GIGA TRONICS INC - Quarter Report: 2020 December (Form 10-Q)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	December 26, 2020

  OR  

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from		to

 

Commission File No. 001-14605

 

GIGA-TRONICS INCORPORATED

(Exact name of registrant as specified in its charter)

 

California		94-2656341
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
5990 Gleason Drive, Dublin CA 94568		(925) 328-4650
(Address of principal executive offices)		Registrant’s telephone number, including area code

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class		Trading Symbol(s)			Name of each exchange on which registered
Common Stock, No par value		GIGA		OTCQB Market

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☐		Smaller reporting company	☒
			Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes ☐     No ☒

 

There were 2,635,856 shares of the Registrant’s Common Stock outstanding as of January 29, 2021.  

 

 

 

 

 

(In thousands except share data)		December 26, 2020				March 28, 2020*
Assets
Current assets:
Cash and cash-equivalents		$	1,348			$	657
Trade accounts receivable, net of allowance of $8 and $8, respectively			212				932
Inventories, net			3,136				3,261
Prepaid expenses and other current assets			2,393				2,209
Total current assets			7,089				7,059
Property and equipment, net			456				508
Right of use asset			946				1,183
Other long-term assets			176				176
Total assets		$	8,667			$	8,926
Liabilities and shareholders' equity
Current liabilities:
Accounts payable		$	1,344			$	803
Loans payable, net of discounts and issuance costs			273				1,320
Accrued payroll and benefits			515				300
Deferred revenue			—				159
Lease obligations			440				426
Other current liabilities			331				364
Total current liabilities			2,903				3,372
Other non-current liabilities			30				119
Long term lease obligations			804				1,135
Total liabilities			3,737				4,626
Shareholders' equity:
Preferred stock; no par value; Authorized - 1,000,000 shares Series A convertible- designated 250,000 shares; no shares at December 26, 2020 and March 28, 2020 issued and outstanding			—				—
Series B, C, D convertible - designated 19,500 shares; 17,781.64 shares at December 26, 2020 and March 28, 2020 outstanding; (liquidation preference of $3,367 at December 26, 2020 and March 28, 2020)			2,745				2,745
Series E convertible- designated 100,000 shares; 9,200 shares at December 26, 2020 and March 28, 2020 outstanding; (liquidation preference of $345 at December 26, 2020 and March 28, 2020)			177				177
Common stock; no par value; Authorized – 13,333,333 shares; 2,635,856 shares at December 26, 2020 and March 28, 2020 issued and outstanding			32,157				31,952
Accumulated deficit			(30,149	)			(30,574	)
Total shareholders' equity			4,930				4,300
Total liabilities and shareholders' equity		$	8,667			$	8,926

 

		Three Months Ended								Nine Months Ended
(In thousands except per share data)		December 26, 2020				December 28, 2019				December 26, 2020				December 28, 2019
Net revenue
Goods		$	1,559			$	193			$	3,490			$	2,576
Services			2,525				2,439				6,834				6,589
Total revenue			4,084				2,632				10,324				9,165
Cost of sales			2,527				1,534				6,213				5,288
Gross profit			1,557				1,098				4,111				3,877
Operating expenses:
Engineering			557				393				1,548				1,097
Selling, general and administrative			937				819				2,832				2,617
Total operating expenses			1,494				1,212				4,380				3,714
Operating income (loss)			63				(114	)			(269	)			163
Gain on extinguishment of PPP Loan			791				—				791				—
Interest expense:
Interest expense, net			(21	)			(42	)			(85	)			(166	)
Interest expense from accretion of loan discount			—				—				—				(19	)
Total interest expense			(21	)			(42	)			(85	)			(185	)
Income (loss) before income taxes			833				(156	)			437				(22	)
Provision for income taxes			—				—				2				2
Net income (loss)		$	833			$	(156	)		$	435			$	(24	)
Deemed dividend on Series E shares		$	(3	)		$	(18	)		$	(10	)		$	(96	)
Cumulative dividends on Series E shares			—				(1,240	)			—				(1,240	)
Net income (loss) attributable to common shareholders		$	830			$	(1,414	)		$	425			$	(1,360	)
Income (loss) per common share - basic		$	0.33			$	(0.58	)		$	0.17			$	(0.55	)
Income (loss) per common share - diluted		$	0.28			$	(0.58	)		$	0.14			$	(0.55	)
Weighted average shares used in per share calculation:
Basic			2,549				2,451				2,549				2,451
Diluted			2,933				2,451				2,933				2,451

