Executives: Traci Mitchell - Investor Relations John Regazzi - Chief Executive Officer Lutz Henckels - Executive Vice President and Chief Financial Officer Tim Ursprung - Vice President Sales and Marketing

Analysts: William Velmer - S.A. Advisory

Operator: Hello and welcome to the Giga-tronics First Quarter Fiscal 2019 Earnings Teleconference. My name is Michelle 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. I will now turn the call over to Ms. Traci Mitchell. Ma'am you may begin.

Traci Mitchell: Hi, everyone, and thanks for joining our quarterly earnings conference call. I'm Traci Mitchell, and I'm joined today by John Regazzi, our CEO; Lutz Henckels, our Chief Financial Officer and Executive VP; and Tim Ursprung, our Vice President of Sales and Marketing. Before we begin, I need to remind everyone that this conference call contains forward-looking statements concerning operational 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 for our new ASG, receipt of timing for future orders, cancellation or deferrals of existing orders, the company's potential need for additional financing, ability to be traded on the OTC market, uncertainty as to the company's ability to continue as a going concern, the volatility in the market price of our common stocks, results of pending or threatened litigation and general market conditions. For further discussions, see our most recent annual report Form 10-K for the fiscal year ended March 31, 2018, Part I, under the heading Risk Factors and Part II, under the heading Management Discussion and Analysis of Financial Conditions and Results of Operations. With those reminders in place, I'll now pass the call to John.

John Regazzi: Thank you, Traci. Good afternoon and thank you for joining our quarterly conference call. Dr. Henckels will go over the numbers in a few moments, but I wanted to highlight a few things about our recent quarters. First, our margins have improved significantly beginning in the fourth quarter of last year and continuing in the first quarter of fiscal 2019, which reflects our focus on production efficiency and overhead costs. We have been in our new facility for one full year now and have things running more smoothly than when we first began occupying the new offices in April of 2018. Second, our operating expenses have been reduced due to our focus on right sizing the company in terms of headcount and investment. With regard to our sales, our RADAR filter business continues to run well and we anticipate higher shipments this fiscal year, due to several new long term contracts we received during the prior fiscal year. Although the order situation remains the same regarding our advanced signal generator platform, we have revamped our sales team in line with the change in strategy of selling full solutions rather than just the enabling pieces, which we believe will improve the order picture for this business in the quarters ahead. Mr. Tim Ursprung, our VP of Sales and Marketing will add remarks later in the call outlining his perspective on the market opportunities available to Giga-tronics. Overall, we believe the elements are in place for the company to return to profitability this fiscal year. With that I'd like to turn the call over to Dr. Lutz Henckels to go over the numbers. Lutz?

