UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-K

 

[ X ]

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

  

For the fiscal year ended March 28, 2015 ,

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 No. 0-12719

 

GIGA-TRONICS INCORPORATED

(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.)

  

  

  

4650 Norris Canyon Road, San Ramon, CA

  

94583

(Address of principal executive offices)

  

(Zip Code)

 

Registrant’s telephone number, including area code: (925) 328-4650

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Name of each exchange on which registered

Common Stock, No par value

  

The NASDAQ Stock Market LLC

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [ ] No [ X ]

 

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 [ X ]

 

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 [ X ] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes [ X ] No [ ]

 

 
1

 

 

 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

[ X ]

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

 

Large accelerated filer

[ ]

  

Accelerated filer

[ ]

  

  

  

  

  

Non-accelerated filer

[ ]

  

Smaller reporting company

[ X ]

(Do not check if a smaller reporting company)

  

  

  

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes [ ] No [ X ]

 

The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant computed by reference to the price at which the common equity was sold or the average bid and asked prices as of September 27, 2014 was $9,731,799.

 

There were a total of 6,725,281 shares of the Registrant’s Common Stock outstanding as of June 2, 2015.

  

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the following documents have been incorporated by reference into the parts indicated:

 

PART OF FORM 10-K

  

DOCUMENT

PART III

  

Registrant’s PROXY STATEMENT for its 2015 Annual Meeting of Shareholders to be filed no later than 120 days after the close of the fiscal year ended March 28, 2015.

 

 
2

 

  

TABLE OF CONTENTS

 

 

  

  

Page

 

PART I

  

ITEM 1.

Business

4

ITEM 1A.

Risk Factors

8

ITEM 1B.

Unresolved Staff Comments

10

ITEM 2.

Properties

10

ITEM 3.

Legal Proceedings

10

ITEM 4.

Mine Safety Disclosures

10

  

  

  

 

PART II

  

  

  

  

ITEM 5.

Market for Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities

11

ITEM 6.

Selected Financial Data

12

ITEM 7.

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

13

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

21

ITEM 8.

Financial Statements and Supplementary Data

22

  

Consolidated Balance Sheets as of March 28, 2015 and March 29, 2014

23

  

Consolidated Statements of Operations for the years ended March 28, 2015 and March 29, 2014

24

  

Consolidated Statements of Shareholders' Equity for the years ended March 28, 2015 and March 29, 2014

25

  

Consolidated Statements of Cash Flows for the years ended March 28, 2015 and March 29, 2014

26

  

Notes to Consolidated Financial Statements

27

  

Report of Independent Registered Public Accounting Firm

46

ITEM 9.

Changes In and Disagreements With Accountants On Accounting and Financial Disclosure

47

ITEM 9A.

Controls and Procedures

47

ITEM 9B.

Other Information

48

  

  

 

 

PART III

 

  

  

 

ITEM 10.

Directors, Executive Officers and Corporate Governance

49

ITEM 11.

Executive Compensation

49

ITEM 12.

Security Ownership Of Certain Beneficial Owners and Management and Related Shareholder Matters

49

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

49

ITEM 14.

Principal Accountant Fees and Services

49

  

  

 

 

PART IV

 

  

  

 

ITEM 15.

Exhibits and Financial Statements Schedules

50

SIGNATURES

51

 

 
3

 

 

PART 1

 

The forward-looking statements included in this report including, without limitation, statements containing the words “believes”, “anticipates”, “estimates”, “expects”, “intends” and words of similar import, which reflect management’s best judgment based on factors currently known, involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including but not limited to those discussed under “Certain Factors Which May Adversely Affect Future Operations Or An Investment In Giga-tronics” in Item 1 below and in Item 7, “Management’s Discussion and Analysis”.

 

ITEM 1. BUSINESS

 

General

 

Giga-tronics Incorporated (Giga-tronics, or the Company) includes the operations of the Giga-tronics Division and Microsource Inc. (Microsource), a wholly owned subsidiary. Giga-tronics Division designs, manufactures and markets 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. These products are used primarily in the design, production, repair and maintenance of commercial telecommunications, radar, and electronic warfare equipment.

 

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.

 

Giga-tronics was incorporated on March 5, 1980, and Microsource was acquired by Giga-tronics on May 18, 1998.

 

The combined Company principal executive offices are located at 4650 Norris Canyon Road, San Ramon, California, and its telephone number at that location is (925) 328-4650.

 

Giga-tronics intends to broaden its product lines and expand its market primarily through internal development of new products.

 

Industry Segments

 

The Company manufactures products used in test, measurement and control. The Company has two reporting segments: Giga-tronics Division and Microsource.

 

For more information regarding the Company’s two reporting segments, see “Part II-Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements-Significant Customers and Industry Segment Information.”

 

Products and Markets

 

Giga-tronics

 

The Giga-tronics Division produces signal sources, generators, power measurement and amplification instruments for use in the microwave and radio frequency (RF) range (10 kilohertz (kHz) to 50 gigahertz (GHz)).  Within each product line are a number of different models and options allowing customers to select frequency range and specialized capabilities, features and functions.  The end-user markets for these products can be divided into three broad segments:  electronic warfare, radar and commercial telecommunications.  These instruments are used in the design, production, repair and maintenance and calibration of other manufacturers’ products, from discrete components to complex systems.

 

 
4

 

 

The Giga-tronics Division also produces switching systems that operate with a bandwidth from direct current (DC) to optical frequencies.  These switch systems may be incorporated within customers’ automated test equipment. The end-user markets for these products are primarily related to defense, aeronautics, communications, satellite and electronic warfare, commercial aviation and semiconductors.

 

 Microsource

 

The Microsource segment develops and manufactures a broad line of YIG tuned oscillators, filters, filter components, and microwave synthesizers, which are used by its customers in operational applications and in manufacturing a wide variety of microwave instruments or devices. The end-user markets for these products are primarily related to defense and commercial aerospace.  

  

Sources and Availability of Raw Materials and Components

 

Substantially all of the components required by Giga-tronics to make its assemblies are available from more than one source. The Company occasionally uses sole source arrangements to obtain leading-edge technology or favorable pricing or supply terms, but not in any material volume. In the Company’s opinion, the loss of any sole source arrangement it has would not be material to its operations. Some suppliers are also competitors of Giga-tronics. In the event a competitor-supplier chooses not sell its products to Giga-tronics, production delays could occur as the Company seeks new suppliers; or, as the Company re-designs components to its products.

 

Although extended delays in receipt of components from its suppliers could result in longer product delivery schedules for the Company, the Company believes that its protection against this possibility stems from its practice of dealing with well-established suppliers and maintaining good relationships with such suppliers.

 

Patents and Licenses

 

The Company’s competitive position is largely dependent upon its ability to provide performance specifications for its instruments and systems that (a) are easy to use and effectively and reliably meet customers’ needs and (b) selectively surpass competitors’ specifications in competing products. Patents may occasionally provide some short-term protection of proprietary designs. However, because of the rapid progress of technological development in the Company’s industry, such protection is most often, although not always, short-lived. Therefore, although the Company occasionally pursues patent coverage, it places major emphasis on the development of new products with superior performance specifications and the upgrading of existing products toward this same end.

 

The Company’s products are based on its own designs, which are derived from its own engineering abilities. If the Company’s new product engineering efforts fall behind, its competitive position weakens. Conversely, effective product development greatly enhances its competitive status.

 

The Company presently holds 31 patents. Some of these are critical to the Company’s ongoing business, and the Company intends to actively maintain them. Capitalized costs relating to these patents were both incurred and fully amortized prior to March 27, 2011. Accordingly, these patents have no recorded value included in the Company’s consolidated financial statements for the fiscal years ended March 28, 2015 (“fiscal 2015”) and March 29, 2014 (“fiscal 2014”).

 

The Company is not dependent on trademarks, licenses or franchises. It does utilize certain software licenses in certain functional aspects for some of its products. Such licenses are readily available, non-exclusive and are obtained at either no cost or for a relatively small fee.

 

Seasonal Nature of Business

 

The business of the Company is not seasonal.

 

 
5

 

 

Working Capital Practices

 

The Company generally strives to maintain adequate levels of inventory and generally sells to customers on 30-day payment terms in the U.S. and generally allows more time for overseas payments. Typically, the Company receives payment terms of 30 days from its suppliers. The Company believes that these practices are consistent with typical industry practices.

 

Importance of Limited Number of Customers

 

The Company is a supplier of microwave and RF test instruments to various United States (U.S.) government defense agencies, as well as to their prime contractors. Management anticipates sales to U.S. government agencies and their prime contractors will remain significant in fiscal 2016. U.S. and international defense-related agencies accounted for 73% and 57% of net sales in fiscal 2015 and 2014, respectively. Commercial business accounted for the remaining 27% and 43% of net sales in fiscal 2015 and fiscal 2014, respectively.

