NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of Giga-tronics Incorporated (“Giga-tronics”) and its wholly owned subsidiary, Microsource, Inc., collectively the “Company”. The Company’s corporate office and manufacturing facilities are located in Dublin, California.
Principles of Consolidation
The consolidated financial statements include the accounts of Giga-tronics and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP 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.
Fiscal Year
The Company’s financial reporting year consists of either a 52 week or 53-week period ending on the last Saturday of the month of March. Fiscal year 2022 ended on March 26, 2022, resulting in a 52-week year. Fiscal year 2021 ended on March 27, 2021, which resulted in a 52-week year. All references to years in the consolidated financial statements relate to fiscal years rather than calendar years.
Reclassification
Certain balances included on the consolidated financial statements for prior periods have been reclassified to conform to the current period presentation.
Leases
The Company has two operating leases for administrative, marketing, sales and engineering offices as well as manufacturing facilities. The Company recognizes long-term operating lease rights and commitments as operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, non-current, respectively, in the Consolidated Balance Sheets. The Company elected the transition package of three practical expedients which allow companies not to reassess (i) whether agreements contain leases, (ii) the classification of leases, and (iii) the capitalization of initial direct costs. Further, the Company elected to not separate lease and non-lease components for all of its leases.
The Company determines if an arrangement is, or contains, a lease at inception. Operating lease right-of-use assets, and operating lease liabilities are initially recorded based on the present value of lease payments over the lease term. Lease terms include the minimum unconditional term of the lease and may include options to extend or terminate the lease when it is reasonably certain at the commencement date that such options will be exercised. In addition, the Company’s leases do not provide an implicit rate. In determining the present value of the Company’s expected lease payments, the discount rate is calculated using the Company’s incremental borrowing rate determined based on the information available, which requires additional judgment.
Revenue Recognition
Beginning April 1, 2018, the Company follows the provisions of ASU 2014-09 as subsequently amended by the FASB between 2015 and 2017 and collectively known as ASC 606. Amounts for prior periods are not adjusted and continue to be reported in accordance with the Company’s historic accounting practices. The guidance provides a unified model to determine how revenue is recognized. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price and (v) recognize revenue when or as we satisfy each performance obligation.
Contract Identification
The Company generates revenue through the design, manufacture, and sale of products used in the defense industry to major prime defense contractors, the U.S. armed services and research institutes. There is generally one performance obligation in the Company’s contracts with its customers. For highly engineered products, the customer typically controls the work in process as evidenced either by contractual termination clauses or by the Company’s right to payment for costs incurred to date plus a reasonable profit for products or services that do not have an alternative use. In these circumstances, the performance obligation is the design and manufacturing service. As control transfers continuously over time on these contracts, revenue is recognized based on the extent of progress towards completion of the performance obligation using a cost-to-cost method. Engineering services are also satisfied over time and recognized on the cost-to-cost method. These types of revenue arrangements are typical for the Company’s defense contracts within the Microsource segment for its RADAR filter products used in fighter jet aircrafts.
For the sale of standard or minimally customized products, the performance obligation is the series of finished products which are recognized at the points in time the units are transferred to the control of the customer, typically upon shipment. This type of revenue arrangement is typical for our commercial contracts within the Giga-tronics segment for its ASGA system products used for testing RADAR /EW equipment.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. The Company’s performance obligations include:
| | ● | Design and manufacturing services |
| | ● | Product supply – Distinct goods or services that are substantially the same |
The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct.
Transaction Price
The Company has both fixed and variable consideration. Under the Company’s highly engineered design and manufacturing arrangements, advance payments and unit prices are considered fixed, as product is not returnable, and the Company has an enforceable right to reimbursement in the event of a cancellation. For standard and minimally customized products, payments can include variable consideration, such as product returns and sales allowances. The transaction price in engineering services arrangements may include estimated amounts of variable consideration, including award fees, incentive fees, or other provisions that can either increase or decrease the transaction price. Milestone payments are identified as variable consideration when determining the transaction price. At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. The Company estimates variable consideration at the amount to which they expect to be entitled and determines whether to include estimated amounts as a reduction in the transaction price based largely on an assessment of the conditions that might trigger an adjustment to the transaction price and all information (historical, current and forecasted) that is reasonably available to the Company. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved.
Allocation of Consideration
As part of the accounting for arrangements that contain multiple performance obligations, the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. When a contract contains more than one performance obligation, the Company uses key assumptions to determine the stand-alone selling price of each performance obligation. Because of the customized nature of products and services, estimated stand-alone selling prices for most performance obligations are estimated using a cost-plus margin approach. For non-customized products, list prices generally represent the standalone selling price. The Company allocates the total transaction price to each performance obligation based on the estimated relative stand-alone selling prices of the promised goods or service underlying each performance obligation.
Timing of Revenue Recognition
Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the cost-to-cost measure of progress as this measure best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue is recognized for design and manufacturing services and for engineering services over time proportionate to the costs that the Company has incurred to perform the services using the cost-to-cost method and for products at a point in time.
Changes in Estimates
The effect of a contract modification on the transaction price and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis.
For contracts using the cost-to-cost method, management reviews the progress and execution of the performance obligations. This process requires management judgment relative to estimating contract revenue and cost and making assumptions for delivery schedule. This process requires management’s judgment to make reasonably dependable cost estimates. Since certain contracts extend over a longer period of time, the impact of revisions in cost and revenue estimates during the progress of work may adjust the current period earnings through a cumulative catch-up basis. This method recognizes, in the current period, the cumulative effect of the changes on current and prior quarters. Contract cost and revenue estimates for significant contracts are generally reviewed and reassessed quarterly.
Balance Sheet Presentation
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the Consolidated Balance Sheets. Under the typical payment terms of over time contracts, the customer pays either performance-based payments or progress payments. Amounts billed and due from customers are classified as receivables on the Consolidated Balance Sheets. Interim payments may be made as work progresses, and for some contracts, an advance payment may be made. A liability is recognized for these interim and advance payments in excess of revenue recognized and is presented as a contract liability which is included within Other current liabilities and Other non-current liabilities on the Consolidated Balance Sheets. Contract liabilities typically are not considered a significant financing component because these cash advances are used to meet working capital demands that can be higher in the early stages of a contract. When revenue recognized exceeds, the amount billed to the customer, an unbilled receivable (contract asset) is recorded for the amount the Company is entitled to receive based on its enforceable right to payment and is included in Unbilled receivable on the Consolidated Balance Sheets. Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the period end date and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity).
