Giga-tronics' (GIGA) CEO Joey Thompson on Q3 2017 Results - Earnings Call Transcript

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Giga-tronics, Incorporated (NASDAQ:GIGA) Q3 2017 Earnings Conference Call February 6, 2017 4:30 PM ET

Executives

Joey Thompson - Chairman and Acting Chief Executive Officer

Temi Oduozor - Corporate Controller & Principal Accounting Officer

John Regazzi - Chief Technical Officer

Analysts

Frank Barresi - Ameriprise

Operator

Welcome to the Giga-tronics Third Quarter Earnings Conference Call. My name is Karen, 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 that this conference is being recorded.

I will now turn the call over to Joey Thompson. Joey, you may begin.

Joey Thompson

Hi, everyone. Thanks for joining our quarterly earnings conference call. I’m Joey Thompson and I’m joined today by John Regazzi, our CTO; and Temi Oduozor, our Controller & Principal Accounting Officer.

Before we begin, I need to remind you that this conference call contains forward-looking statements concerning operating performance, future orders, long-term growth and shipment. 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, results of pending litigation and general market conditions.

For further discussions, see Giga-tronics’ 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 Conditions and Results of Operations. Okay, with those reminders in place, we turn the call over to Temi to review some of the earnings numbers.

Temi Oduozor

Thank you, Joey. Net sales for the third quarter of fiscal 2017 were $3.2 million, compared to $4.5 million for the third quarter of fiscal 2016. The decrease in third quarter net sales over the prior year period was primarily due to lower legacy product sales mainly due to recent product line divestitures The decrease in legacy product sales were offset by an increase of the YIG filter shipments products which we started shipping in the second quarter of fiscal 2017.

Net sales for the nine month period ended December 24, 2016 were $11 million compared to $11.9 million for the nine month period ended December 26, 2015. The decrease was primarily due to lower legacy product sales which was substantially offset by an increase in YIG filter shipments and our ASG product.

Net loss for the third quarter of fiscal 2017 was $575,000, or $0.06 per fully diluted share. This compares to a net loss for the third quarter of fiscal 2016 of $602,000, or $0.09 per fully diluted common share.

Net loss for the nine month period ended December 24, 2016 was $1.1 million, or $0.11 per fully diluted share. This compares to a net loss of $2.5 million, or $0.40 per fully diluted common share for the nine month period ended December 26, 2015.

The reduction in net losses for both periods compared to the prior year periods was primarily due to lower operating expenses, including a reduction in personnel related costs as a result of the switch and legacy product line divestitures, a reduction in non-cash stock based compensation expense and a reduction in consulting and other outside services.

The lower net loss during the nine months period ended December 24, 2016 also includes an $802,000 gain associated with the sale of our switch product line during the first quarter of fiscal 2017. Joey?

Joey Thompson

Okay, thank you Temi. So want to provide some color on the numbers but first I want to speak about terminology here. At this point, the company has focused on electronic warfare. We report on two different divisions, the Giga-tronics divisions, which historically did general purpose test and measurement and our subsidiary Microsource.

The Giga-tronics division is now focused on electronic warfare, test and simulation. And Microsource is focused on airborne subsystems with the bulk of current revenue derived from fast tuning; [blanking] filters used in radar modernization program for F-15, F-16 and F-18 fighter aircraft.

Around tier and everyday conversation I try to refer to these divisions by their product focus, because I think it's more transparent, and I’ll try to do the same on this call, but there's no trickery here, I’m just trying to get people to think what Microsource does versus the new product platform that we’ve built within Giga-tronics.

Okay, so turning to our product lines, we continue to work to increase penetration into the defense-to-market for our electronic warfare test and simulation products. Our bookings last quarter were approximately 1.2 million on two orders. Each of these represented a milestone; the first order for around $400,000 was our first international order for this product platform. While the U.S. is the largest EW market in the world, there are substantial activities among U.S. allies and we’re happy to finally begin serving those markets.

