NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
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Summary of Significant Accounting
Policies
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The accompanying consolidated financial statements include the accounts of Giga-tronics Incorporated (“Giga-tronics”) and its wholly-owned subsidiary, Microsource Incorporated (“Microsource”), collectively the “Company”. The Company’s corporate office and manufacturing facilities are located in Dublin, California.
Giga-tronics Division designs, manufactures and markets the new Advanced Signal Generator (ASG) for the electronic warfare market. The Giga-tronics Division over the past thirty-five years has produced a broad line of test and measurement equipment used primarily for the design, production, repair and maintenance of products in aerospace, telecommunications, RADAR, and electronic warfare. Giga-tronics has recently completed a move within the test and measurement market from legacy products to the newly developed ASG. As part of this evolution certain legacy product lines were sold to raise additional capital. For example, we sold our SCPM line to Teradyne in 2013, and in December of 2015 we sold our Power Meters, Amplifiers, and Legacy Signal Generators to Spanawave Corporation (see Note 10, Sale of Product Lines). In June of 2016 we sold our Switch product line to Astronics (see Note 10, Sale of Product Lines). These transactions will allow us to increase our focus on the ASG and Microsource YIG RADAR filters. With the sales of these legacy product lines, the Giga-tronics Division is solely focused on the ASG product in the test and measurement equipment market.
Microsource develops and manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers, which are used by its customers in operational applications and in manufacturing a wide variety of microwave instruments and devices. Microsource’s two largest customers are prime contractors for which it develops and manufactures YIG RADAR filters used in fighter jet aircraft.
Principles
of
Consolidation
The consolidated financial statements include the accounts of Giga-tronics and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fiscal
Year
The Company’s financial reporting year consists of either a 52 week or 53 week period ending on the last Saturday of the month of March. Fiscal year 2017 ended on March 25, 2017 resulting in a 52 week year. Fiscal year 2016 ended on March 26, 2016, also resulting in a 52 week year. All references to years in the consolidated financial statements relate to fiscal years rather than calendar years.
Reclassifications
Certain reclassifications, none of which affected the prior year’s net loss or shareholders’ equity, have been made to prior year balances in order to conform to the current year presentation.
Revenue Recognition and Deferred Revenue
The Company records revenue when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collectability is reasonably assured. This occurs when products are shipped or the customer accepts title transfer. If the arrangement involves acceptance terms, the Company defers revenue until product acceptance is received. On certain large development contracts, revenue is recognized upon achievement of substantive milestones. Determining whether a milestone is substantive is a matter of judgment and that assessment is performed only at the inception of the arrangement. The consideration earned from the achievement of a milestone must meet all of the following for the milestone to be considered substantive:
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a.
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It is commensurate with either of the following:
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1.
|
The Company’s performance to achieve the milestone.
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2.
|
The enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the Company's performance to achieve the milestone.
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b.
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It relates solely to past performance.
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c.
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It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
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Milestones for revenue recognition are agreed upon with the customer prior to the start of the contract and some milestones are based on product shipping while others are based on design review. In fiscal 2015 the Company’s Microsource business unit received a $6.5 million order from a major aerospace company for non-recurring engineering services to develop a variant of its high performance fast tuning YIG filters for an aircraft platform and to deliver a limited number of flight-qualified prototype hardware units (the “NRE Order”) which is being accounted for on a milestone basis. The Company considered factors such as estimated completion dates and product acceptance of the order prior to accounting for the NRE Order as milestone revenue. During the fiscal years ended March 25, 2017 and March 26, 2016, revenue recognized on a milestone basis were $478,000 and $1.0 million, respectively.
On certain contracts with several of the Company’s significant customers the Company receives payments in advance of manufacturing. Advanced payments are recorded as deferred revenue until the revenue recognition criteria described above has been met.
Accounts receivable are stated at their net realizable value. The Company has estimated an allowance for uncollectable accounts based on analysis of specifically identified accounts, outstanding receivables, consideration of the age of those receivables, the Company’s historical collection experience, and adjustments for other factors management believes are necessary based on perceived credit risk.
The activity in the allowance account for doubtful accounts is as follows for the years ended March 25, 2017 and March 26, 2016:
(Dollars in thousands)
|
|
March 25,
2017
|
|
|
March 26,
2016
|
|
Beginning balance
|
|
$
|
45
|
|
|
$
|
45
|
|
Provisions for doubtful accounts
|
|
|
—
|
|
|
|
—
|
|
Write-off of doubtful accounts
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
$
|
45
|
|
|
$
|
45
|
|
Accrued Warranty
The Company’s warranty policy generally provides one to three years of coverage depending on the product. The Company records a liability for estimated warranty obligations at the date products are sold. The estimated cost of warranty coverage is based on the Company’s actual historical experience with its current products or similar products. For new products, the required reserve is based on historical experience of similar products until such time as sufficient historical data has been collected on the new product. Adjustments are made as new information becomes available.
Inventories
Inventories are stated at the lower of cost or fair value using full absorption and standard costing. Cost is determined on a first-in, first-out basis. Standard costing and overhead allocation rates are reviewed by management periodically, but not less than annually. Overhead rates are recorded to inventory based on capacity management expects for the period the inventory will be held. Reserves are recorded within cost of sales for impaired or obsolete inventory when the cost of inventory exceeds its estimated fair value. Management evaluates the need for inventory reserves based on its estimate of the amount realizable through projected sales including an evaluation of whether a product is reaching the end of its life cycle. When inventory is discarded it is written off against the inventory reserve, as inventory generally has already been fully reserved for at the time it is discarded.
Research and Development
Research and development expenditures, which include the cost of materials consumed in research and development activities, salaries, wages and other costs of personnel engaged in research and development, costs of services performed by others for research and development on the Company’s behalf and indirect costs are expensed as operating expenses when incurred. Research and development costs totaled approximately $2.3 million and $2.8 million for the years ended March 25, 2017 and March 26, 2016, respectively.
Property
and
Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, which range from three to ten years for machinery and equipment and office fixtures. Leasehold improvements and assets acquired under capital leases are amortized using the straight-line method over the shorter of the estimated useful lives of the respective assets or the lease term.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such review indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows on an undiscounted basis, the asset’s carrying amount would be written down to fair value. Additionally, the Company reports long-lived assets to be disposed of at the lower of carrying amount or fair value less cost to sell. As of March 25, 2017, and March 26, 2016, management believes there has been no impairment of the Company’s long-lived assets.
Derivatives
The Company accounts for certain of its warrants as derivatives. Changes in fair values are reported in earnings as gain or loss on adjustment of warrant liability to fair value.
Deferred Rent
Rent expense is recognized in an amount equal to the guaranteed base rent plus contractual future minimum rental increases amortized on the straight-line basis over the terms of the leases, including free rent periods.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future tax benefits are subject to a valuation allowance when management is unable to conclude that its deferred tax assets will more likely than not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers both positive and negative evidence and tax planning strategies in making this assessment.
The Company considers all tax positions recognized in its financial statements for the likelihood of realization. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amounts of the positions that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above, if any, would be reflected as unrecognized tax benefits, as applicable, in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of the provision for income taxes in the consolidated statements of operations.
Product
Development
Costs
The Company incurs pre-production costs on certain long-term supply arrangements. The costs, which represent non-recurring engineering and tooling costs, are capitalized as other assets and amortized over their useful life when reimbursable by the customer. All other product development costs are charged to operations as incurred. Capitalized pre-production costs included in inventory were immaterial as of March 25, 2017 and March 26, 2016.
Software Development Costs
Development costs included in the research and development of new software products and enhancements to existing software products are expensed as incurred, until technological feasibility in the form of a working model has been established. Capitalized development costs are amortized over the expected life of the product and evaluated each reporting period for impairment. During the fourth quarter of fiscal 2017, the Company revised its estimates in accounting for the amortization of the capitalized software costs due to the long procurement cycle associated with the product. The Company had previously elected to amortize the capitalized software costs on a straight-line basis over a three year period, however, the Company revised its estimates based on the percentage of revenue associated with the current period revenues. This change in estimate increased the Company’s cost of sales by $342,000 in fiscal 2017. As of March 25, 2017, and March 26, 2016, capitalized software development costs were $733,000 and $876,000 respectively. As of March 25, 2017, amortization of capitalized software was $476,000. There was no amortization for the fiscal year ended March, 26, 2016 as the Company released the ASG product to its customers in the third quarter of fiscal 2017.