Conversion of Convertible Preferred Stock
ASC 260, Earnings Per Share (“EPS”) (“ASC 260”), provides guidance on the accounting for induced conversions of convertible preferred stock and states that issuers should consider the guidance in ASC 470-20-40-13 through 40-17, Debt with conversion and other options, to determine whether a conversion of preferred stock is pursuant to an inducement offer. ASC 470-20-40-13 through 40-17 addresses the accounting for induced conversions of convertible debt (other than cash convertible debt instruments) that (1) occur pursuant to changed conversion privileges that are exercisable only for a limited period of time, (2) include the issuance of all of the equity securities issuable pursuant to conversion privileges included in the terms of the debt at issuance for each debt instrument that is converted and (3) involve any of the following:
| • | Reduction of the original conversion price (thereby resulting in the issuance of additional shares of stock) |
| • | Issuance of warrants or other securities not provided for in the original conversion terms |
| • | Payment of cash or other consideration (sometimes called a convertible stock sweetener) to those shareholders who convert during the specified time period. The additional consideration is usually offered to induce prompt conversion of the stock to another class of equity. |
ASC 470-20-40-14 further explains that an induced conversion includes an exchange of a convertible debt instrument for equity securities or a combination of equity securities and other consideration, whether or not the exchange involves legal exercise of the contractual conversion privileges included in the terms of the debt.
If a conversion of preferred stock is an inducement offer pursuant to ASC 470, the fair value of the additional securities or other consideration issued to induce conversion should be subtracted from net income to arrive at income available to common shareholders in the calculation of EPS pursuant to ASC 260. The deemed dividend is reflected on the face of the Consolidated Statements of Operations as an increase in net loss or a decrease in net income to arrive at net income/(loss) attributable to common shareholders. (See Note 18 - Preferred Stock and Warrants).
Accrued Warranty
The Company’s warranty policy generally provides one to three years of coverage depending on the product. The Company records a liability for estimated warranty obligations at the date products are sold. The estimated cost of warranty coverage is based on the Company’s actual historical experience with its current products or similar products. For new products, the required reserve is based on historical experience of similar products until such time as sufficient historical data has been collected on the new product. Adjustments are made as new information becomes available.
Inventories
Inventories are stated at the lower of cost or net realizable value using the standard cost method, which approximates the first-in, first-out inventory method. Standard costing and overhead allocation rates are reviewed by management periodically, but not less than annually. Overhead rates are recorded to inventory based on capacity management expects for the period the inventory will be held. Reserves are recorded within cost of sales for impaired or obsolete inventory when the cost of inventory exceeds its estimated fair value. Management evaluates the need for inventory reserves based on its estimate of the amount realizable through projected sales including an evaluation of whether a product is reaching the end of its life cycle. When inventory is discarded it is written off against the inventory reserve, as inventory generally has already been fully reserved for at the time it is discarded.
Research and Development
Research and development expenditures, which include the cost of materials consumed in research and development activities, salaries, wages and other costs of personnel engaged in research and development, costs of services performed by others for research and development on the Company’s behalf and indirect costs are expensed as operating expenses when incurred. Research and development costs totaled approximately $1.2 million and $2.2 million for the years ended March 26, 2022 and March 27, 2021, respectively and are recorded in the Company’s Consolidated Statements of Operations as Engineering under Operating expenses.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, which range from three to ten years for machinery and equipment and office fixtures. Leasehold improvements and assets acquired under capital leases are amortized using the straight-line method over the shorter of the estimated useful lives of the respective assets or the lease term.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such review indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows on an undiscounted basis, the asset’s carrying amount would be written down to fair value. Additionally, the Company reports long-lived assets to be disposed of at the lower of carrying amount or fair value less cost to sell. As of March 26, 2022, and March 27, 2021, management believes there has been no impairment of the Company’s long-lived assets.
Warrants to Purchase Common Stock
Warrants are accounted for in accordance with the applicable accounting guidance provided in ASC 815 – Derivatives and Hedging (“ASC 815”) as either derivative liabilities or as equity instruments depending on the specific terms of the agreement. Liability-classified instruments are recorded at fair value at each reporting period with any change in fair value recognized as a component of change in fair value of derivative liabilities in the Consolidated Statements of Operations. The Company estimates liability-classified instruments using the Black Scholes option-pricing model. The valuation methodologies require management to develop assumptions and inputs that have significant impact on such valuations. The Company periodically evaluates changes in facts and circumstances that could impact the classification of warrants from liability to equity, or vice versa.
Income Taxes
Income taxes are accounted for using the asset and liability 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 carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future tax benefits are subject to a valuation allowance when management is unable to conclude that its deferred tax assets will more likely than not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers both positive and negative evidence and tax planning strategies in making this assessment.
The Company considers all tax positions recognized in its financial statements for the likelihood of realization. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amounts of the positions that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above, if any, would be reflected as unrecognized tax benefits, as applicable, in the accompanying Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of the provision for income taxes in the Consolidated Statements of Operations.
Software Development Costs
Development costs included in the research and development of new software products and enhancements to existing software products are expensed as incurred, until technological feasibility in the form of a working model has been established. As of March 26, 2022 and March 27, 2021, the Company had $172,500 and $0, respectively, as capitalized software development costs which are included in Other long-term assets on the Consolidated Balance Sheets. Capitalized software development costs are evaluated each reporting period for impairment.
Stock-based Compensation
The Company records stock-based compensation expense for the fair value of all stock options and restricted stock that are ultimately expected to vest as the requisite service is rendered.
The cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as cash flows from financing in the Consolidated Statements of Cash Flows. These excess tax benefits were not significant for the Company for the fiscal years ended March 26, 2022 and March 27, 2021.
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. The computation of expected volatility used in the Black-Scholes- Merton option-pricing model is based on the historical volatility of Giga-tronics’ share price. The expected term is estimated based on a review of historical employee exercise behavior with respect to option grants. For new option grants in fiscal 2022, we used the simplified method as described in Staff Accounting Bulletin 107 because of insufficient exercise history. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected dividend yield was not considered in the option pricing formula since the Company has not paid dividends and has no current plans to do so in the future. The Company records forfeitures as they occur.
The fair value of restricted stock awards is based on the fair value of the underlying shares at the date of the grant.
Loss Per Common Share
Basic loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the incremental shares issuable upon the assumed exercise of stock options and warrants using the treasury stock method. Anti-dilutive securities are not included in the computation of diluted EPS. Non-vested shares of restricted stock have non-forfeitable dividend rights and are considered participating securities for the purpose of calculating basic and diluted EPS under the two-class method.
Comprehensive Income or Loss
There are no items of comprehensive income or loss other than net income or loss.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist of cash and trade accounts receivable. Concentration of credit risk in trade accounts receivable results primarily from sales to major customers. The Company individually evaluates the creditworthiness of its customers and generally does not require collateral or other security. As of March 26, 2022, three customers combined accounted for 92% of consolidated gross accounts receivable. As of March 27, 2021, two customers combined accounted for 95% of consolidated gross accounts receivable.
