2012
ANNUAL REPORT
Giga-tronics Incorporated
4650 Norris Canyon Road
San Ramon, California 94583
(925) 328-4650
July 16, 2012
To our shareholders,
Fiscal 2012 was a year of transformation for Giga-tronics. Although our sales and operating
performance was clearly below our expectations, we took positive steps during the year to re-
position the Company towards future sales growth and profitability.
The Company’s soft order and sales performance was a major concern for us during the fiscal year.
Capital spending has not returned to the levels attained before the financial crisis and budget
concerns in the United States unfavorably impacted our domestic defense business. On $13,116,000
in revenue, Giga-tronics posted a net loss of $5,852,000 or $1.17 per fully diluted share. Of the total
net loss of $5,852,000 for fiscal 2012, approximately $1,600,000 was due to one-time adjustments
related to future severance payments, excess and obsolete inventory. The lower sales were primarily
due to a large commercial order we received in fiscal 2011 that did not repeat as expected in 2012, as
well as delays in receiving military program orders for our Microsource fast-tuning YIG filters.
The Company’s recent financial performance coupled with the lack of growth over the last decade
required a new strategy and a revitalization of the Company. On October 31, 2011 Giga-tronics
secured the strategic investment of $2.2M from Alara Capital as a pivotal first step in moving the
Company in a new direction. In addition, I began assembling a new management team resulting in
leadership changes within Marketing, Finance and Administration, and Sales. The Company added
a Vice President of Marketing and a Director of Human Resources during the fiscal year and
recently added a new Vice President of Sales this July. We will be adding a new CFO during the
second half as our current acting CFO will be leaving due to a scheduled retirement at the end of
fiscal 2013.
Giga-tronics continues to make excellent progress on the new investment in product development it
began during the prior year. The Company is now accelerating this new product into the
marketplace with the capital provided from Alara. During fiscal 2012, our marketing department
worked closely with potential customers to create awareness, validate the product’s concepts, and
stimulate future demand so that orders will arrive as soon as possible after the development has been
completed. Over the same period, a majority of the Company’s available engineering resources have
been focused on developing the new product and I’m pleased to report the project’s principal
milestones remain on schedule. I’m excited about the level of performance I’ve seen achieved in the
early prototypes and nearly every customer we visit has indicated a finished product is of genuine
interest to them. The high level of interest shown in the new product, the continued progress in
engineering, and the support from Alara are the reasons I have the confidence during these difficult
times to increase our investment in engineering and marketing over last year by approximately
$1,000,000.
Giga-tronics also took steps to reduce current and future expenses by reducing staff and by
combining the Microsource group in Santa Rosa, California with the Instrument group located at the
Company’s headquarters in San Ramon, California. Relocation benefits or retention bonuses were
offered to all key Microsource employees to provide for a smooth transition of operations. This
physical move is well underway and is expected to be complete by May of 2013. To maintain the
Company’s focus on the new strategy, a number of its slower moving lines were moved into their
end-of-life phase, which required writing off the excess inventory.
Finally, three new directors were added to the Board and two others (George Bruns and Robert
Wilson) have retired. I would like to sincerely thank George and Bob for their many years of service
to Giga-tronics and for their continued support of the Company as it faces the challenges ahead.
Looking forward, I anticipate Giga-tronics will continue to incur losses while we complete the
development of the new product and finish the move of our Microsource operation during fiscal
2013. Although some of the expenses associated with the consolidation of operations were accrued
for during fiscal 2012, there remain a number of necessary expenses that will adversely impact our
bottom line within the current year. The operating plan for fiscal 2013 requires managing the
organization to maintain a minimum cash balance and my team and I will push hard to minimize our
losses without jeopardizing the strategy. I am cautiously optimistic that Giga-tronics can return to
break-even performance before the current fiscal year ends because of the Microsource military
program orders received during our first quarter of fiscal 2013, the return of some of the commercial
business we missed last year, and the recent addition of a strong industry veteran to lead our sales
organization.