Discontinued Operations
The Company reviews its reporting and presentation requirements for discontinued operations as it moves to newer technology within the test and measurement market from legacy products to the newly developed Advanced Signal Generator. The disposal of these product line sales represents an evolution of the Company’s Giga-tronics Division to a more sophisticated product offered to the same customer base. The Company has evaluated the sales of product lines (see Note 10, Sale of Product Lines) concluding that each product line does not meet the definition of a “component of an entity” as defined by ASC 205-20.The Company is able to distinguish revenue and gross margin information as disclosed in Note 10, Sale of Product Lines to the accompanying financial statements; however, operations and cash flow information is not clearly distinguishable and the company is unable to present meaningful information about results of operations and cash flows from those product lines.
Share-based Compensation
The Company has established the 2005 Equity Incentive Plan, which provides for the granting of options for up to 2,850,000 shares of Common Stock. In 2014, the term of the 2005 Equity Incentive Plan was extended to 2025. The Company records share-based compensation expense for the fair value of all stock options and restricted stock that are ultimately expected to vest as the requisite service is rendered.
The cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as cash flows from financing in the statements of cash flows. These excess tax benefits were not significant for the Company for the fiscal years ended March 25, 2017 or March 26, 2016.
In calculating compensation related to stock option grants, the fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The computation of expected volatility used in the Black-Scholes- Merton option-pricing model is based on the historical volatility of Giga-tronics’ share price. The expected term is estimated based on a review of historical employee exercise behavior with respect to option grants. The risk free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected dividend yield was not considered in the option pricing formula since the Company has not paid dividends and has no current plans to do so in the future.
The fair value of restricted stock awards is based on the fair value of the underlying shares at the date of the grant. Management makes estimates regarding pre-vesting forfeitures that will impact timing of compensation expense recognized for stock option and restricted stock awards.
Earnings or Loss Per Common Share
Basic earnings or loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporate the incremental shares issuable upon the assumed exercise of stock options and warrants using the treasury stock method. Anti-dilutive options are not included in the computation of diluted earnings per share. Non-vested shares of restricted stock have non-forfeitable dividend rights and are considered participating securities for the purpose of calculating basic and diluted earnings per share under the two-class method.
Comprehensive Income or Loss
There are no items of comprehensive income or loss other than net income or loss.
Financial
Instruments
and
Concentration
of
Credit
Risk
Financial instruments that potentially subject the Company to credit risk consist of cash, cash-equivalents and trade accounts receivable. The Company’s cash-equivalents consist of overnight deposits with federally insured financial institutions. Concentration of credit risk in trade accounts receivable results primarily from sales to major customers. The Company individually evaluates the creditworthiness of its customers and generally does not require collateral or other security. At March 25, 2017, three customers combined accounted for 67% of consolidated gross accounts receivable. At March 26, 2016, three customers combined accounted for 52% and 65% of consolidated gross accounts receivable.
Fair
Value
of
Financial
Instruments
and
Fair
Value
Measurements
The Company’s financial instruments consist principally of cash and cash-equivalents, line of credit, term debt, and warrant derivative liability. The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date (Level 1), significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (Level 2), or significant unobservable inputs reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability (Level 3), depending on the nature of the item being valued.
Recently Issued Accounting Standards
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. ASU 2014-15 provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company adopted this accounting standard as of March 25,2017.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) –
Simplifying the Presentation of Debt Issuance Costs
,” or ASU 2015-03. ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this ASU by the Company, changed the presentation of certain debt issuance costs, which are reported as a direct offset to the applicable debt on the balance sheet.
In August 2015, the FASB issued ASU 2015-15 – “
Interest—Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”,
Previously, on April 7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs
, which required entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in ASU 2015-03 (see paragraph 835-30-45-1A) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company’s adoption of ASU 2015-15 in fiscal 2017 did not have a material impact on its financial statements.
In November 2015, the FASB issued ASU 2015-17 –
Income Taxes (Topic 740): “Balance Sheet Classification of Deferred Taxes”.
Topic 740 is effective for public business entities for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The amendments may be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The amendments in ASU 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The Company is currently evaluating the impact this accounting standard update may have on its financial statements.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04 (“ASU 2017-04”),
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. ASU 2017-04 amends the guidance to simplify the subsequent measurement of goodwill by removing Step 2 of the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect the standard will have a material impact on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15 (“ASU 2016-15”), Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The objective of ASU 2016-15 is to reduce existing diversity in practice by addressing eight specific cash flow issues related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. If early adopted, an entity must adopt all the amendments in the same period. The Company is currently evaluating the impact of the new guidance and timing of adoption, but does not expect that the standard will have a material impact on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 requires that lessees recognize assets and liabilities for the rights and obligations for leases with a lease term of more than one year. The amendments in this ASU are effective for annual periods ending after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. ASU 2014-09 establishes a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. ASU 2014-09 was further updated in March, April, May, and December 2016 to provide clarification on a number of specific issues as well as requiring additional disclosures. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. The full retrospective method requires companies to recast each prior reporting period presented as if the new guidance had always existed. Under the modified retrospective method, companies would recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application. On July 9, 2015, the FASB approved a one year deferral of the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. The Company has not yet completed its evaluation of the impact of ASU 2014-09 on its past and future revenue recognition and related disclosure.
2
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Going Concern and Management’s Plan
|
The Company incurred net losses of $1.5 million and $4.1 million in the fiscal years ended March 25, 2017 and March 26, 2016, respectively. These losses have contributed to an accumulated deficit of $25.6 million as of March 25, 2017.
The Company has experienced delays in the development of features, orders, and shipments for the new ASG. These delays have significantly contributed to a decrease in working capital from $1.8 million on March 26, 2016, to $620,000 on March 25, 2017. The new ASG product has now shipped to several customers, but potential delays in the refinement of features, longer than anticipated sales cycles, or the ability to efficiently manufacture the ASG, could significantly contribute to additional future losses and decreases in working capital.
To help fund operations, the Company relies on advances under the line of credit with Bridge Bank. The line of credit which expired on May 7, 2017, was renewed through May 6, 2019 (see Note 20, Subsequent Events). The agreement includes a subjective acceleration clause, which allows for amounts due under the facility to become immediately due in the event of a material adverse change in the Company’s business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit based on the lender’s judgement. As of March 25, 2017, the line of credit had a balance of $582,000, and additional borrowing capacity of $234,000, respectively.
These matters raise substantial doubt as to the Company’s ability to continue as a going concern.
To address these matters, the Company’s management has taken several actions to provide additional liquidity and reduce costs and expenses going forward. These actions are described in the following paragraphs.
●
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In July 2016, Microsource received a $1.9 million non-recurring engineering order associated with redesigning a component of its high performance YIG filter used on an aircraft platform. The Company delivered NRE services for approximately $884,000 during fiscal 2017 and we expect to continue such services over the next nine to twelve months.
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|
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●
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On April 27, 2017, the Company entered into a new loan agreement with PFG. Under the terms of the agreement, PFG made a term loan to the Company in the principal amount of $1,500,000, with funding occurring on April 28, 2017. The loan has a two-year term, with interest only payments for the term of the loan (see Note 20, Subsequent Events).
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|
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●
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With the elimination of Giga-tronics Switch, Power Meter, Amplifier, and Signal Generator legacy product lines resulting from the Asset Purchase Agreements with Spanawave and Astronics, (see Note 10, Sale of Product Lines), the Company has been able to reduce the number of employees from 71 in fiscal 2016 to 57 in fiscal 2017, while providing additional cash for operations from the proceeds of the sales. We are also anticipating reductions in overhead costs by relocating our operations into a smaller facility beginning in fiscal 2018.
|
|
|
●
|
In May 2017, the Company renewed its accounts receivable line of credit with Bridge Bank through May 6, 2019.
|
|
|
●
|
In the first quarter of fiscal 2016, the Company’s Microsource business unit also finalized a multiyear $10.0 million YIG Production Order. The Company started shipping the YIG Production Order in the second quarter of fiscal 2017, and we expect to ship the remainder through fiscal 2020.
|
|
|
●
|
To assist with the upfront purchases of inventory required for future product deliveries, the Company entered into advance payment arrangements with certain customers, whereby the customers reimburse the Company for raw material purchases prior to the shipment of the finished products. The Company will continue to seek similar terms in future agreements with these customers and other customers.