We expect international orders to contribute meaningful revenue in the next fiscal year. Our second order became the first shipment finally of our Threat Emulation System, which combines our unique hardware with software that we’ve exclusively licensed from Lockheed Martin in the partnership that announced in December 2015.

So just to remind you, some customers will always just want hardware to integrate into their software environment for particular application, others want the quick utility and the decades of intellectual property that the Threat Emulation software provides.

Going forward, we expect these Threat Emulation Systems to represent a substantial fraction of our revenue. One other thing, if you listen to our last call, I mentioned that we were focused on increasing the fraction of our total revenue attributed to our EW Test and Simulation products, because this is the Company's growth platform.

I also said that, that fraction of revenue from EW Test this past quarter would depend on the timing of shipment of two large customized Threat Emulation Systems ordered by the U.S. Navy.

To be clear, these two systems together were announced in the press release on June 6th, and together comprise a value of about $3.3 million. We finally shipped the first of those two systems this current quarter, we didn't make the cut off for last quarter and we received acceptance from the Navy just last week. We expect to ship the second of those systems by the end of this quarter.

This is a huge milestone for the Company. The system we just shipped is the most complex test system ever shipped by the Company. It expands the capabilities that we can offer our customers and we are optimistic that we’ll see additional orders based on the capabilities that we deliver.

If you want to look, there’s a picture of the system on our website. You can go to go-ASG for a advanced signal generator Go-ASG. gigatronics.com and if you click under application, select multi platform and there’s a picture of the system that we shipped.

Now while we’re happy with the orders we received last quarter and the shipments that we’ve made, we recognized we need to increase sales for our EW Test and Simulation products to achieve consistent profitability. We continue to make adjustments in the organization to enhance our customer interactions and we are adding an experienced marketing and sales engineer to focus on the East Coast of the U.S. where many of our prospective customers are located.

We will continue to work on these short-term issues, but we are increasingly optimistic about the long-term EW market and our role in it. First of all, there is widespread perception in the industry that the current political environment will favor increased EW spending after reduced spending for several years due to sequestration.

More importantly, there are technological changes in electronic warfare that we believe require increased spending in EW and a concurrent increase in the associated test and measurement equipment. Among these changes, are wider instantaneous [bandwidths], more networking in the EW environment and the need for cognitive EW technology that can respond to new threats as opposed to just knowing how to respond to pre-recorded threats.

We have key features that play into these industry drivers. Furthermore, our commercial off-the-shelf model presents a faster and more cost effective opportunity to acquire this technology compared to offerings from some of the larger incumbence.

Now, trying to Microsource our airborne subsystems products delivered revenue of about $2.4 million in Q3, which is a little less than the 2.7 million in sales in Q2. The difference is because of pre programmed timing of shipments on our long-term contracts. We exited the quarter with a backlog of airborne subsystems of about $12.1 million compared to a backlog at the end of the previous quarter of about $14.4 million. In other words, except for one small order essentially all of the Microsoft revenue last quarter was from backlog.

If you have followed the company, you should not find it surprising. Typically the airborne subsystem orders are for substantial contracts. The orders are quite lumpy and we don't expect those orders every quarter.

Looking forward with that business, we expect revenue this current quarter to be somewhat lower than in fiscal Q3 as we near completion on one of our long-term contracts. We expect to be fully complete on that contract early in fiscal Q1, and let me just remind everybody I'm sure everyone knows that our fiscal year ends near the end of March, so Q1 ends in June.

At that point, we will continue shipping against backlog but our monthly Microsource run rate will be lower than our average over the last couple of quarters until we begin shipping on new contracts which we are negotiating now.

While we can't say for sure about the timing, we hope to complete negotiations and begin shipping against the new contracts prior to the end of the calendar year. That’s where we earned topline revenue, obviously we are profitable and we can't ignore how expenses contribute to our losses.