 

At the Giga-tronics Division, U.S. defense agencies and their prime contractors accounted for 40% and 25% of net sales in fiscal 2015 and fiscal 2014, respectively. Microsource reported 98% and 96% of net sales to U.S. defense agencies and their prime contractors during fiscal 2015 and fiscal 2014, respectively.

 

During fiscal 2015, one customer accounted for 28% of the Company’s consolidated revenues and was included in the Microsource reporting segment. A second customer accounted for 23% of the Company’s consolidated revenues during fiscal 2015 and was also included in the Microsource reporting segment. A third customer accounted for 14% of the Company’s consolidated revenues during fiscal 2015 and was included in the Giga-tronics Division reporting segment.

 

During fiscal 2014, one customer accounted for 39% of the Company’s consolidated revenues and was included in the Microsource reporting segment. A second customer accounted for 16% of the Company’s consolidated revenues during fiscal 2014 and was included in the Giga-tronics Division reporting segment.

 

In management’s opinion, the Company could experience a material adverse effect on its financial stability if there was a significant loss of either its defense or commercial customers.

 

The Company’s products are largely capital investments for its customers, and the Company’s belief is that its customers have economic cycles in which capital investment budgets for the kinds of products that the Company produces expand and contract. The Company, therefore, expects that a major customer in one year will often not be a major customer in the following year. Accordingly, the Company’s net sales and earnings will decline if the Company is unable to find new customers or increase its business with other existing customers to replace declining net sales from the previous year’s major customers. A substantial decline in net sales to U.S. government defense agencies and their prime contractors would also have a material adverse effect on the Company’s net sales and results of operations unless replaced by net sales in the commercial sector.

 

Backlog of Orders

 

On March 28, 2015, the Company’s backlog of unfilled orders was approximately $5.7 million compared to approximately $6.7 million at March 29, 2014. As of March 28, 2015, there were approximately $521,000 of orders scheduled for shipment beyond one year. As of March 29, 2014, there were approximately $1.2 million of orders scheduled for shipment beyond one year. Orders for the Company’s products include program orders from both the U.S. government and defense contractors with extended delivery dates. Accordingly, the backlog of orders may vary substantially from year to year and the backlog entering any single quarter may not be indicative of sales for any period.

 

Backlog includes only those customer orders for which a delivery schedule has been agreed upon between the Company and the customer and, in the case of U.S. government orders, for which funding has been appropriated.

 

 
6

 

 

Competition

 

Giga-tronics serves the broad market for electronic instrumentation with applications ranging from the design, test, calibration and maintenance of other electronic devices to providing sophisticated components for complex electronic systems to sub-systems capable of sorting and identifying high frequency signals.  These applications cut across the military, commercial and industrial segments of the broader market.  The Company has a variety of competitors.  Several of its competitors such as Agilent/Keysight, Anritsu and Rohde & Schwarz are much larger than the Company and have greater resources in research and development and manufacturing with substantially broader product lines and channels.  Others are of comparable size or have small product divisions with more limited product lines, such as EADS Company, VTI Instruments, Elcom Group, Aeroflex (now Cobham Plc) and Herley Industries (now Kratos Electronic Products Division).

  

To compete effectively in this circumstance, the Company (a) places strong emphasis on maintaining a high degree of technical competence as it relates to the development of new products and the upgrading of existing products in less competitive growth areas, (b) is highly selective in establishing technological objectives and (c) focuses sales and marketing activities in areas that are weakly served or underserved. The Company does not attempt to compete ‘across the board’, but selectively based upon its particular strengths, the competitors’ perceived limitations, the customer’s needs and market opportunities.

 

The Company is able to compete by offering differentiated products that meet a customer’s particular specification requirements in high value niches; by being able to present the correct product functionality at a high quality level, and by configuring its core platforms to fit the application need.  All of these advantages are attributable to the Company’s continuing investment in platform research and development and in a highly trained engineering staff.

  

When the opportunity involves custom solutions, satisfying the customer’s specific requirements assumes greater importance and the Company has more flexibility in making modifications and enhancements than its larger and more structured competitors.

 

Sales and Marketing

 

Giga-tronics and Microsource market their products through various independent distributors and representatives to commercial and government customers for its instrument products but sell primarily direct on its switch and component products, although not necessarily through the same distributors and representatives.

  

Product Development

 

Products of the type manufactured by Giga-tronics historically have had relatively long product life cycles. However, the electronics industry is subject to rapid technological changes at the component level. The future success of the Company is dependent on its ability to steadily incorporate advancements in component technologies into its new products. In fiscal 2015 and fiscal 2014, product development expenses totaled approximately $3.2 million and $3.9 million respectively.

 

Activities included the development of new products and the improvement of existing products. It is management’s intention to maintain product development at levels required to sustain its competitive position. The Company’s product development activities are funded internally, or through outside equity investment and debt. Product development activities are expensed as incurred.

 

The Company expects to continue to make significant investments in research and development. There can be no assurance that future technologies, processes or product developments will not render the Company’s current product offerings obsolete or that the Company 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 the Company’s business.

 

 
7

 

 

Manufacturing

 

The assembly and testing of Giga-tronics Division and Microsource’s products are done at its San Ramon facility.

 

Environment

 

To the best of its knowledge, the Company is in compliance with all Federal, state and local laws and regulations involving the protection of the environment.

 

Employees

 

As of March 28, 2015 and March 29, 2014, the Company employed 71 and 76 individuals on a full-time basis, respectively. Management believes that the future success of the Company depends on its ability to attract and retain skilled personnel. None of the Company’s employees are represented by a labor union, and the Company considers its employee relations to be good.

 

Information about Foreign Operations

 

The Company sells to its international customers through a network of foreign technical sales representative organizations. All transactions between the Company and its international customers are in U.S. dollars.

 

Geographic Distribution of Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2015 

 

 

2014 

 

 

2015

 

 

2014

 

Domestic

 

$

16,985

 

 

$

11,832

 

 

 

92

%

 

 

89

%

International

 

 

1,467

 

 

 

1,477

 

 

 

8

%

 

 

11

%

Total

 

$

18,452

 

 

$

13,309

 

 

 

100.0

%

 

 

100.0

%

 

See Item 8, footnote 7 of the consolidated financial statements for further breakdown of international sales for the last two years.

 

ITEM 1A. RISK FACTORS 

 

Future liquidity is uncertain

 

Based on current levels of sales and expenses, and based on management's forecast of operations in the near future, management believes that cash and cash equivalents remain adequate to meet current operating needs. The cash forecasts are based on projections that may or may not be realized, and therefore actual cash usage could be greater than projected. In this circumstance, the Company could encounter a need to obtain additional funds from outside sources. If such additional working capital is required, there are no assurances that such financing sources will be available on favorable terms to the Company, if at all. 

 

Customer orders and production of new product platform

 

The Company invested heavily in the development of its new product platform, the Advanced Signal Generation system. In the fourth quarter of fiscal 2015 two customers accepted their initial units of the Advanced Signal Generation System. Longer than anticipated sales cycles in fiscal 2016, or delays in production and shipping volume quantities, could significantly contribute to additional losses. 

 

 
8

 

 

Ability to stay listed for trading on The NASDAQ Capital Market

 

If the Company’s shareholders’ equity falls below $2.5 million, The Nasdaq Stock Market could delist the Company from The Nasdaq Capital Market. On February 20, 2015, the Company received a letter from The Nasdaq Stock Market informing the Company that a Nasdaq Hearings Panel (the “Panel”) determined that the Company had regained compliance with Nasdaq Listing Rule 5550(b)(1), the minimum stockholders’ equity rule (the “Stockholders’ Equity Rule”). As a result, the Panel determined that the Company is in compliance with all applicable listing standards required for listing on The Nasdaq Capital Market, and accordingly, the Panel has determined to continue the listing of the Company’s securities on The Nasdaq Stock Market. However, because the Company has met compliance with the Stockholders’ Equity Rule by a relatively small margin, the Panel has imposed a Panel Monitor to monitor the Company’s continued compliance with the Stockholders’ Equity Rule until February 27, 2016. The Company is under certain notification obligations during this time period, including the obligation to notify the Panel Monitor if it fails to comply with the Stockholders’ Equity Rule or any other applicable listing requirement. If the Company’s Common Stock ceases to be listed for trading on The Nasdaq Capital Market, the Company expects that its Common Stock would be traded on the Over-the-Counter Bulletin Board on or about the same day.