Lutz Henckels: Hi. Thank you for being on this call. I think there are some new people on the call, so I want to briefly summarize what we expect in the conference call and we outlined a major transition that the company has made over the last six years. The transition from being a company that has lot of product lines, little differentiation need to products with poor gross margins. We divested those businesses and we transitioned to a highly focused microwave, RADAR, EW, electronic warfare product company with highly differentiated products and good gross margins. We achieved that by building on our strengths which is microwave integrated circuits, which means building on our very solid foundation, which I call our rock, which is our Microsource division. This division is a sole-source supplier of YIG RADAR filters used in fighter jet aircraft. We sell those to two prime contractors for the F-15, the F-18 and the F-16 fighter jets. This business delivers between $9 million to $10 million of revenue for the company in 2019. We have over a year's worth of backlog, it has 40% plus gross margins. And it's really in a short business for the next five years as we are sole-source supplier. I call that our rock. By focusing on our core competency our strengths which is designing and producing microwave integrated circuit products, the company developed a microwave test platform for RADAR and EW testing and we refer to that product often by the name Hydra or also by the name ASGA, advance signal generator and analyzer. The company has spent over $13 million in R&D on this endower alone and I should say we really overextended ourselves in the past. However, the good news is that we finally have completed this transition and that we believe firmly that we're at an inflection point for the company. And so now we'll talk about the progress that we have made in Q1 of fiscal'19, which ended in June. Now before going into that I need to express to you that there is a change in accounting standards and that's also expressed in the press release. The fact that April 1, 2018, the company was required to adopt the accounting standard up they called ASU 2014-09. This is also called revenue from contracts with customers, commonly also referred to as ASC 606, so I will be using the word ASC 606, which changed the way the company must recognize revenue for certain contracts. So until the end of fiscal '18, which ended on March 31, 2018, we recognize revenue membership that invoice the customer. I think that's simple like that one but we're not allowed to do that. Under ASC 606, we must recognize revenue based on the completion of the contract as it incurs costs. The financial results for the three months ended on June 30, 2018 presented today have been adjusted reflect that new accounting method. However, the comparison is more difficult, because Q1 FY '18 a year ago did not have this new accounting method. I will try however in this presentation today in the discussion to always identify to you the impact that ASC 606 made on every item. However, independent of this account change, be clear that we believe we are at an inflection points, our results are vastly better than a year ago and you know that's completely independent of this accounting change. So now let me go through the details. Let's first look at sales. New serious for the first quarter FY '19, which ended on June 30, 2018 was $3.05 million. This is a 53% increase as compared to a year ago $1.993 million, which was the first quarter of fiscal 2018. The increase in the first quarter net sales versus the prior period was due to three components primarily. The first component indeed was ASC 606. $596,000 increase in revenue was due to that change in accounting. $630,000 increase was due to higher shipments of fighter jet filters. We are now in full production with the three planes F-18, F-15 and F-16 and so by having more planes to ship, we increased the sales by $630,000 independent of this accounting methods. We also increase sales slightly by $52,000 fifty two thousand for legacy service. However, then sales were reduced by 221,000 because we had no Hydra shipments in the first quarter of this fiscal year. Going to the gross margins now, the gross margin for the first fiscal quarter, fiscal '19 was 43%. This compares to a gross margin of 23% a year ago first quarter of fiscal 2018. More so as John also expressed, this is now the second quarter in a row with above 40% gross margins. And I should point out that we fully expected every quarter going forward from here on would have gross margins over 40%. And ASC 606 has really no impact on gross margins. So that percentage does not change because of ASC 606. That's just an absolute performance improvement which is huge, okay. And then when it comes down to the losses, the net operating loss for the first quarter fiscal 2019 was $70,000. This compares to a net loss of the first quarter of fiscal 2018 of $1.157 million. There are four components to the reduction of the loss from $1.157 million to nearly quite even to $70,000. So $492,000 of this improvement was due to the improvements in the gross margins. That gave us $492,000 better performance. $249,000 improvement was due to lower operating expenses. We reduced operating expenses. And that $180,000 was due to an increase in sales. And then $238,000 impacted that. $492,000 gross margin improvement to $49,000 low operating expenses and $108,000 higher sales. Them going below the line, the operating line to interest and other expenses, they were $217,000 in Q1 fiscal 2019. This compares to $101,000 for Q1 fiscal 2018. So this difference of $116,000 in interest and other expenses was due to the following. $62,000 was due to an income tax dispute settlement for the fiscal year 2011. So we owe more money in regards to taxes from the year 2011. $24,000 was due to interest expenses for our loan with PFG, partners for growth. $19,000 was due to the 6% interest for E Series. And then the remainder was our to bridge bank [ph]. I should want to make the point here that our cash payments in terms of interest and other expenses is typically %50,000 per quarter, so that's where the cash grows, okay. So when you combine the operating loss of $70,000 and the interest payment of $217,000 then we have a net loss of $287,000 in the first quarter. And this compares to a net loss of $1.258 million for the first quarter of fiscal 2018. So a major improvement client independent of ASC 606. Now let's go to the balance sheet. Looking at our balance sheet now, it is still weak. Shareholder equity stands at $1.297 million and cash at $748,000. This compares to the March ending 31, 2018 period which you know three months before with an equity of $131,000 and a cash of $1.485 million. Well, you know the equity improved a lot. That is all due to ASC 606 because remember that we made losses, so we cannot improve equity, so that's all due to ASC 606. So you see entries there like a large change in inventory, changes in prepaid expenses and other current assets is a huge change in deferred revenue and changes in retained earnings, all due to this accounting standard. So the fact that the equity improved as all ASC 606. So let's talk more about cash, okay. The actual cash decrease by $738,000, primarily due to a reduction in accounts payable we paid of more bills by $239,000 and then actually net reduction in deferred revenue of by $550,000. Deferred revenue means we invoice a customer for inventory that we purchase and that deferred revenue decrease during that period of time. It fluctuates, I should go say that it's, that's not a trend, it goes up and it goes down and it went down during that quarter and then of course we had the net losses. What stands out in the balance sheet is a net inventory of $3.438 million. And while it seems like if I am going down a lot that's only because of ASC 606. What needs to be understood is that $2.656 million of this inventory is for the RADAR Test products. That is way too high. And we believe that we can easily get at least $1 million out of this inventory in this fiscal year, because as soon as we get the order for the you know that we will talk a little bit about, okay. That system is already in finished goods and it will be shipped and that will be all cash. So we will get some good cash out of inventory. However, cash is clearly still the concern and we are addressing that concern and multiple ways. First, we expect a large order of $4 million of which 40% should have bill immediately, we have it in finished goods. And as I mentioned that's pure cash. We have been also raising funds through the E Series it was oversubscribed and so we increase the limit from $1.5 million to $1.75. And then we expect eliminate losses. And so I think we are addressing the cash concern. In summary, we are near breakeven performance even without the RADAR Test business. This was really achieved because of the much improved gross margin and lower operating expenses. But yes our ASC 606 change, this improved our net earnings by $238,000, so I want to be clear about that, okay. Now moving forward, going to be on the financials, we are focusing on growing the business to achieve at least a 50% in fiscal '19 and fiscal '20. And we expect fully to deliver net profits in fiscal '19. Now to achieve these two goals, require that we change our sales strategy and we change our sales team. And to explain these changes in our outlook, I now like to introduce to you Tim Ursprung, who joined Giga-tronics as a Vice President of Sales and Marketing on July 2, 2018. And Time will also answer the question that we get a lot of where are the orders.

