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Fiscal Year 2023 to Fiscal Year 2022

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

Commission File Number 001-14605


GRESHAM WORLDWIDE, INC.

(Exact name of Registrant as specified in its Charter)

California

94-2656341

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

7272 E. Indian School Rd. Suite 540

Scottsdale, AZ

85251

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (833) 457-6667

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, No par value

 

GIGA

 

 

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on June 30, 2023, was $450,280.

The number of shares of Registrant’s Common Stock outstanding as of April 10, 2024 was 7,931,602.

DOCUMENTS INCORPORATED BY REFERENCE

 

Auditor Firm Id:

[# of Firm Id]

Auditor Name:

[Name of Auditor Firm]

Auditor Location:

[City, State/Province, Country]

 

 

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TABLE OF CONTENTS

 

 

Page No.

PART I

 

 

 

Item 1

Business

3

Item 1A

Risk Factors

13

Item 1B

Unresolved Staff Comments

28

Item 2

Properties

29

Item 3

Legal Proceedings

29

Item 4

Mine Safety Disclosures

29

 

 

 

PART II

 

 

 

 

 

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

29

Item 6

[Reserved]

30

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

39

Item 8

Financial Statements and Supplementary Data

40

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

40

Item 9A

Controls and Procedures

40

Item 9B

Other Information

41

Item 9C

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

41

 

 

PART III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

42

Item 11

Executive Compensation

45

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

48

Item 13

Certain Relationships and Related Transactions, and Director Independence

49

Item 14

Principal Accountant Fees and Services

50

 

 

 

PART IV

 

 

 

 

 

Item 15

Exhibits, Financial Statement Schedules

51

Item 16

Form 10-K Summary

53

Signatures

 

 

 

 

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance, including our liquidity, our receipt of future orders and whether our backlog will result in orders. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties and other factors may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this Report is filed, and we do not intend to update any of the forward-looking statements after the date this Report is filed to confirm these statements to actual results, unless required by law.

This Report also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this Report and, accordingly, we cannot guarantee their accuracy or completeness, though we do generally believe the data to be reliable. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of risks and uncertainties due to a variety of factors, including that (i) we will continue to secure orders and backlog in 2024 and that our Giga-tronics legacy business development efforts to generate new orders will improve, (ii) we will secure adequate cash to bridge operations, (iii) the ongoing geopolitical military conflict (including, the war in Israel, the Russian war on Ukraine, tensions with China and Taiwan and other unrest in the Middle East) will continue, (iv) supply chain turmoil and inflation will continue to affect customer demand for our product offerings, (v) defense budgets for electronic technology solutions that we provide will not decrease, (vi) our key medical customer will not reduce expected orders, and (vii) those other risks and described in “Item 1A - Risk Factors” and in this Report. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

PART I

ITEM 1. BUSINESS

Gresham Worldwide, Inc., formerly Giga-tronics, Incorporated (“Gresham” or the “Company”) designs, manufactures and distributes purpose-built electronics equipment, automated test solutions, power electronics, supply and distribution solutions, as well as radio, microwave and millimeter wave communication systems and components for a variety of applications with a focus on the global defense industry and the healthcare market.

Gresham has two subsidiaries Gresham Holdings, Inc. (“Gresham Holdings”) and Microsource Inc. (“Microsource”). Gresham has also one division. Gresham is a majority-owned subsidiary of Ault Alliance, Inc., a Delaware corporation (“AAI”) and currently operates as an operating segment of AAI. Gresham Holdings has three wholly-owned subsidiaries, Gresham Power Electronics Ltd. (“Gresham Power”), Relec Electronics Ltd. (“Relec”), and Enertec Systems 2001 Ltd. (“Enertec”), and one majority-owned subsidiary, Microphase Corporation (“Microphase”). Our operations consist of three business segments:

Radio Frequency Solutions (“RF Solutions”) – consists of Microphase which is located in Connecticut. Microphase designs and manufactures custom microwave hardware products for military applications and generates revenue primarily through production contracts for custom engineered components and RADAR filters.
Precision Electronic Solutions – consists of two subsidiaries and one division. The subsidiaries are Enertec located in Israel and Microsource located in California. The division is what we call our Giga-tronics Division. Enertec develops and supplies advanced command & control, test and calibration systems for use in failsafe military and medical applications. The legacy business of Giga-tronics (the “Giga-tronics Business”) consists of Microsource, a wholly-owned subsidiary which develops and manufactures sophisticated RADAR filters used in fighter aircraft, and our Giga-tronics Division which markets “EW Test and Training”, which serves the defense electronics market with a signal generation platform.
Power Electronics & Displays – consists of two subsidiaries, namely Relec and Gresham Power located in the United Kingdom (the “UK”) which primarily engineer and provide integrated, mobile power electronics and display solutions that distribute and supply continuous, dependable, clean low voltage power.

We are focused on products that are getting designed in to military systems such as fighter jet, ships and ground vehicles or missiles, which provide a recurring revenue stream for years to come and eliminate competition because the cost of replacing designed in products is prohibitive for both the competition and the customer.

Gresham was incorporated in California on March 5, 1980 as Giga-tronics Incorporated. We changed our name to Gresham effective March 1, 2024. Our common stock continues to trade under the Giga-tronics name and symbol “GIGA” on the OTCQB. We have obtained shareholder

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approval to reincorporate in Delaware. Both our name change and reincorporation are subject to Financial Industry Regulatory Authority approval.

Business Combination

On September 8, 2022 (the “Closing Date”), we acquired Gresham Holdings. We refer to this transaction as the “Business Combination.” Pursuant to the Business Combination, the Company acquired all of the outstanding shares of capital stock of Gresham Holdings and, in exchange the Company issued AAI 2,920,085 shares of the Company’s common stock and 514.8 shares of Series F preferred stock (“Series F”) that are convertible into an aggregate of 3,960,043 shares of the Company’s common stock, subject to potential adjustments, and the assumption of Gresham’s outstanding equity awards representing, on an as-assumed basis, 749,626 shares of the Company’s common stock. AAI beneficially owns 69.6% of the Company’s outstanding shares (excluding shares issuable upon conversion of convertible notes described elsewhere in this Report). The parties had previously entered into a Share Exchange Agreement dated December 27, 2021 (the “Agreement”) for which the Company obtained the requisite stockholder approval on September 8, 2022.

In connection with the consummation of the Business Combination, Gresham Holdings was deemed to be the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification 805 “Business Combinations”. While we were the legal acquirer in the Business Combination, because Gresham Holdings was deemed the accounting acquirer, the historical financial statements of Gresham Holdings became the historical financial statements of the combined company, upon the consummation of the Business Combination.

We operate both within the United States (the “U.S.”) and at three locations abroad. A summary of our locations and high level review of our operations at each facility is provided in the table below:

 

Name

 

Location

 

Nature of Business

Corporate Headquarters

 

Scottsdale, Arizona

 

Offices

Microsource and Giga-tronics Division

 

Livermore, California

 

Offices, research and development, engineering, fabrication, sourcing, assembly, tuning and testing

Microphase Corporation*

 

Shelton, Connecticut

 

Offices, research and development, engineering, fabrication, sourcing, assembly, tuning and testing

Enertec Systems 2001 Ltd.

 

Karmiel, Israel

 

Offices, research and development, engineering, fabrication, sourcing, assembly, tuning and testing

Relec Electronics Ltd.

 

Wareham, Dorset, England UK

 

Offices and warehouse operations

Gresham Power Electronics Ltd.

 

Salisbury, Wiltshire, England UK

 

Offices, research and development, engineering, fabrication, sourcing, assembly, tuning and testing

 

*

63% owned

 

Our Industry

Our operations focus exclusively on the market for electronic solutions that support the defense industry and other mission critical applications, including medical technology, transportation, and telecommunication. The essential nature of these applications provides a degree of insulation from volatility associated with other segments of the global economy while accounting for stability and steady growth of the addressable market opportunities available in segments that we serve. Demand for solutions to meet these requirements continues unaffected, and in many instances increases, in times of global crisis. Total defense spending in the three countries in which we currently operate was expected to total more than an estimated $919 billion in 2023 (https://www.globalfirepower.com/defense-spending-budget.php). We sell to the militaries and defense contractors in 15 other countries as well. Overall global defense spending hit $2.1 trillion in 2023 and is expected to grow at a CAGR of 3% through 2028 with U.S. spending continuing to lead the world in the same period (ASD Reports, Global Defense Budget Analysis - Forecast to 2028). The current wars in the Ukraine and Israel and tensions with China and in the Middle East have intensified interest and investment in defense platforms throughout the UK and Europe.

We believe that the increasing emphasis on electromagnetic spectrum operations and close coordination of air, land, sea, space and cyber operations will fuel an increase in defense modernization, force protection and situational awareness, all of which will drive increased spending in procurement of components and systems to enable electronic warfare, countermeasures and unattended solutions. The Defense Electronics Market was estimated to be $220.3 billion in 2023 and is projected to reach $ 289.0 billion by 2028, at a CAGR of 5.6%. (https://www.marketsandmarkets.com/Market-Reports/defense-electronics-market-183642563.html). The drive for greater connectivity and analytics will in turn increase demand for radio frequency (“RF”) communications, power electronics and electronic control solutions content in new major military platforms, which are the core offerings of our operating units.

Thousands of companies compete in this market to deliver electronics solutions to meet defense and other mission critical applications. However, our operating units have longstanding relationships with dominant defense contractors in the U.S., in the UK, in Israel and other countries who hold contracts for major defense platforms with very long life cycles. Our customers typically have unique needs, and they engage with Gresham in funding development contracts for custom solutions. Once a solution is proven in its application, the company typically realizes a secure,

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recurring revenue stream for products, services and/or repairs for many years (sometimes decades) until the technology becomes outdated. Because the Company is often sole-sourced for developmental projects, it is highly unlikely that a competitor will replace such a designed-in product as the cost and re-qualification time to do so is prohibitive. These relationships enable us to narrow the field of competition considerably and grow based on repeat business with relatively low selling costs. As technology evolves, prime contractors may, over subsequent years, migrate to systems other than those we produce.

Beyond the defense arena, initiatives to complete $42 billion in upgrades to the current National Railway System in the UK over the next three years while spending $115 billion over the next 10 years to build high speed rail to link London with the Midlands cities of Birmingham, Leeds and Manchester will generate significant opportunities for growth in demand for power electronics to upgrade and replace current infrastructure, both in rolling stock and track side controls. Relec’s current relationships and track record for supplying power solutions to the UK rail industry position us ideally to capitalize on these ongoing refurbishment and expansion efforts. A similarly robust market in the medical power supply markets with a compound annual growth rate of 6.9% to reach $1.8 billion in 2025 creates growth opportunities for Relec in the UK. Increases in contracts for the precision manufacturing of medical diagnostic and calibration tools drive growth opportunities for Enertec as well.

Our Business Strengths

We have the following core strengths that we believe give us a competitive advantage:

Developing and producing classified military products requiring a Sensitive Compartmented Information Facility (SCIF) and personnel with appropriate security clearances. These products are designed-in to military systems such as fighter jets, military ships and vehicles.
Military grade quality (AS9100), ultra-reliable technology offerings with elegant designs and precision “high touch” manufacture that stand the test of time, narrow the field of competition and command enhanced operating margins.
Enduring relationships with “blue chip” customers in the defense market provide stable revenue growth and reduce sales cost.
Substantial growth in backlog of orders with definite delivery dates for solutions engineered into long life cycle platforms that provide revenue base for years to come. Global operations expand our market opportunities, extend our operational reach and diversify our business base.

Our Strategy

Our goal is to become the supplier of choice for the major players in the defense industry and provide for solutions for mission critical applications in health care.

Our near-term strategies are focused on developing synergies as a result of the acquisition of Gresham Holdings:

Gresham Holdings incurred major overhead expenses being a subsidiary of a larger company. We incurred large expenses being a public company with very limited sales. We are combining the overhead functions, shrinking our leased facilities and focusing on cost reductions;
Consolidate duplicate functions and reduce the costs of sales, human resources, information technologies, quality management and contracts administration;
Combine the RF Solutions group into one subsidiary and reduce operating costs.

In addition, we are focused on securing sufficient working capital to execute on a substantial backlog of orders with definite delivery dates, take on additional significant orders and further improve access to capital resources.

Our long-term strategy includes the following key elements:

maintain, strengthen and expand relationships with current customers, by increasing on-time delivery, diversifying solutions offered and maximizing quality of solutions;
acquire designed-in products or companies. We believe there are many small well run, profitable defense contractors whose principal owner is nearing retirement which could be attractive acquisition targets;
attract new customers through building business development, marketing and sales infrastructure to raise market awareness and identify opportunities early in the design process;
take advantage of the cross-selling opportunities among our operating subsidiaries to leverage current resources;
enhance our geographic footprint by increasing marketing outreach, forming alliances with leading companies located in areas beyond its current reach and acquiring businesses that expand reach into other geographies.

 

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Our Operations

We conduct our business through our subsidiaries. After the Business Combination, we aligned the operations of our subsidiaries into three key market groups as follows:

img64070447_0.jpg 

RF Solutions

Microphase focuses on designing, engineering, assembling, tuning and testing components, integrated assemblies and subsystems that detect, filter, analyze and process radio frequency, microwave and millimeter wave signals for defense applications.

Precision Electronic Solutions

In the Precision Electronic Solutions group, Enertec, and the Giga-tronics Division and Microsource focus on designing, engineering, developing and producing turnkey precision electronic solutions for mission critical applications primarily focused on defense customers and large global healthcare customers.

Power Electronics and Display Solutions

Gresham Power focuses on providing power electronics solutions to defense customers in the UK and non-U.S. countries. Relec distributes power electronics and displays for mission critical applications to customers in health care, transportation, telecommunications and industrial businesses.

A detailed description of three market groups and associated product offerings follows.

RF Solutions

Microphase Corporation

Microphase designs, engineers, manufactures and distributes components, integrated assemblies and subsystems for a variety of military and telecommunications applications. Such components include RF and microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and Detector Logarithmic Video Amplifiers. Microphase engineers, tunes and tests all its products under stress conditions per defined in tuning protocols and test procedures it developed as part of the production process. This approach ensures that its customers can use and incorporate Microphase products into systems with confidence that the products will perform reliably under extreme operating conditions.

Microphase’s customers include the U.S. military, and contractors to the U.S. military and to militaries of other countries including prime contractors and sub-contractors. Microphase’s technology innovations are used in many significant U.S. Government defense programs, including the F-16, the F-18, the F-35, the JAS Gripen Fighter and the B-1B Bomber.

Microphase’s advanced technology products include:

filters that sort and clarify microwave signals, including multiplexers that are a series of filters combined in a single package;

solid state amplifiers that amplify microwave signals;

detectors and limiters that are semiconductor devices for detection of radar signals and protection of receivers from damage from high power signals and jamming;

detector log video amplifiers that are fully integrated, ruggedized, “mil-spec” signal detection systems; and

integrated assemblies that combine multiple functions from a range of components and devices, including transmitters, receivers, filters, amplifiers, detectors, and other functionality into single, efficient, high performance, multifunction assemblies.

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Microphase’ revenue has grown 34% to $8.2 million in 2023 from $6.1 million in 2022.

Precision Electronic Solutions

Enertec Systems 2001 Ltd.

Based in Israel, Enertec designs, develops, manufactures and maintains advanced end-to-end high technology precision electronic solutions for military, medical and industrial markets. Those solutions include custom computer-based automated test equipment and turnkey systems to ensure combat readiness, provide command and control, and direct and deploy resources in military operations in harsh environments and battlefield conditions.

Enertec delivers complete end-to-end project management with requirements definition, systems engineering, design/development, production, testing, integration, field support, maintenance and optimization. Its custom engineered solutions enable and support mission critical air, land and sea military platforms, e.g., missiles, UAVs, combat aircraft, boats, submarines, trailers and satellites. Enertec’s primary customers include the largest major defense contractor in Israel. In addition, Enertec has a strategic partnership to build and deliver solutions for the Indian military.

Enertec is among Israel’s largest, most well-established manufacturers of test equipment and simulators. Enertec develops and manufacture test systems and simulators for all types of weapons systems at all levels of maintenance, development, and integration. Enertec is currently working on developing a new generation of electronics cards and assemblies to build a new generation of test systems. Enertec complies with all information security requirements included in its customer contracts as well as all the confidentiality laws that Israel mandates for work related to defense of the country.

In addition, Enertec designs, develops, and provides precision equipment to calibrate cardiac catheters for a global health care products company. This business has grown to 27% of revenues in 2023 from 7% of Enertec’s annual revenues in 2021. The US healthcare provider is very satisfied with the current product and is requesting an additional product design which the customer will pay for its development.

Enertec’s offices and engineering and assembly facility are located in Karmiel, Israel, which is near the border with Lebanon. The Hezbollah, an Iranian Proxy, who is located near the Lebanese border, threatens to expand the war to Northern Israel and is increasing its rocket attacks. As such, several employees had to relocate to a more southern location to avoid attacks from the north. In addition, several employees were drafted into military service.

Enertec is a material subsidiary and through December 31, 2023, approximately 41% of the Company’s revenues were derived from Enertec.

The war in Israel poses significant risks to Enertec including possible rocket launches from Lebanon that could destroy Enertec’s facility. Enertec has no alternative facility and the cost of locating a new facility and equipping it would effectively cause it to cease operations for at least six months. If the war continues, it could have a material adverse effect on our operations and financial condition.

Enertec’s revenue has grown approximately 24% in 2023 from $12.5 million in 2022.

