GIGA TRONICS INC - Quarter Report: 2017 December (Form 10-Q)

 

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(In thousands except share data)		December 30, 2017				March 25, 2017 **
Assets
Current assets:
Cash and cash-equivalents		$	760			$	1,421
Trade accounts receivable, net of allowance of $11 and $45, respectively			830				954
Inventories, net			5,421				4,811
Prepaid expenses and other current assets			69				452
Total current assets			7,080				7,638
Property and equipment, net			921				528
Other long-term assets			175				175
Capitalized software development costs			—				733
Total assets		$	8,176			$	9,074
Liabilities and shareholders' (deficit) equity
Current liabilities:
Line of credit		$	552			$	582
Accounts payable			1,463				1,107
Loan payable, net of discounts and issuance costs			1,415				—
Equity forward, at estimated fair value			16				—
Accrued payroll and benefits			439				583
Deferred revenue			3,090				3,614
Capital lease obligations			53				50
Deferred liability related to asset sale			—				375
Deferred rent			55				—
Other current liabilities			1,006				707
Total current liabilities			8,089				7,018
Warrant liability, at estimated fair value			155				222
Long term deferred rent			444				—
Long term obligations - capital lease			74				114
Total liabilities			8,762				7,354
Commitments and contingencies
Shareholders' (deficit) equity:
Convertible preferred stock of no par value; Authorized - 1,000,000 shares; Series A - designated 250,000 shares; no shares at December 30, 2017 and March 25, 2017 issued and outstanding			—				—
Series B, C, D- designated 19,500 shares; 18,533.51 shares at December 30, 2017 and March 25, 2017 issued and outstanding; (liquidation preference of $3,540 at December 30, 2017 and March 25, 2017)			2,911				2,911
Common stock of no par value; Authorized - 40,000,000 shares; 10,179,653 shares at December 30, 2017 and 9,594,203 shares at March 25, 2017 issued and outstanding			24,736				24,390
Accumulated deficit			(28,233	)			(25,581	)
Total shareholders' (deficit) equity			(586	)			1,720
Total liabilities and shareholders' (deficit) equity		$	8,176			$	9,074

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		Three Month Periods Ended								Nine Month Periods Ended
(In thousands except per share data)		December 30, 2017				December 24, 2016				December 30, 2017				December 24, 2016
Net sales		$	3,220			$	3,202			$	7,453			$	11,037
Cost of sales			2,415				2,108				5,695				7,788
Gross profit			805				1,094				1,758				3,249
Operating expenses:
Engineering			452				627				1,313				1,724
Selling, general and administrative			891				1,077				3,158				3,429
Total operating expenses			1,343				1,704				4,471				5,153
Operating loss			(538	)			(610	)			(2,713	)			(1,904	)
Gain on sale of product line			324				—				324				802
Gain on adjustment of warrant liability to fair value			7				62				67				136
Interest expense:
Interest expense, net			(71	)			(24	)			(238	)			(84	)
Interest expense from accretion of loan discount			(35	)			(3	)			(90	)			(21	)
Total interest expense, net			(106	)			(27	)			(328	)			(105	)
Loss before income taxes			(313	)			(575	)			(2,650	)			(1,071	)
Provision for income taxes			—				—				2				2
Net loss		$	(313	)		$	(575	)		$	(2,652	)		$	(1,073	)
Loss per common share - basic		$	(0.03	)		$	(0.06	)		$	(0.27	)		$	(0.11	)
Loss per common share - diluted		$	(0.03	)		$	(0.06	)		$	(0.27	)		$	(0.11	)
Weighted average shares used in per share calculation:
Basic			9,798				9,550				9,769				9,550
Diluted			9,798				9,550				9,769				9,550

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		Nine Month Periods Ended
(In thousands)		December 30, 2017				December 24, 2016
Cash flows from operating activities:
Net loss		$	(2,652	)		$	(1,073	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			1,025				306
Share based compensation			174				218
Adjustment of warrant liability to fair value			(67	)			(136	)
Capitalized software development costs			—				(334	)
Accretion of discounts and issuance costs on debt			100				30
Change in fair value of equity forward			16				—
Change in other long-term liabilities			31				—
Change in deferred rent			499				(110	)
Gain on sale of product line			(375	)			(802	)
Changes in operating assets and liabilities
Trade accounts receivable			124				(405	)
Inventories			(610	)			(394	)
Prepaid expenses and other assets			383				168
Accounts payable			356				(637	)
Accrued payroll and benefits			(144	)			(224	)
Deferred revenue			(524	)			3,659
Other current liabilities			299				(252	)
Net cash (used in) provided by operating activities			(1,365	)			14
Cash flows from investing activities:
Cash received from sale of product lines			—				1,225
Cash returned related to sale of product line			—				(375	)
Purchases of property and equipment			(685	)			(37	)
Net cash (used in) provided by investing activities			(685	)			813
Cash flows from financing activities:
Proceeds from borrowings, net of issuance costs			1,456				—
Repayments of debt			—				(390	)
Repayments of line of credit			(30	)			(96	)
Principal payments on capital leases			(37	)			(32	)
Net cash provided by (used in) financing activities			1,389				(518	)
(Decrease)/Increase in cash and cash-equivalents			(661	)			309
Beginning cash and cash-equivalents			1,421				1,331
Ending cash and cash-equivalents		$	760			$	1,640
Supplementary disclosure of cash flow information:
Cash paid for income taxes		$	2			$	2
Cash paid for interest		$	163			$	63
Supplementary disclosure of noncash financing activities:
Common stock issued in connection with debt issuance		$	172			$	—
Equipment disposal		$	377			$	174