Fair Value of Financial Instruments and Fair Value Measurements
The Company’s financial instruments consist principally of cash, line of credit, term debt, and warrant derivative liability. The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date (Level 1), significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (Level 2), or significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability (Level 3), depending on the nature of the item being valued.
Note 2. Going Concern and Management's Plan
The Company incurred net losses of $2.7 million and $0.4 million in the fiscal years ended March 26, 2022 and March 27, 2021, respectively. These losses have contributed to an accumulated deficit of $34.0 million as of March 26, 2022.
The Company believes that it has a very novel, innovative TEmS solution and that its technology will play a critical role in the development, testing, and fielding of a new advanced weapon system program of record for the U. S. Air Force F-35 program. However, the Company’s limitation in resources as a small public company has caused it to reevaluate its future alternatives and as a result, has it has entered into the Exchange Agreement. Under the Exchange Agreement, the Company is restricted from raising funds either via debt or equity and has therefore received a loan of $1.3 million from DPL, a BitNile subsidiary. The Company expects to combine with Gresham in August 2022 and resolve the going concern matter. (See Note 20 - Share Exchange Agreement with BitNile and Gresham).
Management has also put in place a plan as a stand-alone company and believes that the Company can repay the loan to BitNile in November 2022 without raising additional funding because of the large inventory on hand for TEmS solution, which will result in cash with sales of TEmS solution. Management will continue to review all aspects of its business including, but not limited to, the contribution of its individual business segments, in an effort to improve cash flow and reduce costs and expenses, while continuing to invest, to the extent possible, in new product development for future revenue streams.
The Company's historical operating results and forecasting uncertainties indicate that substantial doubt exists related to its ability to continue as a going concern. Management believes that through the actions to date and possible future actions described above, the Company should have the necessary liquidity to continue operations at least twelve months from the issuance of the financial statements. However, management cannot predict, with certainty, the outcome of its actions to maintain or generate additional liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as currently planned. Forecasting uncertainties also exist with respect to the EW test system product line due to the potential longer than anticipated sales cycles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result if the Company were unable to do so.
Note 3. Cash
Cash of $25,000 and $736,000 as of March 26, 2022, and March 27, 2021, respectively, consisted of demand deposits with a financial institution that is a member of the Federal Deposit Insurance Corporation (“FDIC”). As of March 26, 2022, none of the Company’s demand deposits exceeded FDIC insurance limits. As of March 27, 2021, $486,000 of the Company’s demand deposits exceeded FDIC insurance limits.
Note 4. Inventories, net
| Inventories, net consisted of the following: |
| Inventories, net |
| (Dollars in thousands) |
| | | Fiscal Years Ended | |
| Category | | March 26, 2022 | | | March 27, 2021 | |
| Raw materials | | $ | 2,264 | | | $ | 946 | |
| Work-in-progress | | | 2,474 | | | | 2,418 | |
| Finished goods | | | 95 | | | | 129 | |
| Demonstration inventory | | | 20 | | | | 108 | |
| Total | | $ | 4,853 | | | $ | 3,601 | |
Note 5. Property, Plant and Equipment, net
Property, plant and equipment, net comprised of the following:
| Property, plant and equipment, net |
| (Dollars in thousands) |
| | | Fiscal Years Ended | |
| Category | | March 26 ,2022 | | | March 27 ,2021 | |
| Leasehold improvements | | $ | 648 | | | $ | 648 | |
| Machinery and equipment | | | 4,631 | | | | 4,631 | |
| Computer and software | | | 705 | | | | 705 | |
| Furniture and office equipment | | | 107 | | | | 107 | |
| Property, plant and equipment | | | 6,091 | | | | 6,091 | |
| Less: accumulated depreciation and amortization | | | (5,750 | ) | | | (5,636 | ) |
| Property, plant and equipment, net | | $ | 341 | | | $ | 455 | |
Depreciation expense for the fiscal 2022 and fiscal 2021 was $202,000 and 253,000 respectively.
Note 6. Financed Receivables
On March 11, 2019, the Company entered into an Amended and Restated Business Financing Agreement with Western Alliance Bank. The Financing Agreement amends and restates a previous credit agreement with the bank.
Under the Financing Agreement, the Company may borrow up to 85% of the amounts of customer invoices issued by the Company, up to a maximum of $2.5 million in aggregate advances outstanding at any time.
Interest accrues on amounts outstanding under the Financing Agreement at an annual rate equal to the greater of prime or 4.5% plus 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 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 Financing Agreement has no specified term and may be terminated by either the Company or Western Alliance Bank at any time.
The 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 the bank may declare the loans and all other obligations under the Financing Agreement immediately due and payable.
As of March 26, 2022 and March 27, 2021, the Company’s total outstanding borrowings under the Financing Agreement were $450,000 and $683,000, respectively, and are included in Loans payable, net of discounts and issuance costs on the Consolidated Balance Sheets.
Note 7. Term Loans
On April 27, 2017, the Company entered into a $1.5 million loan agreement with Partners For Growth, which was funded on April 28, 2017. As of March 27, 2021, the Company's total outstanding loan balance under this loan was paid off in full and the agreement was terminated.
On November 12, 2021, the Company borrowed $500,000 from DPL, a California limited liability company and licensed California Finance Lender, and an affiliate of BitNile, a Delaware corporation. On January 2, 2022, the Company borrowed an additional $300,000 from the affiliate of BitNile. The loan is evidenced by a secured promissory note, which provides, among other things that the principal amount of the loan will bear interest at the rate of 10.0% per annum. Unless prepaid by the Company, all principal and accrued interest under the loan is payable on November 12, 2022 or, if earlier, upon the Company’s completion of an underwritten public offering or the Company’s termination of the Exchange Agreement dated December 27, 2021 with BitNile and Gresham Worldwide Inc. (“Gresham”), a Delaware corporation (“Exchange Agreement”). The Company’s obligations under the loan are secured by a pledge of all of the Company’s assets. The loan and the Lender’s security interest are subordinate to the Company’s existing bank Financing Agreement. The Company’s outstanding balance of this loan as of March 26, 2022 was $800,000 and is included in Loans payable, net of discounts and issuance costs on the Consolidated Balance Sheets.
As of March 26, 2022 and March 27, 2021, the Company’s total outstanding loan balances were $800,000 and $0, respectively, and are included in Loans payable, net of discounts and issuance costs on the Consolidated Balance Sheets.
