to read our Safe Harbor statement. This conference call contains forward-looking statements concerning profitability, backlog of order shipments and the likelihood of realizing certain tax benefits.

Actual results may differ significantly due to risks and uncertainties, such as future orders, cancellations or deferral of orders, disputes over performance, the ability to collect receivables and general market conditions.

For further discussions, see the most recent annual report filed by Giga-tronics on Form 10-K for the fiscal year ended March 30, 2013, Part I, under the heading Certain Factors Which May Adversely Affect Future Operations or an Investment in Giga-tronics and Part II, under the heading Management’s Discussions and Analysis of Financial Condition and Results of Operations.

I will turn the call over to our 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 will make some brief remarks and then open the call for questions.

Net sales were $3.4 million this quarter as compared with $3.9 million in the third quarter a year ago. Net sales for the first nine months of the current fiscal quarter were $10.4 million as compared to $11.4 for the first nine months of the prior fiscal year. The decreases in net sales were primarily due to the fulfilment of a large order for our legacy switching products last year prior to selling the product line to Teradyne early in this fiscal year.

Gross margin percentage for this quarter was 38% as compared to 41% for the third quarter a year ago. Gross margin percentage for the first nine months of the current fiscal year was 36% as compared with 40% for the first nine months of the prior fiscal year. The decreases in gross margin percentage are primarily due to the less favorable product mix with additional shipments of lower margin legacy products.

Operating expenses were $2.1 million this quarter, as compared to $2.5 million in the third quarter a year ago. Operating expenses for the first nine months of the current fiscal year and for the first nine months of the prior fiscal year were $7.1 million.

The company is standing between $1 million and $1.1 million in research and development per quarter. The majority of these expenses are associated with the development of the company’s new product platform that is forecast to start shipping in the first quarter of fiscal 2015.

Net loss this quarter was $718,000 or $0.14 per fully diluted share, as compared to a net loss of $865,000 or $0.17 per fully diluted share for the third quarter a year ago. Net loss for the first nine months of the current fiscal year was $2.5 million or $0.49 per fully diluted share as compared to a net loss of $2.6 million or $0.52 per fully diluted share for the first nine months of the prior fiscal year.

During our third quarter of this fiscal year the company’s Microsource business unit received a $1.1 million order for additional radar filter components and the Giga-tronics Instrument Division received a follow-on order of $190,000 from a large aerospace company associated with the new product platform.

With that I’d like to ask Heather, our operator to handle any questions you might have.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). We have a question from Laurence Jaskolski private shareholder. Please go ahead with your questions.

Unidentified Analyst

Hi fellows, how are you doing today?

John Regazzi

We’re doing fine. We’ve got some badly needed rain today, so that’s good.

Unidentified Analyst

Well. I’m calling from Milwaukee and the weather here is pathetic. It seems like it’s all winter. So I have a set of few questions in mind, I know that you’ll be shipping this new product platform in the first quarter of fiscal 2015 and that runs from April till June correct?

John Regazzi

Yes.

Unidentified Analyst

Or April through the end of May?

John Regazzi

No, that’s the June quarter, yes.

Unidentified Analyst

June quarter, right. Now do you know when in that quarter you’ll be shipping it, like April, May, June?

John Regazzi

It’s pretty hard to predict Laurence. I am hoping to hit the middle of the quarter and not go to the very end. But the platform is completely new from the ground up and there has been a lot of technical complexity to it. So it’s not something that I could answer for sure.

Unidentified Analyst

Okay. And now will (inaudible) about $700,000 in orders for this new platform, product platform?

John Regazzi

I think Laurence, it’s closer to $500,000.

Steve Lance

Yes, Laurence it’s exceed that 520.

Unidentified Analyst

520,000? Now, we are spending on R&D about $1 million a quarter. Now, do you expect in the fourth quarter which we’re in now to spend about another $1 million?

Steve Lance

I would say that’s accurate, we would expect the trend to be very similar.

Unidentified Analyst

And also in 2015, fiscal 2015, is the R&D going to be coming down or do you still expect to spend about $1 million a quarter on R&D?

Steve Lance

Yeah, we actually will see it coming down. The main driver behind that is the materials we have had to purchase for the new product platform. So right now, we are purchasing materials in R&D and going forward those will be cost of sales.

Unidentified Analyst

Okay. And I see that our cash and cash equivalents has gone from $1.8 million to $956,000; is that due to the R&D?

Steve Lance

The main reason is, we have continued to run losses and the R&D spending is substantial especially for a company of this size. So I would not -- I think it’s a major component of it.

Unidentified Analyst

Okay. And now, in our line of credit, do we have a $2 million or $3 million line of credit?