Tim Ursprung: Yeah, this is Tim Ursprung. Thank you very much for your time. And let me go forward with the discussion. First you know people ask me about my background, so I'd like to give you a little overview there. I was Vice President for a company called Microwave Power Devices, which built power amplifiers for the communications, electronic warfare and radar markets for about ten years. From there, I worked with a number of other companies that were in the same market space. Then joined Aeroflex Test Solutions as Vice President of Marketing and Sales where I worked there for ten years. At Aeroflex, we really focused on standard and mostly custom test solution for the communication, radar and electronic warfare systems. Here we sold the first Nav/Comm transmit, receive module test system for two major radar manufacturers, resulting in major revenue stream for Aeroflex. After Aeroflex, I was an owner of manufacturer at a firm in the Mid-Atlantic and Southeast for about eight years also concentrating on military aerospace customer base. So after that people would ask me why did you join Giga-tronics. So I just wanted to go over that briefly. I reviewed the product offering of the Hydra next generation EW RADAR Test and development solution and thought that this product has disrupted benefits for customers and EW RADAR marketplace and has the right features become the next generation platform. I'm extremely excited about the opportunity and know we will become a major force supplying complex solutions for our customers. Now on to discussing Giga-tronics, what we're doing and where we're going. As discussed earlier, our rock the Microsource Group is very strong and growing. So I am not going to focus discussing in that product area, but I do have experience with these types of products and feel that these products will have potential growth and going into different market areas as well. Now to discuss the strategy for the next generation EW test development solution. While I could start with saying that I will discuss the set of orders, but I really want to go through what we're doing with the changes, the focus and the sales and marketing team. So first we're changing the overall approach from a product focus to a solution focus. The reason for this is each customer has specific needs requiring minor changes to our system to meet their specific needs. Second, we're assembling a team with a detail technical understanding of these requirements to enable Giga-tronics to properly position the right solution. Third, we're developing a sales channel locating the team in areas with close to military bases and prime contractors focused on electronic warfare and radar systems. Now just regard to that point, we hired a person Dan Kirby, he's a retired Air Force Master Sergeant who worked his career in electronic warfare systems. Dan is located close to customers in the southern California area and has full understanding of the tech to requirements of our customers and the solutions we can offer to meet their needs. I work Dan at previous employers as colleague, I know he has the capability and success rate for our products. In conclusion, this change in strategy is an extremely targeted approach, especially pursuing the right opportunities for Giga-tronics. We want to make sure we configure the right features and better benefits to win the business that it hears to the product roadmap we've developed. Now for what everyone has been waiting for the status of our new major order. So first of all this order has been fully funded by the U.S. government. The order has been submitted into purchasing and is moving forward and we're really keeping close contact every step of this order. Previously, we discussed that this order was estimated to be roughly $2.7 million, which included test systems and product support. The value has now increased to $4 million and it's expected to book by the end of the current fiscal quarter. The timing could slip slightly but we have high confidence this order will happen in the timeframe we've outlined. And as mentioned, we are staying close with the customer at every step. We've also been told it's not a matter of years but when we order well book, which we still expect to be in Q2. So receive this order will solidify our foothold at this customer and this customer has also been [ph] data to center of excellence for electronic warfare system. And as stated that our solution has differentiating features that our competitors do not have. It will try a prime contractors to use the solution in the testing of their air systems. Now that's a key aspect is that using it from the Major government that it drives it down to the prime contractors. Going this will also focus our efforts to carry the solution across their radar and electronic warfare platforms. In addition to that order, we are working with strategic partners to add additional capability to our Hydra platform and should be able to demonstrate this feature within the next 30 to 60 days. And Dan and I have worked in the past with another company that had a product in this product area that has been obsoleted. Our customer base still needs a solution to upgrade that platform. We feel that this product that we're developing will be able to fulfill that solution and bring additional orders in this and the next fiscal year. So as a result with this, I believe this success and I'm extremely confident that our Hydra next generation EW RADAR Testing development solution will grow and become a major source of revenue for Giga-tronics. Thank you very much for your time.

