Annual report pursuant to Section 13 and 15(d)

Note 10 - Sale of Product Lines

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Note 10 - Sale of Product Lines
12 Months Ended
Mar. 25, 2017
Notes to Financial Statements  
Mergers, Acquisitions and Dispositions Disclosures [Text Block]
10
Sale of Product Lines
 
On
June 20, 2016,
the Company entered into an Asset Purchase Agreement for the sale of its Switch product line to Astronics Test Systems Inc. (Astronics). Upon signing the agreement, Astronics paid
$850,000
for the intellectual property of the product line. The Company recognized a net gain of
$802,000
in the
first
quarter of fiscal
2017
after related expenses were subtracted from the sales price. The following table presents the breakdown of the gain recognized related to the asset sale:
  
(In thousands)
  
  
  
  
Cash received from Astronics
  
$
850
  
Cash paid to buy out future commission obligation
  
  
(170
)
Employee severance
  
  
(97
)
Legal fees
  
  
(13
)
Commissions
  
  
(46
)
Warranty Liability released
  
  
278
  
Net gain recognized
  
$
802
  
    
In calculating the gain included in the accompanying consolidated financial statements, the Company released
$278,000
of deferred warranty obligations related to the Switch asset. Pursuant to the terms of the agreement, Astronics assumed all the warranty obligations for the Switch product line, including the products sold prior to the asset being transferred to Astronics. The deferred warranty obligation was previously included in other current liabilities in the consolidated financial statements. The Company also had an existing agreement with a consultant supporting the Switch product line which included a
three
percent commission on the sales of the Switch product line for a period of
4
years ending in
January 2020.
The agreement allowed for a buyout of future commissions associated with the Switch product which the Company exercised in connection with the Astronics transaction in
June 2016
resulting in a payment of
$170,000
by the Company.
  
During fiscal
2017,
the Switch product line accounted for
$2.1
million in product revenue. Gross margins for the Switch product line for the fiscal year ended
March, 25, 2017
was
$437,000.
During fiscal
2016,
the Switch product line accounted for
$2.7
million in product revenue. Gross margins for the Switch product line for the fiscal year ended
March, 26, 2016
was
$958,000.
While the Company is able to distinguish revenue and gross margin information related to the sale of the Switch product line to Astronics, the Company is unable to present meaningful information about results of operation and cash flows from the Switch product line.
  
On
December 15, 2015,
the Company entered into an Asset Purchase Agreement with Spanawave Corporation, whereby Spanawave agreed to purchase the Giga-tronics’ Division product lines for its Power Meters, Amplifiers, and Legacy Signal Generators for
$1.5
million. The agreement provided for the transfer of these product lines to Spanawave sequentially in
six
phases beginning with certain sensor and amplifier products. During the
second
quarter ended
September 24, 2016,
the Company and Spanawave became engaged in a dispute, including litigation initiated by Spanawave and an arbitration proceeding initiated by Spanawave’s affiliate Liberty Test Equipment, Inc., as to whether the Company has fulfilled all the requirements to close phases
one
through
five
and become entitled to the
$375,000
received during the
first
quarter of fiscal
2017.
  
The complaint seeks specific performance of the agreement and damages. Spanawave’s affiliate Liberty Test Equipment also filed an arbitration claim for
$440,000
under a distribution agreement between the Company and Liberty. The Company has filed cross-complaints in both the litigation and arbitration asserting breach of the respective agreements by Spanawave and Liberty. The Company had previously asserted that the distribution agreement does
not
extend to the products with respect to which the claim has been made. Certain customers of the lines of business sold to Spanawave are also customers of the Company’s ongoing Advance Signal Generator business. Continued disruption of the phase
6
signal generator business could have an adverse effect on the ASG business. The parties have negotiated in an effort to settle the dispute notwithstanding the filings. The expenses and potential liability of negotiation, any settlement or continued litigation or arbitration could have a material adverse effect on the Company.
  
During fiscal
2017,
the Company had received
$750,000
from Spanawave under the agreement. Of this amount, the Company returned
$375,000
to Spanawave on
July 28, 2016
resulting from the dispute regarding the status of phases
one
through five. The remaining
$375,000
is included in deferred liability related to asset sales in the consolidated balance sheet. In addition, in
June 2016,
the Company received approximately
$275,000
in exchange for raw material purchases. The purchase price of the raw materials approximated its carrying value, therefore
no
gain or loss was recognized. The parties are currently attempting to resolve this dispute.
No
gain has been recognized in connection with this product line sale because of the aforementioned dispute. These product lines accounted for approximately
$592,000
and
$2.7
million in revenue during the fiscal year ended
March 25, 2017,
and
March 26, 2016,
respectively. There was
no
margin associated with the revenue derived in fiscal
2017
as the revenues were primarily related to inventory transfer at book value. For the fiscal year ended
March 26, 2016,
gross margin was
$240,000.
While the Company is able to distinguish revenue and gross margin information related to the sale of these product lines, the Company is unable to present meaningful information about results of operation and cash flows from these product lines.