 

		Preferred Stock								Common Stock								Accumulated
(In thousands except share data)		Shares				Amount				Shares				Amount				Deficit				Total
Balance at March 30, 2019			116,934			$	4,806				757,367			$	25,557			$	(28,548	)		$	1,815
Net income			—				—				—				—				15				15
Share based compensation			—				—				—				95				—				95
Equity issuance for PFG Loan			—				—				167				—				—				—
Restricted stock forfeited			—				—				(1,333	)			—				—				—
Series E preferred stock issuance, reclass of offering costs of $2			—				(2	)			—				2				—				—
Balance at June 29, 2019			116,934			$	4,804				756,201			$	25,654			$	(28,533	)		$	1,925
Net income			—				—				—				—				44				44
Share based compensation			—				—				—				67				—				67
Warrant exercises			—				—				81,808				230				—				230
Series E dividends			—				—				33,991				142				—				142
Series E converted to common stock			(600	)			(15	)			4,000				20				(5	)			—
Series B converted to common stock			(752	)			(166	)			5,012				166				—				—
Balance at September 28, 2019			115,582			$	4,623				881,012			$	26,279			$	(28,494	)		$	2,408
Net loss			—				—				—				—				(156	)			(156	)
Share based compensation			—				—				—				67				—				67
Fractional shares			—								(81	)			—				—				—
Warrant exercises			—				—				—				(18	)			—				(18	)
Series E dividends			—				—				10,636				47				(18	)			29
Common stock issuances			—				—				699,333				2,053				—				2,053
Series E converted to common stock			(88,600	)			(1,701	)			886,000				2,941				(1,240	)			—
Balance at December 28, 2019			26,982			$	2,922				2,476,900			$	31,369			$	(29,908	)		$	4,383

		Preferred Stock								Common Stock								Accumulated
(In thousands except share data)		Shares				Amount				Shares				Amount				Deficit				Total
Balance at March 28, 2020			26,982			$	2,922				2,635,856			$	31,952			$	(30,574	)		$	4,300
Net income			—				—				—				—				72				72
Share based compensation			—				—				—				76				—				76
Balance at June 27, 2020			26,982			$	2,922				2,635,856			$	32,028			$	(30,502	)		$	4,448
Net loss			—				—				—				—				(477	)			(477	)
Share based compensation			—				—				—				66				—				66
Balance at September 26, 2020			26,982			$	2,922				2,635,856			$	32,094			$	(30,979	)		$	4,037
Net income			—				—				—				—				830				830
Share based compensation			—				—				—				63				—				63
Balance at December 26, 2020			26,982			$	2,922				2,635,856			$	32,157			$	(30,149	)		$	4,930

 

		Nine Months Ended
(In thousands)		December 26, 2020				December 28, 2019
Cash flows from operating activities:
Net income (loss)		$	435			$	(24	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			116				140
Share based compensation			205				229
Gain on extinguishment of PPP Loan			(786	)			—
Gain on forgiveness of Interest on PPP Loan			(5	)			—
Accretion of discounts and issuance costs on debt			—				20
Accrued interest and fees on loan payable			—				(224	)
Change in deferred rent			—				1
Changes in operating assets and liabilities
Trade accounts receivable			720				91
Inventories			125				(852	)
Prepaid expenses and other assets			(184	)			(629	)
Right of use asset			237				197
Accounts payable			541				221
Accrued payroll and benefits			215				(74	)
Deferred revenue			(159	)			218
Other current and non-current liabilities			(127	)			(369	)
Net cash provided by (used in) operating activities			1,333				(1,055	)
Cash flows from investing activities:
Purchases of property and equipment			(64	)			(123	)
Net cash used in investing activities			(64	)			(123	)
Cash flows from financing activities:
Principal payments on leases			(317	)			(282	)
Proceeds from issuance of common stock, net of issuance costs			—				2,053
Proceeds from exercise of warrants			—				211
Proceeds from borrowings, net of issuance costs			1,941				1,051
Repayments of borrowings			(2,202	)			(1,489	)
Net cash provided by (used in) financing activities			(578	)			1,544
Increase in cash and cash-equivalents			691				366
Beginning cash and cash-equivalents			657				878
Ending cash and cash-equivalents		$	1,348			$	1,244
Supplementary disclosure of cash flow information:
Cash paid for income taxes		$	2			$	57
Cash paid for interest		$	85			$	376
Supplementary disclosure of noncash financing activities:
Cumulative effect of adoption of ASC 842 on right of use assets		$	—			$	1,361
Cumulative effect of adoption of ASC 842 on deferred rent		$	—			$	429
Cumulative effect of adoption of ASC 842 on lease liability		$	—			$	1,790
Fair value of dividends in kind		$	10			$	(190	)