Note 8. Paycheck Protection Program Loan under the CARES Act
On April 23, 2020, the Company borrowed $786,000 from Western Alliance Bank pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (“PPP Loan”). The Company accounted for the PPP Loan as a loan under ASC 470. 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.
On November 19, 2020, the outstanding principal and accrued interest for the PPP Loan was forgiven in full by the SBA and recognized as a gain on extinguishment.
In August 2021, the Company applied for the Employee Retention Credit (“ERC”) for a total amount of $233,000. This ERC is a fully refundable tax credit for employers equal to 50 percent of qualified wages that eligible employers pay their employees. This ERC applies to qualified wages paid after March 12, 2020 and before January 1, 2021.
In January 2022, the Company applied for another ERC for a total amount of $321,000. This ERC is a fully refundable tax credit for employers equal to 70 percent of qualified wages that eligible employers pay their employees. This ERC applies to qualified wages paid after December 2020 and before January 1, 2022.
Currently, we are unable to provide an estimate as to whether and when we will receive these ERC funds as the Company's applications are pending Internal Revenue Service processing and approval.
Note 9. Fair Value Measurement
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 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.
Note 10. Sale of Common Stock
On April 27, 2021, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with certain accredited investors (“Investors”) pursuant to which it issued and sold prefunded warrants to purchase an aggregate of 461,538 shares of the Company’s common stock (“Prefunded Warrants”) for gross proceeds of $1,500,000 or $3.25 per Prefunded Warrant in a private placement on the same day. Net proceeds to the Company after fees and expenses of the private placement were approximately $1,343,000. The Purchase Agreement contains customary representations and warranties of the Company and certain indemnification obligations and ongoing covenants of the Company.
The Prefunded Warrants are immediately exercisable and may be exercised for a de-minimis exercise price of $0.01 per share subject to the limitation that a holder of a Prefunded Warrant will not have the right to exercise any portion of the Prefunded Warrant if the holder together with its affiliates and attribution parties (as such terms are defined in the Prefunded Warrants) would beneficially own in excess of 9.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Prefunded Warrants. The Prefunded Warrants do not expire. The Prefunded Warrants also contained a put option, exercisable under certain conditions. Because of this put-option provision, the Prefunded Warrants were initially classified as a liability at fair value of $1,703,000 on the issuance date and marked to market at each reporting date. Further, because the fair value of the prefunded warrant liability on the issuance date was greater than the proceeds of the Prefunded Private Placement and the warrants were issued to existing common stockholders, the difference was recorded to accumulated deficit as a $203,000 deemed dividend. There were finance costs of $157,000 associated with the issuance of the Prefunded Warrants. There was a gain on measurement of $46,000 on the prefunded warrant liability in the first quarter of fiscal 2022 and $46,000 in the second quarter of fiscal year 2022.These amounts are recorded in Other expense, net in the Consolidated Statements of Operations.
Pursuant to the terms of the Purchase Agreement, and as a condition to closing the private placement, the Company and each Investor simultaneously entered into a registration rights agreement (“Registration Rights Agreement”) requiring the Company to file a registration statement with the SEC within 45 days of the closing of the private placement to register for resale the shares of the Company’s common stock underlying the Prefunded Warrants. The Registration Rights Agreement contains customary terms and conditions, certain liquidated damages provisions for failing to comply with the timing obligations for the filing and effectiveness of the registration statement, and certain customary indemnification obligations.
On April 27, 2021, in connection with the private placement, the Company issued warrants to purchase 23,076 shares of the Company’s common stock to the placement agent for such offering (“Placement Agent Warrants”). The Placement Agent Warrants have an exercise price per share equal to $3.575, subject to adjustment in certain circumstances, and will expire on April 27, 2026. The Placement Agent Warrants do not have the same put option provision as the original Prefunded Warrants and, therefore, are classified as equity.
On June 6, 2021, the Company entered into a Securities Purchase Agreement with a private investor for the sale of a total of 46,154 common shares at the price of $3.25 per share, for aggregate gross proceeds of $150,000. The sale was completed, and the shares of common stock were issued on June 6, 2021. Net proceeds to the Company after fees and expenses of the transaction were approximately $145,000.
On July 28, 2021, the Company and the holders amended the terms of the Prefunded Warrants to restrict the holder’s option to require cash payment at the Black-Scholes value of the remaining unexercised portion of the holder’s Prefunded Warrants to only Fundamental Transactions that are within the Company’s control. Because of this modification of the put-option provision, the Prefunded Warrants were no longer required to be classified as liability under either ASC 480, “Distinguishing Liabilities from Equity”, or ASC 815, guidance and do not include any embedded features that require bifurcation. Therefore, the Prefunded Warrants were reclassified to equity and remeasured on the modification date of July 28, 2021.
Note 11. 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 (“Rights Plan”). The Rights Plan is designed to ensure that all of the Company’s shareholders would receive fair treatment in any potential takeover of the Company. The Company implemented the Rights Plan by issuing one Purchase Right (“Right”) for each share of common stock outstanding on 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 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.
Note 12. Significant Customers and Industry Segment Information
The Company has two reportable segments: Microsource and the Giga-tronics Division. Microsource’s primary business is the production of Yttrium-Iron-Garnet (“YIG”) based microwave components designed specifically for the intended operational application. Microsource produces a line of tunable, synthesized Band Reject Filters for solving interference problems in RADAR/EW applications as well as low noise oscillators used on shipboard and land-based self-protection systems. Microsource designs components based upon the Company’s proprietary YIG technology, for each customer’s unique requirement, generally at the customer’s expense. Microsource’s two largest customers are prime contractors for which it develops and manufactures RADAR filters used in fighter jet aircrafts.
The Giga-tronics Division designs, manufactures and markets a family of functional test products for the RADAR/EW segment of the defense electronics market. The Company’s RADAR/EW test products are used to evaluate and improve the performance of RADAR/EW systems.
The accounting policies for the segments are the same as those described in the “Summary of Significant Accounting Policies”. The Company evaluates the performance of its segments and allocates resources to them based on earnings before income taxes. Segment net revenue include revenue to external customers. Inter-segment activities are eliminated in consolidation. Assets include accounts receivable, inventories, equipment, cash, deferred income taxes, prepaid expenses and other long-term assets. The Company accounts for inter-segment revenue and transfers at terms that allow a reasonable profit to the seller. During the periods reported there were no significant inter-segment revenue or transfers.
The Company’s reportable operating segments are strategic business units that offer different products and services. They are managed separately because each business utilizes different technology and requires different accounting systems. The Company’s chief operating decision maker is considered to be the Company’s Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues and pre-tax income or loss by operating segment.