We believe the new investment underway will generate significant future sales growth and, coupled
with our continued emphasis on cost control, will return the Company to profitability and
significantly increase our shareholder value.
Sincerely,
John R. Regazzi
Corporate Profile
For the fiscal year ended March 31st, 2012 Giga-tronics has three main product lines comprised of high
performance microwave test equipment, standard and customized switching solutions, and standard
and custom designed microwave YIG oscillators, YIG filters and hybrid components. Our general
purpose test business focuses on the military and aerospace industries as well as specific niches within
the semiconductor test, wireless infrastructure, and handset manufacturing segments of commercial
communications. Our switching solution business serves the military and aerospace market for
automatic test equipment (ATE) used in maintenance and support, and serves commercial test
applications in the high volume manufacturing of handheld consumer products and semiconductor
components. Our custom microwave components are designed for operational use within specific
military programs or as OEM for other manufacturers.
Giga-tronics sells its products through an indirect sales channel within the US and through distributors
internationally. The Company employs approximately 100 people and designs and manufactures its
products exclusively in San Ramon and Santa Rosa California.
Our general purpose test product line consists of high performance microwave synthesizers, power
meters, high power amplifiers, and low cost USB sensors. These products are available in both bench
and modular form factors and are used by engineers in the design of new products, on the production
line for test and calibration of new products, and in the field for maintenance and re-calibration of
antennas, electronic systems, and equipment.
Our switching products provide the ATE engineer with a method of routing signals with high integrity
between the specific device under test and the general purpose test equipment within the automated
system. Switch products are available to switch voltage, current, radio frequency signals, and
impedances and are generally modular in nature, although bench form factors are available for
microwave applications.
Our component business leverages our vertical integration in high performance instruments by making
our IP and design expertise available to outside firms interested in outsourcing R&D or for situations
where our knowledge of YIG technology and frequency synthesis can solve specific problems in signal
generation or signal interference.
Users of Giga-tronics products include Lockheed Martin, Northrop Grumman, BAE, Raytheon, Boeing,
Teradyne, the US Armed Services, the FAA, Motorola, LTX, Nokia, and Cisco in the US. Internationally,
Giga-tronics serves the MODs and Government Institutes around the world, as well as, commercial
wireless communication companies worldwide.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2012 ,
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. 0-12719
GIGA-TRONICS INCORPORATED
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
94-2656341
(I.R.S. Employer Identification No.)
4650 Norris Canyon Road, San Ramon, CA
(Address of principal executive offices)
94583
(Zip Code)
Registrant’s telephone number, including area code: (925) 328-4650
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, No par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes [ ] No [ X ]
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 [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
[ ]
Accelerated filer
[ ]
Non-accelerated filer
[ ]
(Do not check if a smaller reporting company)
Smaller reporting company
[ X ]
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes [ ] No [ X ]
The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant computed by
reference to the price at which the common equity was sold or the average bid and asked prices as of September 24, 2011
was $6,025,067.
There were a total of 5,029,747 shares of the Registrant’s Common Stock outstanding as of June 19, 2012.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into the parts indicated:
PART OF FORM 10-K
PART III
DOCUMENT
Registrant’s PROXY STATEMENT for its 2012 Annual Meeting of Shareholders to
be filed no later than 120 days after the close of the fiscal year ended March 31, 2012.
2
2
ITEM 1.
Business
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2.
Properties
ITEM 3.
Legal Proceedings
ITEM 4.
Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
Page
4
8
9
9
9
9
ITEM 5.
Market for Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities
10
ITEM 6.
Selected Financial Data
ITEM 7.
Management's Discussion and analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8.
Financial Statements and Supplementary Data
Consolidated Balance Sheets as of March 31, 2012 and March 26, 2011
Consolidated Statements of Income for the years ended March 31, 2012 and March 26, 2011
Consolidated Statements of Shareholders' Equity for the years ended March 31, 2012 and March 26, 2011
Consolidated Statements of Cash Flows for the years ended March 31, 2012 and March 26, 2011
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
ITEM 9.
Changes In and Disagreements With Accountants On Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11.