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Management will continue to review all aspects of the business in an effort to improve cash flow and reduce costs and expenses, while continuing to invest, to the extent possible, in new product development for future revenue streams.
Management will also continue to seek additional working capital through debt, equity financing or possible product line sales, however there are no assurances that such financings or sales will be available at all, or on terms acceptable to the Company.
The Company’s historical operating results and forecasting uncertainties indicate that substantial doubt exists related to the Company’s ability to continue as a going concern. Forecasting uncertainties exist with respect to the ASG product line due to the potential longer than anticipated sales
cycles as well as with potential delays in the refinement of certain features, and/or the Company’s ability to efficiently manufacture it in a timely manner.
The accompanying Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result if the Company were unable to do so.
3
|
Cash and Cash-Equivalents
|
Cash and cash-equivalents of $1.4 million and $1.3 million at March 25, 2017 and March 26, 2016, respectively, consisted of demand deposits with a financial institution that is a member of the Federal Deposit Insurance Corporation (FDIC). At March 25, 2017, $1.1 million of the Company’s demand deposits exceeded FDIC insurance limits.
Inventories, net of reserves, consisted of the following:
(Dollars in thousands)
|
|
March 25,
2017
|
|
|
March 26,
2016
|
|
Raw materials
|
|
$
|
1,775
|
|
|
$
|
3,489
|
|
Work-in-progress
|
|
|
2,155
|
|
|
|
2,156
|
|
Finished goods
|
|
|
473
|
|
|
|
2
|
|
Demonstration inventory
|
|
|
408
|
|
|
|
47
|
|
Total
|
|
$
|
4,811
|
|
|
$
|
5,694
|
|
5
|
Property, Plant and Equipment,
net
|
Property, plant and equipment, net is comprised of the following:
(Dollars in thousands)
|
|
March 25,
2017
|
|
|
March 26,
2016
|
|
Leasehold improvements
|
|
$
|
327
|
|
|
|
327
|
|
Machinery and equipment
|
|
|
4,330
|
|
|
|
4,604
|
|
Computer and software
|
|
|
678
|
|
|
|
647
|
|
Furniture and office equipment
|
|
|
231
|
|
|
|
121
|
|
|
|
|
5,566
|
|
|
|
5,699
|
|
Less: accumulated depreciation and amortization
|
|
|
(5,038
|
)
|
|
|
(4,862
|
)
|
Total
|
|
$
|
528
|
|
|
$
|
837
|
|
6
|
Software Development
Costs
|
On September 3, 2015, the Company entered into a software development agreement with a major aerospace and defense company whereby the aerospace company developed and licensed its simulation software to the Company. The simulation software (also called Open Loop Simulator or OLS technology) is currently the aerospace company’s intellectual property. The OLS technology generates threat simulations and enables various hardware to generate signals for performing threat analysis on systems under test. The Company licenses the OLS software as a bundled or integrated solution with its Advanced Signal Generator system.
The Company paid the aerospace company software development costs and fees for OLS of $1.2 million in the aggregate (this includes an amendment to the software development agreement for additional features and functionality), which was paid in monthly installments as the work was performed by the aerospace company through the third quarter of fiscal 2017. The OLS technology is a perpetual license agreement that may be terminated by the Company at any time as long as the Company provides a notice to the aerospace company and pays for the development costs incurred through the notice termination date. The Company is also obligated to pay royalties to the aerospace company on net sales of its Advanced Signal Generator product sold with the OLS software equal to seven percent of net sales price of each ASG system sold and subject to certain minimums. The Company expenses research and development costs as they are incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers.
As of March 25, 2017, and March 26, 2016, capitalized software costs were $733,000 and $876,000, respectively. The Company began amortizing the costs of capitalized software to cost of sales in fiscal 2017 using the percentage of revenue approach. During the fourth quarter of fiscal 2017, the Company revised its estimates in accounting for the amortization of the capitalized software costs due to the long procurement cycle associated with the product. The Company had previously elected to amortize the capitalized software costs on a straight-line basis over a three year period, however, the Company revised its estimates based on the percentage of revenue associated with the current period revenues. This change in estimate increased the Company’s cost of sales by $342,000 in fiscal 2017. Amortization of capitalized software costs recorded were $476,000 during fiscal 2017. There was no amortization recorded in fiscal 2016 as the Company had not yet released its ASG TEmS units in fiscal 2016.
7
|
Accounts Receivable Line of Credit
|
On June 1, 2015, the Company entered a $2.5 million Revolving Accounts Receivable Line of Credit agreement with Bridge Bank. The credit facility agreement replaced the line of credit with Silicon Valley Bank which expired April 15, 2015. The agreement provides for a maximum borrowing capacity of $2.5 million of which $2.0 million is subject to a borrowing base calculation and $500,000 is non-formula based.
The loan is secured by all assets of the Company including intellectual property and general intangibles and provides for a borrowing capacity equal to 80% of eligible accounts receivable. The loan matured on May 6, 2017 but was renewed through May, 6, 2019 (see Note 20, Subsequent Event) and bears an interest rate equal to 1.5% over the bank’s prime rate of interest (which was 3.75% March 25, 2017 resulting in an interest rate of 5.25%). Interest is payable monthly with principal due upon maturity. The Company paid a commitment fee of $12,500. The loan agreement contains financial and non-financial covenants that are customary for this type of lending and includes a covenant to maintain an asset coverage ratio of at least 135% (defined as unrestricted cash and cash equivalents maintained with Bridge Bank, plus eligible accounts receivable aged less than 90 days from the invoice date, divided by the total amount of outstanding principal of all obligations under the loan agreement).
As of March 25, 2017, the Company was in compliance with all the financial covenants under the agreement. The line of credit requires a lockbox arrangement, which provides for receipts to be swept daily to reduce borrowings outstanding at the discretion of Bridge Bank. This arrangement, combined with the existence of the subjective acceleration clause in the line of credit agreement, necessitates the line of credit be classified as a current liability on the balance sheet. The acceleration clause allows for amounts due under the facility to become immediately due in the event of a material adverse change in the Company’s business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit based on the lender's judgment. As of March 25, 2017, the Company’s total outstanding borrowings and remaining borrowing capacity under the Bridge Bank line of credit were $582,000 and $234,000, respectively.
8
|
Term Loan, Revolving Line of Credit and Warrants
|
On March 13, 2014, the Company entered into a three year, $2.0 million term loan agreement with PFG under which the Company received $1.0 million on March 14, 2014.
On June 16, 2014, the Company amended its loan agreement with PFG (the “Amendment”). Under the terms of the Amendment, PFG made a revolving credit line available to Giga-tronics in the amount of $500,000, and the Company borrowed the entire amount on June 17, 2014. The revolving line had a thirty-three month term. The Amendment reduced the future amount potentially available for the Company to borrow under the PFG Loan agreement from $1.0 million to
$500,000. The interest on the PFG revolving credit line was fixed, calculated on a daily basis at a rate of 12.50% per annum. The Company was allowed to prepay the loan at any time prior to its March 13, 2017 maturity date without a penalty.
On June 3, 2015, the Company further amended its loan agreement with PFG (the “Second Amendment”). The Second Amendment cancelled the Company’s $500,000 of borrowing availability under the June 2014 Amendment and required the Company to pay PFG $150,000 towards its existing $500,000 outstanding balance under the revolving line of credit, which the Company paid in July 2015. The Company also agreed to pay PFG an additional $10,000 per month towards its remaining credit line balance until repaid, followed by like payments towards its term loan balance until repaid. As of March 26, 2016, the $500,000 borrowed with the June 2014 Amendment had been fully repaid.
Interest on the initial $1.0 million term loan was fixed at 9.75% and required monthly interest only payments during the first six months of the agreement followed by monthly principal and interest payments over the remaining thirty months. The Company may prepay the loan at any time prior to maturity by paying all future scheduled principal and interest payments. As of March 25, 2017, the debt was fully repaid.