Giga-tronics Division

Our Giga-tronics Division designs, manufactures, and markets functional test products and integrates those test products along with third-party hardware and software to deliver solutions for evaluating and validating radar and electronic warfare product performance. The Division developed a Threat Emulation System (“TEmS”) using an agile, phase coherent wide bandwidth upconverter hosted within the compact industry standard AXIe modular platform. The TEmS solution is smaller in size, lower in cost than currently used threat simulation systems and when coupled with a tracking antenna, operates at lower power levels making it an ideal solution for outdoor installations with multiple locations for simulating integrated air defense systems.

Giga-tronics Division’s revenue has increased to $1.3 million in 2023 from $0.9 million in 2022. It currently has a $185,000 backlog.

Microsource, Inc.

Microsource’s two largest customers are prime contractors for which we developed and manufactured sophisticated RADAR filters used in fighter aircraft. Microsource serves the market for operational hardware associated with the U.S. Government’s RADAR Modernization Program for prior generation fighter aircraft (i.e., the F-15D, F-16, and F/A-18E jets) to extend their useful lives. We design these filters to operate under extreme conditions. Currently the platforms on which Microsource filter technologies are used are in various stages of product life cycle. Both F-15 and F-16 fighter jet fleets are aging out and programs are nearing end-of-life and are in maintenance and sustainment phases. This will result in reduced revenue

As a result, revenue has declined to $2.7 million in 2023. The current backlog is $336,000.

Power Electronics and Displays

Our subsidiaries in the UK design, develop, manufacture and distribute advanced electronic technology solutions which convert, regulate, purify, manage or distribute electrical power for electronic equipment. Our power solutions are intended for mission-critical defense, industrial, health care and transportation applications in, and generally convert Alternating Current (“AC”) from the power grid to Direct Current (“DC”), or

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modify the voltage being delivered (DC to DC). Our subsidiaries also offer standard off-the-shelf, modified-standard and purpose-built products. Although our subsidiaries sell standard products unmodified to its customers, those standard offerings are designed into specific customer product configurations in most instances. Our Power Electronics and Displays Group also designs, engineers and builds power systems and display solutions to specific customer requirements for mission critical applications in defense, medicine, transportation, telecommunications and manufacturing.

Relec

Relec develops custom, designed-in solutions for various applications ranging from light industrial to heavily ruggedized for the harshest of environments. Relec customizes product features and functionality to achieve optimum performance and service delivery for specific customer requirements. Relec currently operates in specific fields, specializing in AC-DC Power Supplies, DC-DC Converters, Displays and EMC Filters.

Relec’s revenue has grown 3% to $8.5 million in 2023 from $8.2 million in 2022.

Gresham Power

Gresham Power specializes in engineering, designing and developing power conversion, power supplies, uninterruptible power supplies and distribution solutions for Naval applications, with equipment installed on virtually all the UK Royal Navy’s submarine and surface fleet. Many of Gresham Power’s ultra-reliable offerings support shipboard distribution of electrical power in emergencies (such as loss of main ship’s power) to enable continued operation of weapons systems, tactical communications and lighting.

Gresham Power products add diversity to Gresham’s product line, provide greater access to defense customers in the UK and European markets, and strengthen Gresham’s engineering and technical resources.

Gresham Power’s revenue has declined 10% to $1.7 million in 2023 from $1.9 million in 2022.

Research and Development

In 2023, the research and development expenditures were approximately $2,827,000 or 7.4% of revenue. In 2022, the research and development expenditures were approximately $2,137,000 or 7.1% of revenue.

We are focusing our development effort on military products which require (1) the handling of classified documents and an infrastructure that is secure such as a SPIC, CMMC and ITAR compliance, and (2) personnel that has security clearance and (3) meeting the military AS9100 quality standard. In addition, we are focused on products that are getting designed in to military systems such as fighter jet, ships and ground vehicles or missiles, which provide a recurring revenue stream for years to come and eliminate competition because the cost of replacing designed in products is prohibitive for both the competition and the customer.

Our engineering and product development efforts vary with each operating subsidiary. Most of these efforts focus on designing and developing new products in connection with custom product design and modification of standard electronics offerings to provide solutions tailored to specific customer requirements. Our engineers work closely with customers and specialist partners to incorporate modifications or create custom designs for specific project requirements. The customer typically pays for such engineering services which are charged to the cost of revenue.

Enertec provides full-service design and development of turnkey Precision Electronic Solutions. Microphase designs custom RF solutions to meet customer unique specifications. When required, other subsidiaries modify standard products to meet specific customer requirements, including, but not limited to, redesigning commercial products to meet requirements for military applications based on commercial off-the-shelf products and for other customized product requirements, when applicable. We continually seek to improve our product offerings while anticipating changing market demands for increased functionality, customized firmware and improved EMI (electromagnetic interference) filtering.

The legacy Giga-tronics Division historically has funded product development activities internally, through product line sales, or through outside equity investment and debt financing. Microsource and Microphase typically have designed, engineered and developed new product offerings in close collaboration with and funded by its customers.

There can be no assurance that future technologies, processes, or product developments will not render our current product offerings obsolete or that we will be able to develop and introduce new products or enhancements to existing products that satisfy customer needs in a timely manner or achieve market acceptance. Failure to do so could adversely affect our business.

Competition

The defense electronic technology solutions industry is highly fragmented and characterized by intense competition. Our competition includes thousands of companies located throughout the world, some of which have advantages in terms of labor and component costs, and some of which may offer products superior or comparable in quality to us. Each operating subsidiary confronts a different set of competitors depending on solutions offered, vertical markets targeted and geographic scope of operations. We also face competition from current and prospective customers who may decide to design and manufacture power electronics, communications components and precision electronic solutions needed to satisfy their internal programmatic requirements.

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Consolidation in the defense technology solutions market, including through mergers, acquisitions and/or strategic alliances among major primes to whom we sell our products, has the potential to intensify the competitive pressures that we face. Many of our existing and potential competitors may be better positioned than us to acquire other companies, technologies or products. We compete favorably on the basis of multiple factors, including product quality and reliability, technological capabilities, service, past performance, design flexibility and ability to develop and implement complex, integrated solutions customized to its customers’ needs, and cost-effectiveness. Focusing on products with relatively low volumes and high margins enables our operating subsidiaries to compete favorably on price against larger companies with much high indirect cost structures (overhead and G&A) and cumbersome internal bureaucracies. Finally, the fragmentation of the defense technology market also creates opportunities to grow through acquiring competitors and/or potential competitors.

Many competitors have substantially greater financial and marketing resources and geographic presence than we have. However, cost-effective designs, elegant engineering, a collaborative/consultative approach to managing customer relations and a long history of delivering high quality, ultra-reliable, custom designed components and subsystems have enabled us to compete effectively and carve out a defensible niche position against competitors with more resources.

Manufacturing and Testing

We fabricate components and performs product assembly, integration and testing at production facilities in Livermore, California (Microsource and the Giga-tronics Division), Shelton, Connecticut (Microphase), Karmiel, Israel (Enertec) and Salisbury, England (Gresham Power). Each of our operating business has built a robust network of trusted supply chain partners to provide components, materials and parts for assembly into products or products for resale.

We continually strive to improve our production and test processes, to ensure the highest quality and consistent manufacturing of its solutions. Each operating business maintains rigorous quality control to ensure that our solutions conform to all customer specifications and will perform reliably in the customer’s application. We test our products under stress operating conditions per defined test procedures we developed in conjunction with our customers. This approach ensures that our customers can use its solutions right out of the box on their production line or installed directly in the field. We offer customer specific testing services with custom designed tests to simulate operation within our customer applications.

All operating units comply with all applicable safety and EMC standards for electronics solutions.

Compliance with international safety agency standards is critical in every application, and power solutions play a major role in meeting these compliance requirements. Our safety engineers and quality assurance teams help ensure that our custom products are designed to meet all safety requirements and are appropriately documented to expedite safety approval processes.

We maintain ISO 9001:2008 (Enertec), ISO 9001:2015 (Microphase, Gresham Power and Relec) and AS9100D (Enertec, Microphase, Microsource and the Giga-tronics Division) certification in our manufacturing operations. ISO 9001 and AS9100 are universally recognized and accepted international standards for quality management.

Customer Service and Support

Our operating companies offer a “high touch” approach to optimizing and customizing solution offerings to meet customer unique requirements. Working closely with customers, we design, engineer, develop and produce offerings to the highest standards of performance, durability and reliability to meet unique customer requirements. All operating units constantly track performance against cost, quality and on-time delivery metrics with an intense focus on customer satisfaction. Following the Business Combination, regular communications and direct collaboration at all levels with customers have become hallmarks of all our operations.

Given the mission critical nature of the customer applications which our product and solution offerings support, we respond promptly and take necessary corrective action to ensure our offerings conform to the specifications and work to that specific customer’s expectations. We provide warranties on all products offered. The length and terms of the warranties vary with the product type and application in which the product gets used. In addition, even after warranties expire, our operating units will provide maintenance, repair and post-delivery support for the full expected life of the product.

Suppliers

Given the demanding performance requirements and challenging operating envelopes for Gresham products and the Platforms on which they’re used, component vendor selection and management is a key success factor. While substantially most of the components required to make our assemblies are available from multiple sources, we occasionally use sole source arrangements to obtain leading-edge technology or favorable pricing or supply terms, but not in any material volume. Furthermore, the longevity of the programs on which our products are used occasionally presents a parts obsolescence challenge which the Company is continuously monitoring and managing. In our opinion, the loss of any sole source arrangement we have would not materially affect our operations, though we could experience production delays as we seek new suppliers or re-design components of our products. Some suppliers are also competitors of ours. In the event a competitor-supplier chooses not to sell its products to us, production delays that could significantly affect our business could occur as we seek new suppliers or re-design components of our products.

Our operating businesses purchase electronic components, materials, parts and assemblies, including power supplies, converters, transformers, rectifiers, inverters, housings, blocks, covers, machined parts, substrates, resistors, diodes, detectors, amplifiers, integrated circuits, printed circuit

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boards, cables, connectors, metal work, and capacitors, from outside suppliers. We also purchase certain precious metals used in manufacturing of our products (plating, sealing, painting, finishing). We carefully select suppliers based on their ability to provide quality parts and components which meet technical specifications and volume requirements. For defense work, our subsidiaries have built supply chain networks from sources only in the U.S. (Microphase and Microsource source exclusively from the U.S.), Enertec and Relec also source from the U.S., the UK (Gresham Power, Relec) and Israel (Enertec) with no sourcing from China. Relec does work with suppliers in China for some commercial applications.

Customers

Gresham’s defense customers include the Israeli MOD and Israel Air Industries (“IAI”), Rafael and Elbit Systems, the four major defense contractors in Israel, the United States Department of Defense (“U.S. DOD”) and major defense contractors such as BAE Systems North America, L3Harris, Boeing, Lockheed Martin, Raytheon and Sierra Nevada Corporation in the U.S., the UK Ministry of Defense including the Royal Navy, and major defense contractors in the UK and Europe, including BAE Systems PLC, Rolls Royce, Babcock and Thales, SAAB (Sweden), Indra (Spain) and Aselsan (Turkey). In addition, Enertec has a strategic partnership through IAI with Cyient to build and deliver solutions for the Indian military.

Gresham’s commercial customers include Elma GmbH, BioSense Webster, a subsidiary of Johnson & Johnson (a key Enertec customer), RS Components, Farnell, Parker Hannifin, Vanderbilt, Bombardier.

For 2023, Gresham’s two largest customers accounted in the aggregate for 40% of its consolidated revenues. The following table describes Gresham’s customer concentration as of December 31, 2023, based on the percentage of revenue during 2023:

Customer

 

Country

 

Revenue
(in thousands)

 

 

% of Total Revenue

 

 

Customer A

 

Israel

 

$

11,129

 

 

 

29

%

 

Customer B

 

Israel

 

 

4,042

 

 

 

11

%

 

    Total

 

 

 

$

15,172

 

 

 

40

%

 

Our business depends largely on defense spending and program budgets which expand and contract across fiscal year periods. Revenues from orders for our products and services often span several years with deliveries varying across both interim and annual fiscal year periods. We therefore expect that a major customer in one year may not be a major customer in the following year. Accordingly, our net revenue and earnings may vary significantly from one period to the next and will decline if we are unable to gain new customers or cannot increase our business with other existing customers to replace declining net revenue from the previous year’s major customers.

Proprietary Technology and Intellectual Property

Our competitive position is largely dependent upon our ability to deliver systems and products that (a) effectively and reliably meet customers’ needs and (b) selectively surpass competitors’ specifications in competing products. While patents may provide protection of proprietary designs, with the rapid progress of technological development in our industry, such protection is often short-lived. Therefore, although we occasionally pursue patent coverage, we emphasize the development of new products with superior performance specifications and the upgrading of existing products toward this same end.

Our trade names, trademarks, trade secrets, customer relationships, domain names, proprietary technologies and similar intellectual property are important to our success. We rely upon a combination of trade secrets, industry expertise, confidential procedures, and contractual provisions to protect our intellectual property. We believe that because our products are continually updated and revised, obtaining patents would be costly and not beneficial. It is policy to enter into confidentiality and invention assignment agreements with our employees and contractors as well as nondisclosure agreements with our suppliers and strategic partners in order to limit access to and disclosure of our proprietary information.

Microphase and Enertec typically design custom products to their customer specifications as “work for hire” and therefore own no intellectual property in the design. As the ultimate end user, the U.S. military and the Israeli MOD typically acquire and retain rights in all such technical data. Microphase does acquire and own intellectual property in the fabrication, assembly, tuning and testing protocols followed for its products.

In the UK, Gresham Power typically will retain ownership of the intellectual property of the designs of products developed for defense applications. However, neither Relec nor Gresham Power typically retain intellectual property in any of the standard power products that they sell on the commercial market.

Our Giga-tronics Division products are primarily based on our own designs, which are derived from our own engineering abilities. If our new product engineering efforts fall behind, our competitive position weakens. Conversely, effective product development greatly enhances our competitive status. While we utilize certain software licenses in certain functional aspects for some of our products, such licenses are generally readily available, non-exclusive and are obtained at either no cost or for a relatively small fee.

We have maintained three patents related to our 2500B parametric signal generator and two patents related to the Company’s Advanced Signal Generator & Analysis product lines (ASGA platform). A third patent for the ASGA platform was recently granted.

In February 2020, the Company was granted a U.S. patent relating to its ASGA Platform. The patent describes the internal design of the Advanced Signal Generator and the Advanced Signal Analyzer (“ASGA”) along with the architecture of how the components work together to facilitate building multi-channel test systems with reduced size, weight and cost as compared to present solutions. A second patent was granted in

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November 2020 describing uses of the ASGA system in high channel-count situations. A third patent application which was filed in April 2020 describing how the ASGA platform achieves its low noise performance while achieving fast frequency switching speeds was granted by the U.S. Patent and Trademark Office on May 30, 2023.

The Company has paid the U.S. Patent and Trademark Office fees to keep the patents open to allow adding new claims as they arise for continued intellectual property protection.

Operating Capital

We generally strive to maintain adequate levels of inventory and we generally sell to customers on 30-day payment terms in the U.S while allowing more time for our international customers. Typically, we receive payment terms of 30 days from our suppliers. We believe that these practices are consistent with typical industry practices. Beyond financing, our primary sources of liquidity come from customer sales, which are dependent on our receipt and shipment of customer orders.

Gresham’s liquidity was historically supported by AAI’s injection of cash consisting of contributions to capital and loans. AAI has continued to support us with $2.4 million of loans in fiscal 2023. We are seeking additional capital to fund our operations, although we may not be successful in our efforts to do so. See “Risk Factors - Risks Related to Our Financial Condition”. We will need additional capital to fund our operations, and our inability to generate or obtain such capital on acceptable terms, or at all, could harm our business, operating results, financial condition and prospects.”

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources - Our Recent Financings” for the discussion of our financing activities.

Sales and Marketing

We market our products directly to our customers and rely on internal sales forces within each of our operating subsidiaries primarily to identify leads and complete sales. We also engage independent sales representatives who are perceived to have expertise with targeted markets and/or customers. Our marketing and sales efforts target specific types of customers such as major defense contractors, manufacturers of industrial products, health care solutions and infrastructure components in transportation and telecommunications.

Corporate Chief Development Officer

Following the Business Combination, we began relying on Gresham Holdings then Chief Operating Officer to lead our sales and marketing team. Prior to that executive’s retirement in November 2023, he had recruited our Chief Development Officer whose principal role is to drive organic growth and identify prospects for further growth through mergers and/or acquisitions. We have implemented Gresham’s Hub Spot to capture and track the opportunity stream within and among the operating subsidiaries.

RF Solutions

In recent years, much of the business development effort at Microphase comes through engineer to engineer collaboration resulting into products that are designed-in to military systems, as well as our Chief Development Officer holding and maintaining most customer relationships. For the foreseeable future, the backlog of designed-in products is driving the RF Solutions business.

Precision Electronic Solutions

Much of business development and sales effort at Enertec has historically taken place at the senior executive level. The two largest customers of Enertec resulted in 98% of Enertec’s revenue in 2023. Enertec’s former Chief Executive Officer passed away in early March 2024. Our Chief Operating Officer Mr. Nissim Ovadia worked closely with Mr. Avni and has been promoted to Chief Executive Officer at Enertec. Mr. Ovadia while Chief Operating Officer was able to interface with Enertec’s key customers. Additionally, our Chief Executive Officer, Mr. Jonathan Read is the new Chairman of Enertec and is focusing additional efforts to its business. Going forward, we are hopeful that our Precision Electronic Solutions will benefit from Mr. Ovadia’s continuing effort to develop business for turnkey precision electronic solutions.