Lutz Henckels: Okay. Just a couple of remarks and then I'll open it for question. So I do want of express that I think we are optimistic at the same time it is clear to us we are not of the woods yet. We still making losses, we still have no Hydra sales, we have a weak balance sheet and so there ought to be no confusion and be very, very cautious. At the same time being in the words, we do see the medal that we want to reach and I expect to report to you at the next conference call that we are on the medal and that we are pass the inflection point. With this I like to turn it over for question.

Operator: Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] We do have one question in the queue from William Velmer from S.A. Advisory.

William Velmer: Yeah, how are you doing there guys? Real quick question, what is the actual total backlog that you currently have. I mean you're throwing on all kinds of contracts, blah, blah, blah, so what is the actual backlog that you're going to work off the fiscal '19? Thank you.

Lutz Henckels: Okay. Number one, we have zero backlog for the Hydra product, okay. So I assume you're referring to the Microsource product.

William Velmer: I am just looking for any total backlog of all?

Lutz Henckels: I want to be clear, there's no backlog for Hydra. The only backlog we have is for the rock for the Microsource products and we will get you that number in one second. 5.824 million.

William Velmer: 558, roughly?

Lutz Henckels: No, 5.824.

William Velmer: Is that $6 million, is that what you are saying roughly?

Lutz Henckels: Correct, correct.

William Velmer: Okay. So this is where your - that doesn't include a little business opportunities that will arise every month or so, there just finding that you don't look at backlog, it's just continual business, because you did mention that revenue was going to grow by 50% over last year, if I am not correct?

Lutz Henckels: So let me just add to that. So we already did $3 million of business that's on Microsource. So that backlog is roughly $6 million that is there, so that gets you to $9 million which is what we are projecting for this fiscal year. We said $9 million to $10 million. We have no backlog in Hydra. The growth will come very much from Microsource because at $9 million - it grew from $7 million to $9 million because of the added plane, okay. However, our growth really comes from what we call Hydra or the RADAR Test business. And so we expect you know between $4 million to $5 million in sales this fiscal year and notice that the order that we're expecting is for $4 million. So by getting that order, we are basically there for this fiscal year.

William Velmer: Okay, so what is - you know many companies will state that the breakeven point and you got $9 million, the place you're going to make money, you got to hit $8 million, you got to hit $7.5 million. Can you give us a little color on what actual dollar amount is where we're in the green, because you talked about profitability?

Lutz Henckels: Yeah, basically around $12.5 million per year in sales we are in the green, maybe $13 million to $12.5 million, we are in the green.

William Velmer: So when you are saying $9 million, for the year, that means you're going to be pretty much breakeven for this fiscal year?

Lutz Henckels: No, no, no, I'm not saying that. I'm saying that $9 million is for the Microsource business, $3 million in Q1 and we have $2 million in backlog and we expect $9 million. The additional business from Hydra like $4 million or $5 million to get us to $13 million, $14 million in sales in order to be profitable. So $4 million order from as Tim mentioned that is in purchasing and so with that order and with Microsource business, we should be profitable.

William Velmer: Great, so it's $13 million. Okay, great. Thank you very much. A very thorough conference call for a small company. I appreciate it.

Lutz Henckels: Okay. Thank you.

Operator: Thank you, sir. We have no further questions at this time, so I will turn the call over Mr. John Regazzi for final remarks.

John Regazzi: Okay, if there are no further questions, I'd just like to thank everybody for their participation on the call and their continued support for Giga-tronics. Have a good afternoon.

Lutz Henckels: Okay, thank you very much.

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