GIGA TRONICS INC - Quarter Report: 2020 September (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	September 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 October 26, 2020.  

 

INDEX

   

PART I - FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of September 26, 2020 and March 28, 2020	4
	Unaudited Condensed Consolidated Statements of Operations, Three and Six Months Ended September 26, 2020 and September 28, 2019	5
	Unaudited Consolidated Statements of Shareholders’ Equity, Six Months Ended September 26, 2020 and September 28, 2019	6
	Unaudited Condensed Consolidated Statements of Cash Flows, Six Months Ended September 26, 2020 and September 28, 2019	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other information	26
Item 6.	Exhibits	26
SIGNATURES		27
.	Exhibit Index
	31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act.
	31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act.
	32.1 Certification of CEO pursuant to Section 906 of Sarbanes-Oxley Act.
	32.1 Certification of CFO pursuant to Section 906 of Sarbanes-Oxley Act.

 

 

 

(In thousands except share data)		September 26, 2020				March 28, 2020*
Assets
Current assets:
Cash and cash-equivalents		$	405			$	657
Trade accounts receivable, net of allowance of $8 and $8, respectively			1,021				932
Inventories, net			3,166				3,261
Prepaid expenses and other current assets			2,438				2,209
Total current assets			7,030				7,059
Property and equipment, net			458				508
Right of use asset			1,027				1,183
Other long-term assets			176				176
Total assets		$	8,691			$	8,926
Liabilities and shareholders' equity
Current liabilities:
Accounts payable		$	1,030			$	803
Loans payable, net of discounts and issuance costs			1,490				1,320
Accrued payroll and benefits			398				300
Deferred revenue			—				159
Lease obligations			430				426
Other current liabilities			330				364
Total current liabilities			3,678				3,372
Other non-current liabilities			60				119
Long term obligations – leases			916				1,135
Total liabilities			4,654				4,626
Shareholders' equity:
Preferred stock; no par value; Authorized - 1,000,000 shares
Series A convertible- designated 250,000 shares; no shares at September 26, 2020 and March 28, 2020 issued and outstanding			—				—
Series B, C, D convertible - designated 19,500 shares; 17,781.64 shares at September 26, 2020 and 17,781.64 at March 28, 2020 outstanding; (liquidation preference of $3,367 at September 26, 2020 and $3,367 at March 28, 2020)			2,745				2,745
Series E convertible- designated 100,000 shares; 9,200 shares at September 26, 2020 and 9,200 shares at March 28, 2020 outstanding; (liquidation preference of $345 at September 26, 2020 and $345 at March 28, 2020)			177				177
Common stock; no par value; Authorized – 13,333,333 shares; 2,635,856 shares at September 26, 2020 and 2,635,856 shares at March 28, 2020 issued and outstanding			32,094				31,952
Accumulated deficit			(30,979	)			(30,574	)
Total shareholders' equity			4,037				4,300
Total liabilities and shareholders' equity		$	8,691			$	8,926

 

		Three Months Ended								Six Months Ended
(In thousands except per share data)		September 26, 2020				September 28, 2019				September 26, 2020				September 28, 2019
Net revenue
Goods		$	822			$	373			$	1,931			$	2,311
Services			1,870				2,662				4,309				4,222
Total revenue			2,692				3,035				6,240				6,533
Cost of goods and services			1,652				1,787				3,686				3,754
Gross profit			1,040				1,248				2,554				2,779
Operating expenses:
Engineering			554				349				991				704
Selling, general and administrative			926				751				1,895				1,798
Total operating expenses			1,480				1,100				2,886				2,502
Operating income (loss)			(440	)			148				(332	)			277
Interest expense:
Interest expense, net			(32	)			(66	)			(65	)			(124	)
Interest expense from accretion of loan discount			—				—				—				(19	)
Total interest expense, net			(32	)			(66	)			(65	)			(143	)
Income (loss) before income taxes			(472	)			82				(397	)			134
Provision for income taxes			2				2				2				2
Net income (loss)		$	(474	)		$	80			$	(399	)		$	132
Deemed dividend on Series E shares		$	(3	)		$	(36	)		$	(6	)		$	(73	)
Net income (loss) attributable to common shareholders		$	(477	)		$	44			$	(405	)		$	59
Income (loss) per common share - basic		$	(0.18	)		$	0.06			$	(0.15	)		$	0.08
Income (loss) per common share - diluted		$	(0.18	)		$	0.03			$	(0.15	)		$	0.04
Weighted average shares used in per share calculation:
Basic			2,636				780				2,636				780
Diluted			2,636				1,580				2,636				1,580