Steve Lance

It's a $3 million line, but it's tied to our accounts receivable. So, we're able to borrow on eligible [employee fee] from accounts receivable. So at the end of the quarter, we had AR of $1.7 million and the line was $953,000. There is a little bit, maybe a $100,000 $150,000 on the line that we could have still used at the end of the quarter. Yeah.

Unidentified Analyst

So, we spent about how much money under line of credit?

Steve Lance

Right now the line is in the $1 million range; at the end of the quarter it was $953,000. But you can't -- I just want you to understand that it's limited not -- to maximum it’s $3 million, but before we could even get to the maximum, it's a portion of AR. So, it can never be higher than the AR and it's -- practically it's going to be 70% to 80% of the AR balance.

Unidentified Analyst

Okay. And my question is how we're going to finance our R&D when our cash is dwindling and our line of credit is dwindling?

Steve Lance

Yeah, that's something that we look at every day. And one thing that we have last -- since the end of the year our inventories have gone from $4.6 million, down to $3.3 million. But that's been a source of cash going forward. I mean I can't guarantee that it's going to be a source in the future, but we are looking at all opportunities. And John mentioned that gross margins were down and due to sale of legacy products. We do have more legacy products in inventory so we have relied on selling those maybe at a lower margins since the materials already in inventory.

Unidentified Analyst

So you think you can get through the next couple of quarters on the cash you have available and on line of the credit we have?

Steve Lance

Yeah, it’s going to be -- it’s something we evaluate and look at every week and we are managing diligently to it.

Unidentified Analyst

I see that, okay. And also another question on the trading volume; in the last 10 days Giga has been averaging roughly around 23,000 shares a day. And usually -- I have been a long time shareholder; usually average is around 2,000, 3,000 a day. So that’s almost 10 times normal volume and today it traded around 136,000 shares. Do you know any reason for this?

Steve Lance

No, not anything that the company has announced or nothing driven from this and it’s -- as I have talked to NASDAQ, their analytics test to understand the trading recently and from my understanding is that it’s been on the retail side; there hasn’t been a large individual investor. And what could happen is it’s a substantial trade given our, the historic trading volumes that you discussed occur, it’s something out of that normal range considered large for us. There won’t be -- if some of it’s in order and that’s high, there is not -- it raise the price up as they build the order. And then as the price gets driven up then it catches the folks out there that just kind of looking for stocks that have an increased volume or an increase.

Unidentified Analyst

Yes.

Steve Lance

And given the relatively low volume of sales our stock has and the relatively low price, it doesn’t take much for to go up on a percentage basis.

Unidentified Analyst

Right, but it’s mostly retail people getting in, right?

Steve Lance

Yes, it is.

Unidentified Analyst

Okay. And now is Alara Capital still behind you guys and what’s you are doing?

Steve Lance

Yes, they are.

Unidentified Analyst

Good. That's nice to see. And are [they] another source of capital?

Steve Lance

They -- I can’t speak for them, but they are very supportive. John and I -- they are doing up Board of Directors and we have a lot of ongoing conversations with them and we always do that.

Unidentified Analyst

Yeah, okay. Because what I am, I know they have quite a bit of shares and the commons outstanding shares keep going up, I think we had about 5 million shares now. And I’m just wondering if that we’re going to be -- that would be more dilutive and you might be issuing them more shares at a very low price, which would be around $1.30 here, is that a possibility?

Steve Lance

Well I think, you’ve raised a good question at the beginning of the call regarding the cash situation of the company. And we do have to look at -- we do manage cash very closely on weekly basis. So we do have to look at funding opportunities. And the funding opportunities may or may not be the most attractive.

Unidentified Analyst

Okay. Now have we re-priced options?

Steve Lance

No, we have not.

Unidentified Analyst

Okay. And is there a possibility to?

Steve Lance

We have looked at it and we continue to look at it, it’s always a possibility. But at this point, when we last looked at it maybe a few months ago, it didn’t seem useful.

Unidentified Analyst

Good, because I hope we don’t do that and with the stock being so low and lot of these people on the Board of Directors are willing to do. And I think if they may be like the company, they can spend some of their money and buy shares on the open market and say they’re getting into options all the time. That’s just a comment on the shareholder.

John Regazzi

We understand, Larry.

Unidentified Analyst

Okay. Well, thank you so much. I appreciate it. And best of luck.

John Regazzi

Thank you, Larry. Stay warm.

Unidentified Analyst

Thank you so much. Bye.

Operator

(Operator Instructions). At this time I am showing no questions.

John Regazzi

Okay Heather, thank you. And thanks everybody 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.

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