The PFG Loan was secured by all the assets of the Company under a lien that is junior to the Bridge Bank debt described in Note 7, and limits borrowing under the Bridge Bank credit line limit to $2.5 million. The Company paid a loan fee of $30,000 upon the initial draw (“First Draw”) and $15,000 for the June 2014 Amendment. The loan fees paid were recorded as prepaid expenses and amortized to interest expense over the term of the PFG amended loan agreement.
The loan agreement contained financial covenants associated with the Company achieving minimum quarterly net sales and maintaining a minimum monthly shareholders’ equity. In the event of default by the Company, all or any part of the Company’s obligation to PFG could become immediately due. As of March 25, 2017, the Company was in compliance with all the financial covenants under the agreement.
The loan agreement also provided for the issuance of warrants convertible into 300,000 shares of the Company’s common stock, of which 180,000 were exercisable upon receipt of the initial $1.0 million from the First Draw, 80,000 became exercisable with the First Amendment and 40,000 were cancelled as a result of the Second Amendment. Each warrant issued under the loan agreement has a term of five years and an exercise price of $1.42 which was equal to the average NASDAQ closing price of the Company’s common stock for the ten trading days prior to the First Draw.
If the warrants are not exercised before expiration on March 13, 2019, the Company would be required to pay PFG $150,000 and $67,000 as settlement for warrants associated with the First Draw and the Amendment, respectively. The warrants could be settled for cash at an earlier date in the event of any acquisition or other change in control of the Company, future public issuance of Company securities or liquidation (or substantially similar event) of the Company. The Company currently has no definitive plans for any of the aforementioned events, and as a result, the cash payment date is estimated to be the expiration date unless warrants are exercised before then. The warrants have the characteristics of both debt and equity and are accounted for as a derivative liability measured at fair value each reporting period with the change in fair value recorded in earnings.
As of March 25, 2017, the estimated fair values of the derivative liabilities associated with the warrants issued in connection with the First Draw and Amendment were $133,000 and $89,000, respectively, for a combined value of $222,000. As of March 26, 2016, the estimated fair value of the derivative liability associated with the warrant issued in connection with the First Draw and Amendment was $212,000 and $141,000, respectively for a combined value of $353,000. The change in the fair value of the warrant liability totaled $131,000 for the fiscal year ended March 25, 2017 and is reported in the accompanying statement of operations as a gain on adjustment of derivative liability to fair value. The change in the fair of the warrant liability totaled $12,000 for the fiscal year ended March 26, 2016 and is reported as a loss on adjustment of derivative liability to fair value.
The initial $1.0 million in proceeds under the term loan agreement were allocated between the PFG Loan and the warrants based on their relative fair values on the date of issuance which resulted in initial carrying values of $822,000 and $178,000, respectively. The resulting discount of $178,000 on the PFG Loan was accreted to interest expense under the effective interest method over the term of the PFG Loan, and as of March 25, 2017 had been fully accreted since the $1.0 million had been fully repaid.
The proceeds from the $500,000 credit line issued in connection with the Amendment were allocated between the PFG Loan and the warrants based on their relative fair values on the date of issuance which resulted in initial carrying values of $365,000 and $135,000, respectively. The resulting discount of $135,000 on the PFG Loan was accreted to interest expense under the effective interest method over the of the PFG Loan, and as of March 26,2016 had been fully accreted since the $500,000 from the Amendment had been fully repaid.
For the fiscal years ended March 25, 2017 and March 26, 2016, the Company recorded accretion of discount expense associated with the warrants issued with the PFG Loan of $22,000 and $165,000, respectively.
On April 27, 2017, the Company entered into a new loan agreement with PFG. Under the terms of the agreement, PFG made a term loan to the Company in the principal amount of $1,500,000, with funding occurring on April 28, 2017. The loan has a two-year term, with interest only payments for the term of the loan (see Note 20, Subsequent Events).
Pursuant to the accounting guidance for fair value measurement and its subsequent updates, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a hierarchy for inputs used in measuring fair value that minimizes the use of unobservable inputs by requiring the use of observable market data when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on active market data. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.
The fair value hierarchy is broken down into the three input levels summarized below:
|
•
|
Level 1
—Valuations are based on quoted prices in active markets for identical assets or liabilities and readily accessible by us at the reporting date. Examples of assets and liabilities utilizing Level 1 inputs are certain money market funds, U.S. Treasuries and trading securities with quoted prices on active markets.
|
|
•
|
Level 2
—Valuations based on inputs other than the quoted prices in active markets that are observable either directly or indirectly in active markets. Examples of assets and liabilities utilizing Level 2 inputs are U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit and over-the- counter derivatives.
|
|
•
|
Level 3
—Valuations based on unobservable inputs in which there are little or no market data, which require us to develop our own assumptions.
|
The carrying amounts of the Company’s cash and cash-equivalents and line of credit approximate their fair values at each balance sheet date due to the short-term maturity of these financial instruments, and generally result in inputs categorized as Level 1 within the fair value hierarchy. The fair values of term debt are based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company, and generally result in inputs categorized as Level 3 within the fair value hierarchy.
At March 25, 2017 and March 26, 2016, the carrying amounts of the Company’s term debt was zero and $379,000, respectively. The estimated fair value totaled $384,000 at March 26, 2016, the fair value at March 25, 2017 was zero as the loan was paid in full in fiscal 2017. The fair value at March 26, 2016 was calculated using a discounted cash flow model and utilized a 20% discount rate. The rate was commensurate with market rates given the remaining term, principal repayment schedule, the Company’s creditworthiness and outstanding loan balance.
The Company’s derivative warrant liability is measured at fair value on a recurring basis and is categorized as Level 3 in the fair value hierarchy. The derivative warrant liability is valued using a Monte Carlo simulation model, which used the following assumptions as of March 25, 2017: (i) the remaining expected life of 2.0 years, (ii) the Company’s historical volatility rate of 101.1%, (iii) risk-free interest rate of 1.26%, and (iv) a discount rate of twenty four percent.
The aforementioned derivative warrant liability is the Company’s only asset and liability recognized and measured at fair value on a recurring or non-recurring basis and was follows:
Fair Value Measurements as of Mar. 25, 2017
(In Thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Warrant Liability
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
222
|
|
Total
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
222
|
|
Fair Value Measurements as of March 26, 2016
(In Thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrant Liability
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
353
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
353
|
|
There were no transfers between Level 1, Level 2 or Level 3 for the fiscal years ended March 25, 2017 and March 26, 2016.
The table below summarizes changes in gains and losses recorded in earnings for Level 3 assets and liabilities that are still held at March 25, 2017:
|
|
Years Ended
|
|
(In thousands)
|
|
Mar. 25,
2017
|
|
|
Mar. 26,
2016
|
|
Warrant liability at beginning of year
|
|
$
|
353
|
|
|
$
|
341
|
|
Gains on adjustment of warrant liability to fair value
|
|
|
(136
|
)
|
|
|
—
|
|
Losses on adjustment of warrant liability to fair value
|
|
|
5
|
|
|
|
12
|
|
Warrant liability at end of period
|
|
$
|
222
|
|
|
$
|
353
|
|
There were no assets measured at fair value on a recurring basis and there were no assets or liabilities measured on a non- recurring basis at March 25, 2017 and March 26, 2016.
The following table presents quantitative information about recurring Level 3 fair value measurements at March 25, 2017 and March 26, 2016:
March 25, 2017
|
|
Valuation Technique(s)
|
|
Unobservable Input
|
|
Warrant liability
|
|
Monte Carlo
|
|
Discount rate
|
24%
|
|
|
|
|
|
|
March 26, 2016
|
|
Valuation Techniques(s)
|
|
Unobservable Input
|
|
Warrant liability
|
|
Monte Carlo
|
|
Discount rate
|
20%
|
The discount rate of twenty four percent is management’s estimate of the cost of capital given the Company’s credit worthiness. A significant increase in the discount rate would significantly decrease the fair value, but the magnitude of this decrease would be less significant in a scenario where the Company’s stock price is significantly higher than the exercise price since the holder’s option to take a cash payment at maturity represents a smaller component of the total fair value when the Company’s stock price is higher.