 

		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

 

		Six Months Ended
(In thousands)		September 26, 2020				September 28, 2019
Cash flows from operating activities:
Net income (loss)		$	(405	)		$	59
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			81				95
Share based compensation			142				162
Accretion of discounts and issuance costs on debt			—				20
Accrued interest and fees on loan payable			(31	)			(192	)
Change in deferred rent			—				1
Changes in operating assets and liabilities
Trade accounts receivable			(89	)			(426	)
Inventories			95				(483	)
Prepaid expenses and other assets			(229	)			(510	)
Right of use asset			156				130
Accounts payable			227				765
Accrued payroll and benefits			98				(196	)
Deferred revenue			(159	)			—
Other current and non-current liabilities			(62	)			(12	)
Net cash used in operating activities			(176	)			(587	)
Cash flows from investing activities:
Purchases of property and equipment			(31	)			(94	)
Net cash used in investing activities			(31	)			(94	)
Cash flows from financing activities:
Principal payments on leases			(215	)			(188	)
Proceeds from exercise of warrants			—				230
Proceeds from borrowings, net of issuance costs			1,462				889
Repayments of borrowings			(1,292	)			(424	)
Net cash (used in) provided by financing activities			(45	)			507
Decrease in cash and cash-equivalents			(252	)			(174	)
Beginning cash and cash-equivalents			657				878
Ending cash and cash-equivalents		$	405			$	704
Supplementary disclosure of cash flow information:
Cash paid for income taxes		$	2			$	2
Cash paid for interest		$	69			$	66
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
Issuance of dividends in kind		$	—			$	142

 

 (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 six months ended September 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 one long term office lease. 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 the greater of prime or 4.5% plus, in either case, an additional one percent. 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 September 26, 2020 and March 28, 2020, the Company’s total outstanding borrowings under the Restated Financing Agreement were $257,846 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 and Warrants  

 

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 September 26, 2020 and March 28, 2020, the Company’s total outstanding loan balances were $446,100 and $792,300, respectively, and are included in Loans payable, net of discounts and issuance costs on the Condensed Consolidated Balance Sheet.

 

(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 (“CARES”) Act. The loan has been accounted for as a loan under ASC 470 Debt.

 

The PPP Loan is evidenced by a promissory note dated April 21, 2020 (the “Promissory Note”), which matures on April 23, 2022 and bears interest at a rate of 1.0% per annum. Principal and interest are payable monthly commencing on November 1, 2020 and may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Promissory Note contains other customary terms, including representations, events of defaults and remedies.

 

A portion of the principal outstanding and accrued interest under the PPP Loan is forgivable by the U.S. Small Business Administration if the Company uses the loan proceeds for certain purposes designated in the CARES Act, including payroll costs (as defined in the CARES Act), rents and utilities during the 24 weeks following the origination of the PPP Loan (“Eligible Purposes”) and otherwise complies with PPP requirements. To obtain forgiveness of the PPP Loan, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable requirements. The Company must repay any unforgiven principal amount of the PPP Loan, with interest. The Company has used a substantial majority of the PPP Loan proceeds for Eligible Purposes and intends to seek forgiveness for those amounts after the 24 week period, although the Company may take action that could cause some or all of the PPP Loan to become ineligible for forgiveness. However, if any portions of the PPP Loan proceeds are forgiven, any such amounts will be accounted for as a gain under ASC 958-605 which would be shown outside of operating income or loss, since it is not a part of the Company’s ongoing major or central business.