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(1)          Organization and Significant Accounting Policies

 

The condensed consolidated financial statements included herein have been prepared by Giga-tronics Incorporated (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission. 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. For further information, refer to the consolidated financial statements and footnotes thereto, included in the Annual Report on Form 10-K, filed with the Securities and Exchange Commission for the year ended March 25, 2017.

   

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.

  

Derivatives The Company accounts for certain of its warrants and embedded debt features as derivatives. Changes in fair values are reported in earnings as gain or loss on adjustment of these instruments to fair value. 

 

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.

 

Discontinued Operations The Company reviews its reporting and presentation requirements for discontinued operations in accordance with the guidance provided by ASC 205-20 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 9, 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 9, 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.

 

New Accounting Standards 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 elected to adopt the standard as of April 1, 2018 (beginning of the Company’s fiscal year) using the modified retrospective method. Under this approach, no restatement of fiscal years 2017 or 2018 will be required. Rather, the effect of the adoption will be recorded as a cumulative adjustment to the opening balance of retained earnings at April 1, 2018.

 

The Company commenced an analysis of the impact of ASU 2014-09 by evaluating the impact on its contracts at each of the Company’s business segments. With this baseline understanding, the Company developed a project plan to evaluate the contracts across the business segments. ASU 2014-09 also requires expanded disclosures regarding the nature, timing, and uncertainty of revenue, cash flow and customer contract balances, including how and when performance obligations are satisfied and the relationship between revenue recognized and changes in contract balances during a reporting period.

 

Under the legacy GAAP, 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.  Advanced payments are recorded as deferred revenue until the revenue recognition criteria described above has been met.

 

 

Based upon an assessment of material active contracts, the Company expects that for contracts where revenue is currently recognized as units are delivered, in most cases the accounting for those contracts will change under ASU 2014-09 such that revenue will be recognized as costs are incurred. This change will generally result in an acceleration of revenue as compared with the current revenue recognition method for those contracts.

 

 

(2)          Going Concern and Management’s Plan

 

The Company incurred net losses of $313,000 for the third quarter and $2.7 million for the first nine months of fiscal 2018, respectively. These losses have contributed to an accumulated deficit of $28.2 million and shareholders’ (deficit) equity of ($586,000) as of December 30, 2017. The Company used cash flow in operations totaling $1.4 million in the first nine months of fiscal 2018.

 

The Company has experienced delays in the development of features, receipt of orders, and shipments for the new Advanced Signal Generator (“ASG”) and the Advanced Signal Analyzer (“ASA”). These delays have contributed, in part, to a decrease in working capital. The new ASG and ASA products have shipped to several customers, but potential delays in the development or refinement of additional features, longer than anticipated sales cycles, or uncertainty as to the Company’s ability to efficiently manufacture the ASG and ASA, could significantly contribute to additional future losses and decreases in working capital.

 

To help fund operations, the Company relies on advances under the line of credit with Bridge Bank which expires on May 6, 2019. The agreement includes a subjective acceleration clause, which allows for amounts due under the facility to become immediately due in the event of a material adverse change in the Company’s business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit based on the lender’s judgement. As of December 30, 2017, the Company had borrowed $552,000 under the line of credit.

 

These matters raise substantial doubt as to the Company’s ability to continue as a going concern.

  

To address these matters, the Company’s management has taken several actions to provide additional liquidity and reduce costs and expenses going forward. These actions are described in the following paragraphs:

 