Power Electronics and Displays

The Power Electronics and Displays group has a high performing team of four sales professionals supported by a sales administrator and two inside sales professionals to continue drive new business and growth in the UK and European markets. If we can solve our liquidity issues, we plan to add more business development resources in 2024 focused specifically on defense customers for Power Electronics and Displays while the group also expands use of strategic third-party channel partners and or Manufacturer’s Representatives in the Middle East, India and Australia in 2024. These representatives will promote our products and serve as the customer interface for Power Electronics and Displays in specific parts of the world as agreed. Typically, either we or the manufacturing representatives are entitled to terminate the manufacturer representative agreement upon 30 days’ written notice.

Relec and Gresham Power advertise in highly targeted industry-specific publications such as Electronics Weekly, New Electronics, Electronic Product Design & Test, Electronics Specifier, Components in Electronics, Design Products & Applications, Rail Technology Magazine, Rail Engineer, Rail Professional. In addition, Relec also posts regular podcasts on topics of interest to customers and prospect as well as running an active public relations campaign to get placements of earned media and coverage in a wide range of media. We look to replicate similar campaigns in other operating subsidiaries to generate inquiries/leads, raise awareness of us and support talent recruiting efforts.

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Other Marketing Activities

We promote our products and solutions by attending trade shows such as the Association of Old Crows Conferences, Defense Manufacturing Conference, Land Forces Conference (Australia), Doha International Maritime Defense Exhibition & Conference (DIMDEX) Electronica (Europe), Southern Manufacturing and Electronics, and Railtex.

Each of our operating businesses maintain a comprehensive website emphasizing its respective capabilities and expertise. We plan to upgrade all our websites to standardize corporate identification while adding more features and functionality to drive inquiries, generate leads from prospective customers and support recruiting efforts.

Government Regulation

We must meet applicable regulatory, environmental, emissions, safety and other requirements where specified by the customer and accepted by it or as required by local regulatory or legal requirements. The products that we market and sell in Europe may be subject to the 2003 European Directive on Restriction of Hazardous Substances (“RoHS”), which restricts the use of six hazardous materials in the manufacture of certain electronic and electrical equipment, as well as the 2002 European Directive on Waste Electrical and Electronic Equipment (“WEEE”), which determines collection, recycling and recovery goals for electrical goods. In July 2006, our industry began phasing in RoHS and WEEE requirements in most geographical markets with specific emphasis on consumer-based products. We believe that RoHS and WEEE-compliant components may be subject to longer lead-times and higher prices as the industry transitions to these new requirements. REACH Registration, Evaluation, Authorization and Restriction of Chemicals Registration, is a European Union regulation dating from December 18, 2006. REACH addresses the production and use of chemical substances, and their potential impacts on both human health and the environment.

In addition to these requirements for our dealings with customers in the EU, similar regulatory mandates from the U.S., the UK and Israel apply to all our operating subsidiaries. We have structured operations to comply with these requirements and have experienced little to no impact on lead times or prices. Given the applicability of these requirements to all competitors alike, we believe that compliance has had no impact on the competitive position of any operating subsidiary.

Some of our products are subject to the International Traffic in Arms Regulation (”ITAR”), which is administered by the U.S. Department of State. ITAR controls not only the export of certain products specifically designed, modified, configured or adapted for military systems, but also the export of related technical data and defense services and foreign production. We obtain required export licenses for any exports subject to ITAR. Compliance with ITAR may require a prolonged period of time; if the process of obtaining required export licenses for products subject to ITAR is delayed, it could have a materially adverse effect on our business, financial condition, and operating results. Any future restrictions or charges may be imposed by the U.S. or any other foreign country. In addition, from time-to-time, we enter into defense contracts to supply technology and products to foreign countries for programs that are funded and governed by the U.S. Foreign Military Financing program.

We are also subject to heightened government scrutiny of our operations pursuant to certain of our contracts.

Security Clearances

As a U.S. Government contractor, we are required to maintain facility and personnel security clearances complying with the U.S. DOD and other Federal agency requirements. All Gresham operating companies in the U.S. maintain strict protocols for handling classified information and Confidential Unclassified Information associated with its work for the U.S. DOD. We have built within both our production facilities in Shelton, CT and Livermore, CA “Restricted Areas” certified for generating, storing and reviewing classified information. Our U.S. subsidiaries and Division also must obtain and maintain “authority to operate” equipment to perform classified work. The process to secure these authorities is long and laborious. Our U.S. subsidiaries have an experienced information security team to oversee applications to secure these authorities as well as ongoing monitoring to maintain the security of these systems.

Gresham Power works on contracts classified as “Official Sensitive” that require individual security clearances and adherence to information security protocols for receiving, handling and storing confidential information as required in the UK Official Secrets Act and its implementing regulations. Relec does not work on classified, sensitive defense work.

Enertec complies with all information security requirements included in its customer contracts as well as all the confidentiality laws that the State of Israel mandates for work related to defense of the country.

Audits and Investigations

As a government contractor, we are subject to audits and investigations by U.S. Government agencies including the Defense Contract Audit Agency (the “DCAA”), the Defense Contract Management Agency (the “DCMA”), the Inspector General of the U.S. DOD and other departments and agencies, the Government Accountability Office, the Department of Justice (the “DoJ”) and Congressional Committees. From time-to-time, these and other agencies investigate or conduct audits to determine whether a contractor’s operations are being conducted in accordance with applicable requirements. The DCAA and DCMA also review the adequacy of, and compliance with, a contractor’s internal control systems and policies, including the contractor’s accounting, purchasing, property, estimating, earned value management and material management accounting systems. Our final allowable incurred costs for each year are also subject to audit and have from time to time resulted in disputes between us and the U.S. Government. Any costs found to be improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative

12


 

sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. Government.

The Defense Federal Acquisition Regulation, as implemented in standard contract clauses, mandates that our U.S. business establish and follow extensive detailed processes and protocols to protect classified and Confidential Unclassified Information (CUI) from disclosure and unauthorized access. That mandate includes a requirement that Microphase formulate and implement a System Security Plan with 110 different elements and protocols for handling and protecting classified information and CUI. Over the next two years the U.S. DOD will require all participants in the defense supply chain to demonstrate compliance with the Capability Model Maturity Cybersecurity as verified through an independent third-party auditor. Compliance with these mandates requires and will require Gresham’s U.S. subsidiaries to invest significant resources to maintain compliance. For instance, compliance requires extensive security controls on access to IT systems, strong firewalls and intrusion monitoring. We have in place an experienced team to ensure information security for all subsidiaries in the U.S. as well as oversee security of all employees and facilities in U.S. operations. These investments add to indirect cost pools that our U.S. operations must recover in the price of its products for U.S. DOD and contractors.

Enertec conducts operations under constant supervision of the Ministry of Defense of Israel. All its contracts are subject to audits of performance, quality and price reasonableness. Enertec has implemented the strongest possible cybersecurity protections consistent with the resources available to a company its size.

Gresham Power contracts with UK Ministry of Defense, Royal Navy or major contractors serving those agencies include standard provisions which give the customer the right to audit its performance under those contracts when they see fit. Audits are part of doing business with the government and typically focus on deliveries - on time project milestones as well as quality. The Royal Navy reviews Gresham Power pricing of services provided under support contract every 12 months for reasonableness.

Gresham Power is fully certified as “Cyber Essentials Plus Compliant.” Cyber Essentials Plus is a government backed, industry-supported scheme to help organizations protect themselves against common online threats. The UK Government requires all suppliers bidding for contracts involving the handling of sensitive and personal information to be certified against the Cyber Essentials program criteria.

Other Compliance Issues

In addition, we are subject to the local, state and national laws and regulations of the jurisdictions where we operate that affect companies generally, including laws and regulations governing commerce, intellectual property, trade, health and safety, the environment contracts, privacy and communications, cybersecurity, web services, tax, and corporate laws and securities laws. These regulations and laws may change over time. Unfavorable changes in existing and new laws and regulations could increase our cost of doing business and impede its growth.

Employees

As of April 15, 2024, we had a total of 179 employees located in the U.S., the UK and Israel. All but seven of these employees are employed on a full-time basis. We believe that our future success depends on our ability to attract and retain skilled personnel. Competition for skilled personnel in our markets is competitive. While our size and capital resources constrain our ability to attract and retain employees with cash compensation, we attempt to compensate for this constraint by offering opportunities for training and internal promotion. None of our employees is currently represented by a trade union. We consider our relations with our employees to be good. From time-to-time, we may hire additional workers on an independent contractor basis as the need arises. Presently, due to its backlog and expected orders, Microphase needs to add employees in addition to its planned use of Microsource employees.

ITEM 1A. RISK FACTORS

An investment in our common stock involves significant risks. Before investing in our common stock, you should consider each of the following risk factors and any other information set forth in this Report and the other reports filed by the Company with the Securities and Exchange Commission (the “SEC”),including the Company’s financial statements and related notes, in evaluating the Company’s business and prospects. The risks and uncertainties described below are not the only ones that impact on the Company’s operations and business. Additional risks and uncertainties not presently known to the Company, or that the Company currently considers immaterial, may also impair its business or operations. If any of the following risks actually occurs, the Company’s business and financial condition, results or prospects could be harmed. Please also read carefully the section entitled “Forward-Looking Statements” at the beginning of this Report. If any of the events or developments described below occurs, our business, financial condition and results of operations may suffer. In that case, the value of our common stock may decline and you could lose all or part of your investment.

Risk Factors Summary

Our business and an investment in our common stock are subject to numerous risks and uncertainties, including those highlighted in this “Risk Factors” section below. Some of these risks include:

Risks related to our Financial Condition

We have doubts about our ability to continue as a going concern.

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We have historically incurred net losses and negative cash flow and our operating results may significantly vary from quarter-to-quarter, so we may not be able to achieve or sustain profitability.
Because we require consents to obtain new financings, we may not be able to pursue these transactions if we cannot obtain the consents.
As a result of our outstanding convertible notes and related warrants, our stockholders are subject to significant future dilution.

Economic, Policy and Business Risks

A large percentage of our current revenue is derived from prime defense contractors to the U.S. government and its allies, and the loss of these relationships, a reduction in government funding or a change in government spending priorities or bidding processes could have an adverse impact on our business, financial condition, results of operations and cash flows.
If our reputation or relationships with the governments of the U.S., the UK or Israel or the limited number of defense contractors with whom we work were harmed, our future revenues and cash flows would be adversely affected.
Because we engage in fixed fee contracts with our customers, we face pressure on our gross profit margins and operating costs from inflation.
The effects of Russia’s invasion of Ukraine, the war in Israel and tensions elsewhere in the world on the capital markets and the economy is uncertain, and we may have to deal with a recessionary economy and economic uncertainty including possible adverse effects upon the capital markets.
We must replace the former Chief Executive Officer of Gresham Power and hire a new Chief Financial Officer for Enertec.
If the inflationary pressures in the US. and elsewhere where we operate continue, we could experience reduced margins and lose future business.

Sales, Business Development and Competitive Risks

Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period, which may cause our operating results to fluctuate significantly.
Our sales are significantly dependent on the defense industry and a limited number of customers.
We face intense industry competition and product obsolescence, which, in turn, could increase our losses.
If we are unable to monetize our legacy Giga-tronics business, we may be required to discontinue its business.

Performance and Operational Risks

If we are unable to identify, attract, train and retain qualified personnel, especially our design and technical personnel, our business and results of operations would be materially and adversely affected and we may not be able to effectively execute our business strategy.
Performance problems in our products or problems arising from the use of our products together with other vendors’ products may harm our business and reputation.
Supply chain disruptions and our inability to procure necessary component parts for our products have materially and adversely affected our results of operations and could materially and adversely affect our results of operations in the future.
We may not be able to procure necessary key components for our products, or we may purchase too much inventory.
We depend on a limited number of major customers for a significant portion of our revenue. The loss of any of these customers, or the substantial reduction in the quantity of products that they purchase from us, would materially adversely affect our business and results of operations.

Risks Related to our Foreign Operations

Because we have a material subsidiary that operates in Israel, the war which began October 7, 2023 may have a material adverse effect on our future results of operations and financial condition.
Many of Enertec’s employees are obligated to perform military reserve duty in Israel, which could have a disruptive impact on our business.
We depend on international sales for a material portion of our revenue.

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A material portion of our revenue and expenses is denominated in foreign currencies, so fluctuations in exchange rates could have a material adverse effect on our operating results.

Regulatory and Compliance Risks

Our businesses are subject to government procurement laws and regulations.
If we fail to comply with anti-bribery, anti-corruption, anti-money laundering laws, and similar laws, or allegations of such failure, it could have a material adverse effect on our business, financial condition and operating results.
If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to accounting controls and procedures, or if we discover additional material weaknesses and deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.

Risks Related to the Ownership of our Common Stock

Because of limited volume of our common stock, you may not be able to sell many shares without depressing the price.
Our stock price may be volatile, which could result in substantial losses to investors and litigation.
The rights of the holders of common stock may be impaired by the potential additional issuance of preferred stock.
Because our shares of common stock are subject to the penny stock rules, it is more difficult to buy our shares.
We do not anticipate paying any dividends on our common stock for the foreseeable future.

 

Risks Related to our Financial Condition

We have doubts about our ability to continue as a going concern.

We believe that there is doubt about our ability to continue as a going concern because we have incurred recurring net losses and we have not been able to procure funding for our negative cashflows. Convertible notes issued to two lenders mature in October 2024 and convertible notes issued to AAI mature in January 2025. Our inability to continue as a going concern could have a negative impact on the Company, including our ability to obtain needed financing, and could adversely affect the trading price of our common stock.

We have historically incurred net losses and negative cash flow and our operating results may significantly vary from quarter-to-quarter, so we may not be able to achieve or sustain profitability.

For the years ended December 31, 2023 and 2022, Gresham reported revenue of $38.0 million and $30.3 and net losses of $15.3 million and $18.4 million, respectively. We expect to continue to incur substantial expenditures to develop and market our products and services and we could continue to incur losses and negative operating cash flow in the near future. As the result of our lack of working capital, we face a number of challenges:

We have been unable to make installment payments to an investment banker we hired to re-finance our indebtedness. As a result, this party will not provide any further services;
Other service providers have not been paid and have cut back or no longer provide services;
We owe senior management $112,000 in back salaries and $11,000 on credit cards; and
We owe our Chief Financial Officer $50,000 due to our inability to repay interim the loan he made last year. We also owe our Audit Committee Chairman $74,500 in accrued fees which AAI has agreed to pay over time.

In addition, our operating results have in the past been subject to quarter-to-quarter fluctuations, and we expect that these fluctuations will continue, and may increase in magnitude, in future periods. Demand for our products is driven by many factors, including the availability of funding for our products in our customers’ budgets. There is a trend for some of our customers to place large orders near the end of a quarter or fiscal year, in part to spend remaining available budget funds. Seasonal fluctuations in customer demand for our products driven by budgetary and other concerns can create corresponding fluctuations in period-to-period revenue, and we therefore cannot assure you that our results in one period are necessarily indicative of our revenue in any future period. In addition, the number and timing of large individual sales and the ability to obtain acceptances of those sales, where applicable, have been difficult for us to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or deferral of one or more significant sales in a quarter could harm our operating results for such quarter. It is possible that, in some quarters, our operating results will be below the expectations of public market analysts or investors. Finally, supply chain issues have in the past and may in the future affect future quarters.

We will need additional capital to fund our operations, and our inability to generate or obtain such capital on acceptable terms, or at all, could harm our business, operating results, financial condition and prospects.

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We will need to raise additional capital to pay our indebtedness and to support our working capital requirements and our planned growth. Any other future financing may include shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, debt securities, units consisting of the foregoing securities, equity investments from strategic development partners or some combination of the foregoing. There is no assurance that additional financing will be available, or if available, will be on acceptable terms. If we are unable to raise additional capital, we may be required to curtail our operations and take additional measures to reduce costs, including reducing our workforce and eliminating outside consultants in order to conserve cash in amounts sufficient to sustain operations and meet our obligations. This could in its turn have a material adverse effect on our business, operating results and future prospects. There can be no assurance that we will be able to complete any future financing.

Because we require consents to obtain new financings, we may not be able to pursue these transactions if we cannot obtain the consents.

We issued AAI Series F preferred stock and common stock upon the consummation of the Business Combination. The term of the Series F contains negative covenants that apply such as incurring indebtedness of $1,000,000 in any individual transaction or $2,500,000 in the aggregate, or acquiring any business in which the aggregate consideration payable by us is $1 million or more. In addition, if we issue further equity, subject to exceptions for certain excluded securities, such limited issuances pursuant to equity incentive plans, AAI will have the right to purchase additional equity to maintain its ownership interest. Even if AAI fully converts the Series F into shares of our common stock, the Convertible Notes that we issued in connection with the AAI Financing and the transaction documents that we entered into in connection with our January 2023 sale of Senior Secured Convertible Notes with the two investment funds contain substantially similar covenants that are included in the Series F. These provisions could limit our ability to raise capital or make future acquisitions, particularly larger acquisitions. For more information about these negative covenants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources – Our Financings.”

As a result of our outstanding convertible notes and related warrants, our stockholders are subject to significant future dilution.

As of April 8, 2024 we had $18.2 million in outstanding indebtedness evidenced by convertible notes which are convertible into 72.9 million shares of our common stock, subject to possible increases, and 2 million warrants exercisable for nominal consideration. Because of our cash needs, we will have to engage in a new financing or modify of our existing financings. Any new financing or modification may be even further dilutive to our stockholders. Further, the convertible notes have price protection so if we enter into a new financing with a lower conversion or exercise price, those instruments will automatically be adjusted resulting in further dilution.

