UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM |
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended | | |
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.
| GIGA-TRONICS INCORPORATED |
| (Exact name of registrant as specified in its charter) |
| | | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| | ( | |
| (Address of principal executive offices) | Registrant’s telephone number, including area code |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| | | OTCQB Market |
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:
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerate filer ☐ | Accelerated filer ☐ Smaller reporting company Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes
There was a total of
TABLE OF CONTENTS
| Page No. |
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| PART I - FINANCIAL INFORMATION |
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| Item 1. |
Financial Statements |
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| Unaudited Condensed Consolidated Balance Sheets as of December 25, 2021 and March 27, 2021 |
4 |
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| Unaudited Condensed Consolidated Statements of Operations, Three Month and Nine Month Periods Ended December 25, 2021 and December 26, 2020 |
5 |
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| Unaudited Condensed Consolidated Statements of Shareholders’ Equity, Nine Month Periods Ended December 25, 2021 and December 26, 2020 |
6 |
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| Unaudited Condensed Consolidated Statements of Cash Flows, Nine Month Periods Ended December 25, 2021 and December 26, 2020 |
7 |
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| Notes to Unaudited Condensed Consolidated Financial Statements |
8 |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
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| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
24 |
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| Item 4. |
Controls and Procedures |
24 |
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| PART II - OTHER INFORMATION |
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| Item 1. |
Legal Proceedings |
25 |
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| Item 1A. |
Risk Factors |
25 |
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| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
25 |
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| Item 3. |
Defaults Upon Senior Securities |
25 |
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| Item 4. |
Mine Safety Disclosures |
25 |
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| Item 5. |
Other information |
25 |
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| Item 6. |
Exhibits |
25 |
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| SIGNATURES |
26 |
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FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about Giga-tronics Incorporated (the “Company” or “we”) for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products, revenue or cost savings; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes,” "anticipates,” "expects,” "intends,” "targeted,” "projected,” "continue,” "remain,” "will,” "should,” "may," and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to risks related to (1) the Company’s ability to obtain necessary capital to finance its operations; (2) the Company’s ability to develop competitive products in a market with rapidly changing technology and standards; (3) the results of pending or threatened litigation; (4) risks related to customers’ credit worthiness/profiles; (5) changes in the Company’s credit profile and its ability to borrow; (6) a potential decline in demand for certain of the Company’s products; (7) potential product liability claims; (8) the potential loss of key personnel; (9) U.S. and international economic conditions and (10) the COVID-19 pandemic, including the effects of governmental responses to the pandemic; and (11) the Company’s pending acquisition of Gresham Worldwide Inc. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. The reader is directed to the Company's annual report on Form 10-K for the year ended March 27, 2021 for further discussion of factors that could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. The Company undertakes no obligation to update any forward-looking statements in this report.
PART I – FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
| GIGA-TRONICS INCORPORATED |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| (UNAUDITED) |
| (In thousands except share data) |
| December 25, 2021 | March 27, 2021* | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Trade accounts receivable, net of allowance of and , respectively | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Unbilled receivable | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use asset | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and shareholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Loans payable, net of discounts and issuance costs | ||||||||
| Accrued payroll and benefits | ||||||||
| Deferred revenue | ||||||||
| Lease obligations | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Long term lease obligations | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock; par value; Authorized – shares | ||||||||
| Series A convertible preferred stock: shares designated; shares issued and outstanding at December 25, 2021 and March 27, 2021 | ||||||||
| Series B, C, D convertible preferred stock: designated shares; shares issued and outstanding at December 25, 2021 and March 27, 2021; (liquidation preference of at December 25, 2021 and March 27, 2021) | ||||||||
| Series E convertible preferred stock: designated shares; and shares issued and outstanding at December 25, 2021 and March 27, 2021, respectively; (liquidation preference of at December 25, 2021 and at March 27, 2021) | ||||||||
| Common stock; par value; Authorized – shares; and shares issued and outstanding at December 25, 2021 and March 27, 2021, respectively | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
| See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements |
| * Derived from the audited financial statements as of and for the fiscal year ended March 27, 2021. |
| GIGA-TRONICS INCORPORATED |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
| (UNAUDITED) |
| (In thousands except per share data) |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| December 25, 2021 | December 26, 2020 | December 25, 2021 | December 26, 2020 | |||||||||||||
| Net revenue: | ||||||||||||||||
| Goods | $ | $ | $ | $ | ||||||||||||
| Services | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Engineering | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain on extinguishment of PPP Loan | ||||||||||||||||
| Interest expense, net and other: | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| Deemed dividend on Series E preferred stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Cumulative dividends on converted Series E preferred stock | ( | ) | ||||||||||||||
| Net income (loss) attributable to common shareholders | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Income (loss) per common share – basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Income (loss) per common share – diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average common shares used in per share calculation: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements |
| GIGA-TRONICS INCORPORATED |
||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY |
||||||||||||||||
| (UNAUDITED) |
||||||||||||||||
| (In thousands except share data) |
| Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Deficit | Total | |||||||||||||||||||
| Balance at March 28, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||
| Balance at June 27, 2020 | ( | ) | ||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||
| Balance at September 26, 2020 | ( | ) | ||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||
| Balance at December 26, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Deficit | Total | |||||||||||||||||||
| Balance at March 27, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||
| Restricted stock granted | ||||||||||||||||||||||||
| Restricted stock forfeited | ( | ) | ||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||
| Deemed dividend in connection with prefunded warrants issuance | — | — | ( | ) | ( | ) | ||||||||||||||||||
| Common stock issuance net of offering costs | ||||||||||||||||||||||||
| Series E preferred stock converted to common | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at June 26, 2021 | ( | ) | ||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||
| Prefunded warrants granted | — | — | ||||||||||||||||||||||
| Balance at September 25, 2021 | ( | ) | ||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||
| Balance at December 25, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements |
| GIGA-TRONICS INCORPORATED |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (UNAUDITED) |
| (in thousands) |
| Nine Months Ended | ||||||||
| December 25, 2021 | December 26, 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock based compensation | ||||||||
| Gain on extinguishment of PPP Loan | ( | ) | ||||||
| Gain on forgiveness of interest on PPP Loan | ( | ) | ||||||
| Finance costs for issuance of prefunded warrants | ||||||||
| Gain on remeasurement of prefunded warrants liability | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade accounts receivable | ||||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses | ||||||||
| Unbilled receivable | ( | ) | ( | ) | ||||
| Right-of-use asset | ||||||||
| Other long term assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued payroll and benefits | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Other current and non-current liabilities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Principal payments on leases | ( | ) | ( | ) | ||||
| Repayments of borrowings | ( | ) | ( | ) | ||||
| Proceeds from loans payable, net of issuance costs | ||||||||
| Proceeds from issuance of stock, net of issuance costs | ||||||||
| Proceeds from issuance of prefunded warrants | ||||||||
| Finance costs for issuance of prefunded warrants | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Increase (decrease) in cash | ( | ) | ||||||
| Beginning cash | ||||||||
| Ending cash | $ | $ | ||||||
| Supplementary disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplementary disclosure of noncash activities: | ||||||||
| Deemed dividend on common shares from prefunded warrants issuance | $ | $ | ||||||
| Fair value of dividends in kind | $ | $ | ||||||
| See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies
The unaudited condensed consolidated financial statements included herein have been prepared by Giga-tronics Incorporated (“Giga-tronics,” “Company” or “we”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects all adjustments (consisting of normal recurring entries) necessary to make the consolidated results of operations for the interim periods a fair statement of such operations. Please refer to the Company’s Annual Report on Form 10-K for the year ended March 27, 2021 for a discussion of our significant accounting policies. During the nine months ended December 25, 2021, there were no material changes to these policies other than as disclosed below. For further information, refer to the consolidated financial statements and footnotes thereto, included in the Annual Report on Form 10-K, filed with the SEC for the year ended March 27, 2021.