	●	In September 2017, Microsource received a $4.8 million order for continuing the YIG RADAR filter for a fighter jet platform. The Company expects to begin initial shipments of these filters in the fourth quarter of fiscal 2018 and ship the bulk of the order over the succeeding 9 to 12 month period.
	●	On April 27, 2017, the Company entered into a new loan agreement with Partners For Growth V, L.P. (“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. However, for the quarters ended  June 24, 2017,  September 30, 2017, and December 30, 2017, the Company was not in compliance with the loan’s revenue and shareholders’ equity covenants. On August 2, 2017, the Company and PFG entered into a short-term forbearance arrangement with respect to such noncompliance which expired on October 15, 2017. The Company is continuing to work with PFG to extend the previous agreed upon forbearance agreement, however, no assurance can be given that the Company will be able to extend the forbearance agreement beyond the initial forbearance period or agree on any amendments to the loan agreement including any revised covenants due to its current noncompliance. The default interest rate associated with any forbearance agreement is 6%, which is in addition to the loan’s aggregate per annum interest rate (see Note 7 – Term Loan, Revolving Line of Credit and Warrants). The Company will need to raise additional capital to rectify the noncompliance. No assurance can be given that the Company will be able to raise sufficient capital on timely basis.
	●	In March 2017 and July 2017, Microsource received two orders totaling $875,000 associated with its high performance YIG filter used on an aircraft platform; the Company started shipping a portion of the filters in the second quarter of fiscal 2018.
	●	In the first quarter of fiscal 2016, the Company’s Microsource business unit also finalized a multiyear $10.0 million YIG production order (“YIG Production Order”). The Company started shipping the YIG Production Order in the second quarter of fiscal 2017, and we expect to ship the remainder through fiscal 2020.
	●	To assist with the upfront purchases of inventory required for future product deliveries, the Company entered into advance payment arrangements with certain customers, whereby the customers reimburse the Company for raw material purchases prior to the shipment of the finished products. In the third quarter of fiscal 2018, the Company entered into advance payment arrangements totaling $839,000. The Company will continue to seek similar terms in future agreements with these customers and other customers.
	●	The Company has also lowered its operating expenses with the elimination of the Giga-tronics Switch, Power Meter, Amplifier, and Signal Generator legacy product lines resulting from the Asset Purchase Agreements with Spanawave and Astronics (see Note 9, Sale of Product Lines). We have reduced employee headcount from 71 in fiscal 2016 to 48 as of December 30, 2017. We also reduced the size of our facility therefore providing additional savings in monthly rent and overhead costs.

    

 

Management will continue to review all aspects of the business in an effort to improve cash flow and reduce costs and expenses, while continuing to invest, to the extent possible, in new product development for future revenue streams.

 

Management will also continue to seek additional working capital through debt, equity financing or possible product line sales, however, there are no assurances that such financings or sales will be available at all, or on terms acceptable to the Company.

 

The Company’s historical operating results and forecasting uncertainties indicate that substantial doubt exists related to the Company’s ability to continue as a going concern. Forecasting uncertainties exist with respect to the ASG and ASA product line due to the potential longer than anticipated sales cycles as well as with potential delays in the refinement of certain features, and/or the Company’s ability to efficiently manufacture it in a timely manner. The accompanying Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result if the Company were unable to do so.

 

 

 (3)         Revenue Recognition

 

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. The Company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations, or subject to customer-specified return or refund privileges. The Company evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting. 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 will be tied to product shipping while others will be tied to design review.

 

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 have 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 Company provides for estimated costs that may be incurred for product warranties at the time of shipment. The Company’s warranty policy generally provides twelve to eighteen months depending on the customer. 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.

 

 

(4)            Inventories

 

Inventories consisted of the following:

 

 

 

 

(5)          Software Development Costs

 

On September 3, 2015, the Company entered a software development agreement with a major aerospace and defense company whereby the aerospace company developed and licensed its simulation software to the Company. The simulation software (also called Open Loop Simulator or OLS technology) is currently the aerospace company’s intellectual property. The OLS technology generates threat simulations and enables various hardware to generate signals for performing threat analysis on systems under test. The Company licenses the OLS software as a bundled or integrated solution with its ASG.

  

The Company paid the aerospace company software development costs and fees for OLS of $1.2 million in the aggregate (this includes an amendment to the software development agreement for additional features and functionality), which was paid in monthly installments as the work was performed by the aerospace company through the third quarter of fiscal 2017. The OLS technology is a perpetual license agreement that may be terminated by the Company at any time as long as the Company provides a notice to the aerospace company and pays for the development costs incurred through the notice termination date. The Company is also obligated to pay royalties to the aerospace company on net sales of its ASG product sold with the OLS software (ASG TEmS) equal to seven percent of net sales price of each ASG system sold and subject to certain minimums. The Company expenses research and development costs as they are incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers.

  

As of December 30, 2017, and March 25, 2017, the Company had net capitalized software costs of zero and $733,000, respectively. The Company began amortizing the costs of capitalized software to cost of sales in the third quarter of fiscal 2017 using the straight-line methodology over an estimated three-year amortization period. During the fourth quarter of fiscal 2017, the Company changed its estimated amortization period from three years to two years due to the longer than anticipated procurement cycle associated with the ASG TEmS product line. The Company also amortized capitalized software costs using the estimated percentage of revenue approach (which was greater than straight-line amortization) in the fourth quarter of fiscal 2017.

 

In the first and second quarters of fiscal 2018, the Company had no revenues associated with its ASG TEmS product line and therefore amortized capitalized software costs on a straight-line basis. During the three-month period ended December 30, 2017, the Company amortized capitalized software using the estimated percentage of revenue. Amortization of capitalized software costs recorded during the three and nine-month periods ended December 30, 2017, was $431,000 and $733,000, respectively. Amortization of capitalized software costs recorded during the three and nine-month periods ended December 24, 2016 was $34,000.