Economic, Policy and Business Risks

A large percentage of our current revenue is derived from prime defense contractors to the U.S. government and its allies, and the loss of these relationships, a reduction in government funding or a change in government spending priorities or bidding processes could have an adverse impact on our business, financial condition, results of operations and cash flows.

The defense programs may compete with other policy needs, which may be viewed as more necessary. For example, budget and appropriations decisions made by the governments of the U.S, the UK and Israel are outside of our control and have long-term consequences for its business. Government spending priorities and levels remain uncertain and difficult to predict and are affected by numerous factors, and the purchase of our products could be superseded by alternate arrangements. The current prolonged delay in providing new aid to Ukraine and Israel are evidence of the political uncertainties. While defense budgets in countries around the world have generally increased, there can be no assurance that such increases will continue for the foreseeable future. A change in government spending priorities or an increase in non-procurement spending at the expense of our programs, or a reduction in total defense spending, could have material adverse consequences on our future business.

If our reputation or relationships with the governments of the U.S., the UK or Israel or the limited number of defense contractors with whom we work were harmed, our future revenues and cash flows would be adversely affected.

Gresham derives most of its revenue from the governments of the U.S., the UK and Israel as well defense contractors across the world that supply those countries and their allies. Our reputation and relationships with various government entities and agencies, in particular with the U.S. DOD and Ministries of Defense in the UK and Israel, and the limited number of defense contractors serving these agencies, are key factors in maintaining and growing these revenues and winning bids for new business. Negative press reports or publicity, regardless of accuracy, could harm our reputation. If our reputation or relationships with government agencies were to be negatively affected, or if we are suspended or debarred from contracting with government agencies for any reason, the amount of business with government and other customers would decrease and our financial condition and results of operations could be adversely affected.

Because we engage in fixed fee contracts with our customers, we face pressure on our gross profit margins and operating costs from inflation.

Our financial condition, results of operations, and liquidity may be negatively impacted by increased levels of inflation. We are not able to predict the timing and effect of inflation, or its duration and severity. Inflation may cause our costs to purchase inventory to be higher than we planned, and reduce our gross profit margins. Also inflation tends to increase our compensation and other costs. Because of the fixed price contracts we enter into,we may not be able to sell our products to our customers at correspondingly increased prices to cover the impact of inflation, resulting in decreased profit margins.

We may have liabilities that are not known, probable or estimable at this time.

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We remain subject to certain past, current, and future liabilities. There could be unasserted claims or assessments against or affecting us, including the failure to comply with applicable laws and regulations. In addition, there may be liabilities of ours that are neither probable nor estimable at this time that may become probable or estimable in the future, including indemnification requests received from our customers relating to claims of infringement or misappropriation of third party intellectual property or other proprietary rights, tax liabilities arising in connection with ongoing or future tax audits and liabilities in connection with other past, current and future legal claims and litigation. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our financial condition. We may learn additional information that adversely affects us, such as unknown, unasserted, or contingent liabilities and issues relating to compliance with applicable laws or infringement or misappropriation of third-party intellectual property or other proprietary rights.

The effects of Russia’s invasion of Ukraine, the war in Israel and tensions elsewhere in the world on the capital markets and the economy is uncertain, and we may have to deal with a recessionary economy and economic uncertainty including possible adverse effects upon the capital markets.

Russia’s invasion of Ukraine, the war in Israel and tensions with China and Iran have created increased uncertainty in the capital markets and caused in part increased inflation. This may make it more difficult for us to raise capital and the result may be more expense and dilution. We cannot predict how these factors will affect the capital markets, but the impact may be adverse and may delay or prevent us from completing future financings or make any financings.

If the inflationary pressures in the U.S. and elsewhere where we operate continue, we could experience reduced margins and lose future business.

While the inflation rate is lower than it had been, the current inflationary pressures are affecting our gross profit margins particularly since we have lacked the capital to accumulate material inventory. Most of our contracts (except with Relec) are fixed price, which reduces our margins when inflation occurs. Reducing our selling prices results in further reduction of our margins. This customer pricing pressure may also result in the loss of contracts and/or future business. Finally, we are experiencing rising labor and other costs which may further increase our losses.

If we lose key personnel, it could have a material adverse effect on our financial condition, results of operations, and growth prospects.

Our success will depend on the continued contributions of key officers and employees. The loss of the services of key officers and employees, whether such loss is through resignation or other causes, or the inability to attract additional qualified personnel, could have a material adverse effect on our financial condition, results of operations, and growth prospects. In November 2023, our Chief Operating Officer retired. He was a key employee, and he is not being replaced as his duties have been assumed by our Chief Technology Officer. While we believe the replacement of Enertec’s former Chief Executive Officer by its Chief Operating Officer will not have a material adverse effect, it is possible that our expectations will be proved to be incorrect. Further, Gresham Power’s Chief Executive Officer passed away in March 2024. With Gresham Power, the loss of Ms. Karen Jay must be viewed against its declining business. We are uncertain whether we will be able to replace her.

Our success will depend on the continued contributions of key officers and employees. The loss of the services of key officers and employees, whether such loss is through resignation or other causes, or the inability to attract additional qualified personnel, could have a material adverse effect on our financial condition, results of operations, and growth prospects. In November 2023, our Chief Operating Officer retired. He was a key employee, and he is not being replaced as his duties have been assumed by our Chief Technology Officer. The loss of Zvika Avni, Enertec’s Chief executive Officer, due to illness who managed our Israeli operations in the past, could also materially harm our business.

We do not know if the loss of key employees will result in any adverse effects. However, if we were to lose Jonathan Read, Robin Shaffer, Sean Lyle and/or Lutz Henckels, our Chief Executive Officer, Chief Operating Officer, Chief Development Officer and Chief Financial Officer respectively, or Nissim Ovadia, Enertec’s Chief Executive Officer, our business would be materially and adversely affected.

Our sales and profitability may be affected by changes in economic, business and industry conditions.

If the economic climate in the U.S. or abroad deteriorates, customers or potential customers could reduce or delay their orders. In this regard, it was reported in February 2024 that the UK, where we have two subsidiaries, has entered a recession. In this environment, our customers may experience financial difficulty, reduce operations and fail to budget or reduce budgets for the purchase of our products. This may lead to longer sales cycles, delays in purchase decisions, payment and collection, and can also result in downward price pressures, causing our sales and profitability to decline. In addition, general economic uncertainty and general declines in capital spending in the defense electronics sector make it difficult to predict changes in the purchasing requirements of our customers and the markets we serve. There are many other factors which could affect our business, including:

Political factors, which result in a reduction of defense expenditures;
The end of the Russian war in Ukraine, the end of the war in Israel, stability in the Middle East or easing of tensions in Asia;
Gas shortages and environmental issues which divert defense expenditures in the UK;
The introduction and market acceptance of new technologies, products and services including artificial intelligence;
New competitors and new forms of competition;

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The size and timing of customer orders (for retail distributed physical product);
The size and timing of capital expenditures by our customers;
Adverse changes in the credit quality of our customers and suppliers;
Changes in the pricing policies of, or the introduction of, new products and services by us or our competitors;
Changes in the terms of our contracts with our customers or suppliers;
The availability of products and schedule for deliveries from our suppliers; and
Variations in product costs and the mix of products sold.

These trends and factors could adversely affect our business, results of operations and financial condition and diminish our ability to achieve our strategic objectives.

We have been significantly short of capital needed to acquire parts for manufacture of our products to complete orders. At times, we have not had the cash available to make advance payments for the purchase of parts, and then, as a consequence, we would not receive the parts from our vendors required to finish a customer order. This would then delay the delivery of our products to customers and would also delay recognition of the resulting revenue and the receipt of cash from the customer. There can be no assurance that we will not operate at a loss during the current or future fiscal years.

Our future profitability depends upon many factors, including several that are beyond our control. These factors include, without limitation:

changes in the demand for our products and services;
changes in the timing of desired customer deliveries;
the availability of working capital;
our ability to deliver on new product developments and introductions on a timely basis;
our loss of key customers or contracts;
our ability to hire engineers and other technical personnel;
the introduction of competitive products;
the failure to gain market acceptance of its new and existing products; and
changes in technology which cause some of our products to be obsolete.

Sales, Business Development and Competitive Risks

Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period, which may cause our operating results to fluctuate significantly.

The timing of our revenues is difficult to predict. Factors that may contribute to these fluctuations include our dependence on the defense industry, a limited number of customers, the nature and length of our sales cycles for our products and services, the duration and delivery schedules within our customer contracts and our ability to timely develop, produce and upgrade our products.

Most of our revenues result from a limited number of relatively large orders that we receive from prime defense contractors and government agencies. We spend substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales. In addition, purchases of our products are frequently subject to budget constraints (including constraints imposed by governmental agencies), multiple approvals, and unplanned administrative, processing and other delays. Even if we receive a purchase order from a customer, there may be circumstances or terms relating to the purchase that delay our ability to recognize revenue from that purchase, which makes our revenue difficult to forecast. As a result, it is difficult to predict whether a sale will be completed, the particular fiscal period in which a sale will be completed or the fiscal period in which revenue from a sale will be recognized. For these reasons, our operating results may vary significantly from quarter to quarter. Such unpredictable operating results may adversely impact the trading price of our common stock.

Our sales are significantly dependent on the defense industry and a limited number of customers.

Most of our current product and service offerings are directed towards the defense marketplace, which has a limited number of customers. If the defense market demand decreases, our sales may be less than projected with a resulting decline in revenues. As a result, our business depends upon continued U.S., Israeli, UK and other countries’ government expenditures on defense systems for which we provide support. Our business, prospects, financial condition, operating results, and the trading price of our common stock could be materially harmed, among other causes, by the following:

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Budgetary constraints, including mandated automatic spending cuts, affecting across-the-board government spending, or specific agencies in particular, and changes in available funding
A shift in expenditures away from defense programs that we support
U.S. government shutdowns due to, among other reasons, a failure by elected officials to fund the government and other potential delays in the appropriations process
Delays in the payment of our invoices by government payment offices; and
Changes in the political climate and general economic conditions, including a slowdown of the economy or unstable economic conditions and responses to conditions, such as emergency spending, that reduce funds available for other government priorities. The UK economy is now in a recession.

Additionally, the loss of any one customer may have a material adverse effect on future operating results and financial condition. Our product backlog also has a number of risks and uncertainties such as the cancellation or deferral of orders, dispute over performance of our products and our ability to collect amounts due under these orders. If any of these events were to occur, actual shipments could be lower than projected and revenues could decline which would have an adverse effect on our operating results and liquidity.

We face intense industry competition and product obsolescence, which, in turn, could increase our losses.

We operate in an industry that is generally characterized by intense competition. Our competitors continuously engage in efforts to expand their business relationships with the same major defense contractors and the government with whom we enter into contracts with and will continue these efforts in the future, and the governments may choose to use other contractors. We believe that the principal competitive factors in our markets are breadth of product line, quality of products, stability, reliability and reputation of the provider, along with cost. Quantity discounts, price erosion, and rapid product obsolescence due to technological improvements are therefore common in our industry as competitors strive to retain or expand market share. Product obsolescence can lead to increases in unsaleable inventory that may need to be written off and, therefore, could reduce our profitability. Additionally, as we are seeing with Microsource, the U.S. military’s decision to discontinue ordering certain aircraft where Microsource acts as a supplier, results in our loss of orders.

Because our competitors have greater resources, we may not compete effectively.

Several of our competitors, including, among others, K&L Microwave, Q Microwave, Amplitech, Qorvo, Northrop Grumman, Textron, Keysight, Rohde & Schwarz and National Instruments have substantially greater research and development, manufacturing, marketing, financial, technological personnel and managerial resources than us. These resources also make these competitors better able to withstand difficult market conditions than us. We cannot provide assurance that any products developed by these competitors will not gain greater market acceptance than any developed by us.

Our products compete and will compete with similar, if not identical, products produced by our competitors. These competitive products could be marketed by well-established, successful companies that possess greater financial, marketing, distribution personnel, and other resources than we do. These companies can implement extensive advertising and promotional campaigns. They can introduce new products to new markets more rapidly. In certain instances, competitors with greater financial resources may be able to enter a market in direct competition with us, offering attractive marketing tools to encourage the sale of products that compete with our products or present cost features that customers may find attractive.

The markets for some of our products (such as our commercial products in the UK) are also subject to specific competitive risks because these markets are highly price sensitive. Our competitors have competed in the past by lowering prices on certain products. If they do so again, we may be forced to respond by lowering our prices. This would reduce revenue and increase losses. Failure to anticipate and respond to price competition may also further reduce our revenue and increase our losses.

If we are unable to monetize our legacy Giga-tronics Division, we may be required to discontinue its business.

During the last two years the EW Test business has generated approximately $1.1 million per year in revenue despite the fact that we have spent over $26.0 million towards its development. We have a very small backlog for our EW test products as of the date of this Report. Accordingly, if we are unable to monetize our EW business, we may be forced to liquidate our remaining inventory and discontinue its operations.

The sale of our products is dependent upon our ability to satisfy the proprietary requirements of our customers.

We depend upon a relatively narrow range of products for the majority of our revenue. Our success in marketing our products is dependent upon their continued acceptance by our customers. In some cases, our customers require that our products meet their own proprietary requirements. If we are unable to satisfy such requirements, or forecast and adapt to changes in such requirements, our business could be materially harmed.

If we fail to anticipate and adequately respond to rapid technological changes in our industry, including evolving industry-wide standards, in a timely and cost-effective manner, our business, financial condition and results of operations would be materially and adversely affected.

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Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which technologies and/or distribution platforms our products must take advantage of in order to make them competitive in the market at the time they are released. Therefore, we usually start our product development with a range of technical development goals that we hope to be able to achieve for our customers. We may not be able to achieve these goals, or our competition may be able to achieve them more quickly than we can. In either case, our products may be technologically inferior to competitive products, or less appealing to consumers, or both. If we cannot achieve our technology goals for our customers within the original development schedule of our products, then our customers may opt for competitive offerings or we may delay products until these technology goals can be achieved, which may delay or reduce revenue and increase our development expenses. Alternatively, we can increase the resources employed in research and development in an attempt to accelerate our development of new technologies, either to preserve promised delivery date to our customers or to keep up with our competition, which would increase our development expenses and adversely affect our results of operations.

 

Performance and Operational Risks

If we are unable to identify, attract, train and retain qualified personnel, especially our design and technical personnel, our business and results of operations would be materially and adversely affected and we may not be able to effectively execute our business strategy.

Our performance and future success largely depends on its continuing ability to identify, attract, train, retain and motivate qualified personnel, including its management, sales and marketing, finance and in particular its engineering, design and technical personnel. For example, we currently have a limited number of qualified personnel for the assembling, tuning and testing processes. Members of our technical staff are nearing retirement, and it may be difficult to replace them, given their experience and expertise. To the extent skilled engineering and manufacturing personnel can be beneficially utilized across divisions, the Company will look to do so. In addition, we will need additional staff to drive Microphase’s forecasted growth and to allow Enertec to handle more large orders. Further Entertec’s recruiting efforts are challenged by the war in Israel and the priority of the military. We do not know whether we can expand our workforce as needed. Our engineering, design and technical personnel represent a significant asset. The competition for qualified personnel in the defense industry in the U.S., UK and Israel is intense and constrains our ability to attract qualified personnel. The loss of the services of one or more of our key employees, especially our key engineering, design and technical personnel, or its inability to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and operating results.

Performance problems in our products or problems arising from the use of our products together with other vendors products may harm our business and reputation.

Products as complex as those we produce may contain unknown and undetected defects or performance problems. For example, it is possible that one of our products might not comply with stipulated specifications under all circumstances. In addition, our customers generally use our products together with their own products and products from other vendors. As a result, when problems occur in a combined equipment environment, it may be difficult to identify the source of the problem. A defect or performance problem could result in lost revenues, increased warranty costs, diversion of engineering and management time and effort, impaired customer relationships and injury to our reputation generally.

Our EW test and training products are complex and could have unknown defects or errors, which may increase our costs, harm our reputation with customers, give rise to costly litigation, or divert our resources from other purposes.

Our EW test and training systems are extremely complex. Despite testing, our initial products contained defects and errors and may in the future contain defects, errors or performance problems following the sale or when new versions or enhancements are released, or even after these products have been used by our customers for a period of time. These problems could result in expensive and time-consuming design modifications or warranty charges, delays in the introduction of new products or enhancements, significant increases in our service and maintenance costs, diversion of our personnel’s attention from our product development and sales efforts, exposure to liability for damages, damaged customer relationships, and harm to our reputation, any of which could have a material adverse impact on our results of operations. In addition, increased development and warranty costs could be substantial and could reduce our operating margins.

We face risks related to production delays, delays of customer orders and the relatively high selling price of our RADAR/EW testing platform.

Our EW test and training platform has been a primary product development focus for the legacy Giga-tronics Division for the last several years. Presently, this product has no backlog. However, delays in completing its initial development, together with early design and manufacturing issues and longer than anticipated sales cycles have contributed to our inability to generate material sales. Additionally, the average selling price of our EW test and training system is considerably higher than our prior general-purpose test and measurement products, which requires additional internal approvals on the part of the customer and generally leads to longer sales cycles. Our financial condition may also cause potential customers to delay, postpone or decide against placing orders for our products. Continued longer than anticipated sales cycles in the future, or delays in production and shipping volume quantities, could have a material adverse impact on our operating results and liquidity.

Our business could be negatively impacted by cybersecurity threats and other security threats and disruptions.