 

(1)          Organization and Significant Accounting Policies

 

The condensed consolidated financial statements included herein have been prepared by Giga-tronics Incorporated (“Giga-tronics,” “Company” or “we”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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. Please refer to the Company’s Annual Report on Form 10-K for the year ended March 28, 2020 for a discussion of our significant accounting policies. During the nine months ended December 26, 2020, there were no material changes to these policies other than as disclosed below. For further information, refer to the consolidated financial statements and footnotes thereto, included in the Annual Report on Form 10-K, filed with the SEC for the year ended March 28, 2020.

  

On December 12, 2019, the Company completed a one-for-fifteen reverse stock split of its common stock.  All shares and per share amounts included in the financial statements have been adjusted to reflect the effect of the reverse stock split. 

 

Principles of Consolidation The consolidated financial statements include the accounts of Giga-tronics and its wholly owned subsidiary, Microsource, Inc. (“Microsource”). 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.

 

Leases

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 - Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted for similar to guidance for operating leases existing prior to ASC 842. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The Company adopted ASC 842 as of March 31, 2019. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASC Topic 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. The Company has two long term office leases; however, the New Hampshire lease is deemed immaterial upon adoption of ASC 842. The adoption of ASU 2016-02 on March 31, 2019 resulted in the recognition of right-of-use assets of approximately $1.4 million, lease liabilities for operating leases of approximately $1.8 million and no material impact to the Consolidated Statements of Operations or Cash Flows. See below for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.

 

New Accounting Standards

 

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” to simplify the accounting for share based transactions with nonemployees in which the grantor acquires goods or services to be used or consumed. Under the new standard, most of the guidance on recording share-based compensation granted to nonemployees are aligned with the requirements for share-based compensation granted to employees. This standard was effective in the first quarter of fiscal 2020, and early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

 

In February 2016, the FASB issued authoritative guidance under ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize right-of-use assets and lease liabilities for most leases on the balance sheet and to provide expanded disclosures about leasing arrangements. The Company adopted the standard effective March 31, 2019 using the optional transition method and did not restate comparative periods. There was no effect on accumulated deficit at adoption.

 

Practical Expedients Elected

 

The Company has elected the package of practical expedients to (a) not reassess whether expired or existing contracts are or contain leases, (b) not reassess the lease classification for any expired or existing leases and (c) not reassess the accounting for initial direct costs. As a result, leases classified as operating leases prior to adoption of the new lease standard remain as operating leases and leases classified as capital leases prior to adoption of the new lease standard are now finance leases.

 

 

 

(2)            Inventories, net

 

Inventories consisted of the following:

 

 

 

(3)      Financed Receivables

 

On March 11, 2019, the Company entered into an Amended and Restated Business Financing Agreement (the “Restated Financing Agreement”) with Western Alliance Bank, as successor to Bridge Bank. The Restated Financing Agreement amends, restates and replaces a credit agreement with Bridge Bank dated May 6, 2015 (as previously amended, the “Previous Financing Agreement”) in its entirety.

 

Under the Restated Financing Agreement, Western Alliance Bank may advance up to 85% of the amounts of invoices issued by the Company, up to a maximum of $2.5 million in aggregate advances outstanding at any time. The Restated Financing Agreement eliminated a $500,000 non-formula borrowing base and an asset coverage ratio financial covenant included in the Previous Financing Agreement.