The Monte Carlo simulation model simulated the Company’s stock price through the maturity date of March 31, 2019. At the end of the simulated period, the value of the warrant was determined based on the greater of (1) the net share settlement value, (2) the net exercise value, or (3) the fixed cash put value.
On June 20, 2016, the Company entered into an Asset Purchase Agreement for the sale of its Switch product line to Astronics Test Systems Inc. (Astronics). Upon signing the agreement, Astronics paid $850,000 for the intellectual property of the product line. The Company recognized a net gain of $802,000 in the first quarter of fiscal 2017 after related expenses were subtracted from the sales price. The following table presents the breakdown of the gain recognized related to the asset sale:
(In thousands)
|
|
|
|
|
Cash received from Astronics
|
|
$
|
850
|
|
Cash paid to buy out future commission obligation
|
|
|
(170
|
)
|
Employee severance
|
|
|
(97
|
)
|
Legal fees
|
|
|
(13
|
)
|
Commissions
|
|
|
(46
|
)
|
Warranty Liability released
|
|
|
278
|
|
Net gain recognized
|
|
$
|
802
|
|
In calculating the gain included in the accompanying consolidated financial statements, the Company released $278,000 of deferred warranty obligations related to the Switch asset. Pursuant to the terms of the agreement, Astronics assumed all the warranty obligations for the Switch product line, including the products sold prior to the asset being transferred to Astronics. The deferred warranty obligation was previously included in other current liabilities in the consolidated financial statements. The Company also had an existing agreement with a consultant supporting the Switch product line which included a three percent commission on the sales of the Switch product line for a period of 4 years ending in January 2020. The agreement allowed for a buyout of future commissions associated with the Switch product which the Company exercised in connection with the Astronics transaction in June 2016 resulting in a payment of $170,000 by the Company.
During fiscal 2017, the Switch product line accounted for $2.1 million in product revenue. Gross margins for the Switch product line for the fiscal year ended March, 25, 2017 was $437,000. During fiscal 2016, the Switch product line accounted for $2.7 million in product revenue. Gross margins for the Switch product line for the fiscal year ended March, 26, 2016 was $958,000. While the Company is able to distinguish revenue and gross margin information related to the sale of the Switch product line to Astronics, the Company is unable to present meaningful information about results of operation and cash flows from the Switch product line.
On December 15, 2015, the Company entered into an Asset Purchase Agreement with Spanawave Corporation, whereby Spanawave agreed to purchase the Giga-tronics’ Division product lines for its Power Meters, Amplifiers, and Legacy Signal Generators for $1.5 million. The agreement provided for the transfer of these product lines to Spanawave sequentially in six phases beginning with certain sensor and amplifier products. During the second quarter ended September 24, 2016, the Company and Spanawave became engaged in a dispute, including litigation initiated by Spanawave and an arbitration proceeding initiated by Spanawave’s affiliate Liberty Test Equipment, Inc., as to whether the Company has fulfilled all the requirements to close phases one through five and become entitled to the $375,000 received during the first quarter of fiscal 2017.
The complaint seeks specific performance of the agreement and damages. Spanawave’s affiliate Liberty Test Equipment also filed an arbitration claim for $440,000 under a distribution agreement between the Company and Liberty. The Company has filed cross-complaints in both the litigation and arbitration asserting breach of the respective agreements by Spanawave and Liberty. The Company had previously asserted that the distribution agreement does not extend to the products with respect to which the claim has been made. Certain customers of the lines of business sold to Spanawave are also customers of the Company’s ongoing Advance Signal Generator business. Continued disruption of the phase 6 signal generator business could have an adverse effect on the ASG business. The parties have negotiated in an effort to settle the dispute notwithstanding the filings. The expenses and potential liability of negotiation, any settlement or continued litigation or arbitration could have a material adverse effect on the Company.
During fiscal 2017, the Company had received $750,000 from Spanawave under the agreement. Of this amount, the Company returned $375,000 to Spanawave on July 28, 2016 resulting from the dispute regarding the status of phases one through five. The remaining $375,000 is included in deferred liability related to asset sales in the consolidated balance sheet. In addition, in June 2016, the Company received approximately $275,000 in exchange for raw material purchases. The purchase price of the raw materials approximated its carrying value, therefore no gain or loss was recognized. The parties are currently attempting to resolve this dispute. No gain has been recognized in connection with this product line sale because of the aforementioned dispute. These product lines accounted for approximately $592,000 and $2.7 million in revenue during the fiscal year ended March 25, 2017, and March 26, 2016, respectively. There was no margin associated with the revenue derived in fiscal 2017 as the revenues were primarily related to inventory transfer at book value. For the fiscal year ended March 26, 2016, gross margin was $240,000. While the Company is able to distinguish revenue and gross margin information related to the sale of these product lines, the Company is unable to present meaningful information about results of operation and cash flows from these product lines.
11
|
Selling and Advertising Expenses
|
Selling expenses consist primarily of salaries to employees and commissions paid to various sales representatives and marketing agencies. Commission expense totaled $121,000 and $172,000 for fiscal 2017 and 2016, respectively. Advertising costs, which are expensed as incurred, totaled $58,000 and $123,000 for fiscal 2017 and 2016, respectively.
12
|
Significant Customers and Industry Segment Information
|
The Company has two reportable segments: Giga-tronics Division and Microsource. Giga-tronics Division produces a broad line of test and measurement equipment used in the development, test and maintenance of wireless communications products and systems, flight navigational equipment, electronic defense systems and automatic testing systems and designs, manufactures, and markets a line of switching devices that link together many specific purpose instruments that comprise automatic test systems. Microsource develops and manufactures a broad line of Yttrium, Iron and Garnet (YIG) tuned oscillators, filters and microwave synthesizers, which are used in a wide variety of microwave instruments or devices.
The accounting policies for the segments are the same as those described in the "Summary of Significant Accounting Policies". The Company evaluates the performance of its segments and allocates resources to them based on earnings before income taxes. Segment net sales include sales to external customers. Inter-segment activities are eliminated in consolidation. Assets include accounts receivable, inventories, equipment, cash, deferred income taxes, prepaid expenses and other long- term assets. The Company accounts for inter-segment sales and transfers at terms that allow a reasonable profit to the seller. During the periods reported there were no significant inter-segment sales or transfers.
The Company's reportable operating segments are strategic business units that offer different products and services. They are managed separately because each business utilizes different technology and requires different accounting systems. The Company’s chief operating decision maker is considered to be the Company’s Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues and pre-tax income or loss by operating segment.
The tables below present information for the fiscal years ended in 2017 and 2016.
March 25, 2017 (Dollars in thousands)
|
|
Giga-tronics
Division
|
|
|
Microsource
|
|
|
Total
|
|
Revenue
|
|
$
|
8,021
|
|
|
$
|
8,246
|
|
|
$
|
16,267
|
|
Interest expense, net
|
|
|
133
|
|
|
|
—
|
|
|
|
133
|
|
Depreciation and amortization
|
|
|
820
|
|
|
|
7
|
|
|
|
827
|
|
Capital expenditures
|
|
|
41
|
|
|
|
—
|
|
|
|
41
|
|
Income/(Loss) before income taxes
|
|
|
(2,702
|
)
|
|
|
1,158
|
|
|
|
(1,544
|
)
|
Assets
|
|
|
6,433
|
|
|
|
2,641
|
|
|
|
9,074
|
|
March 26, 2016 (Dollars in thousands)
|
|
Giga-tronics
Division
|
|
|
Microsource
|
|
|
Total
|
|
Revenue
|
|
$
|
8,679
|
|
|
$
|
5,917
|
|
|
$
|
14,596
|
|
Interest expense, net
|
|
|
383
|
|
|
|
—
|
|
|
|
383
|
|
Depreciation and amortization
|
|
|
301
|
|
|
|
20
|
|
|
|
321
|
|
Capital expenditures
|
|
|
192
|
|
|
|
—
|
|
|
|
192
|
|
Income/(Loss) before income taxes
|
|
|
(4,119
|
)
|
|
|
17
|
|
|
|
(4,102
|
)
|
Assets
|
|
|
8,059
|
|
|
|
3,134
|
|
|
|
11,193
|
|
The Company’s Giga-tronics Division and Microsource segments sell to agencies of the U.S. government and U.S. defense- related customers. In fiscal 2017 and 2016, U.S. government and U.S. defense-related customers accounted for 78% and 71% of sales, respectively. During fiscal 2017, the Boeing Company accounted for 33% of the Company’s consolidated revenues at March 25, 2017 and was included in the Microsource segment. A second customer, CSRA LLC (CSRA acted as Prime Contractor for the United States Navy) accounted for 20% of the Company’s consolidated revenues at March 25, 2017 was included in the Giga-tronics Division reporting segment. A third customer, Lockheed Martin accounted for 14% of the Company’s revenue and was included in the Microsource segment.