 

 (6)         Leases

 

Operating leases

Building - 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 77 months from April 1, 2017 through August 31, 2023. The Company agreed to pay 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 an aggregate base rent of $90,000 for the period of 36 months. This office lease amends and restates 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 lease 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 six months ended:

 

 

 

 

Other information:          

 

 

Future lease payments as of September 26, 2020 were as follows:

 

 

 

(7)       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.

 

The carrying amounts of the Company’s cash and cash-equivalents and line of credit approximate their fair values at each balance sheet date due to the short-term maturity of these financial instruments, and generally result in inputs categorized as Level 1 within the fair value hierarchy. The carrying value of the outstanding PFG Loan approximates the estimated aggregate 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.

 

 

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 September 26, 2020 and March 28, 2020.

 

 (8)     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 of this offering 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 September 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.

 

(9)      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.

 

(10)   Income (Loss) Per Share

 

Basic income (loss) per share is calculated by dividing net income or loss by the weighted average common shares outstanding during the period. Diluted earnings per share (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 excluded from the diluted EPS calculation for the six month period ended September 26, 2020 because they would be anti-dilutive are as follows:

 

 

 

Shares included in the diluted EPS calculation for the six month periods ended September 26, 2020 and September 28, 2019 are as follows:

 

   

 

(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 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 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 stock option plan. As of September 26, 2020, no SARs have been granted under any option 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 six-month period ended September 26, 2020 and the fiscal year ended March 28, 2020 is as follows:

 

 

   

As of September 26, 2020, there was $347,000 of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a weighted average period of 2.37 years. There were 15,294 options and 9,645 options that vested during the quarter ended September 26, 2020 and September 28, 2019, respectively. The total grant date fair value of options vested during the quarters ended September 26, 2020 and September 28, 2019 was $63,000 and $47,000, respectively. There were 39,987 and 23,464 options that vested during the six-month period ended September 26, 2020 and September 28, 2019, respectively. The total grant date fair value of options vested during the six-month period ended September 26, 2020 and September 28, 2019 was $168,000 and $100,000, respectively. No shares were exercised during the three and six-month periods ended September 26, 2020 and September 28, 2019. Share based compensation cost recognized in operating results for the three-month periods ended September 26, 2020 and September 28, 2019 totaled $58,000 and $52,000, respectively. Share based compensation cost recognized in operating results for the six-month periods ended September 26, 2020 and September 28, 2019 totaled $127,000 and $103,000, respectively.

 

Restricted Stock

 

The Company granted no restricted awards (“RSAs”) during the second quarter and first half of fiscal 2021 and 2020. RSAs are considered fixed awards as the number of shares and fair value at the grant date is amortized over the requisite service period net of estimated forfeitures. As of September 26, 2020, there was $16,000 of total unrecognized compensation cost related to non-vested awards. That cost is expected to be recognized over a weighted average period of 0.50 years and will be adjusted for subsequent changes in estimated forfeitures. Compensation cost recognized for the restricted and unrestricted stock awards during the second quarter and first half of fiscal 2021 was $8,000 and $15,000, respectively. Compensation cost recognized for the restricted and unrestricted stock awards during the second quarter and first half of fiscal 2020 was $15,000 and $59,000, respectively.

   

 

A summary of the changes in non-vested RSAs outstanding for the six-month period ended September 26, 2020 and the fiscal year ended March 28, 2020 is as follows:

 

 

  

 

(12)      Significant Customer and Industry Segment Information 

 

 

The Company has two reportable segments: Microsource and the Giga-tronics Division. Microsource’s primary business is the design of custom Microwave Integrated Components (“MIC”) as well as the production of MIC components using chip and wire assembly methods. Our Microsource Division offers a line of tunable, synthesized Band Reject Filters (BRF) for solving interference problems in RADAR/EW applications. Self-protection systems onboard high-performance military aircraft often require RADAR filters to block electromagnetic interference generated by other onboard electronic systems, particularly the aircraft’s main RADAR. These high-speed, tunable notch filters can quickly block interference from both continuous wave and wide bandwidth emissions. Using proprietary driver and phase lock technology, these filters offer tuning speeds that are up to ten times faster than traditional filter designs. We design these filters specifically for each application. Microsource’s two largest customers are prime contractors for which it develops and manufactures RADAR filters used in fighter jet aircraft.