As a defense contractor, we face certain security threats, including threats to our information technology infrastructure, attempts to gain access to our proprietary or classified information, threats to physical security, and domestic terrorism events. Our information technology networks and

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related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. We are also involved with information technology systems for certain customers and other third parties, which generally face similar security threats. Cybersecurity threats in particular, are persistent, evolve quickly and include, but are not limited to, computer viruses, attempts to access information, denial of service and other electronic security breaches believe that we have implemented appropriate measures and controls and invested in skilled information technology resources to appropriately identify threats and mitigate potential risks, but there can be no assurance that such actions will be sufficient to prevent disruptions to mission critical systems, the unauthorized release of confidential information or corruption of data. A security breach or other significant disruption involving these types of information and information technology networks and related systems could:

disrupt the proper functioning of these networks and systems and therefore its operations and/or those of certain of its customers;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, our proprietary, confidential, sensitive or otherwise valuable information, our operating companies or their customers, including trade secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
compromise national security and other sensitive government functions;
require significant management attention and resources to remedy the damages that result;
subject us to claims for breach of contract, damages, credits, penalties or termination; and
damage our reputation with its customers and the U.S, the UK and Israel, and the public generally.

Any or all of the foregoing could have a negative impact on its business, financial condition, results of operations and cash flows.

Failure of our information technology infrastructure to operate effectively could adversely affect our business.

We depend heavily on information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.

Earthquakes and other events could have a material adverse effect on our business, financial condition and results of operations.

Microsource and our Giga-tronics Division are located in the San Francisco Bay Area near known earthquake fault zones and is vulnerable to significant damage from earthquakes. We are also vulnerable to other natural disasters, epidemics, such as COVID-19, and other events that could disrupt our operations that may be beyond our control. In addition, the war in Israel make our Enertec facility vulnerable to rocket attacks and potential invasion because it is located near the Lebanese boundary.We do not carry insurance for earthquakes and we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our operating results, cash flows and success as an overall business.

Supply chain disruptions and our inability to procure necessary component parts for our products have materially and adversely affected our results of operations and could materially and adversely affect our results of operations in the future.

We manufacture some components for our products, but we rely on subcontract manufacturers to supply components for many of our product offerings. Our reliance upon such subcontract manufacturers involves several risks, including reduced control over manufacturing costs, delivery times, reliability and quality of components, unfavorable currency exchange fluctuations, and continued inflationary pressures on many of the raw materials used in the manufacturing of our products. On occasion, particularly with more complex video and filter assemblies, we may experience parts availability/shortage issues resulting from lower-than-expected production yields, necessitating faster and unexpected use of components planned for later ordering periods and thus causing shortages. If we were to encounter a shortage of key manufacturing components from limited sources of supply, or experience manufacturing delays caused by reduced manufacturing capacity, the inability of our subcontract manufacturers to procure raw materials, the loss of key assembly subcontractors, difficulties associated with the transition to our new subcontract manufacturers or other factors, we could experience lost revenue, increased costs, and delays in, or cancellations or rescheduling of, orders or shipments, any of which would materially harm our business.

We may not be able to procure necessary key components for our products, or we may purchase too much inventory.

The defense industry, and the electronics industry as a whole, can be subject to business cycles. During periods of growth and high demand for our products, we may not have adequate supplies of inventory on hand to satisfy our customers’ needs. Furthermore, during these periods of growth, our suppliers may also experience high demand and, therefore, may not have adequate levels of the components and other materials that we require to build products so that it can meet our customers’ needs. Our inability to secure sufficient components to build products for our customers could negatively impact our sales and operating results. We may choose to mitigate this risk by increasing the levels of inventory for certain key components assuming we have available cash resources. Increased inventory levels can increase the potential risk for excess and obsolescence should our forecasts fail to materialize or if there are negative factors impacting our customers’ end markets. If we purchase too much inventory, we may have to record additional inventory reserves or write-off the inventory, which could have a material adverse effect on our gross margins and on our results of operations.

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We depend on a limited number of major customers for a significant portion of our revenue. The loss of any of these customers, or the substantial reduction in the quantity of products that they purchase from us, would materially adversely affect our business and results of operations.

Our operating companies typically depend upon a limited number of major customers to generate a significant portion of its revenue. For the years ended December 31, 2023 and 2022, Enertec derived approximately to 98% and 89%, respectively, of its revenues from two customers. In each of those years, 75% and 45% of Microphase’s revenues came from the same three customers. However, there is no assurance that the customers, which account for the great proportion of sales in our operating companies will continue placing further orders beyond the backlog orders on hand now. Among the factors that affect future orders are:

We have no intellectual property rights beyond trade secrets for the equipment we manufacture;
We are subject to competition from many manufacturers of purpose-built electronics;
We introduce a new upgraded version of the equipment which may not meet the customer’s needs;
Changing technology may make our products less useful to the customer;
The customer may decrease the size of its orders or seek to reduce our selling price at any time;
The customer may elect to use manufacturers other than our operating companies; and

If one or more of our major customers reduce or cancel their orders scaling back some of their activities, our revenue would be significantly reduced. Furthermore, reduction or diversions in defense spending may lead to reduced demand for our products, which could, in turn, have a material adverse effect on our business and results of operations. If the financial condition of one or more of our major customers were to deteriorate, or if such customers have difficulty acquiring investment capital due to any of these or other factors, a substantial decrease in our revenue would likely result.

If we fail to effectively manage our growth, our business and operating results could be harmed.

We are experiencing growth in our business with our increase in revenue in 2023 and expected increase this year. This growth will place significant demands on our management, operational and financial infrastructure. If we do not manage our growth effectively, the quality of our products and services could suffer, which could negatively affect our operating results. To effectively manage our growth, we must continue to improve our operational, financial and management controls and reporting systems and procedures. These systems improvements may require significant capital expenditures and management resources including hiring a full-time comptroller. Failure to implement these improvements could hurt our ability to effectively manage our growth and would in its turn have a material adverse impact on our business and future operating results.

Our strategic focus on purpose-built electronics solutions and concurrent cost reduction plans may be ineffective or may limit our ability to compete.

We devote significant resources to developing and manufacturing designed-in electronics solutions for our customers. Each product typically represents a uniquely tailored solution for a specific customer’s requirements. Failure to meet these customer product requirements or a failure to meet production schedules and/or product quality standards may put us at risk with one or more of these customers. Moreover, changes in market conditions and changes in the needs and requirements of our customers may affect their purchasing decisions. The loss of one or more of our significant custom electronics solution customers could have a material adverse impact on our revenue, business or financial condition.

We have implemented a series of initiatives designed to increase efficiency and reduce costs. While we believe that these actions will have a positive impact, they may not be sufficient to achieve the required operational efficiencies that will enable us to respond more quickly to changes in the market or result in the improvements in our business that we anticipate. Early in 2024, we implemented a reduction in force and reduction in office space in our U.S. operations. We may be forced to take additional cost-reducing initiatives, including those involving personnel, which may negatively impact our results of operations due to severance and other related costs. In addition, there is the risk that such measures could have long-term adverse effects on our business by reducing our pool of talent, decreasing or slowing improvements in our products or services, making it more difficult for us to respond to customers, limiting our ability to increase production quickly if and when the demand for its solutions increases and limiting our ability to hire and retain key personnel. These circumstances could adversely affect our operating results.

A significant portion of our contracts are fixed-price contracts that could subject us to losses in the event of cost overruns or a material increase in inflation.

We negotiate most of our contracts on a fixed-price basis which allows us to benefit from cost savings but also subject us to the risk of potential cost overruns, particularly for firm fixed-price contracts, because we assume the entire cost burden. If our initial estimates are incorrect, we can lose money on these contracts. Government contracts can expose us to potentially large losses because the government can hold us responsible for completing a project or, in certain circumstances, paying the entire cost of our replacement by another provider regardless of the size or foresee ability of any cost overruns that occur over the life of the contract. Because many of these contracts involve new technologies and applications, unforeseen events such as technological difficulties, fluctuations in the price of raw materials, problems with our suppliers and cost overruns, can result in the contractual price becoming less favorable or even unprofitable to us. The U.S., the UK and the Israel are experiencing

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a significant increase in inflation, which could have a significant adverse impact on the profitability of these contracts. Furthermore, if we fail to meet contract deadlines or specifications, we may need to renegotiate contracts on less favorable terms, be forced to pay penalties or liquidated damages or suffer major losses if the customer exercises its right to terminate. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts we may not realize their full benefits. Cost overruns could have an adverse impact on our operating results.

Many of our operating companies purchase a significant amount of their components and products outside of the countries in which they operate.

With the exception of Microphase, Microsource and the Giga-tronics Division which source all of their components from U.S. suppliers, and Enertec which sources most of its parts in the U.S., we purchase a majority of our components from foreign manufacturers. In addition, we have a substantial majority of our commercial products assembled, packaged, and tested by subcontractors located outside the U.S. These activities are subject to the uncertainties associated with international business operations, including trade barriers and other restrictions, changes in trade policies, governmental regulations, currency exchange fluctuations, reduced protection for intellectual property, war and other military activities, terrorism, changes in social, political, pandemic, or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect on our business and operating results.

If we are unable to satisfy our customers’ specific product quality, certification or network requirements, our business could be disrupted, and our financial condition could be harmed.

Our customers demand that our products meet stringent quality, performance and reliability standards. We have, from time to time, experienced problems in satisfying such standards. Defects or failures have occurred in the past, and may occur in the future, relating to our product quality, performance and reliability. From time-to-time, our customers also require us to implement specific changes to our products to allow these products to operate within their specific network configurations. If we are unable to remedy these failures or defects or if we cannot complete such required product modifications, we could experience lost revenue, increased costs, including inventory write-offs, warranty expense and costs associated with customer support, delays in, or cancellations or rescheduling of, orders or shipments and product returns or discounts, any of which would harm our business.

 

Risks Related to our Foreign Operations

Because we have a material subsidiary that operates in Israel, the war which began October 7, 2023 may have a material adverse effect on our future results of operations and financial condition.

Enertec, a subsidiary of the Company, is an Israeli corporation which has its offices and engineering and assembly facility located in Karmiel, Israel, which is near the border with Lebanon. Enertec is a material subsidiary and through December 31, 2023, approximately 41% of the Company’s revenues were derived from Enertec.

The war in Israel poses significant risks to Enertec including:

If Hezbollah enters the war or continues launching rockets into Israel, it could destroy Enertec’s facility. Enertec has no alternative facility and the cost of locating a new facility and equipping it would effectively cause it to cease operations for at least six months.
Although most of Enertec’s management and engineering and other staff are too old to serve in the military, any war-related injuries to them could result in a material adverse effect on Enertec’s operations;
Even if Enertec is not materially damaged by rockets, Israel has a system of bomb shelters designed to protect its citizens. To the extent Enertec’s employees are required to enter bomb shelters, it will create a material distraction and affect its ability to deliver products.
A prolonged war causing injuries and deaths in Israel could divert Enertec’s staff from their duties to Enertec. Further some employees have had family members killed to date and future deaths and injuries could adversely affect employees’ efforts.
As the war continues, there has been increasing friction between Israel and the U.S. as the U.S. seeks to pressure Israel to enter into a ceasefire. If this were to result in reduced U.S. aid for Israel, it is possible that Enertec’s business could be adversely affected.

In addition, Israel-based companies and companies doing business with Israel have been the subject of an economic boycott by members of the Arab League and certain other predominantly Muslim countries, including Iran, since Israel’s establishment. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved as these countries are opposed to Israel’s continuing the war. Wars and acts of terrorism have resulted in significant damage to the Israeli economy, including reducing the level of foreign and local investment.

Our commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you

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that this government coverage will be maintained or that it will sufficiently cover its potential damages. Any losses or damages incurred by us could have a material adverse effect on our business.

If the war continues, it could have a material adverse effect on our operations and financial condition.

Many of Enertec’s employees are obligated to perform military reserve duty in Israel, which could have a disruptive impact on our business.

Certain number of Enertec’s officers and employees may be obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called up for active military duty at any time. All Israeli citizens who have served in the army are subject to an obligation to perform reserve duty until they are between 40 and 49 years old, depending upon the nature of their military service. These military service obligations could have a disruptive impact on our business, if hostilities develop in the future, which may adversely affect our business.

We depend on international sales for a material portion of our revenue.

Sales to customers outside of North America accounted for more than two thirds of our net revenue for the years ended December 31, 2023 and 2022, respectively. We expect that international sales will continue to represent a material portion of our total revenue. International sales are subject to the risks of international business operations as described above, as well as generally longer payment cycles, greater difficulty collecting accounts receivable, and currency restrictions. These risks include the following:

unexpected changes in practices, tariffs, export quotas, custom duties, trade disputes, tax laws and treaties, particularly due to economic tensions and trade negotiations or other trade restrictions;
different labor laws and regulations;
exposure to many stringent and potentially inconsistent laws and regulations relating to privacy, data protection, and information security;
changes in a specific country’s or region’s political or economic conditions;
risks resulting from fluctuations of currency exchange rates;
risks relating to the trade protection regulations and measures in the U.S. or in other jurisdictions;
limitations on our ability to reinvest earnings from operations derived from one country to fund the capital needs of its operations in other countries;
limited or potentially unfavorable intellectual property protection; and
exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”), and similar applicable laws and regulations in other jurisdictions.

International sales are also subject to the export laws and regulations of the U.S. and other countries. Further, our subsidiaries in the U K and Israel are subject to local regulation which may increase our costs.

Any one or more of these factors could increase our costs and adversely affect our results of operations.

A material portion of our revenue and expenses is denominated in foreign currencies, so fluctuations in exchange rates could have a material adverse effect on our operating results.

We face foreign exchange risks because a significant portion of our revenue and expenses is denominated in foreign currencies. Further, some suppliers to Enertec and Relec require payment in U.S. dollars, which also exposes us to risk. Generally, U.S. dollar strength adversely impacts the translation of the portion of our revenue that is generated in foreign currencies into the U.S. dollar. For the years ended December 31, 2023 and 2022, a substantial portion of our revenue was denominated in currencies other than U.S. dollars. Our results of operations could also be negatively impacted by a strengthening of the U.S. dollar as a large portion of our costs are U.S. dollar denominated. We also have foreign exchange risk exposure with respect to certain of its assets that are denominated in currencies other than the functional currency of its subsidiaries, and its financial results are affected by the re-measurement and translation of these non-U.S. currencies into U.S. dollars, which is reflected in the effect of exchange rate changes on cash, cash equivalents, and restricted cash on the consolidated statements of cash flows. Strengthening of the U.S. dollar could materially and adversely affect our results of operations and financial condition. For the year ended December 31, 2023 we had a gain from foreign currency exchange adjustment of $74,000 and for the year ended December 31, 2022 we had a gain from foreign currency exchange adjustment of $45,000.

 

Legal Risks

Our limited ability to protect our proprietary information and technology may adversely affect our ability to compete, and our products could infringe upon the intellectual property rights of others, resulting in claims against us, the results of which could be costly.

24


 

Many of our products consist entirely or partly of proprietary technology owned by us. Although we seek to protect our technology through a combination of copyrights, trade secret laws and contractual obligations, these protections may not be sufficient to prevent the wrongful appropriation of our intellectual property, nor will they prevent our competitors from independently developing technologies that are substantially equivalent or superior to our proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S. In order to defend our proprietary rights in the technology utilized in our products from third party infringement, we may be required to institute legal proceedings, which would be costly and would divert our resources from the development of our business. If we are unable to successfully assert and defend our proprietary rights in the technology utilized in our products, our future results could be adversely affected.

Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we may become subject to legal proceedings and claims for alleged infringement from time to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, require us to reengineer or cease sales of our products or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making claims may be able to obtain an injunction, which could prevent us from selling our products in the U.S. or abroad.

We may in the future be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe on our patents, trade secrets or the patents of our licensors. To counter such infringement or unauthorized use, we may be required to file infringement claims, or we may be required to defend the validity or enforceability of such patents, which can be expensive and time-consuming. In an infringement proceeding, a court may decide that either one or more of our patents or our licensors’ patents is not valid or is unenforceable or may refuse to stop the other party from using the technology at issue because our patents do not cover that technology. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings filed by third parties or brought by us may be necessary to determine the priority of inventions regarding our patents or patent applications or those of our partners or licensors. An unfavorable outcome could require us to cease using the related technology or to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may cause us to incur substantial costs and distract the attention of our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the U.S.

Because of the substantial amount of discovery required in intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

 

Regulatory and Compliance Risks

Our businesses are subject to government procurement laws and regulations.

We must comply with certain laws and regulations relating to the formation, administration and performance of government contracts. These laws and regulations affect how we conduct business with the government, including the business that we do as a subcontractor to large prime contractors that contract directly with the government. In complying with these laws and regulations, we incur additional costs. These costs may increase in the future, thereby reducing our margins, which could have an adverse effect on our business, financial condition, results of operations and cash flows. Failure to comply with these regulations and requirements could lead to fines, penalties, repayments, or compensatory or treble damages, or suspension or debarment from government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various laws, including those related to procurement integrity, export control, government security regulations, employment practices, protection of the environment, accuracy of records, proper recording of costs and foreign corruption. The termination of a government contract or relationship as a result of any of these acts would have an adverse impact on our operations and could have an adverse effect on our standing and eligibility for future government contracts.

Some U.S. federal statutes and regulations provide for penalties, including automatic debarment based on actions such as violations of the U.S. False Claims Act or the U.S. Foreign Corrupt Practices Act. The suspension or debarment in any particular case may be limited to a facility, contract or subsidiary involved in the violation or could be applied to our entire Company in severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with governments and private customers, which could materially and adversely affect our business, financial condition and results of operations.