 

 

 (6)      Accounts Receivable Line of Credit

 

On June 1, 2015, the Company entered into a $2.5 million Revolving Accounts Receivable Line of Credit agreement with Bridge Bank. The agreement provides for a maximum borrowing capacity of $2.5 million of which $2.0 million is subject to a borrowing base calculation and $500,000 is non-formula based. On May 23, 2017, the Company renewed this credit line (which expired on May 7, 2017) through May 6, 2019.

  

The loan agreement is secured by all assets of the Company including intellectual property and general intangibles and provides for a borrowing capacity equal to 80% of eligible accounts receivable. The loan matures on May 6, 2019 and bears an interest rate, equal to 1.5% over the bank’s prime rate of interest (which was 4.50% at December 30, 2017 resulting in an interest rate of 6.0%). Interest is payable monthly with principal due upon maturity. The Company paid an annual commitment fee of $12,500 in May 2017. The loan agreement contains financial and non-financial covenants that are customary for this type of lending and includes a covenant to maintain an asset coverage ratio of at least 150% (defined as unrestricted cash and cash equivalents maintained with Bridge Bank, plus eligible accounts receivable aged less than 90 days from the invoice date, divided by the total amount of outstanding principal of all obligations under the loan agreement). While the Company maintained the asset coverage ratio, the Company was in a cross default at December 30, 2017, because of the PFG noncompliance described in Note 7 below.

  

The line of credit requires a lockbox arrangement, which provides for receipts to be swept daily to reduce borrowings outstanding at the discretion of Bridge Bank. This arrangement, combined with the existence of the subjective acceleration clause in the line of credit agreement, necessitates the line of credit be classified as a current liability on the balance sheet. The acceleration clause allows for amounts due under the facility to become immediately due in the event of a material adverse change in the Company’s business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit based on the lender's judgment. As of December 30, 2017, the Company had borrowed $552,000 under the line of credit.

 

 

(7)        Term Loan, Revolving Line of Credit and Warrants  

 

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 Giga-tronics 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. The principal amount of the loan plus any accrued interest will be due upon maturity. The loan bears interest at an aggregate per annum rate equal to 16% per annum, fixed, which is comprised of cash interest reflecting a 9.5% per annum rate and deferred interest reflecting a 6.5% per annum rate. The Company will pay the cash interest monthly and will accrue deferred interest on the unpaid principal balance. The deferred interest will be due and payable upon maturity. In addition, the Company agreed to pay PFG a charge of up to $100,000 due and payable upon maturity (the “back-end fee”), $76,000 of which was earned on April 27, 2017, and $24,000 of which is earned at the rate of $1,000 per month on the first day of each month if the loan principal (of any amount) is outstanding during any day of the prior month. If the Company meets or exceeds certain revenue and net income minimums in fiscal 2018, the amount could be reduced by 25 percent. To stay in compliance with the loan terms, the Company must meet certain financial covenants associated with minimum quarterly revenues and monthly minimum shareholders’ equity. The lender can accelerate the maturity of the loan in case of a default. The Company can prepay the loan before maturity at any time without fee or penalty.

  

 

In connection with its loan to the Company, PFG will receive up to 250,000 shares of common stock, 190,000 of which was earned on April 27, 2017 and 60,000 of which is earned at the rate of 2,500 per month on the first day of each month if the loan principal (of any amount) is outstanding during any day of the prior month.

  

The Company has pledged all its assets as collateral for the loan made by PFG, including all its accounts, inventory, equipment, deposit accounts, intellectual property and all other personal property. The PFG loan is subordinate to the Bridge Bank line of credit (see Note 6, Accounts Receivable Line of Credit).

  

The requirement to issue 60,000 shares of the Company’s common stock over the term of the loan is an embedded derivative (an embedded equity forward). The Company evaluated the embedded derivative in accordance with ASC 815-15-25. The embedded derivative is not clearly and closely related to the debt host instrument and therefore has been separately measured at fair value, with subsequent changes in fair value recognized in the Condensed Consolidated Statements of Operations.

  

The proceeds received upon issuing the loan was allocated to: i) common stock, for the fair value of the 190,000 shares of common stock initially issued to the lender; ii) the fair value of the embedded derivative; and iii) the loan host instrument. Upon issuance of the loan, the Company recognized $1,576,000 of principal payable to PFG, representing the stated principal balance of $1,500,000 plus the initial back-end fee of $76,000. The initial carrying value of the loan was recognized net of debt discount aggregating approximately $326,000, which is comprised of the following:

  

  

The bifurcated embedded derivative and the debt discount are presented net with the related loan balance in the Condensed Consolidated Balance Sheets. The debt discount is amortized to interest expense over the loan’s term using the effective interest method.

  

During the three and nine-month periods ended December 30, 2017, the Company amortized discounts of approximately $35,000 and $90,000, respectively, to interest expense.

   

PFG’s ability to call the debt on default (contingent put) and its ability to assess interest rate at a default rate (contingent interest) are embedded derivatives which the Company evaluated. The fair value of these embedded features was determined to be immaterial and was not bifurcated from the debt host for accounting purposes.