The tables below present information for fiscal years ended March 26, 2022 and March 27, 2021.
| March 26, 2022 (Dollars in thousands) | | Giga-tronics Division | | | Microsource | | | Total | |
| Revenue | | $ | 770 | | | $ | 8,257 | | | $ | 9,027 | |
| Interest expense, net and other | | $ | (117 | ) | | $ | — | | | $ | (117 | ) |
| Depreciation and amortization | | $ | 202 | | | $ | — | | | $ | 202 | |
| Net income (loss) before income taxes | | $ | (5,826 | ) | | $ | 3,113 | | | $ | (2,713 | ) |
| Assets (at period end) | | $ | 5,645 | | | $ | 2,410 | | | $ | 8,055 | |
| March 27, 2021 (Dollars in thousands) | | Giga-tronics Division | | | Microsource | | | Total | |
| Revenue | | $ | 3,670 | | | $ | 9,382 | | | $ | 13,052 | |
| Interest expense, net and other | | $ | (97 | ) | | $ | — | | | $ | (97 | ) |
| Depreciation and amortization | | $ | 253 | | | $ | — | | | $ | 253 | |
| Net income (loss) before income taxes | | $ | (642 | ) | | $ | 251 | | | $ | (391 | ) |
| Assets (at period end) | | $ | 5,281 | | | $ | 2,566 | | | $ | 7,847 | |
The Company’s Giga-tronics Division and Microsource segment sell to agencies of the U.S. government and U.S. defense- related customers. In fiscal 2022 and 2021, U.S. government and U.S. defense-related customers accounted for 99% of revenue. During fiscal 2022, one prime contractor accounted for 77% of the Company’s consolidated revenues and was included in the Microsource segment. A second prime contractor accounted for 10% of the Company’s consolidated revenues during fiscal 2022 and was also included in the Microsource segment.
During fiscal 2021, two prime contractors accounted for 66% of the Company’s consolidated revenues and were included in the Microsource segment. A third customer accounted for 14% of the Company’s consolidated revenues during fiscal 2021 and was included in the Giga-tronics Division.
Export revenue accounted for less than 1% of the Company’s revenue for fiscal 2022 and 2021.
Note 13. Loss per Common Share
The number of stock options, restricted stock, convertible preferred stock and warrants set forth below are not included in the computation of diluted EPS as a result of the Company’s net loss and, therefore, the effect of these instruments would be anti-dilutive.
| (Shares in thousands) | | | |
| | | Fiscal Years ended | |
| Category | | March 26, 2022 | | | March 27, 2021 | |
| Stock options | | | 353 | | | | 375 | |
| Restricted stock awards | | | 20 | | | | — | |
| Convertible preferred stock | | | 157 | | | | 180 | |
| Warrants | | | 530 | | | | 28 | |
| Total | | | 1,060 | | | | 583 | |
Note 14. Income Taxes
Following are the components of the provision for income taxes:
| (Dollars in thousands) | | | |
| | | Fiscal Years ended | |
| Category | | March 26, 2022 | | | March 27, 2021 | |
| Current | | | | | | | | |
| Federal | | $ | — | | | $ | — | |
| State | | | 2 | | | | 2 | |
| | | | 2 | | | | 2 | |
| Deferred | | | | | | | | |
| Federal | | | — | | | | — | |
| State | | | — | | | | — | |
| Total | | $ | 2 | | | $ | 2 | |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
| (Dollars in thousands) | | | |
| | | Fiscal Years ended | |
| Category | | March 26, 2022 | | | March 27, 2021 | |
| Net operating loss carryforward | | $ | 2,732 | | | $ | 2,373 | |
| Income tax credits | | | 106 | | | | 106 | |
| Inventory reserves and additional costs capitalized | | | 907 | | | | 850 | |
| Fixed asset depreciation | | | (27 | ) | | | (30 | ) |
| Accrued expenses | | | 97 | | | | 100 | |
| ASC 842 right of use asset | | | 254 | | | | 156 | |
| ASC 842 lease liability | | | (223 | ) | | | (105 | ) |
| Allowance for doubtful accounts | | | — | | | | 1 | |
| State tax benefit | | | (8 | ) | | | (8 | ) |
| Total deferred tax asset | | | 3,838 | | | | 3,443 | |
| Valuation allowance | | | (3,838 | ) | | | (3,443 | ) |
| | | $ | — | | | $ | — | |
The following summarizes the difference between the income tax expense and the amount computed by applying the statutory federal income tax rates of 21% for the years ended March 26, 2022 and March 27, 2021, to income before income tax. The items comprising these differences consisted of the following for the fiscal years ended March 26, 2022 and March 27, 2021:
| (In thousands except percentages) | | Fiscal Years ended | |
| | | March 26, 2022 | | | March 27, 2021 | |
| Category | | | | | | | | | | | | | | | | |
| Statutory federal income tax (benefit) | | $ | (564 | ) | | | 21 | % | | $ | (85 | ) | | | 21 | % |
| Valuation allowance | | | 395 | | | | (15 | )% | | | (9,530 | ) | | | 2,345 | % |
| State income tax, net of federal benefit | | | (194 | ) | | | 7 | % | | | (30 | ) | | | 7 | % |
| Section 382-383 limitation | | | 206 | | | | (7 | )% | | | 9,697 | | | | (2,386 | )% |
| Non tax-deductible expenses | | | 165 | | | | (6 | )% | | | (25 | ) | | | 6 | % |
| Tax credits generated | | | — | | | | — | % | | | (18 | ) | | | 4 | % |
| Other | | | (6 | ) | | | — | % | | | (7 | ) | | | 2 | % |
| Effective income tax | | $ | 2 | | | | — | % | | $ | 2 | | | | (1 | )% |
The increase in valuation allowance from March 27, 2021, to March 26, 2022 was $395,000.
As of March 26, 2022, the Company had pre-tax federal net operating loss carryforwards of $10,720,000 and state net operating loss carryforwards of $6,780,000 available to reduce future taxable income. These amounts are net of a Section 382 limitation of $38,345,000 on the federal net operating loss and $19,612,000 on the state net operating loss. The Section 382 limitation was triggered due to an ownership change in 2020 year. The federal and state net operating loss carryforwards begin to expire from fiscal 2022 through 2038 and from 2029 through 2040, respectively. The federal net operating loss amount of $7,435,000 from fiscal year ended 2020 through 2022 will have an indefinite life. Utilization of net operating loss carryforwards may be subject to annual limitations due to certain ownership change limitations as required by Internal Revenue Code Section 382. The federal income tax credits begin to expire from 2032 through 2040 and state income tax credit carryforwards are carried forward indefinitely. The ownership change in 2020 triggered a Section 383 limitation on the federal income tax credits. The Section 383 limitation reduced the federal carryforward by $394,500 but did not reduce the state credit carryforward due to the indefinite carryforward. The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers both positive and negative evidence and tax planning strategies in making this assessment.