On December 12, 2019, the Company completed a one-for-
Principles of Consolidation The unaudited condensed consolidated financial statements include the accounts of Giga-tronics and its wholly owned subsidiary, Microsource, Inc. (“Microsource”). All significant intercompany balances and transactions have been eliminated in consolidation.
Note 2. Inventories
Inventories are comprised of the following (in thousands):
| Category | December 25, 2021 | March 27, 2021 | ||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Demonstration inventory | ||||||||
| Total | $ | $ | ||||||
Note 3. Financed Receivables
On March 11, 2019, the Company entered into an Amended and Restated Business Financing Agreement (“Restated Financing Agreement”) with Western Alliance Bank, as successor to Bridge Bank.
Under the Restated Financing Agreement, Western Alliance Bank may advance up to
Under the Restated Financing Agreement, interest accrues on outstanding amounts at an annual rate equal to the greater of prime or
As of December 25, 2021, and March 27, 2021, the Company’s total outstanding borrowings under the Restated Financing Agreement were $
Note 4. Term Loans
On April 27, 2017, the Company entered into a $
On November 12, 2021, the Company borrowed $
Note 5. Paycheck Protection Program under the CARES Act
On April 23, 2020, the Company borrowed $
On November 19, 2020, the outstanding principal and accrued interest for the PPP Loan was forgiven in full by the Small Business Administration (“SBA”) and recognized as a gain on extinguishment.
In August 2021, the Company applied for the Employee Retention Credit (“ERC”) for a total amount of $
In January 2022, the Company applied for another ERC for a total amount of $
Currently, we are unable to provide an estimate as to whether and when we will receive these ERC funds as the Company's applications are pending Internal Revenue Service processing and approval.
Note 6. Leases
Operating leases
The Company has a non-cancelable operating lease for office, research and development, engineering, laboratory, storage and/or warehouse uses in Dublin, California for
In December 2018, the Company entered into a lease agreement for an additional
Per the terms of the Company’s lease agreements, the Company does not have any residual value guarantees. In calculating the present value of the lease payments, the Company has elected to utilize its incremental borrowing rate. The Company has elected for facility operating leases to not separate each lease component from its associated non-lease components. The building lease includes variable payments (i.e., common area maintenance) which are charged and paid separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and liability but reflected in operating expense in the period incurred.
Lease costs
For the nine months ended (in thousands):
| Lease Costs | Classification | December 25, 2021 | ||||
| Operating lease costs | Operating expenses | $ | ||||
Other information (in thousands):
| Nine Month Period Ended December 25, 2021 | Operating leases | |||
| Operating cash used for leases | $ | |||
Future lease payments as of December 25, 2021, were as follows (in thousands):
| Fiscal Year | Operating leases | |||
| 2022 (remaining 3 months) | $ | |||
| 2023 | ||||
| 2024 | ||||
| Total future minimum lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
Note 7. Fair Value Measurement
ASC 820 “Fair Value Measurements” ("ASC 820") defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under ASC 820 are described below:
| • | Level 1 —Valuations are based on quoted prices in active markets for identical assets or liabilities and readily accessible by us at the reporting date. Examples of assets and liabilities utilizing Level 1 inputs are certain money market funds, U.S. Treasuries and trading securities with quoted prices in active markets. |
| • | Level 2 —Valuations based on inputs other than the quoted prices in active markets that are observable either directly or indirectly in active markets. Examples of assets and liabilities utilizing Level 2 inputs are U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit and over-the- counter derivatives. |
| • | Level 3 —Valuations based on unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. |
In determining the fair value of warrants, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
Upon issuance on April 27, 2021 and at June 26, 2021, the prefunded warrants liability was measured at fair value. On July 28, 2021, the Company and the holder amended the terms of the Prefunded Warrants to restrict the holder’s option to require cash payment at the Black-Scholes value of the remaining unexercised portion of the holder’s Prefunded Warrants to only Fundamental Transactions that are within the Company’s control. Because of this modification of the put-option provision, the Prefunded Warrants are no longer required to be classified as a liability under either ASC 480, "Distinguishing Liabilities from Equity", or ASC 815, "Derivatives and Hedging", guidance and do not include any embedded features that require bifurcation. Therefore, the Prefunded Warrants liability were remeasured on the modification date and reclassified to equity (See Note 8 – Sale of Common Stock and Prefunded Warrants).
The Company’s fair value hierarchies for its financial assets and liabilities which require fair value measurement on a recurring basis are as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Balance at March 27, 2021 | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Prefunded warrants liability | $ | $ | $ | $ | ||||||||||||
| Balance at June 26, 2021 | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Prefunded warrants liability | $ | $ | $ | $ | ||||||||||||
| Balance at September 26, 2021 | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Prefunded warrants liability | $ | $ | $ | $ | ||||||||||||
| Balance at December 25, 2021 | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Prefunded warrants liability | $ | $ | $ | $ | ||||||||||||
During the nine months ended December 25, 2021 and the year ended March 27, 2021, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value and the valuation techniques used did not change compared to the Company’s established practice.
The Company’s common stock fair value is a significant Level 3 input affecting the valuation of the prefunded warrants.
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities during the nine months ended December 25, 2021, which were measured at fair value on a recurring basis:
| Prefunded warrants liability | ||||
| Balance at March 27, 2021 | $ | |||
| Initial fair value of pre-funded warrants issued in April 2021 | ||||
| Gain on remeasurement of prefunded warrants liability | ( | ) | ||
| Payment of issuance costs | ( | ) | ||
| Reclassification of prefunded warrants liability to equity | ( | ) | ||
| Balance at December 25, 2021 | $ | |||
There were
Note 8. Sale of Common Stock and Prefunded Warrants
On April 27, 2021, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with certain accredited investors (“Investors”) pursuant to which it issued and sold prefunded warrants to purchase an aggregate of
The Prefunded Warrants are immediately exercisable and may be exercised for a de-minimis exercise price of $
Pursuant to the terms of the Purchase Agreement, and as a condition to closing the private placement, the Company and each Investor simultaneously entered into a registration rights agreement (“Registration Rights Agreement”) requiring the Company to file a registration statement with the SEC within 45 days of the closing of the private placement to register for resale the shares of the Company’s common stock underlying the Prefunded Warrants. The Registration Rights Agreement contains customary terms and conditions, certain liquidated damages provisions for failing to comply with the timing obligations for the filing and effectiveness of the registration statement, and certain customary indemnification obligations.