  

As of June 24, 2017, September 30, 2017, and December 30, 2017, the Company was not in compliance with the loan’s revenue and shareholders’ equity covenants. On August 2, 2017, the Company and PFG entered into a short-term forbearance arrangement with respect to such noncompliance which expired on October 15, 2017. The Company is continuing to work with PFG to extend the previous agreed upon forbearance agreement, however, no assurance can be given that the Company will be able to extend the forbearance agreement beyond the initial forbearance period or agree on any amendments to the loan agreement including any revised covenants due to its current noncompliance. The default interest rate associated with any forbearance agreement is 6%, which is in addition to the aggregate per annum interest rate described above. The Company will need to raise additional capital to rectify the noncompliance. No assurance can be given that the Company will be able to raise sufficient capital on timely basis. 

 

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 (“First Draw”). Interest on the initial $1.0 million term loan was fixed at 9.75%. 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 daily at a rate of 12.50% per annum. The Company as of December 30, 2017, and March 25, 2017 had fully repaid both the $1.0 million term loan and the $500,000 revolving credit line.

  

In connection with the March 2014 loan agreement, the Company issued warrants convertible into 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, and 80,000 became exercisable with the First 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 31, 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 December 30, 2017, the estimated fair values of the derivative liabilities associated with the warrants issued in connection with the First Draw and Amendment were $100,000 and $55,000, respectively, for a combined value of $155,000. 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. During the three and nine-month periods ended December 30, 2017, the decrease in the fair value of the warrant liability totaled $7,000 and $67,000, respectively. During the three and nine-month periods ended December 24, 2016, the decrease in the fair value of the warrant liability totaled $62,000 and $136,000 respectively. These changes are reported in the accompanying statement of operations as a gain on adjustment of warrant liability to fair value. There was no accretion recorded in the third quarter or first nine months of fiscal 2018 in connection with the March 2014 loan agreement as the loan was paid in full in January 2017. During the three and nine-month periods ended December 24, 2016, the Company recorded accretion discount expense associated with the March 2014 loan of $3,000 and $21,000, respectively.  

 

 

(8)       Fair Value

 

Pursuant to the accounting guidance for fair value measurement and its subsequent updates, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a hierarchy for inputs used in measuring fair value that minimizes the use of unobservable inputs by requiring the use of observable market data when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on active market data. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.  

  

The fair value hierarchy is broken down into the three input levels summarized 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 on 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 are little or no market data, which require us to develop our own assumptions.

 

Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of and during the three and nine months period ended December 30, 2017. The carrying values of cash and cash equivalents, trade accounts receivable, line of credit, term debt and accounts payable approximate their fair values given their short-term nature. As of December 30, 2017, the carrying value of the outstanding PFG loan approximates the estimated aggregate fair value, since the embedded equity forward is recognized at fair value and classified with the loan host. The fair value estimate of the embedded equity forward is based on the closing price of the Company’s common stock on the measurement date, the risk-free rate, the date of expiration, and any expected cash distributions of the underlying asset before expiration. The estimated fair value of the embedded equity forward represents a Level 2 measurement.

  

Derivatives The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including notes payable, to determine if such instruments are derivatives or contain features that qualify as embedded 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.

  

Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract. Bifurcated embedded derivatives are recognized at fair value, with changes in fair value recognized in the statement of operations each period. Bifurcated embedded derivatives are classified with the related host contract in the Company’s balance sheet.

  

The Company’s derivative warrant liability is measured at fair value on a recurring basis and is categorized as Level 3 in the fair value hierarchy. The derivative warrant liability is valued using a Monte Carlo simulation model, which used the following assumptions as of December 30, 2017: (i) the remaining expected life of 1.25 years, (ii) the Company’s historical volatility rate of 83.3%, (iii) risk-free interest rate of 1.79%, and (iv) a discount rate of thirty percent.

  

 

The aforementioned derivative warrant liability and equity forward are the Company’s only asset and liability recognized and measured at fair value on a recurring or non-recurring basis and are follows:

 

 

 

There were no transfers between Level 1, Level 2, or Level 3 for the three and nine-month periods ended December 30, 2017 and March 25, 2017.  

 

The table below summarizes changes in gains and losses recorded in earnings for Level 3 assets and liabilities that are still held at December 30, 2017:

 

 

There were no assets measured at fair value on a recurring basis and there were no assets or liabilities measured on a non-recurring basis at December 30, 2017 or March 25, 2017.

 

The following table presents quantitative information about recurring Level 3 fair value measurements at December 30, 2017 and March 25, 2017:

 

 

 

The discount rate of thirty percent at December 30, 2017, and twenty four percent at March 25, 2017 is management’s estimate of the current cost of capital given the Company’s credit worthiness. A significant increase in the discount rate would significantly decrease the fair value, but the magnitude of this decrease would be less significant in a scenario where the Company’s stock price is significantly higher than the exercise price since the holder’s option to take a cash payment at maturity represents a smaller component of the total fair value when the Company’s stock price is higher. The Monte Carlo simulation model simulated the Company’s stock price through the maturity date of March 31, 2019. At the end of the simulated period, the value of the warrant was determined based on the greater of (1) the net share settlement value, (2) the net exercise value, or (3) the fixed cash put value.