 

Giga-tronics’ sales are substantially dependent on the defense industry

 

Giga-tronics has a significant number of defense-related orders. If the defense market demand decreases, actual shipments could be less than projected shipments with a resulting decline in sales. The Company’s product backlog has a number of risks and uncertainties such as the cancellation or deferral of orders, dispute over performance and the Company’s ability to collect amounts due under these orders. If any of these events occur, actual shipments could be lower than projected shipments and revenues could decline.

 

Giga-tronics’ markets involve rapidly changing technology and standards

 

The market for electronics equipment is characterized by rapidly changing technology and evolving industry standards. Giga-tronics believes that its future success will depend in part upon its ability to develop and commercialize its existing products, and in part to develop, manufacture and successfully introduce new products and product lines with improved capabilities and to continue to enhance existing products. There can be no assurance that Giga-tronics will successfully complete the development of current or future products, or that such products will achieve market acceptance. The inability to develop new products in a timely manner could have a material adverse impact on operating performance and liquidity.

  

Giga-tronics’ common stock price is volatile

 

The market price of the Company’s common stock could be subject to significant fluctuations in response to variations in quarterly operating results, reduction in revenues or lower earnings or increased losses and reduced levels of liquidity when compared to previous quarterly periods, and other factors such as announcements of technological innovations or new products by Giga-tronics or by competitors, government regulations or developments in patent or other proprietary rights. In addition, NASDAQ and other stock markets have experienced significant price fluctuations in recent years. Some of these fluctuations often have been unrelated to the reported operating performance of the specific companies whose stocks are traded. Broad market fluctuations, as well as general foreign and domestic economic conditions, may adversely affect the market price of the common stock.

  

Giga-tronics stock at any time has historically traded on low volume on the NASDAQ Capital Market. Sales of a significant volume of stock could result in a decline of Giga-tronics’ share price.

 

Performance problems in Giga-tronics’ products or problems arising from the use of its products together with other vendors’ products may harm its business and reputation

 

Products as complex as those Giga-tronics produces may contain unknown and undetected defects or performance problems. For example, it is possible that a product might not comply with stipulated specifications under all circumstances. In addition, Giga-tronics’ customers generally use its products together with their own products and products from other vendors. As a result, when problems occur in a combined 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 Giga-tronics’ reputation generally. To date, performance problems in Giga-tronics’ products or in other products used together with Giga-tronics’ products have not had a material adverse effect on its business. However, management cannot be certain that a material adverse impact will not occur in the future.

 

 
9

 

 

Giga-tronics’ competition has greater resources

 

The Company’s instrument, switch, oscillator and synthesizer products compete with Agilent/Keysight, Anritsu, EADS Company, Aeroflex (now Cobham Plc) and Rohde & Schwarz. All of these companies have substantially greater research and development, manufacturing, marketing, financial, and technological personnel and managerial resources than Giga-tronics. These resources also make these competitors better able to withstand difficult market conditions than the Company. There can be no assurance that any products developed by the competitors will not gain greater market acceptance than any developed by Giga-tronics.

  

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2. PROPERTIES

 

Giga-tronics’ principal executive office and the marketing, sales and engineering offices and manufacturing facilities are located in approximately 47,300 square feet in San Ramon, California, which the Company occupies under a lease agreement expiring December 31, 2016.

 

The Company believes that its facilities are adequate for its business activities.

 

ITEM 3. LEGAL PROCEEDINGS

 

A sole distributor of certain products has made a claim for commissions in connection with prior and future sales by the Company of products that the Company believes are excluded from the terms of the distribution agreement between the parties. As of March 28, 2015, the Company has no material pending legal proceedings. From time to time, Giga-tronics is involved in various disputes and litigation matters that arise in the ordinary course of business.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

  

 
10

 

 

PART II

 

ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES

 

Common Stock Market Prices

 

Giga-tronics’ common stock is traded on the Nasdaq Capital Market using the symbol ‘GIGA’. The number of record holders of the Company’s common stock as of March 28, 2015 was approximately 113. The table below shows the high and low closing bid quotations for the common stock during the indicated fiscal periods. These quotations reflect inter-dealer prices without mark-ups, mark-downs, or commission and may not reflect actual transactions.

 

 

2015

 

High

 

 

Low

 

2014

 

High

 

 

Low

 

First Quarter

(3/30 - 6/28)

 

$

3.45 

 

 

$

1.16 

 

(4/1 - 6/30)

 

$

1.79

 

 

$

1.37

 

Second Quarter

(6/29 - 9/27)

 

 

3.21 

 

 

 

1.84 

 

(7/1 - 9/28)

 

 

1.44

 

 

 

1.22

 

Third Quarter

(9/28 - 12/27)

 

 

2.00 

 

 

 

1.40 

 

(9/29 - 12/28)

 

 

1.24

 

 

 

0.90

 

Fourth Quarter

(12/28 - 3/28)

 

 

1.95

 

 

 

1.43 

 

(12/29 - 3/29)

 

 

1.55

 

 

 

0.92

 

 

On February 20, 2015, the Company received a letter from The Nasdaq Stock Market informing the Company that a Nasdaq Hearings Panel (the “Panel”) determined that the Company had regained compliance with Nasdaq Listing Rule 5550(b)(1), the minimum stockholders’ equity rule (the “Stockholders’ Equity Rule”). As a result, the Panel determined that the Company is in compliance with all applicable listing standards required for listing on The Nasdaq Capital Market, and accordingly, the Panel has determined to continue the listing of the Company’s securities on The Nasdaq Stock Market. However, because the Company has met compliance with the Stockholders’ Equity Rule by a relatively small margin, the Panel has imposed a Panel Monitor to monitor the Company’s continued compliance with the Stockholders’ Equity Rule until February 27, 2016. The Company is under certain notification obligations during this time period, including the obligation to notify the Panel Monitor if it fails to comply with the Stockholders’ Equity Rule or any other applicable listing requirement. If the Company’s Common Stock ceases to be listed for trading on the Nasdaq Capital Market, the Company expects that its Common Stock would be traded on the Over-the-Counter Bulletin Board on or about the same day.

 

The market price of the Company’s Common Stock may be adversely affected if it ceases to be listed for trading on the Nasdaq Capital Market.

 

Giga-tronics has not paid cash dividends in the past and has no current plans to do so in the future, believing the best use of its available capital is in the enhancement of its product position.

 

On February 16, 2015, the Company entered into a Securities Purchase Agreement and Warrant Agreement with Alara Capital in which the Company received total gross cash proceeds of approximately $1.5 million. Funds were received from Alara in separate closings dated February 16, 2015 and February 23, 2015 in which 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 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. All such transactions were previously reported in current reports on Form 8-K.  

 

 
11

 

 

Equity Compensation Plan Information

 

The following table provides information on options and other equity rights outstanding and available at March 28, 2015.

 

Equity Compensation Plan Information

 

 

 

 

 

 

 

 

 

 

 

No. of securities to be issued upon exercise of outstanding options, stock awards, warrants and rights

 

 

Weighted average exercise price of outstanding options, stock awards, warrants and rights

 

 

No. of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

 

Plan Category

 

(a)

 

 

(b)

 

 

(c)

 

Equity compensation plans approved by security holders

 

 

2,208,975

 

 

 

$1.23

 

 

 

397,425

 

Equity compensation plans not approved by security holders

 

 

     

 

 

n/a

 

Total

 

 

2,208,975

     

$1.23

 

 

 

397,425

 

  

Issuer Repurchases

 

The Company did not repurchase any of its equity securities during the fiscal year ended March 28, 2015.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Pursuant to Item 301(c) of Regulation S-K., the Company, as a smaller reporting company, is not required to provide the information required by this item.

 

 
12

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

Overview

 

Giga-tronics produces instruments, subsystems and sophisticated microwave components that have broad applications in both defense electronics and wireless telecommunications. The Company has two reporting 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. These products are used primarily in the design, production, repair and maintenance of radar, electronic warfare equipment and commercial telecommunications.

 

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.

 

In fiscal 2015 the Giga-tronics Division received a $2.4 million order from the United States Navy (“Navy”) for its Model 8003 Precision Scalar Analyzers product (“8003”). The Navy was a significant customer for the Company in fiscal 2015. Also, in both fiscal 2015 and fiscal 2014 the Giga-tronics Division had a range of customers, both domestic and international, and one significant reseller.

 

In fiscal 2015 the 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”). On May 14, 2015 the Company finalized a multi-year follow-on order for $10.0 million associated with the production units, which are anticipated to start shipping in August of 2016.

 

In fiscal 2015 and fiscal 2014, almost all of the orders and sales for the Microsource business unit were from two large aerospace customers. Almost all the orders and revenue for the Microsource business is associated with programs for retrofitting radar filter components on existing military aircraft and radar filter components for new military aircraft. The timing of orders and milestone achievements associated with these customers causes significant differences in orders, backlog, sales, deferred revenue, inventory and cash flow when comparing one fiscal period to another.  