On April 27, 2021, in connection with the private placement, the Company issued warrants to purchase
On June 6, 2021, the Company entered into a Securities Purchase Agreement with a private investor for the sale of a total of
On July 28, 2021, the Company and the holder amended the terms of the Prefunded Warrants to restrict the holder’s option to require cash payment at the Black-Scholes value of the remaining unexercised portion of the holder’s Prefunded Warrants to only Fundamental Transactions that are within the Company’s control. Because of this modification of the put-option provision, the Prefunded Warrants are no longer required to be classified as a liability under either ASC 480, "Distinguishing Liabilities from Equity", or ASC 815, "Derivatives and Hedging", guidance and do not include any embedded features that require bifurcation. Therefore, the Prefunded Warrants liability were remeasured on the modification date of July 28, 2021 and reclassified to equity as of that date.
Note 9. Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted earnings per share (“EPS”) reflects the net incremental shares that would be issued if unvested restricted shares became vested and dilutive outstanding stock options and warrants were exercised, using the treasury stock method. In addition, certain options are considered anti-dilutive because assumed proceeds from exercise price, related tax benefits and average future compensation was greater than the weighted average number of options outstanding multiplied by the average market price during the period.
Shares excluded from the diluted EPS calculation for the nine month periods ended December 25, 2021 and December 26, 2020 are as follows (in thousands):
| Anti-dilutive securities | December 25, 2021 | December 26, 2020 | ||||||
| Common shares issuable upon exercise of stock options | ||||||||
| Restricted stock awards | ||||||||
| Common shares issuable upon conversion of convertible preferred stock | ||||||||
| Common shares issuable upon exercise of warrants | ||||||||
| (In thousands except per share data) | Three Months ended | |||||||
| December 25, 2021 | December 26, 2020 | |||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Weighted average basic shares outstanding | ||||||||
| Effect of dilutive securities | ||||||||
| Weighted-average dilutive shares | ||||||||
| Basic earnings per share | $ | ( | ) | $ | ||||
| Diluted earnings per share | $ | ( | ) | $ | ||||
| (In thousands except per share data) | Nine Months ended | |||||||
| December 25, 2021 | December 26, 2020 | |||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Weighted average basic shares outstanding | ||||||||
| Effect of dilutive securities | ||||||||
| Weighted-average dilutive shares | ||||||||
| Basic earnings per share | $ | ( | ) | $ | ||||
| Diluted earnings per share | $ | ( | ) | $ | ||||
There were
Note 10. Stock-based Compensation and Employee Benefit Plans
The Company maintains a 2018 Equity Incentive Plan which provides for the issuance of up to
During the first nine months of fiscal year 2022, the Company granted stock to purchase
As of December 25, 2021, there were
Stock Options
In calculating compensation related to stock option grants, the fair value of each stock option was estimated on the date of grant using the Black-Scholes-Merton option-pricing model and the following weighted average assumptions:
| Description | Three Months Ended | Nine Months Ended | ||||||||||||||
| December 25, 2021 | December 26, 2020 | December 25, 2021 | December 26, 2020 | |||||||||||||
| Dividend yield | ||||||||||||||||
| Expected volatility | % | % | % | % | ||||||||||||
| Risk-free interest rate | % | % | % | % | ||||||||||||
| Expected term (years) | ||||||||||||||||
The computation of expected volatility used in the Black-Scholes-Merton option-pricing model is based on the historical volatility of the Company’s 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 is based on the U.S. Treasury rates with maturity similar to the expected term of the option on the date of grant.
A summary of the changes in stock options outstanding for the year ended March 27, 2021 and the nine month period ended December 25, 2021 is as follows:
| Description | Shares | Weighted Average Price per share | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at March 28, 2020 | $ | $ | — | |||||||||||||
| Granted | — | |||||||||||||||
| Forfeited / Expired | ( | ) | — | — | ||||||||||||
| Outstanding at March 27, 2021 | — | |||||||||||||||
| Granted | — | |||||||||||||||
| Forfeited / Expired | ( | ) | — | — | ||||||||||||
| Outstanding at December 25, 2021 | $ | $ | — | |||||||||||||
| Exercisable at December 25, 2021 | $ | $ | — | |||||||||||||
| Expected to vest in the future | $ | $ | — | |||||||||||||
As of December 25, 2021, there was $
Restricted Stock
The Company granted
As of December 25, 2021, there was $
A summary of the changes in non-vested RSAs outstanding for the nine month period ended December 25, 2021 is as follows:
| Restricted Stock Awards | Shares | Weighted Average Grant Date Fair Value | ||||||
| Non-vested at March 27, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Non-vested at December 25, 2021 | $ | |||||||
Note 11. Significant Customer andIndustry Segment Information
The Company has
The Giga-tronics Division designs, manufactures and markets a family of functional test products for the RADAR/EW segment of the defense electronics market. Our RADAR/EW test products are used to evaluate and improve the performance of RADAR/EW systems.
The table below presents information for the two reportable segments (in thousands):
| Three Month Period Ended December 25, 2021 | Three Month Period Ended December 26, 2020 | |||||||||||||||||||||||
| Description | Giga-tronics Division | Microsource | Total | Giga-tronics Division | Microsource | Total | ||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Interest expense and other, net | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||
| Assets (at period end) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine Month Period Ended December 25, 2021 | Nine Month Period Ended December 26, 2020 | |||||||||||||||||||||||
| Description | Giga-tronics Division | Microsource | Total | Giga-tronics Division | Microsource | Total | ||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Interest expense and other, net | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||
| Assets (at period end) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
During the third quarter of fiscal 2022,
During the first nine months of fiscal 2022,
Note 12. Income Taxes
The Company accounts for income taxes using the asset and liability method as codified in Topic 740. Under this 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 carry-forwards.
The Company recorded $
As of December 25, 2021, the Company had recorded $
Note 13. Warranty Obligations
The Company records a liability for estimated warranty obligations in cost of revenue at the date products are sold. Adjustments are made as new information becomes available. The Company provides no other guarantees.