 

 

(9)         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 ended June 25, 2016 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 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 by the Company during June of $170,000. Astronics also purchased approximately $500,000 of related materials inventory from Giga-tronics between July and August of 2016.

 

The Company had no revenues or gross margin associated with the Switch product line during the three and nine months periods ended December 30, 2017. During the three-month periods ended December 24, 2016, the Switch product line did not account for any product revenue. During the nine-month period ended December 24, 2016, the Switch product line accounted for approximately $2.1 million in product revenue. Gross margins of the Switch product line for the nine-month periods ended December 24, 2016 was $437,000. 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 asset purchase agreement was for $1.5 million, the Company never realized this amount as a result of the dispute with Spanawave as discussed below). The agreement provided for the transfer of these product lines to Spanawave sequentially in six phases beginning with certain sensor and amplifier products. The Company had transferred the Power Meters and Amplifiers in phases one through five, but still holds the rights to phase 6 (Legacy Signal Generators). 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. (“Liberty Test”), as to whether the Company has fulfilled all the requirements to close phases one through five and become entitled to the $375,000 received by the Company during the first quarter of fiscal 2017 (see below).

  

The complaint sought specific performance of the agreement and damages. Spanawave’s affiliate Liberty Test also filed an arbitration claim for $440,000 under a distribution agreement between the Company and Liberty. The Company 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 did not extend to the products with respect to which the claim has been made. The parties negotiated in an effort to settle the dispute notwithstanding the filings. On October 16, 2017, the Company reached a settlement agreement with Spanawave and Liberty Test whereby all parties exchanged mutual releases and agreed that phases one through five of the Asset Purchase Agreement were concluded and the sale of the remaining phase (Phase 6) to Spanawave (which was in dispute) was abandoned. The abandoned Phase 6 Legacy Signal Generators product line (and related inventory) remains an asset of the Company. The Company, Spanawave and Liberty Test also dismissed all arbitration claims as part of the settlement.

  

During the fourth quarter of fiscal 2016, the Company received $375,000 from Spanawave. In the first quarter of fiscal 2017, the Company received an additional $375,000 from Spanawave under the agreement, for a combined total of $750,000. 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 was included in deferred liability related to asset sales in the consolidated balance sheet during the dispute. However, as a result of the settlement of the dispute in the third quarter of fiscal 2018, the Company recognized a net gain of $324,000, which is net of approximately $51,000 in expenses associated with the Spanawave asset sale. During the three and nine-month periods ended December 30, 2017, these product lines accounted for approximately $111,000 and $297,000 in revenue, respectively. 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. These product lines accounted for approximately $75,000 and $475,000 in revenue during the three and nine-month periods ended December 24, 2016, respectively. 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 operations and cash flows from these product lines.

 

 

 

(10)   Loss Per Share

 

Basic loss per share (EPS) is calculated by dividing net income or loss by the weighted average common shares outstanding during the period. Diluted EPS reflects the net incremental shares that would be issued if unvested restricted shares became vested and dilutive outstanding stock options were exercised, using the treasury stock method. In the case of a net loss, it is assumed that no incremental shares would be issued because they would be antidilutive. In addition, certain options are considered antidilutive 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. The shares used in per share computations are as follows: 

 

  

The exclusion of stock options, restricted stock, convertible preferred stock and warrants from the computation of diluted earnings per share (EPS) for the three and nine-month periods ended December 30, 2017 and December 24, 2016 is a result of the Company’s net loss and, therefore, the effect of these instruments would be anti-dilutive.

 

 

(11)     Share Based Compensation

 

The Company has established the 2005 Equity Incentive Plan, which provide for the granting of options and restricted stock for up to 2,850,000 shares of common stock at 100% of fair market value at the date of grant, with each grant requiring approval by the Board of Directors of the Company. The 2005 Plan has been extended to be effective until 2025. Option grants under the 2000 Stock Option Plan are no longer available. Options granted generally vest in one or more installments in a four or five-year period and must be exercised while the grantee is employed by the Company or within a certain period after termination of employment. Options granted to employees shall not have terms in excess of 10 years from the grant date. Holders of options may be granted stock appreciation rights (SARs), which entitle them to surrender outstanding awards for a cash distribution under certain changes in ownership of the Company, as defined in the stock option plan. As of December 30, 2017, no SAR’s have been granted under the option plan. As of December 30, 2017, the total number of shares of common stock available for issuance was 1,142,177. All outstanding options have a ten-year life from the date of grant. The Company records compensation cost associated with share-based compensation equivalent to the estimated fair value of the awards over the requisite service period. 