 

The Company experienced significant improvements to net sales and results of operations in fiscal 2015, when compared to fiscal 2014, due to the Giga-tronics Division Navy 8003 order and Microsource NRE Order.

 

Since fiscal 2012, the Company has invested heavily in the development of a new Advanced Signal Generation System. This investment contributed to substantial losses in fiscal years 2012 to 2014 and has comprised a significant portion of the Company’s research and development expenses since fiscal 2012. Late in fiscal 2015, the Company achieved an important milestone when two customers formally accepted their initial units of the Company’s new product. The Company believes the new Advanced Signal Generation System will significantly contribute to the Company’s long term success.

 

 
13

 

 

Results of Operations

 

New orders by reporting segment are as follows for the fiscal years ended:

 

NEW ORDERS

                 

% change

 
                   

2015

   

2014

 
                   

vs.

   

vs.

 

(Dollars in thousands)

 

2015

   

2014

   

2014

   

2013

 

Giga-tronics Division

  $ 9,095     $ 8,684       5 %     (4%

)

Microsource

    8,416       4,947       70 %     (43% )

Total

  $ 17,511     $ 13,631       28 %     (23% )

 

New orders received in fiscal 2015 increased 28% to $17.5 million from the $13.6 million received in fiscal 2014. The increase in orders was primarily due to Microsource’s receipt in fiscal 2015 of the approximately $6.5 million NRE order from a large aerospace company. The increase in new orders for the Giga-tronics Division in fiscal 2015 is primarily due to the $2.4 million order from the Navy, which was partially offset by decreases in orders associated with older legacy Giga-tronics Division products.

 

New orders received in fiscal 2014 decreased 23% to $13.6 million from the $17.7 million received in fiscal 2013. The decrease was primarily due to Microsource’s receipt in fiscal 2013 of $8.2 million in long term contracts from a large aerospace company compared to $4.0 million in fiscal 2014.

   

The following table shows order backlog and related information at fiscal year-end:

 

Backlog

                 

% change

 
                   

2015

   

2014

 
                   

vs.

   

vs.

 

(Dollars in thousands)

 

2015

   

2014

   

2014

   

2013

 

Backlog of unfilled orders

  $ 5,729     $ 6,669       (14% )     (9% )

Backlog of unfilled orders shippable within one year

    5,208       5,438       (4% )     (19% )

Long term backlog reclassified during year as shippable within one year

    521       931       (44% )     (57% )

 

The decreases in backlog at the end of fiscal 2015 and fiscal 2014 are primarily due to the timing of the Microsource business unit’s receipt of annual production contracts and production delivery schedules requested by customers.

 

The allocation of net sales by reporting segment was as follows for the fiscal years shown:

 

Allocation of Net Sales

                 

% change

 
                   

2015

   

2014

 
                   

vs.

   

vs.

 

(Dollars in thousands)

 

2015

   

2014

   

2014

   

2013

 

Giga-tronics Division

  $ 9,123     $ 7,290       25 %     (22

%)

Microsource

    9,329       6,019       55 %     25

%

Total

  $ 18,452     $ 13,309       39 %     (6% )

 

Net sales in fiscal 2015 were $18.5 million, a 39% increase from $13.3 million in fiscal 2014. Sales for the Giga-tronics Division increased 25%, or $1.8 million, primarily due to the fulfillment of the $2.4 million Navy 8003 order. Sales for the Microsource business unit increased 55%, or $3.3 million, largely due to recognizing $4.7 million of sales associated with the $6.5 million NRE Order received during the year. This was partially offset by a $1.4 million decrease in the delivery of YIG filter production units associated with the contractual timing of shipments to a large aerospace company.

 

 
14

 

 

Net sales in fiscal 2014 were $13.3 million, a 6% decrease from $14.2 million in fiscal 2013. Sales for the Giga-tronics Division decreased 22%, or $2.1 million, primarily due to a decrease in SCPM switch product sales as a result of the sale of this product line during fiscal 2014 (see Note 5, Gain on Sale of Product Line). Sales for the Microsource business unit increased 25%, or $1.2 million, largely due to the contractual timing of shipments associated with long-term contracts from a large aerospace company.

 

The allocation of cost of sales by reporting segment was as follows for the fiscal years shown:

 

Cost of Sales

                 

% change

 
                   

2015

   

2014

 
                   

vs.

   

vs.

 

(Dollars in thousands)

 

2015

   

2014

   

2014

   

2013

 

Giga-tronics Division

  $ 5,600     $ 5,093       10 %     (11

%)

Microsource

    4,845       3,718       30 %     25

%

Total

  $ 10,445     $ 8,811       19 %     1

%

 

Cost of sales as a percentage of sales decreased in fiscal 2015 to 56.6%, from 66.2% for fiscal 2014.  The decrease in fiscal 2015 was primarily due to the fulfillment of the Microsource NRE Order, which had a lower cost of sales compared to product sales. 

 

Cost of sales as a percentage of sales increased in fiscal 2014 to 66.2%, compared to 61.4% for fiscal 2013.  The increase in fiscal 2014 was primarily due to the change in product mix of Giga-tronics Division, which saw an increase in the sales of lower margin legacy products in fiscal 2014 when compared to fiscal 2013. 

   

Operating expenses were as follows for the fiscal years shown:

 

Operating Expenses

                 

% change

 
                   

2015

   

2014

 
                   

vs.

   

vs.

 

(Dollars in thousands)

 

2015

   

2014

   

2014

   

2013

 

Engineering

  $ 3,210     $ 3,897       (18% )     (9% )

Selling, general and administrative

    4,783       4,809       (1% )     (3% )

Restructuring

          331       (100% )     (21% )

Total

  $ 7,993     $ 9,037       (12% )     (7% )

 

Operating expenses decreased 12%, or $1.0 million, in fiscal 2015 compared to fiscal 2014. Engineering expenses decreased $687,000 during fiscal 2015 when compared to fiscal 2014, which was primarily due to certain engineers being assigned to a Microsource nonrecurring engineering project that is recorded as cost of sales. Selling, general and administrative expenses were approximately $4.8 million for both fiscal 2015 and fiscal 2014. Restructuring expenses decreased $331,000 in fiscal 2015 when compared to fiscal 2014, primarily due to the Company’s completion of its closure of the Santa Rosa facility in May 2013. (see Note 13, Restructuring).

 

Operating expenses decreased 7%, or $639,000, in fiscal 2014 compared to fiscal 2013. Engineering expenses decreased $385,000 during fiscal 2014 when compared to fiscal 2013, which was primarily due to certain engineers being assigned to a Microsource nonrecurring engineering project that is recorded as cost of sales. Selling, general and administrative expenses decreased $167,000 in fiscal 2014 when compared to fiscal 2013, primarily due to reductions in personnel. Restructuring expenses decreased $87,000 in fiscal 2014 when compared to fiscal 2013, primarily due to the Company’s completion of its closure of the Santa Rosa facility in May 2013. (see Note 13, Restructuring).

 

 
15

 

 

Operating Income (Loss)

 

Giga-tronics had operating income of $14,000 in fiscal 2015 compared to an operating loss of $4.5 million for fiscal 2014. The $4.5 million improvement in the results of operation in fiscal 2015 compared to fiscal 2014 was primarily due to increased revenues associated with the Microsource NRE Order and the Navy 8003 order.

 

Gain on the Sale of Product Line

 

On March 18, 2013, the Company entered into an Asset Purchase Agreement with Teradyne Inc. (“Teradyne”), whereby Teradyne agreed to purchase the Giga-tronics Division product line known as SCPM for $1.0 million, resulting in a net gain of $913,000 in fiscal 2014. (see Note 5, Gain on Sale of Product Line).

 

Warrant Charge Expense

 

In fiscal 2015 the Company recorded a $1.2 million one-time non-cash charge related to the issuance of new warrants in connection with a Stock Purchase Agreement and Warrant Agreement with Alara Capital dated February 16, 2015. Pursuant to the agreements, the Company received during February 2015 total cash proceeds of approximately $1.5 million through Alara’s exercise 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 $137,500 or $0.125 per share. The new warrants were accounted for and resulted in the charges described above. (see Note 17, Exercise of Series C and Series D Warrants).

 

Net Interest Expense

 

Net interest expense in fiscal 2015 was $406,000, an increase of $300,000 over fiscal 2014 and was primarily due to borrowings under the Silicon Valley Bank (“SVB”) line of credit and the loans from Partners For Growth IV, L.P. (“PFG”). For fiscal 2015, the Company also recorded $152,000 of interest expense related to accretion of discounts on the PFG Loan and Warrant Debt. There was no such accretion recorded in fiscal 2014 as the loan was funded in late fiscal 2014. (see Note 15, Term Loan, revolving Line of Credit and Warrants).