 

Under the Restated Financing Agreement, interest accrues on outstanding amounts at an annual rate equal to one percent plus the greater of the prime rate or 4.5%. The Company is required to pay certain fees, including an annual facility fee of $14,700, to be paid in two equal semiannual installments. The Company’s obligations under the Restated Financing Agreement are secured by a security interest in substantially all of the assets of the Company and any domestic subsidiaries, subject to certain customary exceptions. The Restated Financing Agreement has no specified term and may be terminated by either the Company or Western Alliance Bank at any time.

 

The Restated Financing Agreement contains customary events of default, including, among others: non-payment of principal, interest or other amounts when due; providing false or misleading representations and information; Western Alliance Bank failing to have an enforceable first lien on the collateral; cross-defaults with certain other indebtedness; certain undischarged judgments; bankruptcy, insolvency or inability to pay debts; and a change of control of the Company. Upon the occurrence and during the continuance of an event of default, the interest rate on the outstanding borrowings increases by 500 basis points and Western Alliance Bank may declare the loans and all other obligations under the Restated Financing Agreement immediately due and payable.

 

As of December 26, 2020 and March 28, 2020, the Company’s total outstanding borrowings under the Restated Financing Agreement were zero and $527,468, respectively, and are included in Loans payable, net of discounts and issuance costs on the Condensed Consolidated Balance Sheet.

 

 

(4)        Term Loan

 

On April 27, 2017, the Company entered into a $1.5 million loan agreement with Partners For Growth (“PFG”), which was funded on April 28, 2017 (the “PFG Loan Agreement”). The PFG Loan Agreement originally provided for interest only payments during the term of the loan with principal and any accrued interest and fees due upon maturity, originally April 27, 2019. The PFG Loan Agreement bears interest at a fixed aggregate rate equal to 16% per annum, of which 9.5% per annum is payable monthly in cash and 6.5% per annum is accrued monthly and due upon maturity. In addition, the Company agreed to pay PFG a cash fee of up to $100,000 on maturity (the “back-end fee”), $76,000 of which was earned on April 27, 2017, and $24,000 of which was earned at the rate of $1,000 per month on the first day of each month thereafter provided any amount of the loan principal was outstanding during any day of the prior month.

 

In December 2018, the Company and PFG agreed to modify the PFG Loan Agreement to extend the maturity date from April 27, 2019 to November 1, 2019, to require the Company to pay all accrued interest on May 1, 2019 and to require the Company to make monthly prepayments of principal of $75,000 and accrued interest from May 1, 2019 until maturity. The effectiveness of the modification was conditioned on the Company raising $500,000 in additional equity capital. The Company satisfied this condition on March 30, 2019.

 

On March 11, 2019, the Company and PFG agreed to further modify the PFG Loan Agreement to extend the maturity date to March 1, 2020 and to add financial covenants requiring the Company to maintain a minimum tangible net worth and minimum revenues.

 

 

On June 28, 2019, the Company and PFG agreed to further modify the PFG Loan Agreement to adjust the financial covenants requiring the Company to maintain a minimum tangible net worth and minimum revenues. At December 28, 2019, the Company did not meet a covenant in the amended PFG Loan Agreement requiring the Company to achieve minimum cumulative revenues of $11 million for the first three quarters of its 2020 fiscal year, which constituted an event of default under the agreement. PFG waived this default on January 31, 2020.

 

On January 31, 2020, the Company and PFG further amended the PFG Loan Agreement to, among other things, extend the maturity date from March 1, 2020 to March 1, 2021, to require the Company make a single principal payments of $75,000 on February 1, 2020 and monthly principal payments of $57,700 thereafter until maturity, and to modify and extend the minimum revenue financial covenant through the new maturity date. The PFG Loan Agreement continues to provide for an annual interest rate of 16%, of which 9.5% is payable monthly and 6.5% is deferred until maturity or payoff. Based on the current payment schedule, the remaining balance at maturity would be less than $200,000.

 

As of December 26, 2020 and March 28, 2020, the Company’s total outstanding loan balances were $273,000 and $792,300, respectively, and are included in Loans payable, net of discounts and issuance costs on the Condensed Consolidated Balance Sheet.