During fiscal 2016, the Boeing Company accounted for 32% of the Company’s consolidated revenues at March 26, 2016 and was included in the Microsource segment. A second customer, DFAS accounted for 11% of the Company’s consolidated revenues at March 26, 2016 was included in the Giga-tronics Division reporting segment.
Export sales accounted for 2% and 4% of the Company’s sales in fiscal 2017 and 2016, respectively. Export sales by geographical area for these fiscal years are shown below:
(Dollars in thousands)
|
|
March 25,
2017
|
|
|
March 26,
2016
|
|
Americas
|
|
$
|
—
|
|
|
$
|
10
|
|
Europe
|
|
|
249
|
|
|
|
326
|
|
Asia
|
|
|
15
|
|
|
|
140
|
|
Rest of world
|
|
|
64
|
|
|
|
122
|
|
Total
|
|
$
|
328
|
|
|
$
|
598
|
|
13
Loss per Common Share
Net loss and common shares used in per share computations for the fiscal years ended March 25, 2017 and March 26, 2016 are as follows:
(In thousands except per-share data)
|
|
March 25,
2017
|
|
|
March 26,
2016
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,546
|
)
|
|
$
|
(4,104
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average: Common shares outstanding
|
|
|
9,550
|
|
|
|
6,941
|
|
Potential common shares
|
|
|
—
|
|
|
|
—
|
|
Common shares assuming dilution
|
|
|
9,550
|
|
|
|
6,941
|
|
Loss per common share – basic
|
|
$
|
(0.16
|
)
|
|
$
|
(0.59
|
)
|
Loss per common share – diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.59
|
)
|
Stock options not included in computation that could potentially dilute EPS in the
future
|
|
|
1,105
|
|
|
|
1,592
|
|
Restricted stock awards not included in computation that could potentially dilute EPS
in the future
|
|
|
—
|
|
|
|
—
|
|
Convertible preferred stock not included in computation that could potentially dilute
EPS in the future
|
|
|
1,853
|
|
|
|
1,853
|
|
Warrants not included in computation that could potentially dilute EPS in the future
|
|
|
3,737
|
|
|
|
3,737
|
|
The stock options, restricted stock, convertible preferred stocks and warrants not included in the computation of diluted earnings per share (EPS) for the fiscal years ended March 25, 2017 and March 26, 2016 is a result of the Company’s net loss and, therefore, the effect of these instruments would be anti-dilutive.
14
Income Taxes
Following are the components of the provision for income taxes:
Fiscal years ended
|
|
March 25,
|
|
|
March 26,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
2
|
|
|
|
2
|
|
Total Current
|
|
|
2
|
|
|
|
2
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(496
|
)
|
|
|
(1,297
|
)
|
State
|
|
|
(6
|
)
|
|
|
215
|
|
Total Deferred
|
|
|
(502
|
)
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
|
Change in liability for uncertain tax positions
|
|
|
14
|
|
|
|
13
|
|
Change in valuation allowance
|
|
|
488
|
|
|
|
1,069
|
|
Provision for income taxes
|
|
$
|
2
|
|
|
$
|
2
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows:
Fiscal years ended (In thousands)
|
|
March 25,
2017
|
|
|
March 26,
2016
|
|
Net operating loss carryforwards
|
|
$
|
15,984
|
|
|
$
|
15,065
|
|
Income tax credits
|
|
|
323
|
|
|
|
296
|
|
Inventory reserves and additional costs capitalized
|
|
|
1,450
|
|
|
|
1,935
|
|
Accrued vacation
|
|
|
109
|
|
|
|
131
|
|
Deferred rent
|
|
|
—
|
|
|
|
44
|
|
Non-qualified stock options and restricted stock
|
|
|
5
|
|
|
|
(10
|
)
|
Other
|
|
|
146
|
|
|
|
68
|
|
Total deferred tax assets
|
|
|
18,017
|
|
|
|
17,529
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(18,017
|
)
|
|
|
(17,529
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The following summarizes the difference between the income tax expense and the amount computed by applying the statutory federal income tax rate of 34% to income before income tax. The items comprising these differences consisted of the following for the fiscal years ended March 25, 2017 and March 26, 2016:
Fiscal years ended
(In thousands except percentages)
|
|
March 25, 2017
|
|
|
March 25, 2016
|
|
Statutory federal income tax (benefit)
|
|
$
|
(525
|
)
|
|
|
34.0
|
%
|
|
$
|
(1,395
|
)
|
|
|
34.0
|
%
|
Valuation allowance
|
|
|
488
|
|
|
|
(31.6
|
)
|
|
|
1,069
|
|
|
|
(26.1
|
)
|
State income tax, net of federal benefit
|
|
|
(90
|
)
|
|
|
5.8
|
|
|
|
(239
|
)
|
|
|
5.8
|
|
Net operating loss expiration
|
|
|
86
|
|
|
|
(5.6
|
)
|
|
|
451
|
|
|
|
(11.0
|
)
|
Non tax-deductible expenses
|
|
|
77
|
|
|
|
(5.0
|
)
|
|
|
107
|
|
|
|
(2.6
|
)
|
Tax credits
|
|
|
(40
|
)
|
|
|
2.6
|
|
|
|
(35
|
)
|
|
|
0.9
|
|
Liability for uncertain tax positions
|
|
|
14
|
|
|
|
(0.9
|
)
|
|
|
13
|
|
|
|
(0.3
|
)
|
Other
|
|
|
(8
|
)
|
|
|
0.5
|
|
|
|
31
|
|
|
|
(0.8
|
)
|
Effective income tax
|
|
$
|
2
|
|
|
|
(0.2
|
)%
|
|
$
|
2
|
|
|
|
(0.1
|
)%
|
The increase in valuation allowance from March 26, 2016 to March 25, 2017 was $488,000.
As of March 25, 2017, the Company had pre-tax federal net operating loss carryforwards of $43 million and state net operating loss carryforwards of $23 million available to reduce future taxable income. The federal and state net operating loss carryforwards begin to expire from fiscal 2023 through 2037 and from 2017 through 2037, respectively. Utilization of net operating loss carryforwards may be subject to annual limitations due to certain ownership change limitations as required by Internal Revenue Code Section 382. The federal income tax credits begin to expire from 2032 through 2037 and state income tax credit carryforwards are carried forward indefinitely.
The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers both positive and negative evidence and tax planning strategies in making this assessment.
As of March 25, 2017, the Company recorded unrecognized tax benefits of $120,000 related to uncertain tax positions. The unrecognized tax benefit is netted against the non-current deferred tax asset on the Consolidated Balance Sheet. The Company has not recorded a liability for any penalties or interest related to the unrecognized tax benefits.
The Company files U.S federal and California state tax returns. The Company is generally no longer subject to tax examinations for years prior to the fiscal year 2012 for federal purposes and fiscal year 2011 for California purposes, except in certain limited circumstances. The Company does have a California Franchise Tax Board audit that is currently in process. The Company is working with the California Franchise Tax Board to resolve all audit issues and does not believe any material taxes or penalties are due. However, as a result of the ongoing examination, the Company eliminated certain income tax credit carryovers. The write-off of these income tax credit carryovers had no impact on total income tax expense as the majority had an uncertain tax position reserve with the balance having a full valuation allowance against the deferred tax asset.