The following provides a reconciliation of changes in the Company’s warranty obligation for the respective periods (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| December 25, 2021 | December 26, 2020 | December 25, 2021 | December 26, 2020 | |||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | ||||||||||||
| Provision | ||||||||||||||||
| Warranty costs incurred | ( | ) | ( | ) | ||||||||||||
| Balance at end of period | $ | $ | $ | $ | ||||||||||||
Note 14. Preferred Stock and Warrants
Series E Senior Convertible Voting Perpetual Preferred Stock
On March 26, 2018, the Company issued and sold
Holders of Series E Shares are entitled to receive, when, as and if declared by the Company’s Board of Directors, cumulative preferential dividends, payable semiannual in cash at a rate per annum equal to
Series E Exchange
The Company completed a private exchange offer on November 7, 2019, issuing an aggregate of
During the nine months ended December 25, 2021, the Company issued
The table below presents Preferred Stock information as of December 25, 2021 and March 27, 2021 ($ in thousands):
| Preferred Stock | Designated | Shares | Shares | Liquidation | ||||||||||||
| As of December 25, 2021 | Shares | Issued | Outstanding | Preference | ||||||||||||
| Series B | $ | |||||||||||||||
| Series C | ||||||||||||||||
| Series D | ||||||||||||||||
| Series E | ||||||||||||||||
| Total at December 25, 2021 | $ | |||||||||||||||
| Preferred Stock | Designated | Shares | Shares | Liquidation | ||||||||||||
| As of March 27, 2021 | Shares | Issued | Outstanding | Preference | ||||||||||||
| Series B | $ | |||||||||||||||
| Series C | ||||||||||||||||
| Series D | ||||||||||||||||
| Series E | ||||||||||||||||
| Total at March 27, 2021 | $ | |||||||||||||||
Note 15. COVID-19 (Coronavirus)
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) and in March 2020 classified the outbreak as a pandemic. In March 2020, the President of the United States and the Governor of California declared a state of emergency, based on the rapid increase in COVID-19 cases including in California. In response to the COVID-19 pandemic, the Company has implemented a number of measures intended to ensure the safety of personnel and the continuity of operations. Following a mandated shut down in March 2020, the Company was designated as an essential business and has largely returned to normal operations though it continues to implement and follow the protective measures described above.
The COVID-19 pandemic has caused significant disruptions to the global, national and local economy. The overall economic and other impacts of the COVID-19 pandemic in the areas in which the Company and its customers and suppliers operates is not known and cannot be predicted at this time. While the disruption is currently expected to be temporary, there is uncertainty about the duration and the total economic impact. If this situation is prolonged, the pandemic could cause additional delays and could have a short- or long-term adverse impact, possibly material, on the Company’s future financial condition, liquidity, and results of operations.
To mitigate these risks, the Company has purchased long-lead inventory ahead of order receipt according to a forecast of anticipated business for its EW business. Microsource generally buys inventory upon receipt of each contract but has experienced delays in delivery of specialty components and certain chips needed for its RADAR filter production. Microsource management is working to secure supply of these materials to minimize gaps in delivery to its customers.
Note 16. Subsequent Events
On December 27, 2021, Giga-tronics entered into a Share Exchange Agreement with BitNile and Gresham, which is a wholly-owned subsidiary of BitNile.
The Exchange Agreement provides that the Company will acquire all of the outstanding shares of capital stock of Gresham in exchange for issuing to BitNile
Immediately following the completion of the Exchange Transaction, Gresham will be a wholly-owned subsidiary of the Company. Outstanding shares of the Company’s common stock, warrants and options will remain outstanding and unaffected upon completion of the Exchange Transaction. The Company’s common stock will continue to be registered under the Securities Exchange Act of 1934, as amended, immediately following the Exchange Transaction.
The Exchange Agreement further provides that, BitNile will loan the Company $
The Company has also agreed to seek the approval of the Company's shareholders to (1) increase the number of shares of common stock that the Company is authorized to issue to
The Exchange Agreement contains certain termination rights for each of the parties, including if (i) the Exchange Transaction is not consummated by June 30, 2022, (ii) the approval of the Company’s shareholders is not obtained, or (iii) there has been a breach by a non-terminating party that is not cured such that the applicable closing conditions are not satisfied. In addition, in certain circumstances, BitNile may terminate the Exchange Agreement prior to the Company’s shareholder approval of the Exchange Transaction in the event that (A) the Company materially breaches its non-solicitation obligations relating to alternative business combination transactions, (B) the Company’s board withdraws or adversely modifies its recommendation to shareholders with respect to the Exchange Transaction or fails to affirm its recommendation within the required time period after an alternate acquisition proposal is made, (C) the Company’s board recommends a tender offer or exchange offer or fails to recommend against such a tender offer or exchange offer within ten business days after commencement. In addition, the Company may terminate the Exchange Agreement to pursue an alternative acquisition transaction. The Exchange Agreement also provides that the Company will be obligated to pay a termination fee of $
During the third quarter of fiscal year 2022, the Company incurred certain costs in connection with the Exchange Agreement as follows (in thousands):
| Three Months Ended | ||||
| Category | December 25, 2021 | |||
| Legal fees | $ | |||
| Investment banker's fairness opinion | $ | |||
| Consulting fees | $ | |||
| Retention bonuses | $ | |||
| Total | $ | |||
Of the $
On January 7, 2022, the Company amended the loan agreement with Digital Power Lending, LLC and received an additional $
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Giga-tronics manufactures specialized electronic equipment for use in both military test and airborne operational applications. Our operations consist of two business segments, those of our wholly owned subsidiary, Microsource, Inc. and those of our Giga-tronics Division. Our Microsource segment designs and manufactures custom microwave products for military airborne applications while the Giga-tronics Division designs and manufactures real time solutions for RADAR/EW test applications.
Our Microsource subsidiary generates revenue through sole-source production contracts for custom engineered components funded by the U.S. Federal Government. Microsource revenue for fiscal year 2021 was $9.4 million related to production of RADAR filters for the F-15D, F-16 and F/A-18E aircrafts. These filters solve an interference problem that occurs between the aircraft’s radar system and the onboard electronic warfare suite when these older aircrafts receive upgraded radar systems. The engineering of each filter variant was funded by the U.S. Government indirectly through each prime contractor, including filters for foreign military sales. Orders for Microsource components involve production contracts where the period of performance typically spans multiple years. During the first nine months of fiscal 2022, Microsource received a new customer-funded development contract valued at $726,000 for redesigning an oscillator component used in missile defense systems that is expected to lead to increased volume production in future years.
Opportunities exist for expanding the use of our Microsource RADAR filters by offering to design variants, such as for use in situations where the electronic warfare suite is externally mounted on a pylon rather than onboard the aircraft. Microsource will also pursue development contracts for adapting the Company’s Advanced Signal Generator and Analyzer (“ASGA”) technology for the benefit of customers who will appreciate faster operation of our RADAR filters, representing a potential source of new revenue as customers upgrade their installed base.