As of March 26, 2022, the Company had unrecognized tax benefits of $52,000 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 has not recorded a liability for any penalties or interest related to the unrecognized tax benefits.
The Company files U.S Federal, California and New Hampshire state tax returns. The Company is generally no longer subject to tax examinations for years prior to the fiscal year 2017 for federal purposes and fiscal year 2016 for California purposes, except in certain limited circumstances.
A reconciliation of the beginning and ending amount of the liability for uncertain tax positions, excluding potential interest and penalties, is as follows:
| | | Fiscal Years ended | |
| | | March 26, 2022 | | | March 27, 2021 | |
| | | | | | | | | |
| Balance as of beginning of year | | $ | 52,000 | | | $ | 132,000 | |
| Change based on current year tax positions | | | — | | | | (80,000 | ) |
| Balance as of end of year | | $ | 52,000 | | | $ | 52,000 | |
The total amount of interest and penalties related to unrecognized tax benefits as of March 26, 2022, is not material. The amount of tax benefits that would impact the effective rate, if recognized, is not expected to be material. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next twelve (12) months.
Note 15. Stock-Based Compensation and Employee Benefit Plans
The Company maintains a 2018 Equity Incentive Plan which provides for the issuance of up to 416,667 shares of common stock upon the exercise of options, stock awards and grants. With the adoption of the 2018 Equity Incentive Plan, no further awards will be issued under the Company’s 2005 Equity Incentive Plan, though all awards under the 2005 Equity Incentive Plan that are outstanding will continue to be governed by the terms, conditions and procedures set forth in the plan and any applicable award agreement.
All outstanding options generally vest over a four or five year service period. However, during the fiscal year 2021, the Company granted options to purchase 138,000 shares of common stocks which vest in full upon the first anniversary of the grant. The vested portion of all option grants may be exercised only 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. Options granted to employees shall not have terms in excess of 10 years from the grant date. Holders of options may be granted stock appreciation rights, 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 March 26, 2022 and March 27, 2021, no stock appreciation rights have been granted under any option plan. As of March 26, 2022, there were 89,875 shares of common stock available for issuance of additional awards under the 2018 Equity Incentive Plan. All outstanding options have a ten year life from the date of grant. The Company records compensation cost associated with stock-based compensation equivalent to the estimated fair value of the awards over the requisite service period.
Stock Options
During the fiscal year 2022, the Company granted options to purchase 42,000 shares of common stock which vest over a four-year service period. During the fiscal year 2021, the Company granted options to purchase 138,000 shares of common stock which vested in full upon the first anniversary of the grant. Additionally, 10,000 shares of common stock was granted by the Company during fiscal 2021 which vest over a four-year service period. The weighted average fair value of stock options granted during the fiscal years ended March 26, 2022 and March 27, 2021 was $2.83 and $3.48, respectively, and was calculated using the following weighted-average assumptions:
| | | Fiscal Years ended | |
| Category | | March 26, 2022 | | | March 27, 2021 | |
| Dividend yield | | | — | | | | — | |
| Expected volatility | | | 105 | % | | | 106 | % |
| Risk-free interest rate | | | 0.90 | % | | | 0.39 | % |
| Expected term (years) | | | 5.50 | | | | 5.50 | |
A summary of the stock option activity for the fiscal years ended March 26, 2022, and March 27, 2021 is presented below:
| Description (Dollars in thousands except share prices) | | Shares | | | Weighted Average Price per share | | | Weighted Average Remaining Contractual Term (Years) | | | Aggregate Intrinsic Value | |
| Outstanding at March 28, 2020 | | | 240,758 | | | $ | 5.86 | | | | 7.90 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 148,000 | | | | 3.53 | | | | 9.30 | | | | — | |
| Forfeited / Expired | | | (13,950 | ) | | | 4.15 | | | | — | | | | — | |
| Outstanding at March 27, 2021 | | | 374,808 | | | | 5.00 | | | | 7.90 | | | | 99,310 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 42,000 | | | | 3.61 | | | | 9.28 | | | | — | |
| Exercised | | | (22,200 | ) | | | 3.51 | | | | — | | | | — | |
| Forfeited / Expired | | | (41,571 | ) | | | 6.51 | | | | — | | | | — | |
| Outstanding at March 26, 2022 | | | 353,037 | | | $ | 4.75 | | | | 7.26 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Exercisable at March 26, 2022 | | | 287,586 | | | $ | 4.89 | | | | 7.02 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Expected to vest in the future | | | 65,451 | | | $ | 4.15 | | | | 8.28 | | | $ | — | |
As of March 26, 2022, there was $333,920 of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a weighted average period of 2.33 years and will be adjusted as forfeitures occur. There were 22,200 options exercised in the fiscal year 2022, and no options were exercised in fiscal year 2021. Stock based compensation cost related to stock options recognized in operating results for the fiscal year 2022, and fiscal year 2021 totaled $485,000 and $314,300, respectively.
Restricted Stock
The restricted stock awards are considered fixed awards as the number of shares and fair value at the grant date are amortized over the requisite service period and will be adjusted as forfeitures occur. As of March 26, 2022 and March 27, 2021, there was $34,400 and $0, respectively of unrecognized compensation cost related to non-vested awards. Compensation cost recognized for restricted stock for fiscal 2022 and fiscal 2021 totaled $94,000 and $39,700, respectively.
A summary of the changes in non-vested restricted stock awards outstanding for the fiscal years ended March 26, 2022 and March 27, 2021 is presented below:
| Category | | Shares | | | Weighted Average Grant Date Fair Value | |
| Non-vested at March 28, 2020 | | | 10,000 | | | $ | 3.97 | |
| Vested | | | (10,000 | ) | | | 3.97 | |
| Non-vested at March 27, 2021 | | | — | | | | — | |
| Granted | | | 38,020 | | | | 3.87 | |
| Vested | | | (18,000 | ) | | | 4.12 | |
| Non-vested at March 26, 2022 | | | 20,020 | | | $ | 3.65 | |
Note 16. Commitments and Contingencies
Operating leases
On January 5, 2017, the Company entered into a seventy-seven month commercial building lease agreement for a 23,873 square feet facility in Dublin, California which began on April 1, 2017. The Company’s principal executive offices along with our marketing, sales, and engineering offices and manufacturing operations are located in the Dublin facility.