A reconciliation of the beginning and ending amount of the liability for uncertain tax positions, excluding potential interest and penalties, is as follows:
(In thousands)
|
|
Fiscal Year
2017
|
|
|
Fiscal Year
2016
|
|
Balance as of beginning of year
|
|
$
|
106
|
|
|
$
|
93
|
|
Additions based on current year tax positions
|
|
|
14
|
|
|
|
13
|
|
(Reductions) additions for prior year tax positions
|
|
|
—
|
|
|
|
—
|
|
Balance as of end of year
|
|
$
|
120
|
|
|
$
|
106
|
|
The total amount of interest and penalties related to unrecognized tax benefits at March 25, 2017 is not material. The amount of tax benefits that would impact the effective rate, if recognized, is not expected to be material. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within next twelve (12) months.
15
|
Share-based Compensation and Employee Benefit Plans
|
Share-based Compensation
The Company has established the 2005 Equity Incentive Plan, which provides for the granting of stock options and restricted stock for up to 2,850,000 shares of common stock at 100% of fair market value at the date of grant, with each grant requiring approval by the Board of Directors of the Company. Options granted generally vest in one or more installments in a four or five year period and must be exercised while the grantee is employed by the Company or within a certain period after termination of employment. Options granted to employees shall not have terms in excess of 10 years from the grant date. Holders of options may be granted stock appreciation rights (SAR), which entitle them to surrender outstanding options for a cash distribution under certain changes in ownership of the Company, as defined in the stock option plan. As of March 25, 2017, no SAR’s have been granted under the option plan. As of March 25, 2017, the total number of shares of common stock available for issuance is 1,285,127. All outstanding options have a ten-year life from the date of grant.
Stock Options
The weighted average grant date fair value of stock options granted during the fiscal years ended March 25, 2017 and March 26, 2016 was $0.83 and $1.04, respectively, and was calculated using the following weighted-average assumptions:
Fiscal years ended
|
|
March 25,
2017
|
|
|
March 26,
2016
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
99
|
%
|
|
|
98
|
%
|
Risk-free interest rate
|
|
|
1.54
|
%
|
|
|
1.55
|
%
|
Expected term (years)
|
|
|
8.36
|
|
|
|
8.36
|
|
A summary of the changes in stock options outstanding for the fiscal years ended March 25, 2017 and March 26, 2016 is presented below:
|
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
Remaining
|
|
|
|
|
|
(Dollars in thousands except share prices)
|
|
Shares
|
|
|
Average
Exercise
Price
|
|
|
Contractual
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 28, 2015
|
|
|
1,726,975
|
|
|
$
|
1.57
|
|
|
|
6.9
|
|
|
$
|
219
|
|
Granted
|
|
|
35,000
|
|
|
|
1.22
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
48,550
|
|
|
|
1.59
|
|
|
|
|
|
|
|
|
|
Forfeited / Expired
|
|
|
121,225
|
|
|
|
2.15
|
|
|
|
|
|
|
|
|
|
Outstanding at March 26, 2016
|
|
|
1,592,200
|
|
|
$
|
1.52
|
|
|
|
6.8
|
|
|
$
|
69
|
|
Granted
|
|
|
148,000
|
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited / Expired
|
|
|
635,700
|
|
|
|
1.57
|
|
|
|
|
|
|
|
|
|
Outstanding at March 25, 2017
|
|
|
1,104,500
|
|
|
$
|
1.41
|
|
|
|
6.1
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 25, 2017
|
|
|
782,550
|
|
|
$
|
1.46
|
|
|
|
5.4
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 25, 2017, expected to vest in the future
|
|
|
231,635
|
|
|
$
|
1.30
|
|
|
|
7.7
|
|
|
$
|
2
|
|
As of March 25, 2017, there was $180,000 of total unrecognized compensation cost related to non-vested options granted under the 2005 Plan and outside of the 2005 Plan. That cost is expected to be recognized over a weighted average period of 3.10 years and will be adjusted for subsequent changes in estimated forfeitures. There were 272,500 and 419,050 options vested during the fiscal years ended March 25, 2017 and March 26, 2016 respectively. The total fair value of options vested during the fiscal years ended March 25, 2017 and March 26, 2016 was $315,000 and $104,000, respectively. There was no exercise in fiscal 2017. Cash received from the exercise of stock options during fiscal 2016 was $77,000. Share based compensation cost recognized in operating results for the fiscal years ended March 25, 2017 and March 26, 2016 totaled
$257,000 and $403,000, respectively.
Restricted Stock
The Company granted 44,500 shares of restricted stock during fiscal 2017 to certain members of the Board of Directors in lieu of cash fees for services performed in fiscal 2017. There were no restricted grants in fiscal 2016. The Company granted 432,000 shares of restricted stock during fiscal 2015 to certain members of the Board of Directors in lieu of cash fees for services performed in fiscal 2016. These restricted stocks fully vested in fiscal 2017 and fiscal 2016 respectively, and the vesting date fair value totaled $29,000 and $761,000, respectively. The fiscal 2016 weighted average grant date fair value was $2.11. The restricted stock awards are considered fixed awards as the number of shares and fair value at the grant date is amortized over the requisite service period net of estimated forfeitures. Compensation cost recognized for restricted stock awards for fiscal 2017 and fiscal 2016 totaled $29,000 and $522,000, respectively.
A summary of the changes in non-vested restricted stock awards outstanding for the fiscal years ended March 25, 2017 and March 26, 2016 is presented below:
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Non-vested at March 28, 2015
|
|
|
482,000
|
|
|
$
|
2.02
|
|
Granted
|
|
|
—
|
|
|
|
|
|
Vested
|
|
|
482,000
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
—
|
|
|
|
—
|
|
Non-vested at March 26, 2016
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
44,500
|
|
|
|
—
|
|
Vested
|
|
|
44,500
|
|
|
|
—
|
|
Forfeited or cancelled
|
|
|
—
|
|
|
|
—
|
|
Non-vested at March 25, 2017
|
|
|
—
|
|
|
$
|
—
|
|
401(k) Plans
The Company has established 401(k) plans which cover substantially all employees. Participants may make voluntary contributions to the plans for up to 100% of their defined compensation. The Company matches a percentage of the participant’s contributions in accordance with the plan. Participants vest ratably in Company contributions over a four- year period. Company contributions to the plans for fiscal 2017 and 2016 were approximately $33,000 and $41,000, respectively.
16
|
Commitments and Contingencies
|
The Company leased a 47,300 square foot facility located in San Ramon, California that expired in April 2017. On January 5, 2017, the Company entered a seventy-seven-month commercial building lease agreement for a 23,873 square feet facility in Dublin, California. The new lease began on April 1, 2017. The Company’s operations were in the San Ramon facility as of March 25, 2017.
The Company also leases certain other equipment under operating leases.
Total future minimum lease payments under the new building lease and certain equipment are as follows. Fiscal year (Dollars in thousands) Fiscal year (Dollars in thousands)
Fiscal year (Dollars in thousands) Fiscal year (Dollars in thousands)
|
|
|
|
|
2018
|
|
|
421
|
|
2019
|
|
|
436
|
|
2020
|
|
|
450
|
|
2021
|
|
|
464
|
|
Thereafter
|
|
|
1,169
|
|
Total
|
|
$
|
2,940
|
|
The Company leases certain equipment under capital leases that expire through May 2021. Capital leases with costs totaling
$249,000 and $249,000 are reported net of accumulated depreciation of $61,000 and $32,000 at March 25, 2017 and March 26, 2016, respectively.
Total future minimum lease payments under these capital leases are as follows.
Fiscal year (Dollars in thousands)
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
2018
|
|
$
|
50
|
|
|
$
|
19
|
|
|
$
|
69
|
|
2019
|
|
|
52
|
|
|
|
12
|
|
|
|
64
|
|
2020
|
|
|
40
|
|
|
|
5
|
|
|
|
45
|
|
2021
|
|
|
23
|
|
|
|
1
|
|
|
|
24
|
|
Total
|
|
$
|
165
|
|
|
$
|
37
|
|
|
$
|
202
|
|
The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of March 25, 2017, total non–cancelable purchase orders were approximately $541,000 and are scheduled to be delivered to the Company at various dates through March 2018.