We also can’t cut our way to success, because we need to continue to innovate, but we are doing what we can to reduce expenses. Most notably, we were lucky that the lease just expired on our current location in San Ramon. With the product line divestiture that the company completed in the last couple of years, our current 47,000 square foot space is larger than we need.

We were unable to reach favorable terms on reducing our footprint in our current location and we have therefore entered into a lease for about 24,000 square feet in the new location down the road. We expect to be fully operational in the new space by the end of April, and while the move is inconvenient our lease expenses will be roughly $500,000 lower than they would have been had we remained in the same location.

That's all for our prepared remarks. Now we would like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from [Don Gruber]. Don, your line is open.

Unidentified Analyst

Oh yes, you – at the end of the last quarter, you had a very good backlog, deliverable in the year unfortunately you decimated that this renders order quarter -- whether you expect in orders next in the current order, otherwise your backlog can be really down year-to-year.

Joey Thompson

I can’t tell you necessarily what we expect in particular in orders. What I can tell you is we recognize the same problem that you do. And we are working as hard as we can to get the orders in, because of course that’s the lifeblood of the company.

We will continue to have quite a large backlog of the airborne subsystems, so really you are talking about the EW Test and Simulation. One of the issues that we have there is that essentially all of those orders are tied one way or another as the government [Indiscernible] the work, and so it’s difficult for us to force the orders to come in quickly by giving discounts or something, that’s not the way this market works. But we are working as hard as we can and focusing as much effort as we can to get bookings in for the EW Test and Simulation, and a lot of that work involves supporting existing customers where we know there is additional business and making them understand or helping them to see how our products help them to be faster.

Unidentified Analyst

Yes, that’s nice, but it doesn't – it doesn’t solve the problem. Is there any big orders that you potentially can get over the next four months?

Joey Thompson

Yes, there are and we are actively working....

Unidentified Analyst

Why don’t you rattle them off into these?

Joey Thompson

Let me, John, historically I don’t believe the company has given particular guidance, on upcoming orders now.

John Regazzi

No, no we haven’t. It’s the company is too small and one little change can make such a swing in the outcome, we’ve tended not to give guidance.

Joey Thompson

I mean, what are the....

Unidentified Analyst

I’m not asking for guidance, I’m asking for what orders are coming up for that you might not even – what are coming up for bid which could help the backlog otherwise you are melting ice cube here.

Joey Thompson

So to be clear, these are not orders that come up for bid, right. These are not RFQs that we are responding to for the most part. These are commercial off-the-shelf orders. And so we are working, we have funnel and we are working all of those orders. Now, obviously we’ve shipped this first systems for the Navy, and just another we are hoping to shift within the next six weeks or so we hope that has babies.

We’ve shipped to several major prime contractors and we are working with them to get those orders to have babies. In addition, we have international orders for people that are sitting there in our funnel that we are working on. So it’s not like we are not doing anything, but this is not the traditional thing where we are responding to a request for quotation and doing a bid on that. That’s not the kind of orders that these are.

Unidentified Analyst

Okay.

Operator

And we have our next question from [Paul Black].

Unidentified Analyst

Hello.

Joey Thompson

Hey.

Unidentified Analyst

I assume you can hear me?

Joey Thompson

Yes, Paul go ahead.

Unidentified Analyst

Thank you. Curious to know what competition or other product providers for the EW products that you are working on now, have you identified, and what steps or plans are you taking or do you have in place to go up against these providers, and get Giga-tronics specified instead of them.

Joey Thompson

That's a really broad question and I’ll speak to it and then you can ask me follow up questions, and John also will weigh in here. So traditionally, if you look at the EW Test and Simulation market, at least a part of the market that we are playing into, it’s kind of a barbell distribution in the sense that there are sort of 2.5 major players that build gigantic systems. These systems will be many racks, they are $10 million or $20 million in cost, and those are systems where they respond to an RFQ for a particular type of threat and it takes a couple of years to produce the systems.