Our Giga-tronics Division participates in the EW test segment with modular microwave up and down converters, real-time Threat Emulation Systems (“TEmS”) and integrated playback and record solutions (“COMPASS”). The Giga-tronics solutions are architected like a RADAR system but built like a test system. This approach differentiates the Company from other suppliers that serve this segment and allows solutions using this technology to provide a better correlation between laboratory tests and actual field results. The platform was specifically designed to address the need for multiple test channels and delivers a product that is smaller, more flexible, easier to use and lower in cost than those previously available.
Orders for Giga-tronics EW test solutions are relatively large, tend to be sporadic and typically involve a long and consultive sales process. Competing against market incumbents has exposed greater than expected challenges in displacing them in laboratory settings. We have achieved limited success to date because existing solutions offer extensive test capability with a record of success built over years of use. These larger and higher cost multi-purpose solutions have become the accepted standard and customers face substantial risk switching to a new solution on a large-scale basis. Consequently, our EW test sales have fallen short of our expectations due to the long time required to establish credibility and grow market share in the laboratory segment.
During fiscal 2021, we moved beyond the laboratory environment and pursued opportunities for open-air range applications for our TEmS solution. Market incumbents on these ranges offer single-purpose solutions because the applications being addressed are less data-intensive and narrower in their requirements compared to those in the laboratory environment. During fiscal 2021, Giga-tronics successfully won sales into applications for air-crew training and air-to-ground missile testing. We believe our initial success in the market for open-air range application results in part because customers only need to compare our accuracy and fidelity against a competing single purpose solution rather than the extensive capability offered by competing laboratory solutions. We believe the Giga-tronics solution is also competitive with incumbent open-air solutions due to its lower price point, smaller size, and relative ease of use. Our early success in applications for air-crew training and air-to-ground missile testing leads us to believe that we can grow our market share faster in this segment compared to laboratory settings. Several program offices within the Army, the Navy, the Marine Corps and the Air Force have expressed interest in Giga-tronics offerings to satisfy EW simulation requirements. However, several of the interested program offices must rely on an independent contracting organization within the Defense Department to manage the selection and awards to contractors under applicable federal acquisition regulations which makes the procurement process less predictable.
Giga-tronics made inventory investments of approximately $1 million in the first nine months of fiscal 2022 in anticipation of orders for its electronic warfare simulation offerings to mitigate anticipated supply chain issues. Delays in the procurement process combined with surging Coronavirus Omicron case rates have caused unplanned staff shortages and compelled many of the acquisition organizations and staff to work remotely, slowing the evaluation, review, and approval processes in the contracting organization. We believe the aforementioned circumstances have resulted in the delay of some anticipated contract award processes into the first half of calendar 2022.
COVID-19 Impact
Following the initial impact of the COVID-19 pandemic in early 2020, Giga-tronics was subsequently identified as an essential business by the Department of Homeland Security due to the importance of our Microsource RADAR filters to the U.S. Department of Defense. The Company restored operations as quickly as feasible while taking the necessary steps to protect our employees from potential harm. Although Giga-tronics experienced a relatively brief shutdown period in late fiscal 2020, the impact was nevertheless significant financially as we had to absorb all of our overhead expenses without any offsetting shipments during that period. During fiscal 2021, Giga-tronics applied for and received a PPP Loan of $786,200 from the SBA. The loan, and all accrued interest, was subsequently forgiven in November 2020 and was recorded as a gain on extinguishment of debt during our third quarter of fiscal 2021.
The COVID-19 pandemic had a significant impact on our ability to directly interact in person with customers at the end of fiscal 2020 and throughout most of fiscal 2021. Consequently, the progress in demonstrating solutions to customers and increasing awareness of Giga-tronics within the user community was delayed. Furthermore, we were unable to discuss customer needs in-person and how our solutions could solve their problems as the military bases blocked outside personnel from visiting and mandated their own personnel to work from home. In addition, travel restrictions made it difficult for our sales team to visit locations throughout the country due to mandatory quarantine periods.
While we expect the impact of COVID-19 to be temporary, the disruptions caused have negatively impacted our revenue and results from operations throughout most of fiscal years 2021 and 2022. During the quarter ended December 25, 2021, we experienced several COVID-19 cases in our Dublin factory which has caused certain production related disruptions.
The pandemic also impacted our supply chain during most of fiscal 2021 and 2022. Many of our suppliers have indicated similar challenges in keeping their own operations running and management believes there may still be some residual delays in fulfilling orders due to the limited availability of parts and services. We expect this situation to improve in calendar 2022.
Critical Accounting Policies
Please refer to the section of the Company’s Annual Report on Form 10-K for the year ended March 27, 2021 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” for a discussion of our critical accounting policies. During the nine months ended December 25, 2021, there were no material changes to these policies other than as disclosed in Note 1 Organization and Significant Accounting Policies to our unaudited condensed consolidated financial statements included with this Quarterly Report on Form 10-Q.
In preparing the unaudited consolidated financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses for the reporting periods. While we believe that these accounting policies and estimates are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates and forecasts.
Results of Operations
New orders by reporting segments are as follows at the end of the respective periods (in thousands):
| Three Months Ended |
||||||||||||||||
| Segment |
December 25, 2021 |
December 26, 2020 |
$ Change |
% Change |
||||||||||||
| Giga-tronics Division |
$ | 195 | $ | 1,615 | $ | (1,420 | ) | (88 | )% |
|||||||
| Microsource |
29 | 506 | (477 | ) | (94 | )% |
||||||||||
| Total |
$ | 224 | $ | 2,121 | $ | (1,897 | ) | (89 | )% |
|||||||
| Nine Months Ended |
||||||||||||||||
| Segment |
December 25, 2021 |
December 26, 2020 |
$ Change |
% Change |
||||||||||||
| Giga-tronics Division |
$ | 831 | $ | 2,713 | $ | (1,882 | ) | (69 | )% |
|||||||
| Microsource |
4,231 | 5,649 | (1,418 | ) | (25 | )% |
||||||||||
| Total |
$ | 5,062 | $ | 8,362 | $ | (3,300 | ) | (39 | )% |
|||||||
New orders received in the third quarter of fiscal 2022 decreased to $224,000 from $2.1 million for orders received in the third quarter of fiscal 2021. The Giga-tronics Division booked only one Advanced Signal Generator order in the third quarter of fiscal 2022, as compared to a TEmS and two COMPASS orders booked in the third quarter of fiscal 2021. The Microsource business unit only booked a repair order during the third quarter of fiscal 2022. The timing of receipt of large RADAR filter contracts and EW Test orders vary significantly from period to period.
New orders received in the first nine months of fiscal 2022 decreased to $5.1 million from $8.4 million received in the first nine months of fiscal 2021. The Giga-tronics Division booked a COMPASS order, an Advanced Signal Generator order, and Microwave Synthesizer orders in the first nine months of fiscal 2022 compared two TeMS orders and 2 COMPASS orders in the comparable prior year period. The Microsource business unit experienced an 25% decrease in orders in the first nine months of fiscal 2022 with the bookings of several orders totaling $4.2 million from three prime contractors as compared to one large order from one prime contractor of $5.0 million booked in the first nine months of fiscal 2021.