 

The SVB line of credit expired on April 15, 2015 and was replaced with a $2.5 million line of credit with Bridge Bank. (see Note 18, Subsequent Events).

 

Derivative Liability

  

For fiscal 2015 and 2014, there were no gains or losses recorded in association with the revaluation of the PFG debt derivative liability.     

 

Net Loss

 

Giga-tronics recorded a pre-tax loss of $1.6 million for fiscal 2015 primarily due to the $1.2 million Alara Capital non-cash warrant charge described above. In fiscal 2014 Giga-tronics recorded a pre-tax loss of $3.7 million due to an operating loss of $4.5 million partially offset by a $913,000 gain on the sale of a product line described above.

 

 
16

 

 

Net Inventories

 

Inventories consisted of the following:

 

Net Inventories

                 

% change

 
                   

2015

 
   

March 28,

   

March 29,

   

vs.

 

(Dollars in thousands)

 

2015

   

2014

   

2014

 

Raw materials

  $ 1,631     $ 1,501       9 %

Work-in-progress

    1,598       1,400       14 %

Finished goods

    15       353       (96 %)

Demonstration inventory

    121       67       81 %

Total

  $ 3,365     $ 3,321       1 %

 

Net inventories increased by $44,000 from March 29, 2014 to March 28, 2015. The increase was primarily due to purchases of inventory for future product deliveries.    

 

Financial Condition and Liquidity

 

As of March 28, 2015, Giga-tronics had $1.2 million in cash and cash-equivalents, compared to $1.1 million as of March 29, 2014.

 

Working capital at the end of fiscal year 2015 was $3.0 million as compared to $1.0 million at the end of fiscal year 2014. The current ratio (current assets divided by current liabilities) at March 28, 2015 was 1.69 as compared to 1.17 at March 29, 2014. The fiscal 2015 increase in working capital was primarily attributable to a $1.2 million decrease in the line of credit balance resulting from the receipt of $1.5 million in net cash proceeds from Alara Capital’s exercise of its warrants (see Note 17, Exercise of Series C and Series D Warrants) and the $508,000 increase in accounts receivable due to the increase in net sales.

 

Cash used in operating activities amounted to $542,000 in fiscal 2015, primarily due to the net loss of $1.7 million, a $508,000 increase in accounts receivable due to increased sales, and a $457,000 decrease in accounts payable associated with the timing of vendor payments. These were partially offset by non-cash charges of $1.2 million for the Alara Capital warrants and $827,000 for share based compensation. Cash used in operating activities was $2.5 million in fiscal 2014, primarily attributed to the net loss of $3.7 million for the year, which was partially offset by a $1.2 million decrease in inventories. 

 

Additions to property and equipment were $16,000 in fiscal 2015 compared to $228,000 in fiscal 2014. The additions in fiscal 2015 were associated with equipment required to manufacture the new product platform. The additions in the prior year were primarily due to leasehold improvements associated with moving the Microsource manufacturing to the San Ramon facility.

 

Cash provided by financing activities in fiscal year 2015 was $669,000, primarily due to $1.5 million in net proceeds from the exercise of existing Alara Capital warrants and $500,000 in proceeds from a revolving line of credit with PFG. These proceeds were partially offset by a $1.2 million repayment of the Company’s line of credit with SVB and a $200,000 repayment on the term loan with PFG. Cash provided by financing activities in fiscal 2014 was $1.9 million which was primarily the result of $1.0 million in proceeds from the PFG term loan, and $817,000 in net proceeds from the issuance of Series D convertible preferred stock.

 

On February 16, 2015, the Company entered into a Securities Purchase Agreement and Warrant Agreement with Alara Capital AVI II, LLC (“Alara Capital”), an investment vehicle sponsored by AVI Partners, LLC (“AVI” ) (with both entities collectively referred to herein as “Alara”), in which the Company received total gross cash proceeds of approximately $1.5 million. Funds were received from Alara in separate closings dated February 16, 2015 and February 23, 2015 in which 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.

 

 
17

 

 

On June 16, 2014, Giga-tronics amended its loan agreement with PFG. Under the terms of the amendment, PFG made a revolving line of credit available to Giga-tronics in the amount of $500,000 and the Company borrowed the entire amount on June 17, 2014. The Company’s original agreement with PFG was entered into on March 13, 2014 under which the Company received $1.0 million from a three-year term loan. Pursuant to the amended loan agreement, the Company may borrow an additional $500,000. The loan agreement contains 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.  

 

In fiscal 2012 the Company began to invest heavily in the development of a new Giga-tronics Division product platform, the Advanced Signal Generation System. Delays in completing the Advanced Signal Generation System have contributed significantly to the losses of the Company. In fiscal 2015 the Company’s net loss was $1.7 million, which included a non-cash expense of $1.2 million related to the issuance of new warrants to Alara Capital and $152,000 of non-cash accretion of loan and warrant debt discounts. Also in fiscal 2015 the Company had operating income of $14,000, compared to an operating loss of $4.5 million in fiscal 2014.

 

In the fourth quarter of fiscal 2015 the Company received $1.5 million of net proceeds associated with Alara Capital exercising 1,002,818 of existing warrants (see Note 17, Exercise of Series C and Series D Warrants). Also in the fourth quarter of fiscal 2015 two customers formally accepted initial units of the Company’s new Advanced Signal Generation System. With initial customer acceptance of Advanced Signal Generation System units, similar units of the new platform are in production for potential future sales to customers. The Company could experience longer than anticipated sales cycles or delays in production and shipping volume quantities of the Advanced Signal Generation System, however, the Company believes the Advanced Signal Generation System will significantly contribute to the Company’s long term success. Furthermore management expects the Company’s cash and liquidity needs will be met through fiscal 2016, even if the Company experiences such delays. On June 1, 2015 the Company entered into a two year $2.5 million Revolving Accounts Receivable Line of Credit agreement with Bridge Bank N.A (“Bridge Bank”). The Bridge Bank credit facility replaced the line of credit with SVB, which expired April 15, 2015. The $2.5 million credit facility includes $500,000 of available borrowing not based on accounts receivables. (see Note 18, Subsequent Events).

 

Given the improved net loss and operating income in fiscal 2015, the $1.5 million of cash received in the fourth quarter of fiscal 2015 from the Alara Capital warrant exercise, the $2.5 million June 1, 2015 Bridge Bank Revolving Accounts Receivable Line of Credit agreement, and management’s forecasts of the Company’s cash flows for fiscal 2016, management believes the Company will have the necessary liquidity to continue its operations at least for the next twelve months.  

 

 Contractual Obligations

 

The Company leases its facility under an operating lease that expires in December 2016 and leases certain equipment under operating leases. Total future minimum lease payments under these leases amount to approximately $1.3 million.

 

The Company leases equipment under capital leases that expire through May 2019. The future minimum lease payments under these leases are approximately $158,000.

 

 
18

 

 

The Company is committed to repay the PFG loan with a maturity date of January 2017. Future payments under this loan consist of $1.3 million in principal and $110,000 in interest.

 

The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of March 28, 2015, total non–cancelable purchase orders were approximately $1.6 million and are scheduled to be delivered to the Company at various dates through March 2016.

 

Critical Accounting Policies

 

The Company’s discussion and analysis of its financial condition and the results of operations are based upon the consolidated financial statements included in this report and the data used to prepare them. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and management is required to make judgments, estimates and assumptions in the course of such preparation. The Summary of Significant Accounting Policies included with the consolidated financial statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. On an ongoing basis, the Company re-evaluates its judgments, estimates and assumptions. The Company bases its judgment and estimates on historical experience, knowledge of current conditions, and its beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Management of Giga-tronics has identified the following as the Company’s critical accounting policies:

 

Revenue Recognition

 

Revenues are recognized when there is evidence of an arrangement, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. This generally occurs when products are shipped and the risk of loss has passed. Revenue related to products shipped subject to customers’ evaluation is recognized upon final acceptance. Revenue recognized under the milestone method is recognized once milestones are met. 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:

 

a. It is commensurate with either of the following:

1. The Company’s performance to achieve the milestone

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.

b. It relates solely to past performance.

c. It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

 

Milestones for revenue recognition are agreed upon with the customer prior to the start of the contract and some milestones will be tied to product shipping while others will be tied to design review.

 

On certain contracts with one 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 have been met.

 

Product Warranties

 

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 sufficient historical data has been collected on the new product. Adjustments are made as new information becomes available.