In December 2018, the Company entered into a lease agreement for an additional 1,200 square foot facility for certain engineering personnel located in Nashua, New Hampshire, which began on February 1, 2019, and expires on January 31, 2022. Effective March 1, 2020, we amended and replaced in its entirety the original Nashua lease agreement to increase the facility size to 2,400 square feet and extend its expiration 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 fiscal year ended:
| Lease Costs | | | | | | | | |
| (Dollars in thousands) | | | | | | | | |
| | | Fiscal Years ended | |
| | | March 26, 2022 | | | March 27, 2021 | |
| Operating lease costs | | $ | 529 | | | $ | 402 | |
| Finance lease | | | - | | | | - | |
| Amortization of lease assets | | | - | | | | 8 | |
| Interest on lease liability | | | - | | | | 1 | |
| Total lease costs | | $ | 529 | | | $ | 411 | |
| Other information (Dollars in thousands): |
| For the fiscal year ended March 26, 2022 | | Operating leases | |
| Operating cash used for leases | | $ | 600 | |
| Weighted-average remaining lease term | | | 1.42 | |
| Weighted-average discount rate | | | 6.5 | % |
Future lease payments as of March 26, 2022 were as follows:
| Future Lease Payments | | | | |
| (Dollars in thousands) | | Operating leases | |
| Fiscal Year 2023 | | $ | 515 | |
| Fiscal Year 2024 | | | 209 | |
| Total future minimum lease payments | | | 724 | |
| Less: imputed interest | | | (33 | ) |
| Present value of lease liabilities | | $ | 691 | |
Note 17. Warranty Obligations
The Company records a liability in cost of revenue 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.
| Warranty Obligations | | | | | | | | |
| (Dollars in thousands) | | Fiscal Years ended | |
| | | March 26, 2022 | | | March 27, 2021 | |
| Balance at beginning of period | | $ | 51 | | | $ | 34 | |
| Provision, net | | | (12 | ) | | | 17 | |
| Warranty costs incurred | | | — | | | | — | |
| Balance at end of period | | $ | 39 | | | $ | 51 | |
Note 18. Preferred Stock and Warrants
Series E Senior Convertible Voting Perpetual Preferred Stock
Holders of Series E Shares are entitled to receive, when, and if declared by the Company’s Board of Directors, cumulative preferential dividends, payable semiannually 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 Consolidated Statements of Operations as an increase in net loss or a decrease in net income to arrive at Net income(loss) attributable to common shareholders.
During fiscal year 2019, the Company issued and sold an additional 56,200 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.
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 to be 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, as amended, though other exemptions may be available.
During the fiscal year ended March 26, 2022, the Company issued 35,000 shares of common stock in exchange for 3,500 shares of Series E Preferred Stock. As a result, 5,700 shares of Series E preferred stock with an aggregate liquidation preference of $214,000 remained outstanding as of March 26, 2022.
The table below presents information for the fiscal years ended March 26, 2022, and March 27, 2021:
| Preferred Stock | | Designated | | | Shares | | | Shares | | | Liquidation | |
| As of March 27, 2021 | | Shares | | | Issued | | | Outstanding | | | Preference | |
| Series B | | | 10,000 | | | | 9,245 | | | | 9,245 | | | $ | 2,136 | |
| Series C | | | 3,500 | | | | 3,425 | | | | 3,425 | | | | 500 | |
| Series D | | | 6,000 | | | | 5,112 | | | | 5,112 | | | | 731 | |
| Series E | | | 100,000 | | | | 9,200 | | | | 9,200 | | | | 345 | |
| Total at March 27, 2021 | | | 119,500 | | | | 26,982 | | | | 26,982 | | | $ | 3,712 | |
| Preferred Stock | | Designated | | | Shares | | | Shares | | | Liquidation | |
| As of March 26, 2022 | | Shares | | | Issued | | | Outstanding | | | Preference | |
| Series B | | | 10,000 | | | | 9,997 | | | | 9,245 | | | $ | 2,136 | |
| Series C | | | 3,500 | | | | 3,425 | | | | 3,425 | | | | 500 | |
| Series D | | | 6,000 | | | | 5,112 | | | | 5,112 | | | | 731 | |
| Series E | | | 100,000 | | | | 5,700 | | | | 5,700 | | | | 214 | |
| Total at March 26, 2022 | | | 119,500 | | | | 23,482 | | | | 23,482 | | | $ | 3,581 | |
Note 19. COVID-19 (Coronavirus)
On January 30, 2020, the World Health Organization announced a global health emergency because of a new strain of coronavirus 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. Since March 2020, with the spread of the coronavirus, we have implemented a number of directives to ensure the safety of our personnel and the continuity of our operations.
COVID-19 has caused significant disruptions to the global, national and local economies While the disruptions are currently expected to be temporary, and infection rates are decreasing nationally with the vaccine roll-out, there is continued uncertainty around the duration and the total economic impact of the pandemic, which cannot be predicted at this time. If this situation is prolonged, it could cause additional delays in our business and could have a short- or long-term adverse impact, possibly material, on the Company’s future financial condition, liquidity, and results of operations.
Note 20. Share Exchange Agreement with BitNile and Gresham
On December 27, 2021, Giga-tronics entered into an Exchange Agreement with BitNile and Gresham, which is a wholly-owned subsidiary of BitNile.
The Exchange Agreement provides that the Company will acquire all of the outstanding shares of capital stock of Gresham in exchange for issuing to BitNile 2,920,085 shares of the Company’s common stock and 514.8 shares of a new series of preferred stock that are convertible into an aggregate of 3,960,043 shares of the Company’s common stock, subject to potential adjustments, and the assumption of Gresham’s outstanding equity awards representing, on an as-assumed basis, 249,875 shares of the Company’s common stock (“Exchange Transaction”). Completion of the Exchange Transaction is subject to the approval of the Company’s shareholders and other customary closing conditions.
Immediately following the completion of the Exchange Transaction, Gresham will be a wholly-owned subsidiary of the Company. Outstanding shares of the Company’s common stock, warrants and options will remain outstanding and unaffected upon completion of the Exchange Transaction. The Company’s common stock will continue to be registered under the Exchange Act immediately following the Exchange Transaction.
The Exchange Agreement further provides that BitNile will loan the Company $4.25 million upon the closing of the Exchange Transaction and the Company will use these funds, in part, to repurchase or redeem all of the currently outstanding shares of the Company's Series B, Series C, Series D and Series E preferred stock (“Outstanding Preferred”). The Exchange Agreement further provides that following the Exchange Transaction, the Company will pursue an underwritten public offering of $25 million of its common stock. BitNile has agreed to purchase up to $10 million of common stock in the offering, which amount would include the conversion of the $4.25 million to be loaned to the Company upon the closing of the Exchange Transaction.