Military program offices must rely on an independent contracting organization within the Defense Department to manage the selection and awards to contractors under applicable federal acquisition regulations which makes the procurement process less predictable. In addition, during the third fiscal quarter ended December 25, 2021, surging COVID-19 case rates caused unplanned staff shortages at the independent contracting organizations and compelled many of the acquisition organizations and their staff to work remotely, slowing the evaluation, review, and approval processes in the contracting organization. We believe these factors have resulted in the further delay of certain anticipated contract award processes from the second half of calendar 2021 into the first half of calendar 2022.
The following table shows order backlog and related information at the end of the respective periods (in thousands):
| As of |
||||||||||||||||
| Segment |
December 25, 2021 |
December 26, 2020 |
$ Change |
% Change |
||||||||||||
| Giga-tronics Division |
$ | 389 | $ | 122 | $ | 267 | 219 | % |
||||||||
| Microsource |
2,198 | 4,669 | (2,471 | ) | (53 | )% |
||||||||||
| Backlog of unfilled orders |
$ | 2,587 | $ | 4,791 | $ | (2,204 | ) | (46 | )% |
|||||||
Backlog at the end of the first nine months of fiscal 2022 decreased 46% compared to the prior year period end. Giga-tronics Division backlog at December 25, 2021 was $389,000, a large percentage increase from the comparable prior year date due to the receipt of a synthesizer order from a foreign military service provider. Microsource experienced a 53% decrease in backlog in the first nine months of fiscal 2022 due primarily to a 25% increase in YIG filter production in the first nine months of fiscal 2022 as well as lower bookings during that period.
The allocation of net revenue was as follows for the periods shown (in thousands):
| Three Months Ended |
||||||||||||||||
| Segment |
December 25, 2021 |
December 26, 2020 |
$ Change |
% Change |
||||||||||||
| Giga-tronics Division |
$ | 164 | $ | 1,559 | $ | (1,395 | ) | (89 | )% |
|||||||
| Microsource |
1,810 | 2,525 | (715 | ) | (28 | )% |
||||||||||
| Total |
$ | 1,974 | $ | 4,084 | $ | (2,110 | ) | (52 | )% |
|||||||
| Nine Months Ended |
||||||||||||||||
| Segment |
December 25, 2021 |
December 26, 2020 |
$ Change |
% Change |
||||||||||||
| Giga-tronics Division |
$ | 512 | $ | 3,490 | $ | (2,978 | ) | (85 | )% |
|||||||
| Microsource |
7,079 | 6,834 | 245 | 4 | % |
|||||||||||
| Total |
$ | 7,591 | $ | 10,324 | $ | (2,733 | ) | (26 | )% |
|||||||
The Giga-tronics Division net revenue for the fiscal quarter ended December 25, 2021 was $164,000, an 89% decrease from the comparable prior year quarter. The Giga-tronics Division shipped an Advanced Signal Generator order in the third quarter of fiscal 2022, as compared to shipping a TEmS system and two COMPASS in the third quarter of fiscal 2021. Net revenue for the Microsource segment during the quarter ended December 25, 2021 decreased 28% over the comparable prior year period primarily due lower orders in fiscal 2022. The timing of receipt of expected large RADAR filter contracts varies from period to period.
Net revenue for the first nine months of fiscal 2022 was $7.6 million, a 26% decrease as compared to $10.3 million for the first nine months of fiscal 2021. The Giga-tronics division reported $512,000 in revenue during the first nine months of fiscal 2022 as compared to $3.4 million in the first nine months of fiscal 2021. The decrease in revenues was due to the aforementioned delays in receiving certain large, anticipated military orders which have long approval and processing cycles. Microsource reported an increase of $245,000 in revenues for the first nine months of fiscal 2022 as compared to the first nine months of fiscal 2021, primarily due to an increase in the production capacity of YIG filters with the addition of a third production test station.
Cost of revenue and gross profit was as follows for the periods shown (in thousands):
| Three Months Ended |
Three Months Ended |
|||||||||||||||
| Segment |
December 25, 2021 |
% of Segment Revenue |
December 26, 2020 |
% of Segment Revenue |
||||||||||||
| Giga-tronics Division |
$ | 137 | 84 | % |
$ | 995 | 64 | % |
||||||||
| Microsource |
1,101 | 61 | % |
1,532 | 61 | % |
||||||||||
| Total Cost of revenue |
$ | 1,238 | 63 | % |
$ | 2,527 | 62 | % |
||||||||
| Gross profit |
$ | 736 | 37 | % |
$ | 1,557 | 38 | % |
||||||||
| Nine Months Ended |
Nine Months Ended |
|||||||||||||||
| Segment |
December 25, 2021 |
% of Segment Revenue |
December 26, 2020 |
% of Segment Revenue |
||||||||||||
| Giga-tronics Division |
$ | 443 | 87 | % |
$ | 1,935 | 55 | % |
||||||||
| Microsource |
4,291 | 61 | % |
4,278 | 63 | % |
||||||||||
| Total Cost of revenue |
$ | 4,734 | 62 | % |
$ | 6,213 | 60 | % |
||||||||
| Gross profit |
$ | 2,857 | 38 | % |
$ | 4,111 | 40 | % |
||||||||
Gross profit decreased by $821,000 in the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021 primarily due to the decrease in revenue as described above. Gross profit decreased by $1.2 million in the first nine months of fiscal 2022 to $2.9 million from $4.1 million in the first nine months of fiscal 2021 primarily due to lower revenues during the first nine months of fiscal 2022 and an unfavorable product mix with 85% lower revenue in the typically higher margin Giga-tronics division during the first nine months of fiscal 2022 as compared to the first nine months of fiscal 2021.
Operating expenses were as follows for the periods shown (in thousands):
| Three Months Ended |
||||||||||||||||
| Category |
December 25, 2021 |
December 26, 2020 |
$ Change |
% Change |
||||||||||||
| Engineering |
$ | 218 | $ | 557 | $ | (339 | ) | (61 | )% |
|||||||
| Selling, general and administrative |
1,296 | 937 | 359 | 38 | % |
|||||||||||
| Total |
$ | 1,514 | $ | 1,494 | $ | 20 | 1 | % |
||||||||
| Nine Months Ended |
||||||||||||||||
| Category |
December 25, 2021 |
December 26, 2020 |
$ Change |
% Change |
||||||||||||
| Engineering |
$ | 854 | $ | 1,548 | $ | (694 | ) | (45 | )% |
|||||||
| Selling, general and administrative |
3,444 | 2,832 | 612 | 22 | % |
|||||||||||
| Total |
$ | 4,298 | $ | 4,380 | $ | (82 | ) | (2 | )% |
|||||||
Total operating expenses increased 1% or $20,000 in the third quarter of fiscal 2022 versus the third quarter of fiscal 2021. Engineering expenses decreased by $339,000 primarily due to increased capitalization of software engineering expenses, reduced engineering personnel costs, reduced consulting costs and a greater portion of non-recurring engineering expenses for contract services which were allocated to cost of revenue. Selling, general and administrative expenses increased by 38% primarily due to transaction related expenses of $402,000 associated with the aforementioned Exchange Agreement with BitNile and Gresham (See Note 16 – Subsequent Events).