If we fail to comply with anti-bribery, anti-corruption, anti-money laundering laws, and similar laws, or allegations of such failure, it could have a material adverse effect on our business, financial condition and operating results.

25


 

We are subject to various anti-bribery, anti-corruption, anti-money laundering laws, including the FCPA, the U.S. Travel Act, and the USA PATRIOT Act. In addition, we are subject to the UK Bribery Act 2010, the Proceeds of Crime Act 2002, Chapter 9 (sub-chapter 5) of the Israeli Penal Law, 1977, the Israeli Prohibition on Money Laundering Law–2000, and possibly other similar laws in countries outside of the U.S. in which we conduct our business or seek to sell our products. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees, agents, representatives, business partners, and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector.

We, our employees, agents, representatives, business partners and third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corruptor other illegal activities of these employees, agents, representatives, business partners or third-party intermediaries even if we do not explicitly authorize such activities.

These laws also require that we keep accurate records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and procedures to address compliance with such laws, we cannot assure you that none of our employees, agents, representatives, business partners or third-party intermediaries will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. In addition, we may be held liable for violations committed of the FCPA or similar foreign laws by companies that we acquire.

Any alleged or actual violation of the FCPA or other applicable anti-bribery, anti-corruption laws, and anti- money laundering laws could result in whistleblower complaints, investigations, enforcement actions, fines and other criminal or civil sanctions, adverse media coverage, loss of export privileges, or suspension or termination of government contracts. Responding to any investigation or enforcement action would require significant attention of our management and resources, including significant defense costs and other professional fees. Failure to comply with anti-bribery, anti-corruption, anti-money laundering laws, and similar laws, or allegations of such failure, could therefore have a material adverse effect on our business, results of operations, financial condition and future prospects.

We are subject to certain governmental regulatory restrictions and regulations relating to international sales.

Some of our products are subject to ITAR, which is interpreted, enforced and administered by the U.S. Department of State. ITAR regulation controls not only the export, import and trade of certain products specifically designed, modified, configured or adapted for military systems, but also the export of related technical data and defense services as well as foreign production. Any delays in obtaining the required export, import or trade licenses for products subject to ITAR regulation and rules could have a material adverse effect on our business, financial condition, and/or operating results. In addition, changes in U.S. export and import laws that require us to obtain additional export and import licenses or delays in obtaining export or import licenses currently being sought could cause significant shipment delays and, if such delays are too great, could result in the cancellation of orders. Any future restrictions or charges imposed by the U.S. or any other country on our international sales or foreign subsidiary could have a materially adverse effect on our business, financial condition, and/or operating results. In addition, from time to time, Gresham has entered into contracts with the Israeli MOD which were governed by the U.S. Foreign Military Financing program (“FMF”). Any such future sales would be subject to these regulations. Failure to comply with FMF rules could subject us to investigations that could lead to civil, administrative and possible criminal prosecution, which have a material adverse effect on its financial condition, operating results and/or prospects for obtaining future government business. Failure to comply with ITAR or FMF rules could also have a material adverse effect on our financial condition, and/or operating results.

We are also required to obtain export licenses before filling foreign orders for many of our products that have military or other governmental applications. The U.S. Export Administration regulations control technology exports like our products for reasons of national security and compliance with foreign policy, to guarantee domestic reserves of products in short supply and, under certain circumstances, for the security of a destination country. Thus, any foreign sales of our products requiring export licenses must comply with these general policies. Compliance with these regulations is costly, and these regulations are subject to change, and any such change may require us to improve our technologies, incur expenses or both in order to comply with such regulations.

If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to accounting controls and procedures, or if we discover additional material weaknesses and deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.

If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover additional material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting.

We have noted the following deficiencies that we believe to be material weaknesses:

At December 31, 2023, we did not have sufficient resources in our accounting function, which restricted our ability to gather, analyze and properly review information related to financial reporting in a timely manner.
Due to our size and nature, the Company is not able to maintain appropriate segregation of conflicting duties as it is not always possible and is not economically feasible.

26


 

Our primary user access controls to ensure appropriate authorization and segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to appropriate personnel were not designed and/or implemented effectively. We did not design and /or implement sufficient controls for program change management to certain financially relevant systems affecting our processes.
Due to the lack of appropriate personnel necessary for financial reporting, the Company has failed to properly account for complex financial instruments.

While we want to begin remediating these material weaknesses, our management has been distracted with our liquidity concerns. When we can obtain the cash resources, we expect to increase our accounting staff. With our recent reductions of employees, we did not lay off any accounting personnel. However, our vice president of finance who acted as our comptroller resigned last year and we must replace him. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.

 

Risks Related to the Ownership of Our Common Stock

Because of limited volume of our common stock, you may not be able to sell many shares without depressing the price.

There has been a relatively illiquid public market for our common stock on the OTCQB. The average daily trading volume of our shares of common stock during 2023 was approximately 9,250 shares and during 2024 through the date of the Report was approximately 1,700 shares. Accordingly, you may not be able to trade a large amount of our common stock without depressing the price. Further, the low market cap may impede our ability to solve our liquidity issues and prevent us from listing our common stock on a national securities exchange.

Our stock price may be volatile, which could result in substantial losses to investors and litigation.

In addition to changes to market prices based on our results of operations and the factors discussed elsewhere in this “Risk Factors” section, the market price of and trading volume for our common stock may change for a variety of other reasons, not necessarily related to our actual operating performance. The capital markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, the average daily trading volume of the securities of small companies can be very low, which may contribute to future volatility. Factors that could cause the market price of our common stock to fluctuate significantly include:

the results of operating and financial performance and prospects of Gresham and other companies in our industry;
strategic actions by us or our competitors, such as acquisitions or restructurings;
announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;
the public’s reaction to our press releases, other public announcements, and filings with the SEC;
lack of securities analyst coverage or speculation in the press or investment community about us or market opportunities in the defense electronics industry;
changes in government policies in the U.S. and, as our international business increases, in other foreign countries;
changes in earnings estimates or recommendations by securities or research analysts who track our common stock or failure of our actual results of operations to meet those expectations;
market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
changes in accounting standards, policies, guidance, interpretations or principles;
any lawsuit involving us, our solutions or our product offerings;
arrival and departure of key personnel;
sales of common stock by us, our investors or members of our management team; and
changes in general market, economic and political conditions in the U.S. and global economies or financial markets, including those resulting from natural or man-made disasters or the banking crisis.

Any of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume of our common stock and could seriously harm the market price of our common stock, regardless of our operating performance. This may prevent you from being able to sell your shares at or above the price you paid for your shares, if at all. In addition, following periods of volatility in the market price of a

27


 

company’s shares, stockholders often institute securities class action litigation against that company. Our involvement in any class action suit or other legal proceeding could divert our senior management’s attention and could adversely affect our business, financial condition, results of operations and prospects.

The rights of the holders of common stock may be impaired by the potential additional issuance of preferred stock.

Our charter documents give our board of directors (the “Board”),the right to create new series of preferred stock. As a result, our Board may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any shares of preferred stock, we may issue such shares in the future.

Because our shares of common stock are subject to the penny stock rules, it is more difficult to buy our shares.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Unless we are listed on the NYSE American, or the Nasdaq Stock Market or if the price of our common stock is less than $5.00 (as it is now), our common stock will be a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty buying their shares. Also it is increasingly harder for stockholders to deposit penny stock with broker-dealers which may discourage others from buying our common stock.

We do not anticipate paying any dividends on our common stock for the foreseeable future.

We have not paid any dividends on our common stock to date, and we do not anticipate paying any such dividends in the foreseeable future. We anticipate that any earnings will be retained to finance the implementation of our operational business plan and expected future growth.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 1C. CYBERSECURITY

Like all companies that utilize technology, we are subject to threats of breaches of our technology systems. To mitigate the threat to our business, we take a comprehensive approach to cybersecurity risk management. Our management actively oversees our risk management program, including the management of cybersecurity risks. We have established policies, standards, processes and practices for assessing, identifying, and managing material risks from cybersecurity threats, including those discussed in our Risk Factors. We have devoted significant financial and personnel resources to implement and maintain security measures to meet regulatory requirements and stakeholder expectations, and we intend to continue to make significant investments to maintain the security of our data and cybersecurity infrastructure. We have established and maintain a Cybersecurity Maturity Model Certification (“CMMC”) compliance program and are working to meet all applicable deadlines. While there can be no guarantee that our policies and procedures will be properly followed in every instance or that those policies and procedures will be effective, we believe that the Company’s investment in people and technologies have contributed to a culture of continuous improvement that has put the Company in a position to protect against potential compromises and we do not believe that risks from prior cybersecurity threats have materially affected our business to date. We can provide no assurance that there will not be incidents in the future or that past or future attacks will not materially affect us, including our business strategy, results of operations, or financial condition.

Risk Management and Strategy

At a high level, the key objectives for the Company’s cybersecurity program are to implement and sustain effective security controls to stop intrusion attempts and to maintain and continuously improve its ability to respond to attacks and incidents. Success in achieving these objectives relies upon using quality technology solutions, cultivating and maintaining a team of skilled professionals, and improving processes continuously. Our cybersecurity program in particular focuses on the following key areas:

Risk Assessment: At least annually, we conduct a cybersecurity risk assessment that takes into account information from internal stakeholders, known information security vulnerabilities, and information from external sources, including reported security incidents that have impacted other companies, industry trends, and evaluations by third parties and consultants. The results of the assessment are used to develop initiatives to enhance our security controls, make recommendations to improve processes, and inform a broader Company-wide risk assessment that are then reported to our members of management.

28


 

Technical Safeguards: We regularly assess and deploy technical safeguards designed to protect our information systems from cybersecurity threats. Such safeguards are regularly evaluated and improved based on vulnerability assessments, cybersecurity threat intelligence and incident response experience.

Incident Response and Recovery Planning: We have established comprehensive incident response and recovery plans that guide our response in the event of a cybersecurity incident. We continuously test and evaluate the effectiveness of those plans.

Vendor Risk Management: We have implemented a vendor risk management program, which is designed to identify and mitigate cybersecurity threats associated with our use of third-party service providers. Such providers are subject to security risk assessments at the time of on-boarding, contract renewal, and upon detection of an increase in risk profile. We use a variety of inputs in such risk assessments, including information supplied by providers in response to detailed questionnaires and meetings as well as information from third parties. In addition, we require our providers to meet appropriate security requirements, controls and responsibilities and investigate security incidents that have impacted our third-party providers, as appropriate. Contract language, purchasing decisions, and/or technology implementation strategies are frequently adjusted as a result of this process.

Education and Awareness: Our policies require each of our employees to contribute to our data security efforts. We regularly remind employees of the importance of handling and protecting data, including through annual privacy and security training to enhance employee awareness of how to detect and respond to cybersecurity threats. As part of that educational process, we periodically simulate cybersecurity threats to the Company and review/assess employee responses. In this regard, the Company has implemented policies and procedures for all employees including: (i) information security/cybersecurity policies, which are internally available for all employees, (ii) information security/cybersecurity awareness training; (iii) a clear escalation process which employees can follow in the event an employee notices something suspicious; and (iv) ensuring that information security/cybersecurity is part of the employee performance evaluation and/or disciplinary process.

ITEM 2. PROPERTIES

Our principal executive offices are located in an executive suite in Scottsdale, Arizona. We maintain a large facility with marketing, sales, and engineering offices and manufacturing departments in a 20,595 square foot facility in Livermore, California, which we have occupied since March 2024. We also lease an additional 32,000 square foot facility in Shelton, Connecticut.

In addition, we lease facilities internationally. In September 2010, Gresham Power entered into a long term lease for its 25,000 square-foot facility in Salisbury, UK, where it designs, develops, manufactures, markets and distributes commercial and military power products for the European market. Sales and service support staff for its European network of distributors are located within the building together with other functions, such as engineering and administration. Gresham Power’s lease expires in September 2024. Further, in June 2021, Enertec entered into a five-year lease with an option to extend the lease for an additional five-year term for its 32,900 square-foot facility in Karmiel, Israel, where it manufactures specialized electronic systems for the Israel military market and medical systems for a multinational pharmaceutical company. In July 2020, Relec entered into a 10-year lease for its 7,490 square-foot facility in Dorset, UK, where it markets and distributes power electronics and display solutions for mission critical rail, industrial, medical, telecoms and military applications.

We believe our existing and planned facilities and offices are adequate to meet our current needs and are being utilized consistently with our past practice. We consistently look for opportunities to minimize costs related to office space through improved efficiencies and intend to make changes to leased facilities in the future as appropriate to reflect changes in worldwide operations and headcount.

We currently anticipate that our current leased spaces will be sufficient to support our current and foreseeable future needs.

From time-to-time, we are subject to various claims and legal proceedings that arise in the ordinary course of business. We accrue for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated.

As of the date of the Report, we were not party to any material legal proceedings for which a loss was probable or an amount was accrued.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the OTCQB using the symbol “GIGA”. The number of record holders of our common stock as of April 8, 2024 was 94. A significantly larger number of stockholders may be “street name” or beneficial holders, whose shares of record are held by banks, brokers and other financial institutions.

Dividend Policy

29


 

We have not paid cash dividends on our common stock in the past and have no current plans to do so in the future, believing our available capital is best used to fund our operations, including product development and enhancements.

Recent Sales of Unregistered Equity Securities

Not applicable

Equity Compensation Plan Information

The following chart reflects the number of securities granted and the weighted average exercise price for our compensation plans as of December 31, 2023:

 

 

 

 

No. of securities to be

 

 

Weighted Average

 

 

 

 

No. of restricted stock

 

 

issued upon exercise of

 

 

exercise price of

 

 

 

 

units and awards

 

 

outstanding options

 

 

outstanding options

 

 

Plan Category

 

outstanding

 

 

(a)

 

 

(b)

 

 

2023 Equity Incentive Plan

 

 

249,875

 

 

 

483,093

 

 

$

2.97

 

 

2018 Equity Incentive Plan

 

 

5,000

 

 

 

200,572

 

 

$

4.22

 

 

2005 Equity Incentive Plan

 

 

 

 

 

43,401

 

 

$

6.12

 

 

Total

 

 

254,875

 

 

 

727,066

 

 

$

3.50

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuer Repurchases

We did not repurchase any of our equity securities during the years ended December 31, 2023 and 2022.

ITEM 6. [RESERVED]

Not applicable.

30


 

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Gresham designs, manufactures and distributes purpose-built electronics equipment, automated test solutions, power electronics, supply and distribution solutions, as well as radio, microwave and millimeter wave communication systems and components for a variety of applications with a focus on the global defense industry and the healthcare market.

Gresham has two subsidiaries Microsource and Gresham Holdings. Gresham is a majority owned subsidiary AAI and currently operates as an operating segment of AAI. Gresham Holdings has three wholly-owned subsidiaries, Gresham Power, Relec, and Enertec, and one majority owned subsidiary, Microphase. Our operations consist of three business segments:

Radio Frequency Solutions – consists of Microphase which is located in Connecticut. Microphase designs and manufactures custom microwave hardware products for military applications and generates revenue primarily through production contracts for custom engineered components and RADAR filters.
Precision Electronic Solutions – consists of one subsidiary and one division, namely Enertec located in Israel and what we call our Giga-tronics Division. Enertec develops and supplies advanced command & control, test and calibration systems for use in failsafe military and medical applications. The Giga-tronics Business consists of Microsource, a wholly-owned subsidiary which develops and manufactures sophisticated RADAR filters used in fighter aircraft, and our “EW Test and Training” Division, which serves the defense electronics market with a signal generation platform. We refer to this later business as our “Giga-tronics Division”.
Power Electronics & Displays – consists of two subsidiaries, namely Gresham Power and Relec located in the UK which primarily engineer and provide integrated, mobile power electronics and display solutions that distribute and supply continuous, dependable, clean low voltage power.

We are focused on products that are getting designed in to military systems such as fighter jet, ships and ground vehicles or missiles, which provide a recurring revenue stream for years to come and eliminate competition because the cost of replacing designed in products is prohibitive for both the competition and the customer.

Recent Trends and Uncertainties

We are in the process of aggressively managing our cash flow and reducing our expenses. As part of this endeavor, in March 2024 we implemented a reduction in our work force and recently moved to a smaller facility in California. We continue to have working capital issue. See “Risk Factors”.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with GAAP. In reading and understanding this discussion of results of operations, liquidity and capital resources, you should be aware of key policies, judgments and assumptions that are important to the portrayal of financial conditions and results.

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 3 of Notes to the Consolidated Financial Statements describe the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts. These critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements and actual results could differ materially from the amounts reported based on these policies.

Revenue Recognition

Revenues are reported in operating results based upon the ratio that incurred costs bear to total estimated contract costs with related cost of revenues recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information regarding labor, outside services, materials, overhead costs, and status of the contract. The effect of any change in the estimated gross margin rate for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.

Significant judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor.

Results of Operations

Revenue

The allocation of net revenue was as follows for the periods shown (in thousands):

31


 

 

Year Ended

 

 

 

 

 

 

 

Segment

 

December 31, 2023

 

 

December 31, 2022

 

 

$ Change

 

 

% Change

 

Precision Electronic Solutions

 

$

19,592

 

 

$

13,950

 

 

$

5,642

 

 

 

40

%

Power Electronics & Displays

 

 

10,039

 

 

 

10,175

 

 

 

(136

)

 

 

(1

)%

RF Solutions

 

 

8,195

 

 

 

6,130

 

 

 

2,065

 

 

 

34

%

Total

 

$

37,826

 

 

$

30,255

 

 

$

7,571

 

 

 

25

%

The Precision Electronic Solutions group generated net revenue of $19.6 million during the year ended December 31, 2023, a 40% increase over the same period in the prior year. The increase was primarily due to an increase of $2.5 million in revenue from Enertec’s defense business as well as the addition of $2.5 million of the Giga-tronics Division and Microsource revenue.