 

 
19

 

  

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are stated at their net realizable values. The Company has estimated an allowance for uncollectible accounts based on analysis of specifically identified problem 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.

   

Inventory

 

Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company periodically reviews inventory on hand to identify and write down excess and obsolete inventory based on estimated product demand.

 

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 the consolidated 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.

 

Share Based Compensation

 

The Company has a stock incentive plan that provides for the issuance of stock options and restricted stock to employees and directors. The Company calculates share based compensation expense for stock options using a Black-Scholes-Merton option pricing model and records the fair value of stock option and restricted stock awards expected to vest over the requisite service period. In so doing, the Company makes certain key assumptions in making estimates used in the model. The Company believes the estimates used, which are presented in Note 10 of Notes to Consolidated Financial Statements, are appropriate and reasonable.

 

 
20

 

 

Off-Balance-Sheet Arrangements

 

The Company has no other off-balance-sheet arrangements (including standby letters of credit, guaranties, contingent interests in transferred assets, contingent obligations indexed to its own stock or any obligation arising out of a variable interest in an unconsolidated entity that provides credit or other support to the Company), that have or are likely to have a material effect on its financial conditions, changes in financial conditions, revenue, expense, results of operations, liquidity, capital expenditures or capital resources.

 

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.

 

 
21

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

Index To Financial Statements And Schedules

 

 

Financial Statements

Page

  

  

Consolidated Balance Sheets - As of March 28, 2015 and March 29, 2014

23

  

 

Consolidated Statements of Operations - Years ended March 28, 2015 and March 29, 2014

24

  

 

Consolidated Statements of Shareholders’ Equity - Years ended March 28, 2015 and March 29, 2014

25

  

 

Consolidated Statements of Cash Flows - Years ended March 28, 2015 and March 29, 2014

26

  

 

Notes to Consolidated Financial Statements

27-45

  

 

Report of Independent Registered Public Accounting Firm

46

 

 
22

 

  

CONSOLIDATED BALANCE SHEETS

 

(In thousands except share data)

 

March 28, 2015

   

March 29, 2014

 

Assets

               

Current assets:

               

Cash and cash-equivalents

  $ 1,170     $ 1,059  

Trade accounts receivable, net of allowance of $45 and $44, respectively

    2,354       1,846  

Inventories, net

    3,365       3,321  

Prepaid expenses and other current assets

    373       349  

Total current assets

    7,262       6,575  

Property and equipment, net

    718       949  

Other long term assets

    74       69  

Total assets

  $ 8,054     $ 7,593  

Liabilities and shareholders' equity

               

Current liabilities:

               

Line of credit

  $     $ 1,165  

Current portion of long term debt

    811       200  

Accounts payable

    973       1,430  

Accrued payroll and benefits

    678       755  

Deferred revenue

    1,127       1,329  

Deferred rent

    127       104  

Capital lease obligations

    69       147  

Other current liabilities

    501       472  

Total current liabilities

    4,286       5,602  

Long term loan and warrant debt, net of discounts

    392       672  

Derivative liability, at estimated fair value

    252       128  

Long term obligations - deferred rent

    111       237  

Long term obligations - capital lease

    58       77  

Total liabilities

    5,099       6,716  

Commitments and contingencies

               

Shareholders' equity:

               

Convertible preferred stock of no par value; Authorized - 1,000,000 shares

               

Series A - designated 250,000 shares; no shares at March 28, 2015 and March 29, 2014 issued and outstanding

           

Series B, C, D- designated 19,500 shares; 18,533.51 shares at March 28, 2015 and March 29, 2014 issued and outstanding; (liquidation preference of $3,540 at March 28, 2015 and March 29, 2014)

    2,911       2,911  

Common stock of no par value; Authorized - 40,000,000 shares; 6,706,065 shares at March 28, 2015 and 5,181,247 at March 29, 2014 issued and outstanding

    19,975       16,224  

Accumulated deficit

    (19,931 )     (18,258

)

Total shareholders' equity

    2,955       877  

Total liabilities and shareholders' equity

  $ 8,054     $ 7,593  

 

See Accompanying Notes to Consolidated Financial Statements

 

 
23

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   

Years Ended

 

(In thousands except per-share data)

 

March 28, 2015

   

March 29, 2014

 

Net sales

  $ 18,452     $ 13,309  

Cost of sales

    10,445       8,811  

Gross margin

    8,007       4,498  
                 

Operating expenses:

               

Engineering

    3,210       3,897  

Selling, general and administrative

    4,783       4,809  

Restructuring

          331  

Total operating expenses

    7,993       9,037  
                 

Operating income/(loss)

    14       (4,539

)

                 

Gain on sale of product line

          913  

Warrant expense

    (1,232 )      

Other loss

    (2 )     (8 )

Interest expense:

               

Interest expense, net

    (254 )     (106

)

Interest expense from accretion of loan and warrant debt discounts

    (152 )      

Total interest expense

    (406 )     (106 )

Loss before income taxes

    (1,626 )     (3,740

)

Provision for income taxes

    47       2  

Net loss

  $ (1,673 )   $ (3,742

)

                 

Loss per common share – basic

  $ (0.32 )   $ (0.74

)

Loss per common share – diluted

  $ (0.32 )   $ (0.74

)

                 

Weighted average common shares used in per share calculation:

         

Basic

    5,279       5,058  

Diluted

    5,279       5,058  

 

 See Accompanying Notes to Consolidated Financial Statements

 

 
24

 

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

 

   

Preferred Stock

   

Common Stock

   

Accumulated

         

(In thousands except share data)

 

Shares

   

Amount

   

Shares

   

Amount

   

Deficit

   

Total

 

Balance at March 30, 2013

    13,422     $ 2,454       5,079,747     $ 15,132     $ (14,278

)

  $ 3,308  

Net loss

                                    (3,742 )     (3,742 )

Restricted stock granted

                    71,500                          

Stock granted without restrictions

                    30,000                          

Share based compensation

                            494               494  

Series D preferred stock issuance, net of offering costs of $41

    5,112       457               598       (238 )     817  

Balance at March 29, 2014

    18,534       2,911       5,181,247       16,224       (18,258 )     877  

Net loss

                                    (1,673

)

    (1,673

)

Restricted stock granted

                    432,000                        

Option exercises

                    90,000       163               163  

Share based compensation

                            827               827  

Warrant charge expense

                          1,232               1,232  

Warrant exercise and newly issued warrant, net of issuance cost

                    1,002,818       1,529               1,529  

Balance at March 28, 2015

    18,534     $ 2,911       6,706,065     $ 19,975     $ (19,931 )   $ 2,955  

 

See Accompanying Notes to Consolidated Financial Statements

 

 
25

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

  

   

Years Ended

 

(In thousands)

 

March 28, 2015

   

March 29, 2014

 

Cash flows from operating activities:

               

Net loss

  $ (1,673 )   $ (3,742 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Warrant issuance expense

    1,232        

Depreciation and amortization

    311       284  

Share based compensation

    827       494  

Accretion of discounts on loan and warrant debt

    152        

Change in deferred rent

    (103 )     (81 )

Changes in operating assets and liabilities:

               

Trade accounts receivable

    (508 )     (180 )

Inventories

    (44 )     1,239  

Prepaid expenses and other assets

    (29 )     83  

Accounts payable

    (457 )     642  

Accrued payroll and benefits

    (77 )     (292 )

Deferred revenue

    (202 )     (949 )

Other current liabilities

    29       (33 )

Net cash used in operating activities

    (542 )     (2,535 )
                 

Cash flows from investing activities:

               

Purchases of property and equipment

    (16 )     (228 )

Net cash used in investing activities

    (16 )     (228 )
                 

Cash flows from financing activities:

               

Proceeds from exercise and issuance of warrants, net of issuance costs of $42

    1,529        

Proceeds from exercise of stock options

    163        

Payments on capital leases

    (158 )     (185 )

Proceeds from line of credit

    8,624       5,917  

Proceeds from issuance of debt

    500       1,000  

Repayments of line of credit

    (9,789 )     (5,609 )

Repayments of debt

    (200 )      

Proceeds from issuance of preferred stock, net of issuance costs of $41

          817  

Net cash provided by financing activities

    669       1,940  
                 

Increase/(Decrease) in cash and cash-equivalents

    111       (823 )
                 

Beginning cash and cash-equivalents

    1,059       1,882  

Ending cash and cash-equivalents

  $ 1,170     $ 1,059  
                 

Supplementary disclosure of cash flow information:

               

Cash paid for income taxes

  $ 2     $ 2  

Cash paid for interest

  $ 219     $ 106  
                 

Supplementary disclosure of noncash financing activities:

               

Equipment acquired under capital lease

  $ 61     $ 254  

 

See Accompanying Notes to Consolidated Financial Statements

 

 
26

 

 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1     Summary of Significant Accounting Policies

 

The Company 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 San Ramon, California. Giga-tronics and its subsidiary company design, manufacture and market 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. The Company also manufactures and markets a line of test, measurement, and handling equipment used in the manufacturing of semiconductor devices. The Company’s products are sold worldwide to customers in the test and measurement and semiconductor industries. The Company currently has no foreign-based operations or material amounts of identifiable assets in foreign countries. Its gross margins on foreign and domestic sales are similar, and all non-U.S. sales are transacted in U.S. dollars.