 

At December 26, 2020, the Company did not meet a covenant in the amended PFG Loan Agreement requiring the Company to achieve minimum cumulative revenues of $11 million for the first three quarters of its 2021 fiscal year, which constituted an event of default under the agreement. PFG waived this default in January 2021.

 

 

 

(5)         Paycheck Protection Program (the “PPP”) under the CARES Act

 

On April 23, 2020, the Company borrowed $786,200 from Western Alliance Bank (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act. The Company accounted for the PPP Loan as a loan under ASC 470 Debt. The PPP Loan had a stated maturity date of April 23, 2022 with interest accruing on the principal balance at the rate of 1.0% per annum, with principal and interest payable monthly commencing on November 1, 2020.

 

As a result of the Company’s request for loan forgiveness, on November 19, 2020, the outstanding principal and accrued interest for the PPP Loan was forgiven in full by the U.S. Small Business Administration (“SBA”).

 

The amount of the PPP Loan forgiven by the SBA is accounted as a gain under ASC 470, which refers to the extinguishment guidance in ASC 405, Liabilities: Extinguishment of Liabilities. Under this guidance, debt is extinguished when either of the following conditions is met: the debtor pays the creditor or the debtor is legally released from being the primary obligor by the creditor. The Company was legally released from being the primary obligor when the Company’s application for forgiveness was approved by the SBA. The amount forgiven was recognized in the statement of operations as gain on extinguishment.

 

 

 

(6)         Leases

 

Operating leases

The Company has a non-cancelable operating lease for an office, research and development, engineering, laboratory, storage and/or warehouse uses in Dublin, California for a term of 77 months from April 1, 2017 through August 31, 2023. The Company agreed to pay rent monthly with an aggregate base rent of $2,384,913 for the period of 77 months, with an annual increase of $0.05 per rentable square foot for each subsequent year. The lease provided for rent abatement of $173,079 during the initial five months of the lease term, subject to the Company performing the terms and conditions required under the lease, and certain tenant improvements completed at the landlord’s expense of $358,095.

 

The Company also has a non-cancelable operating lease for an office it uses for research and development and engineering in Nashua, New Hampshire for 36 months from March 1, 2020 through February 28, 2023. The Company agreed to pay rent monthly, with an aggregate base rent of $90,000 for the period of 36 months. This office lease amends and restated in its entirety the Office Lease executed as of December 28, 2018 for the primary purposes of adding additional office space and extending the term from January 31, 2022 to February 28, 2023.

 

Per the terms of the Company’s lease agreements, the Company does not have any residual value guarantees. In calculating the present value of the lease payments, the Company has elected to utilize its incremental borrowing rate. The Company has elected for facility operating leases to not separate each lease component from its associated non-lease components. The building leases includes variable payments (i.e. common area maintenance) which are charged and paid separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and liability but reflected in operating expense in the period incurred.

 

 

Lease costs

 

For the nine months ended (in thousands):

 

 

 

Other information (in thousands except weighted average amounts):

 

 

 

Future lease payments as of December 26, 2020 were as follows (in thousands):

 

 

 

 

 (7)     Sale of Common Stock

 

On November 8, 2019, the Company completed an underwritten public offering of 699,333 shares of its common stock at $3.75 per share. The net proceeds from the offering after deducting underwriting discounts and commissions and offering expenses were approximately $2.1 million. The Company’s use of the net proceeds was for general corporate purposes, which included the repayment of debt. In connection with the offering, the Company granted the underwriter a warrant to purchase 20,980 shares of common stock at the price of $4.50 per share. The warrant is immediately exercisable and has a five-year term.

 

In addition, on November 8, 2019, the Company completed a private exchange offer in which it issued an aggregate of 896,636 shares of common stock in exchange for 88,600 shares of its Series E preferred shares and the dividends thereon. As a result, 9,200 shares of Series E preferred stock with an aggregate liquidation preference of $345,000 remained outstanding as of December 26, 2020 and March 28, 2020.

 

On March 11, 2020, the Company entered into Securities Purchase Agreements with two private investors for the sale of a total of 146,668 common shares at the price of $3.75 per share, for aggregate gross proceeds of $550,004. Net proceeds to the Company after fees and expenses of this private placement were $510,000.