Total operating expenses decreased by $82,000 in the first nine months of fiscal 2022 as compared to the first nine months of fiscal 2021. Engineering expenses decreased $694,000 in the first nine months of fiscal 2022 versus the comparable prior year period, primarily due to lower personnel costs, increased capitalization of software engineering expenses, lower consulting costs and a greater portion of non-recurring engineering expenses for contract services which were allocated to cost of revenue. Selling, general and administrative expenses increased by $612,000 in the first nine months of fiscal 2022 versus the comparable prior year period primarily due to transaction related expenses of $402,000 as well as higher personnel costs, an increase in stock-based compensation and an increased headcount in the sales team.
Interest expense, net and other were as follows for the periods shown (in thousands):
| Three Months Ended |
||||||||||||||||
| Category |
December 25, 2021 |
December 26, 2020 |
$ Change |
% Change |
||||||||||||
| Interest expense, net |
$ | (13 | ) | $ | (21 | ) | $ | 8 | (38 | )% |
||||||
| Gain on Extinguishment of PPP Loan |
$ | — | $ | 791 | $ | 791 | (100 | )% |
||||||||
| Deemed dividend on Series E preferred stock |
$ | (2 | ) | $ | (3 | ) | $ | 1 | (33 | )% |
||||||
| Nine Months Ended |
||||||||||||||||
| Category |
December 25, 2021 |
December 26, 2020 |
$ Change |
% Change |
||||||||||||
| Interest expense, net |
$ | (27 | ) | $ | (85 | ) | $ | 58 | (68 | )% |
||||||
| Gain on extinguishment of PPP Loan |
$ | — | $ | 791 | $ | 791 | — | % |
||||||||
| Gain on remeasurement of prefunded warrants liability |
$ | 92 | $ | — | $ | 92 | — | % |
||||||||
| Finance costs for issuance of prefunded warrants |
$ | (157 | ) | $ | — | $ | (157 | ) | — | % |
||||||
| Deemed dividend on Series E preferred stock |
$ | (7 | ) | $ | (10 | ) | $ | 3 | (30 | )% |
||||||
| Cumulative dividends on Series E preferred stock |
$ | (43 | ) | $ | — | $ | (43 | ) | — | % |
||||||
Net interest expense in the third quarter of fiscal 2022 was $13,000, a decrease of $8,000 from the third quarter of fiscal 2021. Interest expense decreased primarily due to the repayment of the PFG Loan in fiscal 2021.
Net interest expense in the first nine months of fiscal 2022 was $27,000, a decrease of $58,000 over the first nine months of fiscal 2021. Interest expense decreased primarily due to the repayment of the PFG Loan. During the first nine months of fiscal 2022 the conversion of 35,000 Series E preferred stock to common shares resulted in a $43,000 cumulative dividend non-cash charge. In addition, the issuance of the prefunded warrants incurred financing costs of $157,000 and the remeasurement of prefunded warrants liability realized a gain of $92,000 (See Note 14 – Preferred Stock and Warrants).
Net income (loss)
Net loss attributable to common shareholders for the third quarter of fiscal 2022 was $795,000, compared to net income of $830,000 recorded in the third quarter of fiscal 2021. The $1.6 million decrease in income during the third quarter of fiscal 2022 was primarily due to lower net revenue along with the transaction related costs of $402,000 in the third quarter of fiscal 2022 versus the comparable prior year period as well as a one-time gain of $791,000 in the third quarter of fiscal 2021 in connection with the extinguishment of the PPP Loan.
Net loss attributable to common shareholders for the first nine months of fiscal 2022 was $1.6 million compared to net income of $425,000 recorded in the first nine months of fiscal 2021. The $2.0 million decrease in net income was primarily due to the decrease in net revenue for the Giga-tronics division along with the transaction related costs of $402,000 in the third quarter of fiscal 2022 versus the comparable prior year period as well as a one-time gain of $791,000 in the third quarter of fiscal 2021 in connection with the extinguishment of the PPP Loan.
Financial Condition and Liquidity
| As of |
||||||||
| Category ($ in thousands) |
December 25, 2021 |
March 27, 2021 |
||||||
| Cash |
$ | 316 | $ | 736 | ||||
| Total current assets |
$ | 6,844 | $ | 6,358 | ||||
| Total current liabilities |
$ | 3,138 | $ | 2,904 | ||||
| Working Capital |
$ | 3,706 | $ | 3,454 | ||||
| Current ratio |
$ | 2.18 | $ | 2.19 | ||||
Our primary sources of liquidity come from customer sales and our Financing Agreement with Western Alliance Bank, both of which are dependent on our receipt and shipment of customer orders, and capital raised from investors and lenders. Therefore, if we are unable to maintain sufficient levels of liquidity solely from sales to customers and borrowings under the Financing Agreement, we may be required to seek funding from other sources. To address our liquidity needs in the near term, we entered into a loan agreement with Digital Power Lending, LLC, an affiliate of BitNile, the parent company of Gresham and borrowed $500,000 on November 12, 2021 (See Note 4 – Term Loans). On January 7, 2022 the parties amended this loan agreement which allowed the Company to borrow an additional $300,000 under the agreement (See Note 16 – Subsequent Events). Our Share Exchange Agreement with BitNile and Gresham provides that following our acquisition of Gresham, we will pursue an underwritten public offering of $25 million of our common stock. BitNile has agreed to purchase up to $5.75 million of common stock in the public offering and simultaneous therewith, to convert $4.25 million of indebtedness that BitNile has agreed to lend to us upon the closing of our acquisition of Gresham. There can be no assurance that we will successfully complete the public offering or that additional financing will be available to us in the future. Our ability to obtain additional financing is subject to several factors, including market and economic conditions, our performance and investor and lender sentiment with respect to us and our industry. If we are unable to raise additional financing in the near term as needed, our operations and production plans may be scaled back or curtailed and our operations and growth would be impeded.
Our near-term fixed commitments for cash expenditures are primarily for payments for employee salaries, operating leases and inventory purchase commitments.