The Power Electronics & Displays group was largely unchanged for the year ended December 31, 2023 in comparison to the year ended December 31, 2022.

The RF Solutions group recognized a 34% increase in revenue by Microphase largely due to $1.7 million in shipments to a new customer.

Backlog*

The following table shows order backlog and related information at the end of the respective periods (in thousands):

 

As of

 

 

 

 

 

 

 

Segment

 

December 31, 2023

 

 

December 31, 2022

 

 

$ Change

 

 

% Change

 

Precision Electronic Solutions

 

$

11,575

 

 

$

11,682

 

 

$

(107

)

 

 

(1

)%

Power Electronics & Displays

 

 

6,689

 

 

 

8,890

 

 

 

(2,201

)

 

 

(25

)%

RF Solutions

 

 

12,982

 

 

 

10,125

 

 

 

2,857

 

 

 

28

%

Total

 

$

31,246

 

 

$

30,697

 

 

$

549

 

 

 

2

%

*Backlog represents orders to be fulfilled including bookings prior to the the year ended December 31, 2023

Backlog as of December 31, 2023 increased 2% compared to December 31, 2022.

The Power Electronics & Displays group experienced a 25% decline in backlog primarily due to a 68% decline in bookings at Gresham Power and a 26% decline in bookings at Relec.

The RF Solutions group experienced a 28% increase in backlog primarily due to orders totaling $5.5 million received from one prime contractor in calendar 2023.

Cost of revenue and gross profit were as follows for the periods shown (in thousands):

 

Year Ended

 

 

Year Ended

 

Segment

 

December 31, 2023

 

 

% of Segment Revenue

 

 

December 31, 2022

 

 

% of Segment Revenue

 

Precision Electronic Solutions

 

$

15,401

 

 

 

79

%

 

$

10,632

 

 

 

76

%

Power Electronics & Displays

 

 

6,791

 

 

 

68

%

 

 

6,651

 

 

 

65

%

RF Solutions

 

 

5,886

 

 

 

72

%

 

 

4,497

 

 

 

73

%

Total cost of revenue

 

$

28,078

 

 

 

74

%

 

$

21,780

 

 

 

72

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

9,748

 

 

 

26

%

 

$

8,475

 

 

 

28

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit was $9.8 million or 26% of revenue for the year ended December 31, 2023, in comparison to $8.5 million or 28% for the year ended December 31, 2022. The primary reason for the low 26% gross margin was due to the Giga-tronics Business, which had very low revenues of $4.0 million in 2023 causing negative gross margins due to fixed overheads and variable costs which did not reduce proportionally to revenue. Excluding the Giga-tronics Business, gross margins were 30.5% in 2023.

Operating expenses were as follows for the periods shown (in thousands):

32


 

 

Year Ended

 

 

 

 

 

 

 

Category

 

December 31, 2023

 

 

December 31, 2022

 

 

$ Change

 

 

% Change

 

Selling and marketing and general and administrative

 

$

14,681

 

 

$

12,255

 

 

$

2,426

 

 

 

20

%

Research and development

 

 

2,918

 

 

 

2,137

 

 

 

781

 

 

 

37

%

Impairment of goodwill

 

 

3,172

 

 

 

10,459

 

 

 

(7,287

)

 

 

(70

)%

Impairment of intangibles

 

 

1,525

 

 

 

 

 

 

1,525

 

 

 

%

Total

 

$

22,296

 

 

$

24,851

 

 

$

(2,555

)

 

 

(10

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses decreased 10% or $2.6 million for the year ended December 31, 2023 with lower non-cash impairment charges as compared to the year ended December 31, 2022. Research and development expenses increased by 32% primarily due to the Giga-tronics Business, which incurred $1.28 million in research and development expenses for the year 2023 as compared to $403,000 for the period of September 8, 2022 to December 31, 2022.

Selling, general and administrative expenses increased by 21% primarily due the issuance cost of $1.2 million of the Notes and Warrants (see Note 13. Senior Secured Convertible Notes and Warrants), as well as the added general and administrative costs of the Giga-tronics Business in 12-month period ended December 31, 2023 as compared to the period of September 8, 2022 to December 31, 2022.

The Company determined that the goodwill of $3.2 million and the intangibles of $1.5 million associated with the Microphase business was impaired due to a poor fourth quarter in 2023 and continued losses over a 5-year period and the Company recorded these non-cash impairments within operating expenses for the year ended December 31, 2023.

Microphase’s business has rebounded with the revenue for the first quarter increasing by 25% sequentially. With a backlog of approximately $11.9 million as of March 31, 2024 and anticipated deliveries, we expect the second quarter will increase by 40% sequentially Further we believe Microphase’s 2024 revenues may be the highest since it was acquired by Gresham Holdings.

The Company determined that the goodwill of $10.5 million associated with the acquisition of the Giga-tronics Business was impaired due to the lack of backlog, the decline in revenue and forecasts, and recorded this non-cash impairment within operating expenses for the year ended December 31, 2022.

Other income (expenses), net were as follows for the periods shown (in thousands):

 

Year Ended

 

 

 

 

 

 

 

Category

 

December 31, 2023

 

 

December 31, 2022

 

 

$ Change

 

 

% Change

 

Interest expense, related party

 

$

 

 

$

(482

)

 

$

482

 

 

 

(100

)%

Interest expense

 

 

(868

)

 

 

(739

)

 

 

(129

)

 

 

17

%

Change in fair value of senior secured convertible notes, related party

 

 

7

 

 

 

(1,092

)

 

 

1,099

 

 

 

(101

)%

Change in fair value of senior secured convertible notes

 

 

(3,741

)

 

 

 

 

 

(3,741

)

 

 

%

Change in fair value of warrants issued with senior secured convertible notes

 

 

2,437

 

 

 

 

 

 

2,437

 

 

 

%

Issuance of common stock purchase warrants

 

 

(726

)

 

 

 

 

 

(726

)

 

 

%

Other

 

 

408

 

 

 

148

 

 

 

260

 

 

 

176

%

Total other expense, net

 

$

(2,483

)

 

$

(2,165

)

 

$

(318

)

 

 

15

%

Total other expenses increased by $315,000 or 15% for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Interest expense, related party in 2022 was due to interest on existing notes at Microphase to AAI prior to the Business Combination, there were no such interest after September 8, 2022.

We recorded a gain in the fair value of the senior secured convertible notes, related party of $7,000 in 2023 as compared to a loss of $1.1 million in 2022 (see Note 14. Notes Payable, Related Parties, net).

For the year ended December 31, 2023, interest increased by $129,000 primarily due to interest on the Senior Secured Convertible Notes (see Note 13. Senior Secured Convertible Notes and Warrants). These notes had a change in fair value of $3.7 million in 2023 and a gain in the fair value of the associated warrants of $2.4 million in 2023. In addition the Company issued warrants on modification of the Senior Secured Convertible Note with a fair value of $0.7 million.

Net Loss

33


 

Net loss was as follows for the periods shown (in thousands):

 

Year Ended

 

 

 

 

December 31, 2023

 

 

December 31, 2022

 

 

Revenue

 

$

37,826

 

 

$

30,255

 

 

Cost of revenue

 

 

28,078

 

 

 

21,780

 

 

Gross profit

 

 

9,748

 

 

 

8,475

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

22,296

 

 

 

24,851

 

 

Other income (expense), net

 

 

(2,483

)

 

 

(2,165

)

 

Income tax (provision) benefit

 

 

(244

)

 

 

123

 

 

Net loss

 

 

(15,275

)

 

 

(18,418

)

 

Net loss (gain) attributable to non-controlling interest

 

 

180

 

 

 

680

 

 

Net loss available to common stockholders

 

$

(15,095

)

 

$

(17,738

)

 

Net loss attributable to common stockholders for the year ended December 31, 2023 was $15.1 million, compared to a net loss of $17.7 million recorded for the year ended December 31, 2022. The $2.6 million decrease in net losses for the year ended December 31, 2023 was primarily due to lower operating expenses and the lower impairment charges of goodwill partially offset by higher impairment charges of intangibles.

Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined by the SEC as a numerical measure of a company’s historical or future performance, financial position or cash flows that includes or excludes amounts from the most directly comparable measure under GAAP. Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, our reported results prepared in accordance with GAAP. Users of this financial information should consider the types of events and transactions that are excluded from these measures.

We measure our operating performance in part based on earnings before interest, taxes, depreciation and amortization (“EBITDA”). We also measure our operating performance based on “Adjusted EBITDA,” which we define as EBITDA adjusted for share based compensation and certain one-time income or expense items. EBITDA and Adjusted EBITDA are non-GAAP financial measures that are commonly used, but neither is a recognized accounting term under GAAP. We use EBITDA and Adjusted EBITDA to monitor and facilitate internal evaluation of the performance of our business operations, to facilitate external comparison of our business results to those of others in our industry, and to plan and evaluate our operating budgets. We believe that our measures of EBITDA and Adjusted EBITDA provide useful information to the investing public regarding our operating performance and our ability to service debt and fund capital expenditures and may help investors understand and compare our results to other companies that have different financing, capital and tax structures. Neither EBITDA nor Adjusted EBITDA should be considered in isolation or as a substitute for, but as a supplement to, income or loss from operations, net income or loss, cash flows from operating activities, or other income or cash flow data prepared in accordance with GAAP.

In the following reconciliation, we provide amounts as reflected in our accompanying consolidated financial statements unless otherwise noted.

The reconciliation of our net loss to EBITDA and Adjusted EBITDA is as follows (in thousands):

 

Year Ended

 

 

 

December 31, 2023

 

 

December 31, 2022

 

 

Net loss

 

$

(15,275

)

 

$

(18,418

)

 

Net income (loss) attributable to non-controlling interest

 

 

180

 

 

 

680

 

 

Net loss attributable to common shareholders

 

 

(15,095

)

 

 

(17,738

)

 

Depreciation and amortization

 

 

2,061

 

 

 

663

 

 

Interest and taxes

 

 

1,112

 

 

 

995

 

 

EBITDA

 

 

(11,922

)

 

 

(16,080

)

 

 

 

 

 

 

 

 

 

Adjustments:

 

 

 

 

 

 

 

Stock-based compensation

 

 

440

 

 

 

605

 

 

Impairment of goodwill

 

 

3,172

 

 

 

10,459

 

 

Impairment of intangibles

 

 

1,525

 

 

 

 

 

Change in fair value of senior secured convertible notes, related party

 

 

(7

)

 

 

 

 

Change in fair value of senior secured convertible notes

 

 

3,741

 

 

 

 

 

Change in fair value of warrants issued with senior secured convertible notes

 

 

(2,437

)

 

 

 

 

Compensation warrants issued in connection with senior secured convertible notes

 

 

858

 

 

 

 

 

Issuance of common stock purchase warrants

 

 

726

 

 

 

 

 

Increase in capital contribution from parent for corporate overhead

 

 

 

 

 

1,092

 

 

Compensation warrant issued in connection with Senior secured convertible notes

 

 

 

 

 

 

 

Original issue discount in connection with senior secured convertible notes

 

 

333

 

 

 

 

 

Adjusted EBITDA

 

$

(3,571

)

 

$

(3,924

)

 

 

34


 

Liquidity and Capital Resources

On December 31, 2023, we had cash of $3.6 million (excluding restricted cash of $0.7 million), compared to cash and cash of $2.2 million at December 31, 2022. The increase in cash was primarily due to pre-payments on defense contracts. Our cash is substantially all held by our subsidiaries.

Net cash used by operating activities totaled $2.8 million for the year ended December 31, 2023, compared to net cash used in operating activities of $5.0 million for the year ended December 31, 2022. The primary use of cash for the year ended December 31, 2023 was due to the net loss of $15.3 million offset by non-cash changes in the fair value of convertible notes, by the non-cash impairment of goodwill and intangibles of $4.7 million . and warrants and depreciation and amortization expenses. The primary use of cash for the year ended December 31, 2022 was due to net loss of $18.4 million offset by the non-cash impairment of goodwill of $10.5 million .

Net cash used in investing activities for the year ended December 31, 2023 was $234,000 for purchases of equipment. Cash used in investing activities for the year ended December 31, 2022 was $4.3 million which was primarily due to the acquisition of the Giga-tronics Business.

Cash provided by financing activities for the year ended December 31, 2023 was $4.9 million which was primarily due to proceeds from the Senior Secured Convertible Notes (see Note 13. Senior Secured Convertible Notes and Warrants) and from the notes payable, related parties.

Cash provided by financing activities for the fiscal year ended December 31, 2022 was $9.7 million which was primarily due to proceeds from notes payable, related parties.

Liquidity

Our primary sources of liquidity have historically been funded by AAI and in January 2023 by two other lenders who lent the Company $3.0 million. Without the availability of working capital from AAI, unless we are successful in securing additional financing from third parties, we believe that we will not have sufficient cash to meet our needs over the next 12 months including $4.600,000 of convertible notes due on October 11, 2024. We do not have sufficient working capital to meet our needs for the next 12 months – See “Risk Factors.”

 

 

As of

 

Category (in thousands)

 

December 31, 2023

 

 

December 31, 2022

 

Cash

 

$

4,301

 

 

$

2,195

 

Total current assets

 

$

19,194

 

 

$

19,738

 

Total current liabilities

 

$

20,131

 

 

$

14,031

 

Working Capital

 

$

(937

)

 

$

5,707

 

Even as we reduce our operations in California and possibly elsewhere, we need to complete a material financing which will provide the working capital to support our meeting our backlog and future orders. In addition, we must obtain a financing to repay the $4.6 million Senior Secured Convertible Notes (the “Senior Notes”) due this fall. Any financing will likely have onerous terms and be dilutive of our stockholders. As disclosed elsewhere in this Report, if we default on the Senior Notes, the interest rate increases from 7% to 18%, the Company is required to pay 20% of its consolidated revenues monthly on each interest payment date in reduction of the principal amount of the Senior Notes then outstanding and the holders have the right to require the Company to prepay the Senior Notes at 125% of principal.

As of April 5, 2024, the Company has approximately $4.1 million in cash.

Our ability to obtain additional financing is subject to several factors, including market and economic conditions, our performance and investor and lender sentiment with respect to us and our industry. If we are unable to raise additional financing in the near term as needed, our operations and production plans may be scaled back or curtailed and our operations and growth would be impeded.

Our near term fixed commitments for cash expenditures are primarily for payments for employee salaries, operating leases and inventory purchase commitments. Due to the deterioration of the Giga-tronics Division including its Microsource subsidiary, we have lacked sufficient capital to pay our payables. To assist with our liquidity issues, our executive officers have agreed to accept the minimum wage of $1,240 per week and to defer their remaining salaries for a single pay period. In 2023 we borrowed a total of $50,000 from our Chief Financial Officer and $50,000 from a director, of which the loan to our Chief Financial Officer remains unpaid. As a result of our liquidity issues, we need to raise approximately $5.0 million to meet our short-term working capital needs, not including the $4.6 million we owe which is due on October 11, 2024. While we are engaged in discussions with AAI and another lender about possible solutions, we cannot assure you that we will be successful in solving our liquidity issues. In addition to risk factors disclosed in this Prospectus, one of the solutions is based upon our common stock beginning to trade actively. We cannot assure you that will occur.

Our Financings

The AAI Financing

35


 

In December 31, 2022 (the “AAI Closing Date”), we entered into an Exchange Agreement (the “Exchange Agreement”) with AAI, to exchange the Senior Secured Convertible Promissory Note due February 14, 2023 in the principal face amount of $4,250,000 dated September 8, 2022 and any accrued interest thereon for a convertible note in the principal amount of $4,382,740 due December 31, 2024 (the “Exchange Note”).

The Exchange Note bears interest at 10% per annum. The Exchange Note is, at the option of AAI, convertible into our common stock at a conversion price equal to the lesser of (i) $0.78 per share, or (ii) the VWAP Price (as defined in the Exchange Note) on such date less a 20% discount to such VWAP Price, but in no event less than $0.25 per share. In addition, all principal and outstanding interest under the Exchange Note will automatically convert to our common stock upon (i) the consummation of a public offering of securities in which we receive net proceeds (net of underwriters’ discounts and selling commissions) of at least $25 million (a “Qualified Public Offering”), in which case the conversion price shall be the price at which the common stock is sold to the public, provided, however, that no underwriters’ discounts or selling commissions shall be imposed on such conversion, (ii) the consummation of a private or public offering of shares of common stock that is not a Qualified Public Offering but that results in the net proceeds (net of underwriters’ discounts and selling commissions) to us of at least $5 million (a “Non-Qualified Offering”), in which case the conversion price shall be the price at which common stock is sold in such Non-Qualified Offering less a 25% discount or (iii) December 31, 2024, in which case the conversion price shall be the VWAP Price less a 25% discount to such VWAP Price.

Our obligations under the Exchange Agreement and the Exchange Note are secured by a lien on all of our assets and our wholly-owned subsidiaries pursuant to the Security Agreement dated December 31, 2022 (the “Exchange Security Agreement”), by and among us, our two of our wholly-owned subsidiaries, Microsource, Inc. and Gresham Holdings, Inc., and AAI.