Those players are Northrop Grumman and Textron AAI. Those are the two groups. Northrop Grumman is the Empress division. So if you look up in the marketplace, that Northrop Grumman part is CEESIM is what it’s called, and the AAI Textron part is A2PATS. These are their names for these customized products.

At the other end of the market are what I call the individual boxes. So these are signal generators, arbitrary waveform generators, these are the boxes that you buy from what it’s now called [keyside] it used to Agilent or Hewlett-Packard. [Indiscernible] for its Tektronix, people like this and these are systems where you buy the individual boxes, and you put them together in a system that works in some way.

We're sitting somewhere in between these, in the sense that we are providing more of the functionality, the big systems, but we are not making giant systems, so we are not making systems that have a hundred channels on them, we are making systems that are benchtop applications where people can pull the system out and use it.

And the way we like to think about it here is, it’s kind of like a PC compared to a mainframe computer, that Northrop and AAI they make mainframe computers and they are great at them. We are making a PC that enables people to quickly test the threat themselves. Like you make say, well why do you need that? The issue is that just like in the old days when you use mainframe computers, I don't know who on this call is old enough to remember this, but you have to queue of at a window to turn in your cards and wait for the result. That’s kind of what happens with the big systems from Grumman and AAI.

And the problem is if you have a problem with your jammer or whatever your EW subsystem that your testing is, it’s kind of late in the game to find out that you have a simple problem with that system when you show up with that big mainframe that you have reserved ahead of time, some months ahead of time let’s say. So we are going in and enabling people to test earlier and much less expense.

Now what are we doing to compete against the other people that the partnership with Lockheed it's very helpful to us, because it enables people who don't have the sophistication internally to build software and do these simulations themselves to do that stuff again out of the box, and do test that require high fidelity signals quickly.

The other thing that we are doing, that [Cess] is a part in a big way, is we have what’s called the Dell converter. And that's important, more important now than it would have appeared let’s say a few years ago because what I mentioned in the prepared statements about cognitive EW. The issue, if you think about how electronic warfare testing is done, typically people record what the threats are, somehow by some measure they figure out what the threats are. Either they fly a drone through airspace or they capture one of these devices, they figure out what the threat is, and then they report that and play it back and test their jammer or whatever against this threat.

The problem is that high speed digital electronics these days is enabling people to change threats on the fly. And we’re going to have to be in a world where the jammers and all the EW stuff can respond in real time with some type of machine learning to be able to respond to things they don't know about ahead of time. That requires that not only can you generate the signal, but that you can then analyze the signal coming back at you which requires the down convertor. So that’s something that we have that is unique, and we are working very hard to make sure people understand that we have that ability because it plays well into what's happening in EW right now.

Unidentified Analyst

Okay, well that answers, that answer is part of what I wanted to know. I think what I'm hearing you say, by the way I have a engineering technical background and yes I am old enough to remember standing in line with the stack of IBM cards for computer time.

Joey Thompson

So there you go.

Unidentified Analyst

I think what I'm kind of hearing you say is that you got the large integrators on one end and then you’ve got box sellers on the other end who just do that, they sell boxes and allow customers to do systems configuration and integration on their own, and I think you're trying to kind of niche yourself in the middle between those two groups. Is that a fair statement, do you think?

Joey Thompson

Yes, I think that’s a fair statement. It is true that what we do is not the same as the box sellers. We don’t claim to do everything that the giant providers do, but it’s not the same as the box sellers. And we do have capabilities that they don't have. But yes, we are in between those two.

Unidentified Analyst

Okay. All right, well very good. That pretty much answers my question. And I think that probably is a good approach on your part to try and as Henry Kaiser said, find the need and fill it. So thank you very much.

Joey Thompson

Okay. Thank you.

Operator

And we have our next question from Frank Barresi from Ameriprise.

Frank Barresi

Joey and John, how are you guys doing?

Joey Thompson

Fine, thanks Frank. Great.