 

(8)      Reverse Stock Split

 

On December 12, 2019, the Company amended its Articles of Incorporation to implement a 1-for-15 reverse split of its common stock.

 

The reverse stock split reduced the number of shares of common stock outstanding from 37,154,730 to 2,476,982 shares on December 12, 2019. The number of authorized shares of the Company’s common stock was reduced in the same proportion to 13,333,333 shares of common stock.

 

As a result of the reverse stock split, each of the Company’s holders of common stock received one share of common stock for every 15 shares of common stock held immediately prior to the reverse stock split. No fractional shares were issued in connection with the reverse stock split and cash was paid in lieu of any fractional shares. The reverse stock split also reduced the number of shares of common stock issuable upon the conversion of the Company’s outstanding shares of preferred stock and the exercise of its outstanding stock options and warrants in proportion to the ratio of the reverse stock split and caused a proportionate increase in the conversion and exercise prices of such preferred stock, stock options and warrants.

 

All share and per share amounts included in the financial statements have been adjusted to reflect the effect of the reverse stock split.

 

 

 

(9)      Shareholder Rights Plan

  

On October 12, 2020, the Company adopted a shareholder rights plan by entering into a Rights Agreement with American Stock Transfer & Trust Company, LLC (the “Rights Plan”). The Rights Plan is designed to ensure that all of the Company’s shareholders would receive fair treatment in any takeover of the Company. The Company implemented the Rights Plan by issuing one purchase right (a “Right”) for each share of common stock outstanding on the record date of October 22, 2020.

 

The Rights Agreement provides that in the event any person becomes the beneficial owner of 15% or more of the outstanding common shares, each Right (other than any Rights held by the 15% shareholder) will be exercisable, on and after the close of business on the tenth business day following such event, for the purchase of a number of shares of common stock (or equivalent securities, such as one-hundredths of the Company’s Series A Junior Participating Preferred Shares) equal to the exercise price (initially $15.00) divided by 25% of the then current fair market value of the common stock.  The Rights Plan further provides that if, on or after the occurrence of such event, the Company is merged into any other corporation or 50% or more of the Company's assets or earning power are sold, each Right (other than any Rights held by the 15% shareholder) will be exercisable to purchase a similar number of securities of the acquiring corporation.

 

The Rights expire on October 22, 2025 (unless previously triggered) and are subject to redemption by the Board of Directors at $0.001 per Right at any time prior to the first date upon which they become exercisable to purchase common shares.

 

 

 

(10)   Income Per Share

 

Basic net income per share (EPS) is calculated by dividing net income 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.

 

Shares included in the diluted EPS calculation for the three-month and nine-month periods ended December 26, 2020 are as follows:

 

 

Shares excluded from the diluted EPS calculation because they would be anti-dilutive are as follows: 

 

 

The stock options, restricted stock, convertible preferred stocks and warrants are not included in the computation of diluted EPS for the three-month and nine-month periods ended December 28, 2019 because the Company reported a net loss and, therefore, the effect of these instruments would be anti-dilutive.

  

 

 

(11)     Share-based Compensation and Employee Benefits Plans

 

On September 17, 2020, the Company amended its 2018 Equity Incentive Plan to increase the number of shares issuable under the plan by 250,000 shares to 416,667 shares of common stock upon the exercise of options, stock awards and grants. As of September 26, 2020, there were 268,493 shares of common stock available for issuance of additional awards under the 2018 Equity Incentive Plan. No further awards will be issued under the Company’s 2005 Equity Incentive Plan or its 2000 Stock Option Plan, though all awards under the 2005 Equity Incentive Plan that are outstanding continue to be governed by the terms, conditions and procedures set forth in the plan and any applicable award agreement.

