Note 1 - Summary of Significant Accounting Policies
|12 Months Ended|
Mar. 25, 2017
|Notes to Financial Statements|
|Significant Accounting Policies [Text Block]||
The accompanying consolidated financial statements include the accounts of Giga-tronics Incorporated (“Giga-tronics”) and its wholly-owned subsidiary, Microsource Incorporated (“Microsource”), collectively the “Company”. The Company’s corporate office and manufacturing facilities are located in Dublin, California.
Giga-tronics Division designs, manufactures and markets the new Advanced Signal Generator (ASG) for the electronic warfare market. The Giga-tronics Division over the past
thirty-fiveyears has produced a broad line of test and measurement equipment used primarily for the design, production, repair and maintenance of products in aerospace, telecommunications, RADAR, and electronic warfare. Giga-tronics has recently completed a move within the test and measurement market from legacy products to the newly developed ASG. As part of this evolution certain legacy product lines were sold to raise additional capital. For example, we sold our SCPM line to Teradyne in
2015we sold our Power Meters, Amplifiers, and Legacy Signal Generators to Spanawave Corporation (see Note
10,Sale of Product Lines). In
2016we sold our Switch product line to Astronics (see Note
10,Sale of Product Lines). These transactions will allow us to increase our focus on the ASG and Microsource YIG RADAR filters. With the sales of these legacy product lines, the Giga-tronics Division is solely focused on the ASG product in the test and measurement equipment market.
Microsource develops and manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers, which are used by its customers in operational applications and in manufacturing a wide variety of microwave instruments and devices. Microsource’s
twolargest customers are prime contractors for which it develops and manufactures YIG RADAR filters used in fighter jet aircraft.
Use of EstimatesThe 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.
53week period ending on the last Saturday of the month of
March 25, 2017resulting in a
52week year. Fiscal year
March 26, 2016,also resulting in a
52week year. All references to years in the consolidated financial statements relate to fiscal years rather than calendar years.
noneof 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 RevenueThe 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:
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
2015the Company’s Microsource business unit received a
$6.5million order from a major aerospace company for non-recurring engineering services to develop a variant of its high performance fast tuning YIG filters for an aircraft platform and to deliver a limited number of flight-qualified prototype hardware units (the “NRE Order”) which is being accounted for on a milestone basis. The Company considered factors such as estimated completion dates and product acceptance of the order prior to accounting for the NRE Order as milestone revenue. During the fiscal years ended
March 25, 2017and
March 26, 2016,revenue recognized on a milestone basis were
On certain contracts with several of the Company’s significant customers the Company receives payments in advance of manufacturing. Advanced payments are recorded as deferred revenue until the revenue recognition criteria described above has been met.
Accounts receivable are stated at their net realizable value. The Company has estimated an allowance for uncollectable accounts based on analysis of specifically identified accounts, outstanding receivables, consideration of the age of those receivables, the Company’s historical collection experience, and adjustments for other factors management believes are necessary based on perceived credit risk.
The activity in the allowance account for doubtful accounts is as follows for the years ended
March 25, 2017and
March 26, 2016:
Accrued WarrantyThe Company’s warranty policy generally provides
threeyears 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.
InventoriesInventories are stated at the lower of cost or fair value using full absorption and standard costing. Cost is determined on a
first-out basis. Standard costing and overhead allocation rates are reviewed by management periodically, but
notless 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 DevelopmentResearch and development expenditures, which include the cost of materials consumed in research and development activities, salaries, wages and other costs of personnel engaged in research and development, costs of services performed by others for research and development on the Company’s behalf and indirect costs are expensed as operating expenses when incurred. Research and development costs totaled approximately
$2.8million for the years ended
March 25, 2017and
March 26, 2016,respectively.
tenyears 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
notbe recoverable. If such review indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows on an undiscounted basis, the asset’s carrying amount would be written down to fair value. Additionally, the Company reports long-lived assets to be disposed of at the lower of carrying amount or fair value less cost to sell. As of
March 25, 2017,and
March 26, 2016,management believes there has been
noimpairment of the Company’s long-lived assets.
DerivativesThe Company accounts for certain of its warrants as derivatives. Changes in fair values are reported in earnings as gain or loss on adjustment of warrant liability to fair value.
Deferred RentRent 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 TaxesIncome 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
notbe realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers both positive and negative evidence and tax planning strategies in making this assessment.
The Company considers all tax positions recognized in its financial statements for the likelihood of realization. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amounts of the positions that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than
notthat 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-
notrecognition threshold are measured as the largest amount of tax benefit that is more than
50percent 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.
March 25, 2017and
March 26, 2016.
Software Development CostsDevelopment costs included in the research and development of new software products and enhancements to existing software products are expensed as incurred, until technological feasibility in the form of a working model has been established. Capitalized development costs are amortized over the expected life of the product and evaluated each reporting period for impairment. During the
fourthquarter of fiscal
2017,the Company revised its estimates in accounting for the amortization of the capitalized software costs due to the long procurement cycle associated with the product. The Company had previously elected to amortize the capitalized software costs on a straight-line basis over a
threeyear period, however, the Company revised its estimates based on the percentage of revenue associated with the current period revenues. This change in estimate increased the Company’s cost of sales by
March 25, 2017,and
March 26, 2016,capitalized software development costs were
$876,000respectively. As of
March 25, 2017,amortization of capitalized software was
noamortization for the fiscal year ended
March, 26, 2016as the Company released the ASG product to its customers in the
thirdquarter of fiscal
Discontinued OperationsThe Company reviews its reporting and presentation requirements for discontinued operations as it moves to newer technology within the test and measurement market from legacy products to the newly developed Advanced Signal Generator. The disposal of these product line sales represents an evolution of the Company’s Giga-tronics Division to a more sophisticated product offered to the same customer base. The Company has evaluated the sales of product lines (see Note
10,Sale of Product Lines) concluding that each product line does
notmeet the definition of a “component of an entity” as defined by ASC
20.TheCompany is able to distinguish revenue and gross margin information as disclosed in Note
10,Sale of Product Lines to the accompanying financial statements; however, operations and cash flow information is
notclearly distinguishable and the company is unable to present meaningful information about results of operations and cash flows from those product lines.