Frank Barresi

Okay, so I’m glad to hear that, that Navy orders shipped, I mean because it's like I know that you ship like the first automotive who but the first one back in July 2014 and I suppose it just didn't work too well. The first, at first their problems that people had using the customers had using it. I mean, how many, how hard is it to use now I mean what kind of progress have you made?

John Regazzi

Frank, this is John. I’m not quite sure I follow what you're saying. We – the early customers were, we shipped just hardware, we did not have any relationship Lockheed at that time. And just like anything that’s complex, they had issues applying it to their job and they were relying on us for help. They were also some of the early production units that we had some changes we had to make, but it wasn't, I mean it wasn't as maybe as bad as you are making it sound. The most recent shipment that Joey referred to with the system that includes our Lockheed software and everything worked out fine with that. We have received acceptance from the customer, there is a second one underway right now and I think whenever a customer is doing part of the job themselves rather than buying a complete package, there is always going to be, there is always going to be questions even in our general-purpose business we always would get support questions, how do you do this, how do you do that. I tried to do something and I did something I didn't expect. It's just a matter of the customer getting familiar with the product.

Frank Barresi

Well, I'm not even trying -- I don't even mean the sound negative. I mean it's just that – I’ve I been with you guys a long, long time on this, I mean a long time, since you were working on the product. And maybe 2.5 years isn’t that long, but the thought then was that the market even for the hardware only is potentially very large. And if it had all worked really well, are -- you’re saying if the customers didn’t know how to use it, or I mean, they’re pretty sophisticated customers, aren’t they, I mean?

Joey Thompson

Frank, I would say first of all, every early product had issues, our manual, I’m sure wasn’t complete, I wasn’t here reading the manual at the time, but just my prior experience with this stuff, there’s things like that. And it’s hard in the beginning because when a minute ago I talked about this as a PC compared to mainframe, part of issue – that’s not the way people in that market historically buy stuff. And they were getting momentum on that.

So, this system that we just shipped and I encourage you to go look up a picture of it. I wish there was a – somebody standing next to it, but 6.5 feet tall or something rack, fully integrated system. It’s pretty complicated. And now that we’ve got that out there and it helps people to understand the full utility of this within the DOD. But yes, two and half year is a long time and we’re not happy, and we are doing what we can to ramp up sales and penetration into the market.

And I don't think you're being unnecessarily critical. We're not happy and we’re trying to make it better. The thing that we believe is the opportunity is there and we partly by design and partly by luck we happened to be in a spot where there are trends in EW that it become apparent in the last year that were not apparent a few years ago when we started down this path that seem to be breaking in our favor. But until we get real momentum there are going to be questions and we're doing our best to get the sales.

Frank Barresi

Oh, yes. Hey, I’m a booster of what you're doing. Trust me. I mean, I – hey, I stand in the benefit. The -- so the new product and they've accepted it. So I mean, I don't know, turnkey might be a little strong, but let me go back. My understanding is that with this contract, since the Navy is using it, the contractors are going to be okay, I mean, that's a big endorsement if you will where they would be -- the potential is for many -- potentially at least many contractors to buy the system, correct. So there I think with the navy or is that any opportunity?

John Regazzi

Frank, this is John. So, you're correct about that the second system is actually going towards the manufacturer of the EW product that’s being tested with the system. So the first system went to the Navy and Point Mugu down in Southern California. And the second system is going to be owned by the manufacturer of the EW component, which is Northrop Grumman. So the contractor is buying one.

Frank Barresi

Okay. So, I mean in electronic warfare radar, I mean it covers so many things. I mean this would be applicable to many parts I guess of the electronic warfare capabilities are -- well I guess you're looking for radar, I mean, that’s the threat, basically it’s detecting the enemy radar and I don't know what else, I'm no expert on this stuff.

Joey Thompson

Okay. So, I want to answer your question. And it’s complicated and I’m not saying not to – it’s too complicated to talk about. I’m just think, that I’m going to say a few different things because I can't say it very succinctly.