 

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.

 

Basis of Presentation The consolidated financial statements are presented on the assumption that the company will continue to operate as a going concern. Discussion of recent events that Management believes support this presentation are as follows:

 

In fiscal 2012 the Company began to invest heavily in the development of a new Giga-tronics Division product platform, the Advanced Signal Generation System. Delays in completing the Advanced Signal Generation System have contributed significantly to the losses of the Company. In fiscal 2015 the Company’s net loss was $1.7 million, which included a non-cash expense of $1.2 million related to the issuance of new warrants to Alara Capital and $152,000 of non-cash accretion of loan and warrant debt discounts. Also in fiscal 2015 the Company had operating income of $14,000, compared to an operating loss of $4.5 million in fiscal 2014.

 

In the fourth quarter of fiscal 2015 the Company received $1.5 million of net proceeds associated with Alara Capital exercising 1,002,818 of existing warrants (see Note 17, Exercise of Series C and Series D Warrants). Also in the fourth quarter of fiscal 2015 two customers formally accepted initial units of the Company’s new Advanced Signal Generation System. With initial customer acceptance of Advanced Signal Generation System units, similar units of the new platform are in production for potential future sales to customers. The Company could experience longer than anticipated sales cycles or delays in production and shipping volume quantities of the Advanced Signal Generation System, however, the Company believes the Advanced Signal Generation System will significantly contribute to the Company’s long term success. On June 1, 2015 the Company entered into a two year $2.5 million Revolving Accounts Receivable Line of Credit agreement with Bridge Bank. The Bridge Bank credit facility replaced the line of credit with SVB, which expired April 15, 2015. The $2.5 million credit facility includes $500,000 on a non-formula basis in addition to the Borrowing Base. (see Note 18, Subsequent Events).

 

 

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 2015, ended on March 28, 2015 resulting in a 52 week year. Fiscal year 2014, ended on March 29, 2014 also resulting in a 52 week year. All references to years in the consolidated financial statements relate to fiscal years rather than calendar years.

 

 
27

 

 

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:

 

a. It is commensurate with either of the following:

1. The Company’s performance to achieve the milestone.

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.

b. It relates solely to past performance.

c. It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

 

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 28, 2015 and March 29, 2014, revenue recognized on a milestone basis were $4.7 million and $486,000, 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 reserve account for doubtful accounts is as follows for the years ending March 28, 2015 and March 29, 2014:

  

(Dollars in thousands)

 

March 28, 2015

   

March 29, 2014

 

Beginning balance

  $ 44     $ 35  

Provisions (reversals of previous provisions) for doubtful accounts

    1       22  

Write-off of doubtful accounts

          (13 )

Ending balance

  $ 45     $ 44  

 

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.

 

 
28

 

 

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 $3.2 million and $3.9 million for the years ended March 28, 2015 and March 29, 2014, 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 28, 2015 and March 29, 2014, management believes there has been no impairment of the Company’s long-lived assets.

 

Derivatives The Company accounts for free standing derivatives and embedded derivatives required to be bifurcated and accounted for on a stand-alone basis at estimated fair value. Changes in fair value are reported in earnings as other income or loss.

 

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.

  

 
29

 

 

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 28, 2015 and March 29, 2014.

 

Software Development Costs Development costs included in the research and development of new products and enhancements to existing products are expensed as incurred, until technological feasibility in the form of a working model has been established. To date, completion of software development has been concurrent with the establishment of technological feasibility, and accordingly, no costs have been capitalized.

 

Share-based Compensation The Company has established the 2005 Equity Incentive Plan, which provides for the granting of options for up to 2,250,000 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 28, 2015 or March 29, 2014.

 

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 nonforfeitable 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.

 

 
30

 

 

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 28, 2015, and March 29, 2014, three customers combined accounted for 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, warrant liability 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.

  

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. The fair values of term debt and warrant debt are based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3). At March 28, 2015 the carrying amounts of the Company’s term debt and warrant debt totaled $1.1 million and $82,000, respectively. At March 28, 2015 the estimated fair values of the Company’s term debt and warrant debt totaled $1.2 million and $112,000, respectively. At March 29, 2014, the carrying amounts of the Company’s term debt and warrant debt totaled $822,000 and $50,000, respectively, and the carrying amounts approximated fair value since the agreement was entered into near the balance sheet date. The fair value of the bifurcated conversion feature represented by the warrant derivative liability which is measured at fair value on a recurring basis is based on a Black Scholes option pricing model with assumptions for stock price, exercise price, volatility, expected term, risk free interest rate and dividend yield similar to those described previously for share-based compensation which were generally observable (Level 2). The Company had no assets or liabilities measured at fair value on a non-recurring basis, nor were there any transfers between Level 1 and Level 2 of the fair value hierarchy. 

 

Recently Issued Accounting Standards

 

In April 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update that changes the criteria for reporting discontinued operations. Under the accounting standard update, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results when either it qualifies as held for sale, disposed of by sale, or disposed of other than by sale. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2016. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

 

In May 2014, the FASB amended the accounting standards by creating a new Topic 606 which is in response to a joint initiative of the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. generally accepted accounting principles and international financial reporting standards that would:

  

  

1.

Remove inconsistencies and weaknesses in revenue requirements.

  

2.

Provide a more robust framework for addressing revenue issues.

  

3.

Improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets.

  

4.

Provide more useful information to users of financial statements through improved disclosure requirements.

  

5.

Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

  

 
31

 

 

For a public entity, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently evaluating the impact this new accounting standard will have on its financial statements.

  

In June 2014, the FASB amended ASC 718, Share Based Compensation, to require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. For all entities, the amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company is currently evaluating the impact this accounting standard update may have on its financial statements.    

  

In August 2014, the FASB issued ASU 2014-15 which 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 is currently evaluating the impact this accounting standard update may have on its financial statements.

 

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 will change the presentation of debt issuance costs, which will be reported as a direct offset to the applicable debt on the balance sheet.

  

2     Cash and Cash-Equivalents

 

Cash and cash-equivalents of $1.2 million and $1.1 million at March 28, 2015 and March 29, 2014, respectively, consisted of demand deposits with a financial institution that is a member of the Federal Deposit Insurance Corporation (FDIC). At March 28, 2015, $827,000 of the Company’s demand deposits exceeded FDIC insurance limits.

 

 

3     Inventories

 

Inventories, net of reserves, consisted of the following:

 

(Dollars in thousands)

 

March 28, 2015 

 

 

March 29, 2014 

 

Raw materials

 

$

1,631

 

 

$

1,501

 

Work-in-progress

 

 

1,598

 

 

 

1,400

 

Finished goods

 

 

15

 

 

 

353

 

Demonstration inventory

 

 

121

 

 

 

67

 

Total

 

$

3,365

 

 

$

3,321

 

 

 
32

 

 

4     Property, Plant and Equipment, net

 

Property, plant and equipment, net is comprised of the following:

 

(Dollars in thousands)

 

March 28, 2015

   

March 29, 2014

 

Leasehold improvements

  $ 327       327  

Machinery and equipment

    4,130       3,863  

Computer and software

    459       388  

Furniture and office equipment

    325       325  

Construction in progress

          227  
      5,241       5,130  

Less: accumulated depreciation and amortization

    (4,523 )     (4,181 )

Total

  $ 718     $ 949  

 

 5     Gain on Sale of Product Line

 

On March 18, 2013, the Company entered into an Asset Purchase Agreement with Teradyne Inc. (Teradyne), whereby Teradyne agreed to purchase the Giga-tronics Division product line known as SCPM for $1.0 million, resulting in a net gain of $913,000 during fiscal 2014.

 

6     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 $237,000 and $196,000 for fiscal 2015 and 2014, respectively. Advertising costs, which are expensed as incurred, totaled $7,000 and $14,000 for fiscal 2015 and 2014, respectively.

 

7     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.

 

 
33

 

 

The tables below present information for the fiscal years ended in 2015 and 2014.