Cash Flows
The following summary of our cash flows for the periods indicated has been derived from our unaudited condensed consolidated financial statements included elsewhere in this filing (in thousands):
| Nine Months Ended |
||||||||
| Category |
December 25, 2021 |
December 26, 2020 |
||||||
| Net cash provided by (used in) operating activities |
$ | (1,564 | ) | $ | 1,333 | |||
| Net cash used in investing activities |
— | (64 | ) | |||||
| Net cash provided by (used in) financing activities |
1,144 | (578 | ) | |||||
| Net decrease in cash |
(420 | ) | 691 | |||||
| Cash at the beginning of the fiscal year |
736 | 657 | ||||||
| Cash at the end of the period |
$ | 316 | $ | 1,348 | ||||
Cash Flows from Operating Activities
During the first nine months of fiscal 2022, we used cash of $1.6 million for operating activities, as compared to $1.3 million provided in the first nine months of fiscal 2021. The increased use of cash was primarily due to an increase in inventories of $1.1 million in anticipation of new orders and the net loss of $1.6 million.
We expect that cash flows from operating activities will fluctuate in future periods due to a number of factors including our level of revenue, which fluctuates significantly from one period to another due to the timing of receipt of contracts, operating results, amounts of non-cash charges, and the timing of our inventory purchases, billings, collections and disbursements.
Cash Flows from Financing Activities
Cash provided by financing activities for the nine month period ended December 25, 2021 was $1.1 million which was primarily due to $1.5 million proceeds from the issuance of prefunded warrants offset by $157,000 of issuance expense. In addition, we received a loan of $500,000 from an affiliate of the parent company of Gresham Worldwide and received net proceeds of $145,000 from the sale of common shares at $3.25 per share.
Net cash used in financing activities for the nine month period ended December 26, 2020 was $578,000, primarily due to $2.2 million of loan repayments associated with the PFG loan and financed receivables and $317,000 of capital lease payments partially offset by $1.9 million in proceeds from financed receivables and the forgiveness of the PPP Loan of $791,000 which is reflected as a non-cash reconciling item to net income.
Non-GAAP Financial Measures
A Non-GAAP financial measure is generally defined by the SEC as a numerical measure of a company’s historical or future performance, financial position or cash flows that includes or excludes amounts from the most directly comparable measure under GAAP. Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, our reported results prepared in accordance with GAAP. Users of this financial information should consider the types of events and transactions that are excluded from these measures.
We measure our operating performance in part based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) which is a non-GAAP financial measure that is commonly used but is not a recognized accounting term under GAAP. We use EBITDA to monitor and facilitate internal evaluation of the performance of our business operations, to facilitate external comparison of our business results to those of others in our industry, and to plan and evaluate operating budgets. We believe that our measure of EBITDA provides useful information to the public regarding our operating performance and ability to service debt and fund capital expenditures and may help our investors understand and compare our results to other companies that have different financing, capital and tax structures. EBITDA should not be considered in isolation or as a substitute for, but instead as a supplemental to, income or loss from operations, net income or loss, cash flows from operating activities, or other income or cash flow data prepared in accordance with GAAP.
We define Adjusted EBITDA as EBITDA adjusted for net other income or expense items, share based compensation and certain one-time income or expense items. In the following reconciliation, we provide amounts as reflected in our accompanying unaudited condensed consolidated financial statements unless otherwise noted.
The reconciliation of our Net income (loss) to Adjusted EBITDA is as follows (in thousands):
| Three Months Ended |
||||||||
| December 25, 2021 |
December 26, 2020 |
|||||||
| Net income (loss) |
$ | (793 | ) | $ | 833 | |||
| Cumulative and deemed dividends on Series E preferred stock |
(2 | ) | (3 | ) | ||||
| Net income (loss) attributable to common shareholders |
(795 | ) | 830 | |||||
| Depreciation and amortization |
50 | 61 | ||||||
| Interest and taxes | 17 | 24 | ||||||
| EBITDA | (728 | ) | 915 | |||||
| Adjustments: | ||||||||
| Stock-based compensation |
113 | 63 | ||||||
| Gain on extinguishment of PPP Loan |
— | (791 | ) | |||||
| Transaction related expenses |
402 | — | ||||||
| Adjusted EBITDA |
$ | (213 | ) | $ | 187 | |||
| Nine Months Ended |
||||||||
| December 25, 2021 |
December 26, 2020 |
|||||||
| Net income (loss) |
$ | (1,543 | ) | $ | 435 | |||
| Cumulative and deemed dividends on Series E preferred stock |
(50 | ) | (10 | ) | ||||
| Net income (loss) attributable to common shareholders |
(1,593 | ) | 425 | |||||
| Depreciation and amortization |
157 | 195 | ||||||
| Interest and taxes | (27 | ) | 97 | |||||
| EBITDA | (1,463 | ) | 717 | |||||
| Adjustments: | ||||||||
| Stock-based compensation |
414 | 205 | ||||||
| Finance costs for issuance of prefunded warrants | 157 | — | ||||||
| Gain on remeasurement of prefunded warrants liability | (92 | ) | — | |||||
| Gain on extinguishment of PPP Loan |
— | (791 | ) | |||||
| Transaction related expenses |
402 | — | ||||||
| Adjusted EBITDA |
$ | (582 | ) | $ | 131 | |||
ITEM 3 – 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.
ITEM 4 – CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 25, 2021, which is the end of the fiscal quarter covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurances that (i) the information the Company is required to disclose in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period required by the Commission’s rules and forms, and (ii) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
There were no significant changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
II - OTHER INFORMATION
ITEM 1 – LEGALPROCEEDINGS
As of December 25, 2021, the Company has no material pending legal proceedings. From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business.
ITEM 1A – RISKFACTORS
There has been no material change in the risk factors disclosed in the registrant’s Annual Report on Form 10-K for the fiscal year ended March 27, 2021.
ITEM 2 – UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 – DEFAULTSUPON SENIOR SECURITIES
None.
ITEM 4 – MINESAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHERINFORMATION
None.
ITEM 6 – EXHIBITS
| 31.1* |
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act. |
| 31.2* |
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act. |
| 32.1** |
|
| 101.INS* |
Inline XBRL Instance |
| 101.SCH* |
Inline XBRL Taxonomy Extension Schema |
| 101.CAL* |
Inline XBRL Taxonomy Extension Calculation |
| 101.DEF* |
Inline XBRL Taxonomy Extension Definition |
| 101.LAB* |
Inline XBRL Taxonomy Extension Labels |
| 101.PRE* |
Inline XBRL Taxonomy Extension Presentation |
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
* Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GIGA-TRONICS INCORPORATED |
||||
| (Registrant) |
||||
| By: |
||||
| Date: |
February 8, 2022 |
/s/ John R. Regazzi |
||
| John R. Regazzi |
||||
| Chief Executive Officer |
||||
| (Principal Executive Officer) |
||||
| Date: |
February 8, 2022 |
/s/ Lutz P. Henckels |
||
| Lutz P. Henckels |
||||
| Chief Financial Officer Chief Operating Officer and Director (Principal Financial and Accounting Officer) |