Frank Barresi

Okay.

Joey Thompson

Number one is earlier when I asked about boxes or when I talk about boxes versus complete system, there is sort of a spectrum there of the type products you can offer. And to-date we sold three different kinds of products on the same platform. We’ve sold hardware only and hardware only means you have to be pretty smart to understand what to do with the system. It shows up with some capabilities, but you really have to know what you're doing in the EW space to be able to use it, and there are lot of people like that, so I’m not saying you can’t use it.

Then there is sort of the PC analogy that I made earlier where you pulled out of the box and along with the chassis that we shipped with the cards in it, there also come PC with software preloaded on it. And that’s the full test system that you can use at your bench to test the device that you want to test. And I’m going to get to what kind of test that you're doing in a minute.

And then the third type of thing that we ship is the thing that we just shipped to the Navy which is a fully integrated semi-custom solution where they can use that system to do a full test of a variety of different type of threats. And again, I would encourage you to look on the website; go-asg.gigatronics.com and look under applications and multiplatform. You'll see a picture of it. You’ll see a lot of stuff in the rack and even stuff that we make, its integration that we did. There’s a core stuff that we make plus additional stuff that we add on to make it full test system, so there’s sort of three different use cases there that we’re talking about.

Here what we just shipped to the Navy with what we ship two years ago and we're still shipping that stuff that we ship for two years ago. It’s not a direct comparison because there's a much higher level of integration with the thing we’ve just shipped to the Navy. Okay. So that's one thing I want to say. Another thing I want to say is you said well I'm not sure what you're testing.

So, at the end of the day in the electronic warfare stuff that we are testing basically there are, let’s call them radar signal flying around. And maybe you want to test your jammer or your radar warning receiver, and in that case what you want is, you want to simulate a bunch of threat radar maybe those are land-based radars, maybe they’re ship borne, maybe there are other aircraft, may be there all the above.

And so our chassis with our up-and-down converters it enables you to simulate some of those signals. If you add the software that we have license from Lockheed, enables you to set up that situation in pretty easy way. So, you can test your jammer or your radar warning receiver, but the other thing you can do is you can test your radar, so you can test just the opposite thing. And you're really testing the same kind of a thing because it just radar signals. But in this case, you are simulating targets that the radar is seeing and that's why it's so important that we have this frequency-agile system with that phase-coherent, all the stuff that John originally conceived several years ago, all the cleverness in their enables you to test radar in a very realistic way. So it’s not your -- ultimately, we are a piece that enables you to test either the radar side of things or the jammer or radar warning receiver side of things, it’s kind of two sides of the same point.

Frank Barresi

Right.

Joey Thompson

And the different user will use it in different ways. But what they look off for a high fidelity reproduction of the signal.

Frank Barresi

And so this Navy system that you’ve gotten to the point where the signal is really good that you’re generating where they feel good about what they've received, so that you feel like, I mean will they need more? Will the Navy itself wouldn't they need more or maybe ones enough, I don't know. But would they need more devices or…?

Joey Thompson

I don't think that -- I'm not providing you any guidance on this. I'm only going to say that yes, I would expect that they would need more. But don't look at that as guidance.

Frank Barresi

Okay.

Joey Thompson

And Joe, you’re listening. I'm not telling you that’s an order, we’re working on and I’m not know, I’m telling you this. Just telling you that I would expect they can need more.

Frank Barresi

Okay. And then, the -- well and there's a lot of different suppliers and what about at [basis] would it go to or is this more of a product development tool, the ASG?

Joey Thompson

I think it can be all the above. I think though that by and large we tend to see this more in understanding emerging threat, new threats studying how to simulate new threats as well as bench-top testing of systems that you're developing versus sort of final test where you put this aircraft in an anechoic chamber something and beam a million things at it. But I don't think we yet fully understand how far this can go.

Frank Barresi

Okay. Sure.