Share-based CompensationThe Company has established the
2005Equity Incentive Plan, which provides for the granting of options for up to
2,850,000shares of Common Stock. In
2014,the term of the
2005Equity 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
notsignificant for the Company for the fiscal years ended
March 25, 2017or
March 26, 2016.
In calculating compensation related to stock option grants, the fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The computation of expected volatility used in the Black-Scholes- Merton option-pricing model is based on the historical volatility of Giga-tronics’ share price. The expected term is estimated based on a review of historical employee exercise behavior with respect to option grants. The risk free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected dividend yield was
notconsidered in the option pricing formula since the Company has
notpaid dividends and has
nocurrent 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 ShareBasic 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
notincluded in the computation of diluted earnings per share. Non-vested shares of restricted stock have non-forfeitable dividend rights and are considered participating securities for the purpose of calculating basic and diluted earnings per share under the
Comprehensive Income or LossThere are
noitems of comprehensive income or loss other than net income or loss.
notrequire collateral or other security. At
March 25, 2017,
threecustomers combined accounted for
67%of consolidated gross accounts receivable. At
March 26, 2016,
threecustomers combined accounted for
65%of consolidated gross accounts receivable.
1), significant other observable inputs other than Level
1prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are
notactive; or other inputs that are observable or can be corroborated by observable market data (Level
2), or significant unobservable inputs reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability (Level
3), depending on the nature of the item being valued.
Recently Issued Accounting Standards
August 2014,the FASB issued ASU
15,Presentation of Financial Statements—Going Concern (Subtopic
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU
15provides 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
oneyear of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after
December 15, 2016,and interim periods thereafter, with early adoption permitted. The Company adopted this accounting standard as of
April 2015,the FASB issued ASU
03,“Interest - Imputation of Interest (Subtopic
Simplifying the Presentation of Debt Issuance Costs,” or ASU
03simplifies 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
notaffected by this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after
December 15, 2015,and interim periods within those fiscal years. The adoption of this ASU by the Company, changed the presentation of certain debt issuance costs, which are reported as a direct offset to the applicable debt on the balance sheet.
August 2015,the FASB issued ASU
Interest—Imputation of Interest (SubtopicPreviously, on
30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”,
April 7, 2015,the FASB issued ASU
03,Interest—Imputation of Interest (Subtopic
Simplifying the Presentation of Debt Issuance Costs, which required entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in ASU
notaddress presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU
03for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would
notobject to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015.The Company’s adoption of ASU
nothave a material impact on its financial statements.
November 2015,the FASB issued ASU
Income Taxes (TopicTopic
740): “Balance Sheet Classification of Deferred Taxes”.
740is effective for public business entities for financial statements issued for annual periods beginning after
December 15, 2016,and interim periods within those annual periods. For all other entities, the amendments are effective for financial statements issued for annual periods beginning after
December 15, 2017,and interim periods within annual periods beginning after
December 15, 2018.The amendments
maybe applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The amendments in ASU
17eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The Company is currently evaluating the impact this accounting standard update
mayhave on its financial statements.
January 2017,the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
Intangibles - Goodwill and Other (Topic. ASU
350): Simplifying the Test for Goodwill Impairment
04amends the guidance to simplify the subsequent measurement of goodwill by removing Step
2of the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU
04is effective for annual reporting periods beginning after
December 15, 2019,with early adoption permitted. The Company does
notexpect the standard will have a material impact on its Consolidated Financial Statements.
August 2016,the FASB issued ASU
15”), Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments. The objective of ASU
15is to reduce existing diversity in practice by addressing
eightspecific cash flow issues related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU
15is effective for fiscal years beginning after
December 15, 2017,including interim periods within those fiscal years. Early adoption is permitted. If early adopted, an entity must adopt all the amendments in the same period. The Company is currently evaluating the impact of the new guidance and timing of adoption, but does
notexpect that the standard will have a material impact on its Consolidated Financial Statements.
February 2016,the FASB issued ASU
02”), Leases. ASU
02requires that lessees recognize assets and liabilities for the rights and obligations for leases with a lease term of more than
oneyear. The amendments in this ASU are effective for annual periods ending after
December 15, 2018.Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU
02on its consolidated financial statements.
May 2014,the FASB issued ASU
09”), Revenue from Contracts with Customers. ASU
09establishes a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. ASU
09was further updated in
December 2016to provide clarification on a number of specific issues as well as requiring additional disclosures. ASU
maybe applied either retrospectively or through the use of a modified-retrospective method. The full retrospective method requires companies to recast each prior reporting period presented as if the new guidance had always existed. Under the modified retrospective method, companies would recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application. On
July 9, 2015,the FASB approved a
oneyear deferral of the effective date of ASU
09to annual reporting periods beginning after
December 15, 2017.The Company has
notyet completed its evaluation of the impact of ASU
09on its past and future revenue recognition and related disclosure.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://www.xbrl.org/2003/role/presentationRef