Annual report pursuant to Section 13 and 15(d)

Note 8 - Term Loan, Revolving Line of Credit and Warrants

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Note 8 - Term Loan, Revolving Line of Credit and Warrants
12 Months Ended
Mar. 25, 2017
Notes to Financial Statements  
Long-term Debt [Text Block]
8
Term Loan, Revolving Line of Credit and Warrants
 
On
March 13, 2014,
the Company entered into a
three
year,
$2.0
million term loan agreement with PFG under which the Company received
$1.0
million on
March 14, 2014.
 
On
June 16, 2014,
the Company amended its loan agreement with PFG (the “Amendment”). Under the terms of the Amendment, PFG made a revolving credit line available to Giga-tronics in the amount of
$500,000,
and the Company borrowed the entire amount on
June 17, 2014.
The revolving line had a
thirty-three
month term. The Amendment reduced the future amount potentially available for the Company to borrow under the PFG Loan agreement from
$1.0
million to
$500,000.
The interest on the PFG revolving credit line was fixed, calculated on a daily basis at a rate of
12.50%
per annum. The Company was allowed to prepay the loan at any time prior to its
March 13, 2017
maturity date without a penalty.
 
On
June 3, 2015,
the Company further amended its loan agreement with PFG (the “Second Amendment”). The Second Amendment cancelled the Company’s
$500,000
of borrowing availability under the
June 2014
Amendment and required the Company to pay PFG
$150,000
towards its existing
$500,000
outstanding balance under the revolving line of credit, which the Company paid in
July 2015.
The Company also agreed to pay PFG an additional
$10,000
per month towards its remaining credit line balance until repaid, followed by like payments towards its term loan balance until repaid. As of
March 26, 2016,
the
$500,000
borrowed with the
June 2014
Amendment had been fully repaid.
 
Interest on the initial
$1.0
million term loan was fixed at
9.75%
and required monthly interest only payments during the
first
six
months of the agreement followed by monthly principal and interest payments over the remaining
thirty
months. The Company
may
prepay the loan at any time prior to maturity by paying all future scheduled principal and interest payments. As of
March 25, 2017,
the debt was fully repaid.
 
The PFG Loan was secured by all the assets of the Company under a lien that is junior to the Bridge Bank debt described in Note
7,
and limits borrowing under the Bridge Bank credit line limit to
$2.5
million. The Company paid a loan fee of
$30,000
upon the initial draw (“First Draw”) and
$15,000
for the
June 2014
Amendment. The loan fees paid were recorded as prepaid expenses and amortized to interest expense over the term of the PFG amended loan agreement.
 
The loan agreement contained financial covenants associated with the Company achieving minimum quarterly net sales and maintaining a minimum monthly shareholders’ equity. In the event of default by the Company, all or any part of the Company’s obligation to PFG could become immediately due. As of
March 25, 2017,
the Company was in compliance with all the financial covenants under the agreement.
 
The loan agreement also provided for the issuance of warrants convertible into
300,000
shares of the Company’s common stock, of which
180,000
were exercisable upon receipt of the initial
$1.0
million from the First Draw,
80,000
became exercisable with the First Amendment and
40,000
were cancelled as a result of the Second Amendment. Each warrant issued under the loan agreement has a term of
five
years and an exercise price of
$1.42
which was equal to the average NASDAQ closing price of the Company’s common stock for the
ten
trading days prior to the First Draw.
 
If the warrants are
not
exercised before expiration on
March 13, 2019,
the Company would be required to pay PFG
$150,000
and
$67,000
as settlement for warrants associated with the First Draw and the Amendment, respectively. The warrants could be settled for cash at an earlier date in the event of any acquisition or other change in control of the Company, future public issuance of Company securities or liquidation (or substantially similar event) of the Company. The Company currently has
no
definitive plans for any of the aforementioned events, and as a result, the cash payment date is estimated to be the expiration date unless warrants are exercised before then. The warrants have the characteristics of both debt and equity and are accounted for as a derivative liability measured at fair value each reporting period with the change in fair value recorded in earnings.
 
As of
March 25, 2017,
the estimated fair values of the derivative liabilities associated with the warrants issued in connection with the First Draw and Amendment were
$133,000
and
$89,000,
respectively, for a combined value of
$222,000.
As of
March 26, 2016,
the estimated fair value of the derivative liability associated with the warrant issued in connection with the First Draw and Amendment was
$212,000
and
$141,000,
respectively for a combined value of
$353,000.
The change in the fair value of the warrant liability totaled
$131,000
for the fiscal year ended
March 25, 2017
and is reported in the accompanying statement of operations as a gain on adjustment of derivative liability to fair value. The change in the fair of the warrant liability totaled
$12,000
for the fiscal year ended
March 26, 2016
and is reported as a loss on adjustment of derivative liability to fair value.
 
The initial
$1.0
million in proceeds under the term loan agreement were allocated between the PFG Loan and the warrants based on their relative fair values on the date of issuance which resulted in initial carrying values of
$822,000
and
$178,000,
respectively. The resulting discount of
$178,000
on the PFG Loan was accreted to interest expense under the effective interest method over the term of the PFG Loan, and as of
March 25, 2017
had been fully accreted since the
$1.0
million had been fully repaid.
 
The proceeds from the
$500,000
credit line issued in connection with the Amendment were allocated between the PFG Loan and the warrants based on their relative fair values on the date of issuance which resulted in initial carrying values of
$365,000
and
$135,000,
respectively. The resulting discount of
$135,000
on the PFG Loan was accreted to interest expense under the effective interest method over the of the PFG Loan, and as of
March
26,2016
had been fully accreted since the
$500,000
from the Amendment had been fully repaid.
 
For the fiscal years ended
March 25, 2017
and
March 26, 2016,
the Company recorded accretion of discount expense associated with the warrants issued with the PFG Loan of
$22,000
and
$165,000,
respectively.
 
On
April 27, 2017,
the Company entered into a new loan agreement with PFG. Under the terms of the agreement, PFG made a term loan to the Company in the principal amount of
$1,500,000
,
with funding occurring on
April 28, 2017.
The loan has a
two
-year term, with interest only payments for the term of the loan (see Note
20,
Subsequent Events).