Joey Thompson

We’re kind to focus on research labs because they derive a lot of what happens, and bench-top testing, this sort in process development of EW systems.

Frank Barresi

Okay. Well, I don't want to take everybody else's time. I have some other questions.

Joey Thompson

How about if look some other people ask questions and then…

Frank Barresi

Sure. I’ll come back to you.

Joey Thompson

Yes.

Operator

[Operator Instructions] And it looks like we have no questions in queue.

Joey Thompson

So, Karen, should we go back and get Frank another shot of his questions, because I didn’t want to cut them off, I just want to make sure everybody have chance.

Operator

Sure. [Operator Instructions].

Frank Barresi

Yes. And I didn't want to take up like the whole caller, but just I know, it sounds to me, I'd not knowing a lot about instead of this if it works well and it’s easy to use like – I mean you sell lot of these, I mean that’s why I got involved with the company to begin with. But you mentioned that the artificial intelligence angle on this where the system itself has some smarts where, because the radar or for one these radars are very complicated anyway but when it changes it you can do simulations to see if device you are developing can react to the changes or…

Joey Thompson

So, Frank, I want to be very careful. I think my comments mislead you.

Frank Barresi

Okay.

Joey Thompson

I don’t think any artificial intelligence in the system. What I'm talking about that, the new threats are being developed out there are going to require machine learning, AI, whatever you want to call it to respond threat that people don't yet know about. And one of the things you have to do to develop systems like that is o be able to test them in real life. And we provide a way of getting -- transparently providing the high-frequency signals to a device and transparently taking the high-frequency response from that device and down converted to low-frequency where people can analyze that stuff.

Frank Barresi

Okay.

Joey Thompson

And this down conversion is important because it allows people to do what’s called a closed loop test, and they're going to need to do that if it's really true that that AI is going to be used in this stuff and from what we can tell it seems to be a real thing.

Frank Barresi

So, you already have the capability to do this closed loop, I mean as the Lockheed software take care of that with the up-and-down converter or…?

Joey Thompson

That is an excellent question. So that sort of yes and no, the yes part is we have the up-and-down converter, the hardware is capable of doing closed loop. But our current version of the Lockheed software is an open-loop simulation, it generates signals but it doesn't automatically then closed the loop of that. And so we are looking -- that doesn't mean we’re not pursuing it, it just means that people who want closed loop stuff right now are people that are at very fringe of technology and they would have to do that part himself. But we are working toward that type of solution as well.

Frank Barresi

And they could do this with a relatively low cost system instead of the $10 million system?

Joey Thompson

Well, the funny thing to the $10 million system these days that’s not one of the standard offerings, it’s the down conversion part, because it hasn't been as important before. So yes, the short answer is yes. They can do this with a low-cost system. But the more complicated answer is and it’s not as if they go often spent $10 million and they automatically get that, at least in the existing solution. I'm sure that the other guys are working on that stuff, but we know we have working down converters now.

Frank Barresi

Okay. Okay. It gets a little overwhelming. Can I ask a question about the filters of the micro source?

Joey Thompson

Sure.

Frank Barresi

Okay. The F-16 I guess order you started to deliver and the thing -- when you're talking about stopping, I guess the F-15 is running, is that what's happening F-15 is running off, it's about done or…?

Joey Thompson

Yes.

Frank Barresi

Okay. And so, I mean are there many other – I mean, because obvious, I guess you're working on other -- the others are more F-16, more people want to update their F-16. Is at the main hope for future revenue from the filters?

Joey Thompson

John, want to say something here, and I just want to interject that I'm concerned about speaking too much about aircraft out there that might upgraded, because I’m not sure what we are allowed to say and what we’re not allowed to say.

Frank Barresi

Okay. Sure.

Joey Thompson

And I'm not -- I'm really not trying to be evasive. I just want to be respectful of our customers and the air forces around the world that are choosing to upgrade their system.

Frank Barresi

Okay. Sure.

