Annual report pursuant to Section 13 and 15(d)

Note 1 - Summary of Significant Accounting Policies

v3.7.0.1
Note 1 - Summary of Significant Accounting Policies
12 Months Ended
Mar. 25, 2017
Notes to Financial Statements  
Significant Accounting Policies [Text Block]
1
Summary of Significant Accounting
Policies
 
The accompanying consolidated financial statements include the accounts of Giga-tronics Incorporated (“Giga-tronics”) and its wholly-owned subsidiary, Microsource Incorporated (“Microsource”), collectively the “Company”. The Company’s corporate office and manufacturing facilities are located in Dublin, California.
 
Giga-tronics Division designs, manufactures and markets the new Advanced Signal Generator (ASG) for the electronic warfare market. The Giga-tronics Division over the past
thirty-five
years has produced a broad line of test and measurement equipment used primarily for the design, production, repair and maintenance of products in aerospace, telecommunications, RADAR, and electronic warfare. Giga-tronics has recently completed a move within the test and measurement market from legacy products to the newly developed ASG. As part of this evolution certain legacy product lines were sold to raise additional capital. For example, we sold our SCPM line to Teradyne in
2013,
and in
December
of
2015
we sold our Power Meters, Amplifiers, and Legacy Signal Generators to Spanawave Corporation (see Note
10,
Sale of Product Lines). In
June
of
2016
we sold our Switch product line to Astronics (see Note
10,
Sale of Product Lines). These transactions will allow us to increase our focus on the ASG and Microsource YIG RADAR filters. With the sales of these legacy product lines, the Giga-tronics Division is solely focused on the ASG product in the test and measurement equipment market.
 
Microsource develops and manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers, which are used by its customers in operational applications and in manufacturing a wide variety of microwave instruments and devices. Microsource’s
two
largest customers are prime contractors for which it develops and manufactures YIG RADAR filters used in fighter jet aircraft.
 
Principles
of
Consolidation
The consolidated financial statements include the accounts of Giga-tronics and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Fiscal
Year
The Company’s financial reporting year consists of either a
52
week or
53
week period ending on the last Saturday of the month of
March.
Fiscal year
2017
ended on
March 25, 2017
resulting in a
52
week year. Fiscal year
2016
ended on
March 26, 2016,
also resulting in a
52
week year. All references to years in the consolidated financial statements relate to fiscal years rather than calendar years.
 
Reclassifications
Certain reclassifications,
none
of which affected the prior year’s net loss or shareholders’ equity, have been made to prior year balances in order to conform to the current year presentation.
 
Revenue Recognition and Deferred Revenue
The Company records revenue when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collectability is reasonably assured. This occurs when products are shipped or the customer accepts title transfer. If the arrangement involves acceptance terms, the Company defers revenue until product acceptance is received. On certain large development contracts, revenue is recognized upon achievement of substantive milestones. Determining whether a milestone is substantive is a matter of judgment and that assessment is performed only at the inception of the arrangement. The consideration earned from the achievement of a milestone must meet all of the following for the milestone to be considered substantive:
 
 
a.
It is commensurate with either of the following:
 
1.
The Company’s performance to achieve the milestone.
 
2.
The enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the Company's performance to achieve the milestone.
 
b.
It relates solely to past performance.
 
c.
It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
 
Milestones for revenue recognition are agreed upon with the customer prior to the start of the contract and some milestones are based on product shipping while others are based on design review. In fiscal
2015
the Company’s Microsource business unit received a
$6.5
million order from a major aerospace company for non-recurring engineering services to develop a variant of its high performance fast tuning YIG filters for an aircraft platform and to deliver a limited number of flight-qualified prototype hardware units (the “NRE Order”) which is being accounted for on a milestone basis. The Company considered factors such as estimated completion dates and product acceptance of the order prior to accounting for the NRE Order as milestone revenue. During the fiscal years ended
March 25, 2017
and
March 26, 2016,
revenue recognized on a milestone basis were
$478,000
and
$1.0
million, respectively.
 
On certain contracts with several of the Company’s significant customers the Company receives payments in advance of manufacturing. Advanced payments are recorded as deferred revenue until the revenue recognition criteria described above has been met.
 