 

Outstanding options generally vest over a period determined by the Company’s board of directors, and must be exercised while the grantee is employed by the Company (or while providing services under a service arrangement in the case of non-employees) or within a certain period after termination of employment or service arrangement in the case of non-employees. All outstanding options have a ten-year life from the date of grant. 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 equity incentive plan. As of December 26, 2020, no SARs have been granted under any equity incentive plan. 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 26, 2020 and the fiscal year ended March 28, 2020 is as follows:

 

 

 

 

As of December 26, 2020, there was $307,000 of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a weighted average period of 2.15 years. There were 12,675 options and 13,240 options that vested during the quarters ended December 26, 2020 and December 28, 2019, respectively. The total grant date fair value of options vested during the quarters ended December 26, 2020 and December 28, 2019 was $53,400 and $61,000 respectively. There were 52,662 and 47,700 options that vested during the nine-month periods ended December 26, 2020 and December 28, 2019, respectively. The total grant date fair value of options vested during the nine-month periods ended December 26, 2020 and December 28, 2019 was $222,000 and $185,000, respectively. No shares were exercised during the three and nine-month periods ended December 26, 2020 and December 28, 2019. Share based compensation cost recognized in operating results for the three-month periods ended December 26, 2020 and December 28, 2019 totaled $55,000 and $56,000, respectively. Share based compensation cost recognized in operating results for the nine-month periods ended December 26, 2020 and December 28, 2019 totaled $182,000 and $159,000, respectively.

 

Restricted Stock

 

The Company granted no restricted stock awards during the third quarter and first nine months of fiscal 2021. 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 26, 2020, there was $8,000 of total unrecognized compensation cost related to non-vested restricted stock awards. That cost is expected to be recognized over a weighted average period of 0.25 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 2021 was $7,900 and $23,000, respectively. Compensation cost recognized for the restricted and unrestricted stock awards during the third quarter and first nine months of fiscal of 2020 was $9,600 and $70,000, respectively.

   

A summary of the changes in non-vested restricted stock awards outstanding for the nine-month period ended December 26, 2020 and the fiscal year ended March 28, 2020 is as follows:

 

 

 

 

(12)      Significant Customer and Industry Segment Information

 

Microsource’s primary business is the design of custom microwave products and the production of microwave components using chip and wire assembly methods. Microsource offers a line of tunable, synthesized Band Reject Filters for solving interference problems in RADAR/EW applications. Electronic attack systems onboard high-performance fighter jets often require RADAR filters to block electromagnetic interference generated by other onboard electronic systems, particularly the aircraft’s main RADAR. Our high-speed, tunable notch filters can quickly block interference from both continuous wave and wide bandwidth emissions. Using proprietary driver and phase lock technology, our filters offer tuning speeds that are up to ten times faster than traditional filter designs. We custom design these filters specifically for each application.

 

Our Giga-tronics Division designs, manufactures, and markets a family of functional test systems for the RADAR and Electronic Warfare (RADAR/EW) segment of the defense electronics market. Our RADAR/EW test systems are used to evaluate and improve the performance of RADAR systems and EW counter measures, such as jammers. Giga-tronics Division customers include major defense prime contractors, the armed services (primarily in the United States) and research institutes. Currently, 100% of the company’s operating expenses are recorded to the Giga-tronics division.

 

 

The tables below present information for the two reportable segments:

 

 

 

During the third quarter of fiscal 2021, three customers accounted for approximately 95% of the Company’s consolidated revenues. One of the customers accounted for 54% of the Company’s consolidated revenue and was included in the Microsource segment. A second customer accounted for 25% of the Company’s consolidated revenue and was included in the Microsource segment. A third customer accounted for 16% of the Company’s consolidated revenue and was included in the Giga-tronics Division. During the third quarter of fiscal 2020, two customers accounted for approximately 77% of the Company’s consolidated revenues. One of the customers accounted for 45% of the Company’s consolidated revenue and was included in the Microsource segment. A second customer accounted for 32% of the Company’s consolidated revenue and was included in the Microsource segment.

 

During the first nine months of fiscal 2021, three customers accounted for approximately 89% of the Company’s consolidated revenues. One of the customers accounted for 55% of the Company’s consolidated revenues and was primarily included in the Microsource segment. A second and third customer accounted for a total of 34% of the Company’s consolidated revenue and were included in the Microsource segment and the Giga-tronics Division. During the first nine months of fiscal 2020, three customers accounted for approximately 89% of the Company’s consolidated revenues. One of the customers accounted for 45% of the Company’s consolidated revenues and was primarily included in the Microsource segment. A second and third customer accounted for a total of 44% of the Company’s consolidated revenue and were included in the Microsource segment and the Giga-tronics Division.