Joey Thompson

But what I can tell you is, there are lot of aircraft out there. In terms of F-16 there are [gazillion] of these and there are quite a few F-15. I mean there are quite a few of these aircraft and in fact there are new F-18 still being ordered if you look -- if you look at, follow up the news or whatever you’ll see. So yes, we are working on contract for thing, but I'm kind of reluctant to talk specifically about what because I'm not sure if I'm allowed to do that I want to be respectful.

Frank Barresi

Sure.

John Regazzi

Frank, what I was going to say maybe that we were confusing. The F-15 is a upgrade program we've been involved with though number of years and there's several hundred airplanes that need to be upgraded. We get orders for upgrading 40 airplanes or 20 airplanes at a time something like that, and so we have nowhere near finish that upgrade program, but the current contracts that we received we’re basically finishing those and we’ll [probably fill] them out by the end of the quarter.

As Joey said during the prepared remarks, we’re negotiating follow-on contracts for the next several years for that same program. So the F-15 is not over, we didn't mean to imply that.

Frank Barresi

Okay.

John Regazzi

So, but that's a known quantity, we expect to get more orders there. The unknown part is tends to be more centered around the F-16 and it tends to be more international business although we never deal directly with international countries. We always go through the U.S. primes to do that work, but in any event where we expect to see may be new business in this area is with the F-16 and with international orders, foreign military sales.

Frank Barresi

Yes. On the last call you made the comments that, the F-15 I think they're going to fly it so long that they are looking at developing, someone ask about it about developing digital, a digital product but that's like you are thinking like five years away probably?

John Regazzi

Oh, it’s probably longer than that before they're deployed, but if somebody decides to upgrade the radar only, we have a shot at selling them a filter to prevent the interference that happens between the new radar and the existing electronics. If all the electronics are slated for upgrade then were not likely to sell the filter because they'll solve the interference problem with the new package. So that’s really what the comment was. But probably that's a decade more away before that's going to a show up.

Frank Barresi

Okay. So there is a lot more potential out there. Well, I just – and I was a little confused on when you’re talking orders and shipments this last quarter with the ASG you shipped two orders or you received two orders?

Joey Thompson

We’ve received two orders.

Frank Barresi

Okay. So you received two orders like 1.2 million and a $400,000 order I guess?

John Regazzi

Correct.

Frank Barresi

Okay. So those are not the Navy orders?

John Regazzi

Correct.

Frank Barresi

That is nothing to do with the Navy. That’s some other entities. And then you -- the $3.3 million Navy order, I don't know if you said how much you shipped to them this quarter.

Joey Thompson

We shipped none of that in the quarter that we are reporting on. We shipped the first of those in the current quarter.

Frank Barresi

Okay.

Joey Thompson

And we expect to ship the next one to build also in this correct order.

Frank Barresi

So, and they’ve accepted the first one that hey, this is working, we’re happy. I hope that means they're happy with really happy, not just accepted, but I guess you really can't – never mind, should even ask. But anyway they have accepted one of them and you expect and why wouldn't you be able to ship at this quarter?

Joey Thompson

It’s just time to put it together, so we expect too, but of course there's a lot to do, to get it done, but…

Frank Barresi

How many blades are in the systems?

Joey Thompson

That again is a nuanced question. I think there are three ASG blades plus the four ASG blades; John is signaling me is the one that we just shipped. But the system is much larger then because we’re doing integration with a bunch of other devices as well some [semiconductor].

Frank Barresi

Okay. Yes, I’ll look at the picture. I haven't had a chance because I’m trying to listen it, make sure I don't miss anything. So, well it sounds like we’re making progress and like – I mean, hopefully it's going to be a whole really good from here. I appreciate your time and help…

Joey Thompson

Okay, well thank you.

John Regazzi

Take care, Frank.

Operator

And we have no questions in queue.

Joey Thompson

Okay, Karen thank you so much for hosting the call for us.

Operator

And thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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