Accounts receivable are stated at their net realizable value. The Company has estimated an allowance for uncollectable accounts based on analysis of specifically identified accounts, outstanding receivables, consideration of the age of those receivables, the Company’s historical collection experience, and adjustments for other factors management believes are necessary based on perceived credit risk.
 
The activity in the allowance account for doubtful accounts is as follows for the years ended
March 25, 2017
and
March 26, 2016:
 
(Dollars in thousands)
 
March 25,
2017
 
 
March 26,
2016
 
Beginning balance
  $
45
    $
45
 
Provisions for doubtful accounts
   
     
 
Write-off of doubtful accounts
   
     
 
Ending balance
  $
45
    $
45
 
 
Accrued Warranty
The Company’s warranty policy generally provides
one
to
three
years of coverage depending on the product. The Company records a liability for estimated warranty obligations at the date products are sold. The estimated cost of warranty coverage is based on the Company’s actual historical experience with its current products or similar products. For new products, the required reserve is based on historical experience of similar products until such time as sufficient historical data has been collected on the new product. Adjustments are made as new information becomes available.
 
Inventories
Inventories are stated at the lower of cost or fair value using full absorption and standard costing. Cost is determined on a
first
-in,
first
-out basis. Standard costing and overhead allocation rates are reviewed by management periodically, but
not
less than annually. Overhead rates are recorded to inventory based on capacity management expects for the period the inventory will be held. Reserves are recorded within cost of sales for impaired or obsolete inventory when the cost of inventory exceeds its estimated fair value. Management evaluates the need for inventory reserves based on its estimate of the amount realizable through projected sales including an evaluation of whether a product is reaching the end of its life cycle. When inventory is discarded it is written off against the inventory reserve, as inventory generally has already been fully reserved for at the time it is discarded.
 
Research and Development
Research and development expenditures, which include the cost of materials consumed in research and development activities, salaries, wages and other costs of personnel engaged in research and development, costs of services performed by others for research and development on the Company’s behalf and indirect costs are expensed as operating expenses when incurred. Research and development costs totaled approximately
$2.3
million and
$2.8
million for the years ended
March 25, 2017
and
March 26, 2016,
respectively.
 
Property
and
Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, which range from
three
to
ten
years for machinery and equipment and office fixtures. Leasehold improvements and assets acquired under capital leases are amortized using the straight-line method over the shorter of the estimated useful lives of the respective assets or the lease term.
 
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may
not
be recoverable. If such review indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows on an undiscounted basis, the asset’s carrying amount would be written down to fair value. Additionally, the Company reports long-lived assets to be disposed of at the lower of carrying amount or fair value less cost to sell. As of
March 25, 2017,
and
March 26, 2016,
management believes there has been
no
impairment of the Company’s long-lived assets.
 
Derivatives
The Company accounts for certain of its warrants as derivatives. Changes in fair values are reported in earnings as gain or loss on adjustment of warrant liability to fair value.
 
Deferred Rent
Rent expense is recognized in an amount equal to the guaranteed base rent plus contractual future minimum rental increases amortized on the straight-line basis over the terms of the leases, including free rent periods.
 
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future tax benefits are subject to a valuation allowance when management is unable to conclude that its deferred tax assets will more likely than
not
be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers both positive and negative evidence and tax planning strategies in making this assessment.
 
The Company considers all tax positions recognized in its financial statements for the likelihood of realization. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amounts of the positions that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than
not
that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-
not
recognition threshold are measured as the largest amount of tax benefit that is more than
50
percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above, if any, would be reflected as unrecognized tax benefits, as applicable, in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of the provision for income taxes in the consolidated statements of operations.
 
Product
Development
Costs
The Company incurs pre-production costs on certain long-term supply arrangements. The costs, which represent non-recurring engineering and tooling costs, are capitalized as other assets and amortized over their useful life when reimbursable by the customer. All other product development costs are charged to operations as incurred. Capitalized pre-production costs included in inventory were immaterial as of
March 25, 2017
and
March 26, 2016.
 