The Company will need to seek the approval of the Company's shareholders to (1) increase the number of shares of common stock that the Company is authorized to issue to 100 million shares, (2) to complete a reverse split of the Company's common stock and (3) to change the Company's charter from that of a California corporation to that of a Delaware corporation.
The Exchange Agreement contains certain termination rights for each of the parties, including if (i) the Exchange Transaction is not consummated by June 30, 2022, (ii) the approval of the Company’s shareholders is not obtained, or (iii) there has been a breach by a non-terminating party that is not cured such that the applicable closing conditions are not satisfied. In addition, in certain circumstances, BitNile may terminate the Exchange Agreement prior to the Company’s shareholder approval of the Exchange Transaction in the event that (A) the Company materially breaches its non-solicitation obligations relating to alternative business combination transactions, (B) the Company’s Board of Directors withdraws or adversely modifies its recommendation to shareholders with respect to the Exchange Transaction or fails to affirm its recommendation within the required time period after an alternate acquisition proposal is made, (C) the Company’s Board of Directors recommends a tender offer or exchange offer or fails to recommend against such a tender offer or exchange offer within ten business days after commencement. In addition, the Company may terminate the Exchange Agreement to pursue an alternative acquisition transaction. The Exchange Agreement also provides that the Company will be obligated to pay a termination fee of $1.0 million to Gresham if the Exchange Agreement (i) is terminated by BitNile in the circumstances described in the preceding sentence (ii) (A) if an acquisition proposal is made to the Company or to its shareholders publicly, (B) the Exchange Agreement is terminated for failure to consummate the Exchange Transaction by the End Date for failure to obtain the approval of the Company’s shareholders and (C) the Company enters into a definitive agreement with respect to or consummates certain acquisition proposals within 12 months of termination of the Exchange Agreement or (iii) the Company terminates the Exchange Agreement in order to enter into a definitive agreement with respect to an alternate acquisition proposal. In addition, the Company would be required to immediately repay a loan made by an affiliate of BitNile in the aggregate principal amount of $1,300,000, including $500,000 borrowed on April 5, 2022 (See Note 21 – Subsequent Events), under the loan agreement that otherwise matures in November 2022 (See Note 7 – Term Loans).
Note 21. Subsequent Events
On April 5, 2022, the Company (1) amended its Exchange Agreement with BitNile and Gresham, (2) borrowed an additional $500,000 from an affiliate of BitNile, and (3) issued a warrant to Gresham, all as described in more detail below.
The Amendment to the Share Exchange Agreement
On April 5, 2022, the Company, BitNile and Gresham, which is a subsidiary of BitNile, amended the Exchange Agreement among the parties dated December 27, 2022 by entering into Amendment No. 1 to the Share Exchange Agreement (“Amendment”). The Amendment (1) extends from June 30, 2022 to August 31, 2022 the earliest date on which either the Company or BitNile may terminate the Exchange Agreement for any reason if the share exchange contemplated by the Exchange Agreement is not completed (assuming the terminating party’s breach of the Exchange Agreement is not the principal cause of the failure to complete the share exchange) (“End Date Termination”), (2) restates an existing provision of the Exchange Agreement, which provides that if the Company terminates the Exchange Agreement, it must repay the loan from an affiliate of BitNile the following business day, to reflect the full principal amount of such loan, which is $1,300,000 after giving effect to the additional funding described below, and (3) provides for the Company’s issuance of a warrant to Gresham, which is described in more detail below.
The Amended Loan Documents
On April 5, 2022, the Company borrowed an additional $500,000 from DPL and the Company and DPL entered into an Amended and Restated Secured Promissory Note and an amendment to the Security and Pledge Agreement originally dated as of November 12, 2021 to reflect that the Company has borrowed an aggregate of $1,300,000 from DPL (“Loan”). The Company intends to use the additional Loan proceeds for general corporate purposes.
The material terms of the Loan remain unchanged. The principal amount of the Loan bears interest at the rate of 10.0% per annum. Unless prepaid by the Company, all principal and accrued interest under the Loan is payable on November 12, 2022 or, if earlier, upon the Company’s completion of an underwritten public offering or the Company’s termination of the Exchange Agreement. The Company’s obligations under the Loan are secured by a pledge of all of the Company’s assets. The Loan and DPL’s security interest are subordinate to the Company’s existing bank lending arrangement.
This description is qualified by the Amended and Restated Secured Promissory Note, the Security and Pledge Agreement with DPL and the amendment thereto, copies of which are filed as exhibits to this report and incorporated by reference herein.
The Warrant
On April 5, 2022, as contemplated by the Amendment, the Company issued to Gresham a warrant representing the right to purchase 433,333 shares of its common stock (“Warrant Shares”) at the initial exercise price of $3.00 per share. The Warrant will become exercisable if the closing of the share exchange transaction contemplated by the Exchange Agreement does not occur, unless the failure to close results (1) solely from BitNile’s or Gresham’s breach of the Exchange Agreement or (2) BitNile’s election to terminate the Exchange Agreement pursuant to the End Date Termination provision (“Trigger Date”). The Warrant may be exercised in whole or part for a period of three years following the Trigger Date or, if earlier, until December 31, 2025. A Warrant holder may not exercise the Warrant with respect to any Warrant Shares that would cause such holder to beneficially own in excess of 4.99% of the Company’s outstanding common stock, though a holder may elect to increase this limit to 9.9% of the Company’s common stock on at least 61 days written notice. The Warrant may be exercised for cash or, if there is no effective registration statement covering the resale of the Warrant Shares, the Warrant may be exercised on a cashless basis beginning six months after the Trigger Date. The number of Warrant Shares issuable upon exercise of the Warrant is subject to adjustment for splits, subdivisions or consolidations of shares and other standard dilutive events, or in the event the Company effects a reorganization, reclassification, merger, consolidation, disposition of assets, or other fundamental transaction. In addition, subject to certain exempt issuances, if at any time while the Warrant is outstanding, the Company sells, issues or grants any shares of Company common stock or other securities entitling the holder to acquire shares of Company common stock at a price per share less than the then exercise price, the exercise price shall be reduced to equal the lesser of either such lesser price or the volume-weighted average price on the next trading date following the first public disclosure of the issuance. The Warrant includes a most favored nation clause providing that if the Company issues or sells any shares of common stock or any securities of the Company which would entitle the holder of such securities to acquire common stock on terms the holder reasonably believes are more favorable than those in the Warrant, at the request of the holder, the Company shall amend the Warrant to include such terms.
After the Company is eligible to register securities with the SEC using a Form S-3 registration statement, the Warrant requires the Company to, subject to certain exceptions, include the Warrant Shares in any registration statement and to include the Warrant Shares alongside any underwritten offering of securities that the Company may undertake, at the holder’s request.
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