 

The Giga-tronics Division designs, manufactures and markets a family of functional test products for the RADAR and Electronic Warfare (RADAR/EW) segment of the defense electronics market. Our RADAR/EW test products are used to evaluate and improve the performance of RADAR/EW systems.

 

The tables below present information for the two reportable segments:

 

  

 

 

 

During the second quarter of fiscal 2021, one customer accounted for approximately 56% of the Company’s consolidated revenues and was included in the Microsource segment. A second customer accounted for 28% of the Company’s consolidated revenue and was included in the Giga-tronics division. During the second quarter of fiscal 2020, one customer accounted for approximately 57% of the Company’s consolidated revenues and was included in the Microsource segment. A second customer accounted for 31% of the Company’s consolidated revenue and was also included in the Microsource segment.

 

During the first half of fiscal 2021, one customer accounted for 55% of the Company’s consolidated revenues and was primarily included in the Microsource segment. A second customer accounted for 28% of the Company’s consolidated revenue and was included in the Giga-tronics division. During the first half of fiscal 2020, one customer accounted for 47% of the Company’s consolidated revenues and was primarily included in the Microsource segment. A second customer accounted for 30% of the Company’s consolidated revenue and was included in 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 and $2,000 income tax expense for the six months ended September 26, 2020 and September 28, 2019, respectively. The effective tax rate for the six months ended September 26, 2020 and September 28, 2019 was 0% each year, primarily due to a valuation allowance recorded against the net deferred tax asset balance.

 

As of September 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 liability in cost of goods and services 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. 

 

  

 

 (15)      Preferred Stock and Warrants

 

Series E Senior Convertible Voting Perpetual Preferred Stock

 

 

On March 28, 2018, the Company issued and sold 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 investors in a private placement for gross proceeds of approximately $1.095 million. Net proceeds to the Company after fees and expenses were approximately $1.0 million. During the 2019 fiscal year, the Company issued and sold an additional 56,200 Series E Shares resulting in additional gross proceeds of $1,405,000 or approximately $1.2 million after fees and expenses of approximately $212,000.

 

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 preceding 10 day volume weighted average price of the common stock. The deemed dividend is reflected on the face of the income statement as a decrease in net income or increase in the case of net loss to arrive at net income or loss attributable to common shareholders.

 

 

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 unpaid 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 (the “Securities Act”), though other exemptions may be available.

 

For the six months ended September 26, 2020, no additional Series E shares were issued.

 

The table below presents information as of September 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 a mandated shut down in March 2020, the Company was designated as an essential business and has largely returned to “business as usual,” 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. While the disruption is currently expected to be temporary, there is 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

 

Shareholder Rights Plan 

 

On October 8, 2020, the Company’s Board of Directors announced the adoption of a Shareholders Rights Plan designed to ensure that all Giga-tronics shareholders would receive fair treatment in any takeover of the Company. The Plan provides for the distribution of one right (“Right”) for each share of common stock outstanding on the record date of October 22, 2020.

 

The Rights Plan provides that in the event any person becomes the beneficial owner of 15% or more of the outstanding common shares, each Right (other than a Right 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 Giga-tronics common shares (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 a Right 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.

 

A copy of the Rights Agreement was filed with the SEC as an exhibit to a Form 8-K filed by the Company on October 13, 2020.

 

 

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

 

On October 12, 2020, the Company submitted an application for forgiveness after the 24 week period. The forgiveness process can take up to five months.