The Company records a liability in cost of sales for estimated warranty obligations at the date products are sold. Adjustments are made as new information becomes available. The following provides a reconciliation of changes in the Company’s warranty reserve. The Company provides no other guarantees.
(In thousands)
|
|
March 25,
2017
|
|
|
March 26,
2016
|
|
Balance as of beginning of year
|
|
$
|
60
|
|
|
$
|
76
|
|
Provision, net
|
|
|
234
|
|
|
|
55
|
|
Warranty costs incurred
|
|
|
(171
|
)
|
|
|
(71
|
)
|
Balance as of end of year
|
|
$
|
123
|
|
|
$
|
60
|
|
18
|
Private Placement Offering
|
On January 19, 2016, the Company entered into a Securities Purchase Agreement for the sale of 2,787,872 Units, each consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock, to approximately 20 private investors. The purchase price for each Unit was $1.24375. Gross proceeds were approximately $3.5 million. Net proceeds to the Company after fees was approximately $3.1 million. The portion of the purchase price attributable to the common shares included in each Unit was $1.15, the consolidated closing bid price for the Company’s common stock on January 15, 2016. The warrant price was $.09375 per Unit (equivalent to $0.125 per whole warrant share), with an exercise price of $1.15 per share. The term of the warrants is five years from the date of completion of the transaction. Emerging Growth Equities, Ltd also received warrants to purchase 292,727 shares of common stock at an exercise price of $1.15 per share as part of its consideration for serving as placement agent in connection with the private placement.
19
|
Series B, C, D Convertible Voting Perpetual Preferred Stock and Warrants
|
On November 10, 2011, the Company received $2,199,000 in cash proceeds from Alara Capital AVI II, LLC, a Delaware limited liability company (the “Investor”), an investment vehicle sponsored by Active Value Investors, LLC, under a Securities Purchase Agreement entered into on October 31, 2011. Under the terms of the Securities Purchase Agreement, the Company issued 9,997 shares of its Series B Convertible Voting Perpetual Preferred Stock (“Series B Preferred Stock”) to the Investor at a price of $220 per share. The Company has recorded $2.0 million as Series B Preferred Stock on the consolidated balance sheet which is net of stock offering costs of approximately $202,000 and represents the value attributable to both the convertible preferred stock and warrants issued to the Investor. After considering the value of the warrants, the effective conversion price of the preferred stock was greater than the common stock price on date of issue and therefore no beneficial conversion feature was present.
On February 19, 2013, the Company entered into a Securities Purchase Agreement pursuant to which it agreed to sell 3,424.65 shares of its Series C Convertible Voting Perpetual Preferred Stock (“Series C Preferred Stock”) to the Investor, for aggregate consideration of $500,000, which is approximately $146.00 per share. The Company has recorded $457,000 as Series C Preferred Stock on the consolidated balance sheet, which is net of stock offering costs of approximately $43,000. As part of this transaction, the Company and the Investor agreed to reduce the number of shares exercisable under the previously issued warrant, and after considering the reduction in the value of the warrant, the effective conversion price of the preferred stock was greater than the common stock price on the date of issue and therefore no beneficial conversion feature was present.
On July 8, 2013 the Company received $817,000 in net cash proceeds from the Investor under a Securities Purchase Agreement. The Company sold to the Investor 5,111.86 shares of its Series D Convertible Voting Perpetual Preferred Stock (Series D Preferred Stock) and a warrant to purchase up to 511,186 additional shares of common stock at the price of $1.43 per share. The allocation of the $858,000 in gross proceeds from issuance of Series D Preferred Stock based on the relative fair values resulted in an allocation of $498,000 (which was recorded net of $41,000 of issuance costs) to Series D Preferred Stock and $360,000 to Common Stock. In addition, because the effective conversion rate based on the $498,000 allocated to Series D Preferred Stock was $0.97 per common share which was less than the Company’s stock price on the date of issuance, a beneficial conversion feature was present at the issuance date. The beneficial conversion feature totaled $238,000 and was recorded as a reduction of common stock and an increase to accumulated deficit.
Each share of Series B, Series C and Series D Preferred Stock is convertible into one hundred shares of the Company’s common stock. In connection with the preferred stock issuance described above, the Company issued to the investor warrants to purchase a total of 1,017,405 common shares at an exercise price of $1.43 per share. These warrants were exercised in February 2015, and May 2015. The Company received funds from Alara in separate closings dated February 16, 2015 and February 23, 2015. Alara exercised a total of 1,002,818 of its existing Series C and Series D warrants to purchase common shares, all of which had an exercise price of $1.43 per share for total cash proceeds of $1,434,000, which was recorded net of $42,000 of stock issuance costs. As part of the consideration for this exercise, the Company sold to Alara two new warrants to purchase an additional 898,634 and 194,437 common shares at an exercise price of $1.78 and $1.76 per share, respectively, for a total purchase price of $137,000 or $0.125 per share. The new warrants have a term of five years and may be paid in cash or through a cashless net share settlement. The Company and Alara amended the remaining 14,587 warrants as part of the February closings. On May 14, 2015, Alara exercised the remaining 14,587 warrants by acquiring 7,216 of shares of the Company’s common stock through a cashless net share settlement.
The table below present information for the periods ended March 25, 2017 and March 26, 2016:
Preferred Stock
As of March 25, 2017 and March 26, 2016
|
|
Designated
|
|
|
Shares
|
|
|
Shares
|
|
|
Liquidation
Preference
|
|
|
|
Shares
|
|
|
Issued
|
|
|
Outstanding
|
|
|
(in thousands)
|
|
Series B
|
|
|
10,000.00
|
|
|
|
9,997.00
|
|
|
|
9,997.00
|
|
|
$
|
2,309
|
|
Series C
|
|
|
3,500.00
|
|
|
|
3,424.65
|
|
|
|
3,424.65
|
|
|
|
500
|
|
Series D
|
|
|
6,000.00
|
|
|
|
5,111.86
|
|
|
|
5,111.86
|
|
|
|
731
|
|
Total
|
|
|
19,500.00
|
|
|
|
18,533.51
|
|
|
|
18,533.51
|
|
|
$
|
3,540
|
|
2
0
Subsequent Events
On April 27, 2017, the Company entered into a loan agreement with PFG. Under the terms of the agreement, PFG made a term loan to Giga-tronics in the principal amount of $1,500,000, with funding occurring on April 28, 2017.
The loan has a two-year term, with interest only payments for the term of the loan. The principal amount of the loan plus any accrued interest will be due upon maturity. The loan bears interest at an aggregate per annum rate equal to 16% per annum, fixed, which is comprised of cash interest reflecting a 9.5% per annum rate and deferred interest reflecting a 6.5% per annum rate. The Company will pay the cash interest monthly and will accrue deferred interest on the unpaid principal balance. The deferred interest will be due and payable upon maturity. In addition, the Company agreed to pay PFG a charge of up to $100,000 due and payable upon maturity, $76,000 of which was earned on April 27, 2017 and $24,000 of which is earned at the rate of $1,000 per month on the first day of each month if the loan principal (of any amount) is outstanding during any day of the prior month. If the Company meets or exceeds certain revenue and net income minimums in fiscal 2018, the amount could be reduced by 25 percent. To stay in compliance with the loan terms, the Company must meet certain financial covenants associated with minimum quarterly revenues and monthly minimum shareholders’ equity. The lender can accelerate the maturity of the loan in case of a default. The Company can prepay the loan before maturity at any time without fee or penalty.
In connection with its loan to the Company, PFG will receive up to 250,000 shares of common stock, 190,000 of which was earned on April 27, 2017 and 60,000 of which is earned at the rate of 2,500 per month on the first day of each month if the loan principal (of any amount) is outstanding during any day of the prior month.
The Company has pledged all its assets as collateral for the loan made by PFG, including all its accounts, inventory, equipment, deposit accounts, intellectual property and all other personal property. The PFG loan is subordinate to the Bridge Bank line of credit (see Note 7, Accounts Receivable Line of Credit).
On May 23, 2017, the Company renewed its accounts receivable line of credit with Bridge Bank. The $2.5 million line which expired on May 7 2017, was renewed through May 6, 2019. The renewal terms for the accounts receivable line is consistent with the current line as described in Note 7, Accounts Receivable Line of Credit.