 

 

 

(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 in income tax expense for the nine months ended December 26, 2020 and December 28, 2019. The effective tax rate for the nine months ended December 26, 2020 and December 28, 2019 was 0% each year, primarily due to a valuation allowance recorded against the net deferred tax asset balance.

 

As of December 26, 2020, the Company had recorded $132,000 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.

 

 

 

(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)       Preferred Stock and Warrants

 

Series E Senior Convertible Voting Perpetual Preferred Stock

 

On March 26, 2018, the Company entered into a Securities Purchase Agreement for the sale of 42,800 shares of a newly designated series of 6.0% Series E Senior Convertible Voting Perpetual Preferred Stock (“Series E Shares”) to approximately 15 private investors. The sale was completed and the Series E Shares were issued on March 28, 2018.

 

Each Series E share is convertible into 6.67 shares of the Company’s common stock. Holders of Series E Shares are entitled to receive, when, as and if declared by the Company’s Board of Directors, cumulative preferential dividends, payable semiannual in cash at a rate per annum equal to 6.0% of the initial purchase price of $25.00 per share or in-kind (at the Company’s election) through the issuance of shares of the Company’s common stock, based on the 10 day volume weighted average price of the common stock. The deemed dividend is reflected on the face of the income statement as an increase in net loss or a decrease in net income to arrive at net income (loss) attributable to common shareholders.

 

The purchase price for each Series E Share was $25.00. Gross proceeds received by the Company were approximately $1.095 million (the “Placement”). Net proceeds to the Company after fees and expenses of the Placement were approximately $1.0 million. Placement agent fees incurred in connection with the transaction were 5% of gross proceeds or approximately $57,000 in cash, plus warrants to purchase 5% of the number of common shares into which the Series E shares can be converted (14,867 shares) at an exercise price of $3.75 per share.

 

During the 2019 fiscal year, the Company issued and sold an additional 57,200 Series E Shares for the price of $25.00 per share, resulting in gross proceeds of $1,405,000. Net proceeds from sales of Series E Shares during the 2019 fiscal year were approximately $1.2 million after fees and expenses of approximately $212,000. Placement agent fees incurred in connection with the transaction were 5% of gross proceeds or approximately $56,875 in cash, plus warrants to purchase 5% of the number of common shares into which the Series E shares can be converted (6.67 shares) at an exercise price of $3.75 per share.

 

For the nine months ended December 26, 2020, no additional Series E shares were issued.

 

Series E Exchange

 

The Company completed a private exchange offer on November 7, 2019, issuing an aggregate of 896,636 shares of common stock in exchange for 88,600 shares of Series E Preferred Stock and the dividends accrued thereon. The shares of common stock issued in the exchange were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act of 1933, though other exemptions may be available.

 

Preferred Stock

 

The table below presents information about the Company’s preferred stock as of December 26, 2020 and March 28, 2020:

 

 

 

 

(16)        COVID-19 (Coronavirus)

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) and in March 2020 classified the outbreak as a pandemic. In March 2020, the President of the United States and the Governor of California declared a state of emergency, based on the rapid increase in COVID-19 cases including in California. In response to the COVID-19 pandemic, the Company has implemented a number of measures intended to ensure the safety of personnel and the continuity of operations. Following California’s initial mandated shut down in March 2020, the Company was designated as an essential business and most of its manufacturing activities have largely returned to pre-pandemic levels though it continues to implement and follow the protective measures described above and includes most of its non-production personnel working remotely.

 

The COVID-19 pandemic has caused significant disruptions to the global, national, and local economy. The overall economic and other impacts of the COVID-19 pandemic in the areas in which the Company and its customers and suppliers operates is not known and cannot be predicted at this time. Delays in access to customer sites has caused disruptions in our business. While the circumstances relating to the COVID-19 pandemic and governmental responses are expected to be temporary, there is still uncertainty about the duration and the total economic impact. If this situation is prolonged, the pandemic could cause additional delays and could have a short- or long-term adverse impact, possibly material, on the Company’s future financial condition, liquidity, and results of operations.

 

 

 

 (17)        Subsequent Events

 

None.