 

Stock Options

 

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 and the following weighted average assumptions:

 

 

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 nine-month period ended December 30, 2017 and the fiscal year ended March 25, 2017 is as follows:

 

   

As of December 30, 2017, there was $103,000 of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a weighted average period of 3.01 years. There were 14,350 options and 56,150 options that vested during the quarter ended December 30, 2017 and December 24, 2016, respectively. The total grant date fair value of options vested during the quarters ended December 30, 2017 and December 24, 2016 was $14,000 and $73,000 respectively. There were 107,200 and 187,300 options that vested during the nine-month period ended December 30, 2017 and December 24, 2016, respectively. The total grant date fair value of options vested during the nine-month period ended December 30, 2017 and December 24, 2016 was $119,000 and $233,000, respectively. No shares were exercised during the three and nine-month period ended December 30, 2017 and December 24, 2016. Share based compensation cost recognized in operating results for the three-month periods ended December 30, 2017 and December 24, 2016 totaled $22,000 and $61,000, respectively. Share based compensation cost recognized in operating results for the nine-month periods ended December 30, 2017 and December 24, 2016 totaled $101,000 and $211,000, respectively.

 

Restricted Stock

 

There were no restricted awards granted during the three-month period ended December 30, 2017. The Company granted 386,450 restricted awards during the nine-month period ended December 30, 2017. The Company granted 44,500 restricted awards during the third quarter and the first nine months of fiscal 2017. The restricted stock awards are considered fixed awards as the number of shares and fair value at the grant date are amortized over the requisite service period net of estimated forfeitures. As of December 30, 2017, there was $157,000 of total unrecognized compensation cost related to non-vested awards. That cost is expected to be recognized over a weighted average period of 1.42 years and will be adjusted for subsequent changes in estimated forfeitures. Compensation cost recognized for the restricted and unrestricted stock awards during the third quarter and first nine months of fiscal of 2018 was $33,000 and $73,000. Compensation cost recognized for restricted and unrestricted stock awards during the three and nine-month periods ended December 24, 2016 was $7,000.

   

A summary of the changes in non-vested restricted stock awards outstanding for the nine-month period ended December 30, 2017 and the fiscal year ended March 25, 2017 is as follows:

 

 

 

 

 

(12)      Significant Customer and Industry Segment Information

 

The Company has two reportable segments: Giga-tronics Division and Microsource.

  

	●	The Giga-tronics Division historically 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. The Company completed the divestiture of its switch and legacy product lines (see Note 9, Sale of Product Lines), and is now solely focused on producing the ASG and the ASA.
	●	Microsource primarily develops and manufactures YIG RADAR filters used in fighter jet aircraft for two prime contractors.

 

The tables below present information for the two reportable segments:

 

  

 

 

During the third quarter of fiscal 2018, two customers accounted for approximately 87% of the Company’s consolidated revenues. One of the customers accounted for 55% of the Company’s consolidated revenue and was included in the Giga-tronics Division. A second customer accounted for 32% of the Company’s consolidated revenue and was included in the Microsource segment. During the third quarter of fiscal 2017, two customers accounted for 76% of the Company’s consolidated revenues. One of the customers accounted for 52% of the Company’s consolidated revenue and was included in the Microsource segment. A second customer accounted for 24% of the Company’s consolidated revenue and was included in the Giga-tronics Division. A third customer accounted for 13% of the Company’s consolidated revenue and was primarily included in the Microsource segment.

 

During the first nine months of fiscal 2018, three customers accounted for approximately 84% of the Company’s consolidated revenues. One of the customer accounted for 37% of the Company’s consolidated revenues and was primarily included in the Microsource segment. A second and third customer accounted for 24% of the Company’s consolidated revenue and was also included in the Microsource segment and the Giga-tronics Division. During the first nine months of fiscal 2017, one customer accounted for 38% of the Company’s consolidated revenues and was primarily included in the Microsource segment. A second customer accounted for 15% of the Company’s consolidated revenue and was also included in the Microsource segment. 

 

 

(13)     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 $2,000 of income tax expense for the nine-month periods ended December 30, 2017 and December 24, 2016. The effective tax rate for the three and nine-month periods ended December 30, 2017 and December 24, 2016 was 0%, primarily due to a valuation allowance recorded against the net deferred tax asset balance.

 

 

As of December 30, 2017, the Company has a $120,000 liability recorded for unrecognized tax benefits related to uncertain tax positions. The unrecognized tax benefit is netted against the non-current deferred tax asset on the Consolidated Balance Sheet. The Company does not expect the liability for unrecognized tax benefits to change materially within the next 12 months. The Company has a California Franchise Tax Board audit that is currently in process. The Company is working with the California Franchise Tax Board to resolve all audit issues and does not believe any material taxes, penalties and fees are due. However, as a result of the on-going examination, the Company recorded an estimated associated tax liability of $45,000 in the first quarter of fiscal 2015.

 

On December 22, 2017, the President signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act, following its passage by the United States Congress. The Tax Cuts and Jobs Act will make significant changes to U.S. federal income tax laws. However, the enactment of the legislative changes has not affected the Company’s overall effective tax rate of 0%, due to a full valuation allowance recorded against the net deferred tax asset balance.