Software Development Costs
Development costs included in the research and development of new software products and enhancements to existing software products are expensed as incurred, until technological feasibility in the form of a working model has been established. Capitalized development costs are amortized over the expected life of the product and evaluated each reporting period for impairment. During the
fourth
quarter of fiscal
2017,
the Company revised its estimates in accounting for the amortization of the capitalized software costs due to the long procurement cycle associated with the product. The Company had previously elected to amortize the capitalized software costs on a straight-line basis over a
three
year period, however, the Company revised its estimates based on the percentage of revenue associated with the current period revenues. This change in estimate increased the Company’s cost of sales by
$342,000
in fiscal
2017.
As of
March 25, 2017,
and
March 26, 2016,
capitalized software development costs were
$733,000
and
$876,000
respectively. As of
March 25, 2017,
amortization of capitalized software was
$476,000.
There was
no
amortization for the fiscal year ended
March, 26, 2016
as the Company released the ASG product to its customers in the
third
quarter of fiscal
2017.
 
Discontinued Operations
The Company reviews its reporting and presentation requirements for discontinued operations as it moves to newer technology within the test and measurement market from legacy products to the newly developed Advanced Signal Generator. The disposal of these product line sales represents an evolution of the Company’s Giga-tronics Division to a more sophisticated product offered to the same customer base. The Company has evaluated the sales of product lines (see Note
10,
Sale of Product Lines) concluding that each product line does
not
meet the definition of a “component of an entity” as defined by ASC
205
-
20.The
Company is able to distinguish revenue and gross margin information as disclosed in Note
10,
Sale of Product Lines to the accompanying financial statements; however, operations and cash flow information is
not
clearly distinguishable and the company is unable to present meaningful information about results of operations and cash flows from those product lines.
 
Share-based Compensation
The Company has established the
2005
Equity Incentive Plan, which provides for the granting of options for up to
2,850,000
shares of Common Stock. In
2014,
the term of the
2005
Equity Incentive Plan was extended to
2025.
The Company records share-based compensation expense for the fair value of all stock options and restricted stock that are ultimately expected to vest as the requisite service is rendered.
 
The cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as cash flows from financing in the statements of cash flows. These excess tax benefits were
not
significant for the Company for the fiscal years ended
March 25, 2017
or
March 26, 2016.
 
In calculating compensation related to stock option grants, the fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The computation of expected volatility used in the Black-Scholes- Merton option-pricing model is based on the historical volatility of Giga-tronics’ share price. The expected term is estimated based on a review of historical employee exercise behavior with respect to option grants. The risk free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected dividend yield was
not
considered in the option pricing formula since the Company has
not
paid dividends and has
no
current plans to do so in the future.
 
The fair value of restricted stock awards is based on the fair value of the underlying shares at the date of the grant. Management makes estimates regarding pre-vesting forfeitures that will impact timing of compensation expense recognized for stock option and restricted stock awards.
 
Earnings or Loss Per Common Share
Basic earnings or loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporate the incremental shares issuable upon the assumed exercise of stock options and warrants using the treasury stock method. Anti-dilutive options are
not
included in the computation of diluted earnings per share. Non-vested shares of restricted stock have non-forfeitable dividend rights and are considered participating securities for the purpose of calculating basic and diluted earnings per share under the
two
-class method.
 
Comprehensive Income or Loss
There are
no
items of comprehensive income or loss other than net income or loss.
 
Financial
Instruments
and
Concentration
of
Credit
Risk
Financial instruments that potentially subject the Company to credit risk consist of cash, cash-equivalents and trade accounts receivable. The Company’s cash-equivalents consist of overnight deposits with federally insured financial institutions. Concentration of credit risk in trade accounts receivable results primarily from sales to major customers. The Company individually evaluates the creditworthiness of its customers and generally does
not
require collateral or other security. At
March 25, 2017,
three
customers combined accounted for
67%
of consolidated gross accounts receivable. At
March 26, 2016,
three
customers combined accounted for
52%
and
65%
of consolidated gross accounts receivable.
 
Fair
Value
of
Financial
Instruments
and
Fair
Value
Measurements
The Company’s financial instruments consist principally of cash and cash-equivalents, line of credit, term debt, and warrant derivative liability. The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date (Level
1
), significant other observable inputs other than Level
1
prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not
active; or other inputs that are observable or can be corroborated by observable market data (Level
2
), or significant unobservable inputs reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability (Level
3
), depending on the nature of the item being valued.
 
Recently Issued Accounting Standards
 
In
August 2014,
the FASB issued ASU
2014
-
15,
Presentation of Financial Statements—Going Concern (Subtopic
205
-
40
):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. ASU
2014
-
15
provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within
one
year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after
December 15, 2016,
and interim periods thereafter, with early adoption permitted. The Company adopted this accounting standard as of
March
25,2017.
 