On the AAI Closing Date, we also entered into a Securities Purchase Agreement (the “Purchase Agreement”) by and between us and Ault Lending, whereby we issued Ault Lending a 10% Senior Secured Convertible Promissory Note in the principal amount of $6,750,000 (the “Secured Note”) and five-year warrants to purchase 2,000,000 shares of our common stock (the “AAI Warrants”). The AAI warrants were recently exercised. They were exercisable for five years from December 31, 2022 at an exercise price of $0.01. In connection with the issuance of the Secured Note, as of the AAI Closing Date, Ault Lending surrendered for cancellation a term note dated November 12, 2021, in the principal face amount $1,300,000 previously issued by us, including accrued but unpaid interest thereon in the amount of $123,123. In addition, on the AAI Closing Date advances previously made by AAI Lending to us in the aggregate amount of $4,067,469 were rolled into the Secured Note. Pursuant to the Purchase Agreement, as additional consideration for the issuance of the Secured Note, Ault Lending agreed to provide us an additional $1,259,407 no later than May 31, 2023.

The Secured Note is due December 31, 2024, and bears interest at 10% per annum. The voluntary conversion and automatic conversion price of the Secured Note are similar to the conversion price of the Exchange Note.

With a limited exception, the Senior Secured Note contains a most favored nations provision with respect to our future financings.

With limited exceptions, we also agreed to certain negative covenants that will require the prior approval of the holder of the Secured Note to incur indebtedness (other than permitted indebtedness), enter into variable rate transactions, incur indebtedness for borrowed money, purchase money indebtedness or lease obligations that would be required to be capitalized on a balance sheet prepared in accordance with U.S. Generally Accepted Accounting Principles, or guaranty the obligations of any other person, in an aggregate amount at any time outstanding in excess of $1,000,000 in any individual transaction or $2,500,000 in the aggregate. Our obligations under the Purchase Agreement and the Secured Note are secured by a lien on all of our assets of and our wholly-owned subsidiaries pursuant to a Security Agreement, dated December 31, 2022 (the “AAI Security Agreement”) by and among us, our wholly-owned subsidiaries, Microsource and Gresham and Ault Lending and AAI.

Pursuant to the Purchase Agreement, we and two of our wholly-owned subsidiaries, Microsource and Gresham, entered into a Guaranty Agreement, dated December 31, 2022 with Ault Lending. Each such subsidiary guaranteed to Ault Lending the payment of the Secured Note.

In connection with the issuance of the Exchange Note and the Secured Note, we granted AAI and Ault Lending certain mandatory and piggyback registration rights pursuant to two registration rights agreements.

On January 3, 2023 we, AAI and Ault Lending entered into a letter agreement whereby the parties agreed that notwithstanding any obligations in any of the foregoing transaction documents we shall not be required to reserve more than 150% of the shares issuable under the Exchange Note and the Secured Note using $0.78 per share (subject to adjustment for stock splits, stock dividends or combinations) plus reservation of one share for each outstanding share issuable under the warrants (subject to adjustment for stock splits, stock dividends or combinations).

AAI and Ault Lending are limited to owning no more that 4.99% of our common stock based upon beneficial ownership limitations contained in the Secured Note and the Exchange Note.

 

The January 2023 Private Placement

36


 

On January 11, 2023, the Company entered into a Securities Purchase Agreement with the Lenders pursuant to which the Company sold to the Lenders $3.3 million 10% original issue discount Notes and five-year warrants to purchase a total of 1,666,666 shares of common stock, no par value for total gross proceeds of $3,000,000. The net proceeds were used primarily for working capital.

The Notes are secured by our assets pursuant to a Security Agreement entered into for such purpose, and are senior to the indebtedness payable to AAI, pursuant to a Subordination Agreement entered into in connection with the Securities Purchase Agreement.

The Notes mature on nine months from the issuance date, or October 6, 2023. The Notes accrue interest at a rate of 6% per annum payable monthly, which increases to 18% upon an event of default. In addition, under the Notes upon an event of default we are required to pay 20% of our consolidated revenues monthly on each interest payment date in reduction of the principal amount of the Notes then outstanding.

The Notes provide for certain events of default which include failure to maintain effectiveness of the registration statement under the Registration Rights Agreement (as described below), suspension of trading of our common stock for five consecutive trading days, failure to timely deliver shares issuable upon conversion of the Notes or exercise of the Warrants, failure to timely make payments under the Notes, default under other indebtedness, and certain other customary events of default, subject to certain exceptions and limitations.

Upon an event of default, the holders will have the right to require us to prepay the Notes at a 125% premium. Further, upon a bankruptcy event of default or a change of control event, we will be required to prepay the Notes at a premium. If the conversion price falls below $0.25, we may also elect to prepay the notes at a 125% premium.

Pursuant to the Notes, upon an event of default one of the investors is entitled to cause Jonathan Read, our Chief Executive Officer and one of our directors, to resign from his positions with the Company. Mr. Read executed and delivered to the investor an undated letter of resignation to that effect, which the investor may cause to be dated and released upon the occurrence of an event of default.

The Notes are convertible at a conversion price equal to the greater of (a) 90% of the VWAP for the 10 trading days prior to the conversion date and (b) $0.25 per share, subject to adjustment including downward adjustment upon any dilutive issuance of securities. Each holder’s conversion is subject to a 4.99% beneficial ownership limitation which may be increased to 9.99% on 61 days’ notice from the holder.

The Notes contain customary restrictive covenants including covenants against incurring new indebtedness or liens, changing the nature of its business, transfers of assets, transactions with affiliates, and issuances of securities, subject to certain exceptions and limitations.

We repaid our existing line of credit with Western Alliance Bank which had an existing balance of approximately $59,000.

The warrants entitle the holders to purchase a total of 1,666,666 shares of common stock for a five-year period from issuance, at an exercise price of the lower of (A) $0.78 and (B) 90% of the lowest VWAP for the 10 trading days prior to the date of the exercise, subject to adjustment including downward adjustment upon any dilutive issuance of securities. Because our common stock will not be listed on a national securities exchange by October 6, 2023, the maturity date of the Notes, the number of shares of common stock that may be purchased upon exercise of the warrants will be doubled on that date, without an adjustment to the exercise price.

Each holder’s exercise is subject to a 4.99% beneficial ownership limitation which may be increased to 9.99% on 61 days’ notice from the holder. The Warrants may be exercised cashlessly if the registration statement covering the resale of the shares of common stock issuable upon exercise is not effective as required under the Registration Rights Agreement.

We are required to maintain a reserve of authorized but unissued shares of common stock initially equal to approximately 15,000,000 shares of common stock, subject to reduction as the Notes and warrants are converted and exercised, respectively.

Spartan Capital Securities, LLC (the “Placement Agent”) served as placement agent in the offering and received a cash commission in the amount of 8% of the gross proceeds, or $240,000. In addition, we paid the Placement Agent an expense allowance of $30,000. Furthermore, we agreed to issue the Placement Agent five-year warrants to purchase a number of shares of common stock equal to 8% of the total number of shares of common stock underlying the Notes and warrants sold in the offering, or 1,200,000 shares. The placement agent warrants have an exercise price of 110% of the warrant exercise price.

Under the SPA we reimbursed the Lenders a total of $60,000 out of the proceeds from the offering for fees and expenses incurred in connection therewith.

On October 11, 2023, the “Company entered into an Exchange and Waiver Agreement (the “Agreement”) with the two Lenders.

Under the Agreement, the Lenders exchanged the Notes for new Senior Secured Convertible Promissory Notes (the “New Notes”), which are substantially identical to the Notes, including the conversion price, except: (A) the maturity date of the New Notes is October 11, 2024, (B) the

37


 

principal of each New Note is $2,000,000, (C) the interest rate is 7% per year, and (D) the New Notes have a working capital covenant pursuant to which the Company’s working capital, excluding any debt owed to Ault Lending or any of its affiliates and the New Notes, shall increase by a minimum of $250,000 per quarter for the quarters ending December 31, 2023 and March 31, 2024 and $500,000 per quarter thereafter while either of the New Notes remain outstanding (such exchange, the “Exchange”).

Pursuant to the Agreement, the Company also issued to each Lender a five-year warrant to purchase 333,333 shares of the Company’s common stock (the “New Warrants”), which are substantially identical to the Prior Warrants.

As required by the Agreement, Ault Lending extended the maturity dates of the 10% Senior Secured Promissory Notes (as defined in the Agreement) to January 15, 2025 and consented to the accrual of all interest while either New Note remains outstanding. Accordingly, on October 11, 2023, the Company entered into a Waiver Agreement with (AAI and together with Ault Lending, “Ault”) and Ault Lending pursuant to which Ault waived certain rights in furtherance of the foregoing.

The New Notes are secured and senior to the indebtedness payable to AAI.

The Prior Warrants provided that the number of shares of Company common stock issuable thereunder (“Warrant Shares”) would be doubled (with no adjustment to the exercise price) upon the failure of the Company’s common stock to be listed for trading on a national securities exchange operated by The Nasdaq Stock Market or the New York Stock Exchange (an “Uplist Transaction”) to occur by the Maturity Date of the Notes (as such terms are defined in the Prior Warrants). Because the Uplist Transaction failed to occur by the Maturity Date, on October 11, 2023 the Company issued additional warrants to the Buyers to increase the Warrant Shares by 833,333 additional Warrant Shares per Buyer.

Present Liquidity

Even with the reduction of our operations in California and elsewhere, we need to complete a material financing which will provide the working capital to support our meeting our backlog and future orders. In addition, we must obtain a financing to repay the $4.6 million Notes due on October 11, 2024. Any financing may have onerous terms and be very dilutive to our shareholders. As disclosed elsewhere in this Prospectus, if we default on the Notes, the consequences may be severe and include the resignation of the Chief Executive Officer.

As of April 5, 2024, the Company has approximately $4.1 million in cash mostly in foreign countries. As a result, we have struggled to meet our payroll and have relied on loans from one of our directors and one officer to meet our payroll. See “Related Party Transactions.”

We expect AAI will continue funding us in the near future. Without the availability of working capital from AAI, unless we are successful in securing additional financing from third parties, we believe that we will not have sufficient cash to meet our needs over the next 12 months as well as AAI’s position as a secured creditor or to repay the Notes.

Our ability to obtain additional financing is subject to several factors, including market and economic conditions, our performance and investor and lender sentiment with respect to us and our industry. If we are unable to raise additional financing in the near term as needed, our operations and production plans may be scaled back or curtailed and our operations and growth would be impeded.

Our near term fixed commitments for cash expenditures are primarily for payments for employee salaries, operating leases, inventory purchase commitments and public company costs.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pursuant to Item 305 of Regulation S-K, the Company, as a smaller reporting company, is not required to provide the information required by this item.

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ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA

The financial statements required by this Item 8 are included in this Annual Report following Item 16 hereof. As a smaller reporting company, we are not required to provide supplementary financial information.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Our principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based upon our evaluation, each of our principal executive officer and principal financial officer has concluded that the Company’s internal control over financial reporting was not effective as of the end of the period covered by this Report on Form 10-K due to the material weaknesses as described herein.

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (United States) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following material weaknesses:

The Company does not have sufficient resources in its accounting function, which restricts its ability to gather, analyze and properly review information related to financial reporting in a timely manner.
Due to its size and nature, the Company is not able to maintain appropriate segregation of conflicting duties as it is not always possible and is not economically feasible.
Our primary user access controls (i.e., provisioning, de-provisioning, privileged access and user access reviews) to ensure appropriate authorization and segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to appropriate personnel were not designed and/or implemented effectively. We did not design and/or implement sufficient controls for program change management to certain financially relevant systems affecting our processes.
Due to the lack of the appropriate personnel necessary for financial reporting, the Company failed to properly account for complex financial instruments.

Planned Remediation

Management continues to work to improve its controls related to our material weaknesses, specifically relating to user access and change management surrounding our information technology systems and applications. Management will continue to implement measures to remediate material weaknesses, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) enhancing design and documentation related to both user access and change management processes and control activities; and (ii) developing and communicating additional policies and procedures to govern the area of information technology change management.

We are currently working to improve and simplify our internal processes and implement enhanced controls to address the material weaknesses in our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. These material weaknesses will not be considered to be remediated until the applicable remediated controls are operating for a sufficient period of time and management has concluded that these controls are operating effectively.

Despite the existence of these material weaknesses, we believe that the consolidated financial statements included in the period covered by this Report on Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective could provide only reasonable assurance with respect to financial statement preparation and presentation.

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Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, based on the framework in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 Internal Control-Integrated Framework”). Based on our evaluation under the 2013 Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was not effective as of December 31, 2023 as a result of the material weaknesses described above.

Changes in Internal Control over Financial Reporting

Except as detailed above, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTION THAT PREVENT INSPECTIONS

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Our Executive Officers

Executive officers are elected by and serve at the discretion of the Board of Directors (the “Board”) of Gresham. The names of our executive officers, their positions with the Company and their ages are set forth in the table below, followed by certain other information about them:

 

Name

 

Age

 

Position

 

Jonathan Read

 

67

 

Chief Executive Officer and Director

 

Robin Shaffer

 

61

 

Chief Operating Officer & Chief Technology Officer

 

Lutz Henckels

 

83

 

Chief Financial Officer

 

 

 

Jonathan Read became our Chief Executive Officer and was appointed a director effective on September 8, 2022 with the closing of the Business Combination. Mr. Read has been Gresham’s Chief Executive Officer since May 2019. He was a director of Red Cat Holdings, Inc., formerly known as Timefire VR, Inc., from August 18, 2017 to November 3, 2022 and was the Chief Executive Officer of Timefire VR, Inc. from October 2017 through May 2019 and from November 2015 to January 2017. From July 14, 2017 through July 20, 2018, Mr. Read served as a director of BTCS, Inc., a digital asset-related company. From 2005 through 2012, Mr. Read was the Chief Executive Officer of ECOtality Inc. (“ECOtality”), a San Francisco based company that Mr. Read founded and was formed to create a network of charging stations for electric cars. In 2013, ECOtality filed for Chapter 11 bankruptcy protection. In 2014, Mr. Read filed for bankruptcy. We believe that Mr. Read’s management and public company experience, his experience in the defense industry and his role as Chief Executive Officer of the Company, give him the qualifications and skills to serve as one of our directors.

Robin Shaffer has served as the Chief Technology Officer of Gresham Holdings since January 2022 and was appointed our Chief Operating Officer on January 2024. From July 2015 to October 2020, Mr. Shaffer served as Managing Principal of Sustainability Partners. Mr. Shaffer holds a BSnvE from Cal Poly SLO and an MBA from Marquette University.

Lutz Henckels has served as our Chief Financial Officer since March 2019. He was a member of our Board from 2011 through September 8, 2022. He was appointed our Interim Chief Financial Officer in February 2018. He was appointed as our Executive Vice President in March 2019. He was appointed to the additional position of Chief Operating Officer in July 2020. Effective September 8, 2022, Dr. Henckels resigned all of his positions except Chief Financial Officer. Dr. Henckels has more than 40 years’ experience in corporate leadership roles, and previously served as Chief Executive Officer of public and private technology companies, including HiQ Solar, SyntheSys Research (acquired by Tektronix/Danaher), LeCroy Corporation and HHB Systems. He was the founder of HBB Systems, an electronic design automation company, and took that company public with its listing on Nasdaq. As CEO of LeCroy, he focused the company on its oscilloscope business, drove a successful turnaround and guided that company though its public listing on Nasdaq. Dr. Henckels holds a Bachelor of Science and Master of Science in Electrical Engineering and PhD in Computer Science from the Massachusetts Institute of Technology and he is also a graduate of the OMP program of Harvard Business School.

Our Directors

The Board consists of seven directors. The names of our directors, their positions with the Company and their ages are set forth in the table below, followed by certain other information about them:

 

Name

 

Age

 

Position

 

Jonathan Read

 

67

 

Chief Executive Officer and Director

 

Jeffrey Bentz

 

64

 

Chairman of the Board of Directors

 

William B. Horne

 

55

 

Director

 

Robert Smith

 

79

 

Director

 

John R. Regazzi

 

69

 

Director

 

William J. Thompson

 

59

 

Director

 

Thomas E. Vickers

 

60

 

Director

 

 

 

 

 

 

 

 

Set forth below is a brief biographical description of each of our directors who are not previously described above, including their business experience, director positions held currently or at any time during the last five years.

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Jeffrey Bentz is our Chairman of our Board since September 8, 2022. He has been a director of AAI since 2018. Mr. Bentz has been a director of AAI Disruptive Technologies Corp. [NYSE:ADRT] since December 2021. Mr. Bentz is an experienced businessman who has served since 1994 as President of North Star Terminal & Stevedore Company, a full-service stevedoring company located in Alaska and whose major areas of business include terminal operations and management, stevedore services, and heavy equipment operations. He also has served as a director and advisor to several private companies and agencies. We believe that Mr. Bentz’s public company director experience, executive-level experience, including his operational and financial oversight of companies with multiple profit centers and his extensive experience in the real estate and commercial services industries give him the qualifications and skills to serve as one of our directors.

William Horne has served as our director since September 8, 2022. He has been the Chief Executive Officer of AAI since January 2021 and a director since October 2016. He served as AAI’s President from August 2020 until January 2021 and previously as its Chief Financial Officer since January 2018. He has been a director of Gresham since 2019. Mr. Horne served as the Chief Executive Officer and a director of AAI Disruptive Technologies Corporation (NYSE:ARDT) since January 2021. He served as the Chief Financial Officer of Targeted Medical Pharma, Inc. (OTCBB: TRGM) from August 2013 to May 2019. Mr. Horne is a director and Chief Financial Officer of Avalanche International, Corp. Mr. Horne has served on the board of directors of Alzamend Neuro, Inc., a biotechnology firm dedicated to finding the treatment, prevention and cure for Alzheimer’s Disease, since 2016. From January 29, 2024 to February 21, 2024 Mr. Horne served as a director of RiskOn International, Inc. We believe that Mr. Horne's extensive financial and accounting experience in diversified indust