 

March 28, 2015 (Dollars in thousands)

 

Giga-tronics Division

   

Microsource

   

Total

 

Revenue

  $ 9,123     $ 9,329     $ 18,452  

Other expense

    (1,386 )           (1,386 )

Interest expense, net

    (254 )           (254 )

Depreciation and amortization

    277       34       311  

Capital expenditures

    81             81  

Income/(Loss) before income taxes

    (6,110 )     4,484       (1,626 )

Assets

    6,103       1,951       8,054  

 

March 29, 2014 (Dollars in thousands)

 

Giga-tronics Division

   

Microsource

   

Total

 

Revenue

  $ 7,290     $ 6,019     $ 13,309  

Interest expense, net

    (106 )           (106 )

Depreciation and amortization

    251       33       284  

Capital expenditures

    482             482  

Loss before income taxes

    (3,531 )     (209 )     (3,740 )

Assets

    5,442       2,151       7,593  

 

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 2015 and 2014, U.S. government and U.S. defense-related customers accounted for 69% and 57% of sales, respectively. During fiscal 2015, one customer accounted for 28% of the Company’s consolidated revenues at March 28, 2015 and was included in the Microsource segment. A second customer accounted for 23% of the Company’s consolidated revenues at March 28, 2015 and was also included in the Microsource segment. A third customer accounted for 14% of the Company’s consolidated revenues during fiscal 2015 and was included in the Giga-tronics Division reporting segment.

 

During fiscal 2014, one customer accounted for 39% of the Company’s consolidated revenues at March 29, 2014 and was included in the Microsource segment. A second customer accounted for 16% of the Company’s consolidated revenues at March 29, 2014 and was included in the Giga-tronics Division.

 

Export sales accounted for 8% and 11% of the Company’s sales in fiscal 2015 and 2014, respectively. Export sales by geographical area for these fiscal years are shown below:

 

(Dollars in thousands)

 

March 28, 2015 

 

 

March 29, 2014 

 

Americas

 

$

26

 

 

$

169

 

Europe

 

 

179

 

 

 

661

 

Asia

 

 

1,085

 

 

 

507

 

Rest of world

 

 

177

 

 

 

140

 

Total

 

$

1,467

 

 

$

1,477

 

  

 
34

 

 

8     Loss per Common Share

 

Net loss and common shares used in per share computations for the fiscal years ended March 28, 2015 and March 29, 2014 are as follows:

 

(In thousands except per-share data)

 

March 28, 2015 

 

 

March 29, 2014 

 

Net loss

 

$

(1,673

)

 

$

(3,742

)

 

 

 

   

 

 

   

Weighted average:

 

 

   

 

 

   

Common shares outstanding

 

 

5,279

 

 

 

5,058

 

Potential common shares

   

     

 

Common shares assuming dilution

 

 

5,279

 

 

 

5,058

 

 

 

 

   

 

 

   

Loss per common share – basic

 

$

(0.32

)

 

$

(0.74

)

Loss per common share – diluted

 

$

(0.32

)

 

$

(0.74

)

Stock options not included in computation that could potentially dilute EPS in the future

 

 

1,727

 

 

 

1,739

 

Restricted stock awards not included in computation that could potentially dilute EPS in the future

 

 

482

 

 

 

122

 

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

 

 

1,368

 

 

 

1,317

 

 

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 28, 2015 and March 29, 2014 is a result of the Company’s net loss and, therefore, the effect of these instrument would be anti-dilutive.

 

9     Income Taxes

 

Following are the components of the provision for income taxes:

 

Fiscal years ended (In thousands)

 

March 28, 2015 

 

 

March 29, 2014 

 

Current

 

 

 

 

 

 

 

 

Federal

 

$

 

 

 

$

 

 

State

 

 

47

 

 

 

2

 

Total current

 

 

47

 

 

 

2

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

Federal

 

 

210

   

 

(568

)

State

 

 

391

   

 

(330

)

Total deferred

 

 

601

   

 

(898

)

 

 

 

     

 

 

 

Change in liability for uncertain tax positions

 

 

23

   

 

1,579

 

Change in valuation allowance

 

 

(624

)  

 

(681

)

Provision for income taxes

 

$

47 

 

 

$

2

 

 

 
35

 

 

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 28, 2015 

 

 

March 29, 2014 

 

Net operating loss carryforwards

 

$

13,657

 

 

$

14,300

 

Income tax credits

 

 

306

 

 

 

143

 

Inventory reserves and additional costs capitalized

 

 

1,974

 

 

 

2,051

 

Accrued vacation

 

 

133

 

 

 

129

 

Deferred rent

 

 

95

 

 

 

136

 

Non-qualified stock options and restricted stock

 

 

247

 

 

 

211

 

Other

 

 

48

 

 

 

114

 

Total deferred tax assets

 

 

16,460

 

 

 

17,084

 

 

 

 

 

 

 

 

 

 

Valuation allowance

 

 

(16,460

)

 

 

(17,084

)

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 28, 2015 and March 29, 2014: 

 

Fiscal years ended (In thousands except percentages)

 

March 28, 2015

   

March 29, 2014

 

Statutory federal income tax (benefit)

  $ (553 )     34 %   $ (1,256 )     34 %

Valuation allowance

    (624 )     38.4       681       (18.4 )

State income tax, net of federal benefit

    (95 )     5.8       (216 )     5.8  

Net operating loss expiration

    861       (53.0 )            

Non tax-deductible expenses

    593       (36.5 )     132       (3.6 )

Tax credits

    (187 )     11.5       2,238       (60.6 )

Liability for uncertain tax positions

    23       (1.4 )     (1,579 )     42.8  

Other

    29       (1.8 )     2       (0.1 )

Effective income tax

  $ 47       3.0 %   $ 2       (0.1 )%

 

The decrease in valuation allowance from March 29, 2014 to March 28, 2015 was $624,000.

 

As of March 28, 2015, the Company had pre-tax federal net operating loss carryforwards of $35.9 million and state net operating loss carryforwards of $25.0 million available to reduce future taxable income. The federal and state net operating loss carryforwards begin to expire from fiscal 2023 through 2035 and from 2015 through 2035, 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 2021 through 2035 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 28, 2015, the Company recorded unrecognized tax benefits of $93,000 related to uncertain tax positions. The unrecognized tax benefit is netted against the noncurrent 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.

 

 
36

 

 

The Company files U.S federal and California state income 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 pending. 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 in fiscal 2014.  The write-off of these income tax credit carryovers did not have a significant 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 2015

   

Fiscal Year 2014

 

Balance as of beginning of year

  $ 70     $ 1,649  

Additions based on current year tax positions

    23        

(Reductions) additions for prior year tax positions

          (1,579 )

Balance as of end of year

  $ 93     $ 70  

 

The total amount of interest and penalties related to unrecognized tax benefits at March 28, 2015 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.

 

10     Share-based Compensation and Employee Benefit Plans

 

Share-based Compensation The Company has established the 2000 Stock Option Plan and the 2005 Equity Incentive Plan, which provide for the granting of options and restricted stock for up to 2,250,000 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. Option grants under the 2000 Stock Option Plan are no longer available. 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 28, 2015, no SAR’s have been granted under the option plan. As of March 28, 2015, the total number of shares of common stock available for issuance is 397,425. All outstanding options have either a five year or a ten year life.

 

The weighted average grant date fair value of stock options granted during the fiscal years ended March 28, 2015 and March 29, 2014 was $1.66 and $1.07, respectively, and was calculated using the following weighted-average assumptions:

 

Fiscal years ended

 

March 28, 2015

   

March 29, 2014

 

Dividend yield

           

Expected volatility

    92

%

    86

%

Risk-free interest rate

    1.61

%

    1.02

%

Expected term (years)

    8.34       7.91  

 

 
37

 

 

A summary of the changes in stock options outstanding for the fiscal years ended March 28, 2015 and March 29, 2014 is presented below:

 

 

 

 

 

 

 

 

 

 

Weighted

Average

 

 

 

 

 

 

 

 

 

 

Weighted

Average

 

 

Remaining

Contractual

 

 

Aggregate

Intrinsic

 

(Dollars in thousands except share prices)

 

Shares

 

 

Exercise Price

 

 

Terms (Years)

 

 

Value

 

Outstanding at March 30, 2013

 

 

1,556,250

 

 

$

1.62

 

 

 

6.8

 

 

$

252

 

Granted

 

 

430,750

 

 

 

1.32

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited / Expired

 

 

248,250

 

 

 

1.72

 

 

 

 

 

 

 

 

 

Outstanding at March 29, 2014

 

 

1,738,750

 

 

$

1.53

 

 

 

6.8

 

 

$

113

 

Granted

 

 

306,500

     

2.01

 

 

 

 

 

 

 

 

 

Exercised

 

 

90,000

     

1.80