In
April 2015,
the FASB issued ASU
2015
-
03,
“Interest - Imputation of Interest (Subtopic
835
-
30
) –
Simplifying the Presentation of Debt Issuance Costs
,” or ASU
2015
-
03.
ASU
2015
-
03
simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are
not
affected by this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after
December 15, 2015,
and interim periods within those fiscal years. The adoption of this ASU by the Company, changed the presentation of certain debt issuance costs, which are reported as a direct offset to the applicable debt on the balance sheet.
 
In
August 2015,
the FASB issued ASU
2015
-
15
– “
Interest—Imputation of Interest (Subtopic
835
-
30
) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”,
Previously, on
April 7, 2015,
the FASB issued ASU
2015
-
03,
Interest—Imputation of Interest (Subtopic
835
-
30
):
Simplifying the Presentation of Debt Issuance Costs
, which required entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in ASU
2015
-
03
(see paragraph
835
-
30
-
45
-
1A
) does
not
address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU
2015
-
03
for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would
not
object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015.
The Company’s adoption of ASU
2015
-
15
in fiscal
2017
did
not
have a material impact on its financial statements.
 
In
November 2015,
the FASB issued ASU
2015
-
17
Income Taxes (Topic
740
): “Balance Sheet Classification of Deferred Taxes”.
Topic
740
is effective for public business entities for financial statements issued for annual periods beginning after
December 15, 2016,
and interim periods within those annual periods. For all other entities, the amendments are effective for financial statements issued for annual periods beginning after
December 15, 2017,
and interim periods within annual periods beginning after
December 15, 2018.
The amendments
may
be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The amendments in ASU
2015
-
17
eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The Company is currently evaluating the impact this accounting standard update
may
have on its financial statements.
 
In
January 2017,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2017
-
04
(“ASU
2017
-
04”
),
Intangibles - Goodwill and Other (Topic
350
): Simplifying the Test for Goodwill Impairment
. ASU
2017
-
04
amends the guidance to simplify the subsequent measurement of goodwill by removing Step
2
of the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU
2017
-
04
is effective for annual reporting periods beginning after
December 15, 2019,
with early adoption permitted. The Company does
not
expect the standard will have a material impact on its Consolidated Financial Statements.
 
In
August 2016,
the FASB issued ASU
2016
-
15
(“ASU
2016
-
15”
), Statement of Cash Flows (Topic
230
): Classification of Certain Cash Receipts and Cash Payments. The objective of ASU
2016
-
15
is to reduce existing diversity in practice by addressing
eight
specific cash flow issues related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU
2016
-
15
is effective for fiscal years beginning after
December 15, 2017,
including interim periods within those fiscal years. Early adoption is permitted. If early adopted, an entity must adopt all the amendments in the same period. The Company is currently evaluating the impact of the new guidance and timing of adoption, but does
not
expect that the standard will have a material impact on its Consolidated Financial Statements.
 
In
February 2016,
the FASB issued ASU
2016
-
02
(“ASU
2016
-
02”
), Leases. ASU
2016
-
02
requires that lessees recognize assets and liabilities for the rights and obligations for leases with a lease term of more than
one
year. The amendments in this ASU are effective for annual periods ending after
December 15, 2018.
Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU
2016
-
02
on its consolidated financial statements.
 
In
May 2014,
the FASB issued ASU
2014
-
09
(“ASU
2014
-
09”
), Revenue from Contracts with Customers. ASU
2014
-
09
establishes a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. ASU
2014
-
09
was further updated in
March,
April,
May,
and
December 2016
to provide clarification on a number of specific issues as well as requiring additional disclosures. ASU
2014
-
09
may
be applied either retrospectively or through the use of a modified-retrospective method. The full retrospective method requires companies to recast each prior reporting period presented as if the new guidance had always existed. Under the modified retrospective method, companies would recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application. On
July 9, 2015,
the FASB approved a
one
year deferral of the effective date of ASU
2014
-
09
to annual reporting periods beginning after
December 15, 2017.
The Company has
not
yet completed its evaluation of the impact of ASU
2014
-
09
on its past and future revenue recognition and related disclosure.