 

 

(14)        Warranty Obligations

 

The Company records a provision in cost of sales for estimated warranty obligations at the date products are sold. Adjustments are made as new information becomes available. The following provides a reconciliation of changes in the Company’s warranty reserve. The Company provides no other guarantees for product sales.

 

  

 

 (15)      Series B, C, D Convertible Voting Perpetual Preferred Stock and Warrants

 

On November 10, 2011, the Company received $2,199,000 in cash proceeds from Alara Capital AVI II, LLC, a Delaware limited liability company (the “Investor”), an investment vehicle sponsored by Active Value Investors, LLC, under a Securities Purchase Agreement entered into on October 31, 2011. Under the terms of the Securities Purchase Agreement, the Company issued 9,997 shares of its Series B Convertible Voting Perpetual Preferred Stock (“Series B Preferred Stock”) to the Investor at a price of $220 per share. The Company has recorded $2.0 million as Series B Preferred Stock on the consolidated balance sheet which is net of stock offering costs of approximately $202,000 and represents the value attributable to both the convertible preferred stock and warrants issued to the Investor. After considering the value of the warrants, the effective conversion price of the preferred stock was greater than the common stock price on date of issue and therefore no beneficial conversion feature was present.

  

On February 19, 2013, the Company entered into a Securities Purchase Agreement pursuant to which it agreed to sell 3,424.65 shares of its Series C Convertible Voting Perpetual Preferred Stock (“Series C Preferred Stock”) to the Investor, for aggregate consideration of $500,000, which is approximately $146.00 per share. The Company has recorded $457,000 as Series C Preferred Stock on the consolidated balance sheet, which is net of stock offering costs of approximately $43,000. After considering the reduction in the value of the warrant, the effective conversion price of the preferred stock was greater than the common stock price on the date of issue and therefore no beneficial conversion feature was present.

  

On July 8, 2013, the Company received $817,000 in net cash proceeds from the Investor under a Securities Purchase Agreement. The Company sold to the Investor 5,111.86 shares of its Series D Convertible Voting Perpetual Preferred Stock (Series D Preferred Stock) and a warrant to purchase up to 511,186 additional shares of common stock at the price of $1.43 per share. The allocation of the $858,000 in gross proceeds from issuance of Series D Preferred Stock based on the relative fair values resulted in an allocation of $498,000 (which was recorded net of $41,000 of issuance costs) to Series D Preferred Stock and $360,000 to Common Stock.  In addition, because the effective conversion rate based on the $498,000 allocated to Series D Preferred Stock was $0.97 per common share which was less than the Company’s stock price on the date of issuance, a beneficial conversion feature was present at the issuance date. The beneficial conversion feature totaled $238,000 and was recorded as an increase of common stock and an increase to accumulated deficit. 

  

Each share of Series B, Series C and Series D Preferred Stock is convertible into one hundred shares of the Company’s common stock. In connection with the preferred stock issuance described above, the Company issued to the investor warrants to purchase a total of 1,017,405 common shares at an exercise price of $1.43 per share. These warrants were exercised in February 2015, and May 2015. The Company received funds from Alara in separate closings dated February 16, 2015 and February 23, 2015. Alara exercised a total of 1,002,818 of its existing Series C and Series D warrants to purchase common shares, all of which had an exercise price of $1.43 per share for total cash proceeds of $1,434,000, which was recorded net of $42,000 of stock issuance costs. As part of the consideration for this exercise, the Company sold to Alara two new warrants to purchase an additional 898,634 and 194,437 common shares at an exercise price of $1.78 and $1.76 per share, respectively, for a total purchase price of $137,000 or $0.125 per share. The new warrants have a term of five years and may be paid in cash or through a cashless net share settlement. The Company and Alara amended the remaining 14,587 warrants as part of the February closings. On May 14, 2015, Alara exercised the remaining 14,587 warrants by acquiring 7,216 of shares of the Company’s common stock through a cashless net share settlement.

  

 

The table below presents information as of December 30, 2017 and March 25, 2017:

 

Preferred Stock as of December 30, 2017 and March 25, 2017    

 

 

 

(16)        Private Placement Offering

 

On January 19, 2016, the Company entered into a Securities Purchase Agreement for the sale of 2,787,872 Units, each consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock, to approximately 20 private investors. The purchase price for each Unit was $1.24375. Gross proceeds were approximately $3.5 million. Net proceeds to the Company after fees was approximately $3.1 million. The portion of the purchase price attributable to the common shares included in each Unit was $1.15, the consolidated closing bid price for the Company’s common stock on January 15, 2016. The warrant price was $0.09375 per Unit (equivalent to $0.125 per whole warrant share), with an exercise price of $1.15 per share. The term of the warrants is five years from the date of completion of the transaction. Emerging Growth Equities, Ltd also received warrants to purchase 292,727 shares of common stock at an exercise price of $1.15 per share as part of its consideration for serving as placement agent in connection with the private placement.

 

 

 

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