Executive Compensation
ITEM 12.
Security Ownership Of Certain Beneficial Owners and Management and Related Shareholder Matters
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
ITEM 14.
Principal Accountant Fees and Services
ITEM 15.
Exhibits and Financial Statements Schedules
SIGNATURES
PART IV
3
3
11
13
18
18
19
20
21
22
23
33
34
34
34
35
35
35
35
35
35
36
PART 1
The forward-looking statements included in this report including, without limitation, statements containing the words
“believes”, “anticipates”, “estimates”, “expects”, “intends” and words of similar import, which reflect management’s best
judgment based on factors currently known, involve risks and uncertainties. Actual results could differ materially from
those anticipated in these forward-looking statements as a result of a number of factors, including but not limited to those
discussed under “Certain Factors Which May Adversely Affect Future Operations Or An Investment In Giga-tronics” in
Item 1 below and in Item 7, “Management’s Discussion and Analysis”.
ITEM 1. BUSINESS
General
Giga-tronics Incorporated (Giga-tronics, or the Company) includes the operations of the Giga-tronics Division and
Microsource Inc. (Microsource), a wholly owned subsidiary. Giga-tronics Division designs, manufactures and markets a
broad line of test and measurement equipment used in the development, test and maintenance of wireless communications
products and systems, flight navigational equipment, electronic defense systems and automatic testing systems. These
products are used primarily in the design, production, repair and maintenance of commercial telecommunications, radar,
and electronic warfare equipment.
Giga-tronics was incorporated on March 5, 1980. Its principal executive offices are located at 4650 Norris Canyon Road,
San Ramon, California, and its telephone number at that location is (925) 328-4650.
Effective May 18, 1998, Giga-tronics acquired Microsource. Microsource, located in Santa Rosa, California, develops and
manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers, which are
used by its customers in operational applications and in manufacturing a wide variety of microwave instruments and
devices.
Giga-tronics intends to broaden its product lines and expand its market, both by internal development of new products and
through the acquisition of other business entities. From time to time, the Company considers a variety of acquisition
opportunities.
Industry Segments
The Company manufactures products used in test, measurement and control. The Company has two reporting segments:
Giga-tronics Division and Microsource.
Products and Markets
Giga-tronics
The Giga-tronics Division produces signal sources, generators and sweepers, and power measurement instruments for use
in the microwave and radio frequency (RF) range (10 kilohertz (kHz) to 50 gigahertz (GHz)). Within each product line are
a number of different models and options allowing customers to select frequency range and specialized capabilities,
features and functions. The end-user markets for these products can be divided into three broad segments: commercial
telecommunications, radar and electronic warfare. These instruments are used in the design, production, repair and
maintenance and calibration of other manufacturers’ products, from discrete components to complex systems.
The Giga-tronics Division also produces switch modules and interface adapters that operate with a bandwidth from direct
current (DC) to optical frequencies. These switch modules may be incorporated within its customers’ automated test
equipment. The end-user markets for these products are primarily related to defense, aeronautics, communications, satellite
and electronic warfare, commercial aviation and semiconductors.
Microsource
The Microsource segment develops and manufactures a broad line of YIG tuned oscillators, filters and microwave
synthesizers, which are used by its customers in operational applications and in manufacturing a wide variety of microwave
instruments or devices.
4
4
Sources and Availability of Raw Materials and Components
Substantially all of the components required by Giga-tronics to make its assemblies are available from more than one
source. The Company occasionally uses sole source arrangements to obtain leading-edge technology or favorable pricing
or supply terms, but not in any material volume. In the Company’s opinion, the loss of any sole source arrangement it has
would not be material to its operations. Some suppliers are also competitors of Giga-tronics. In the event a competitor-
supplier chooses not sell its products to Giga-tronics, production delays could occur as the Company seeks new suppliers;
or, the Company re-designs components to its products.
Although extended delays in receipt of components from its suppliers could result in longer product delivery schedules for
the Company, the Company believes that its protection against this possibility stems from its practice of dealing with well-
established suppliers and maintaining good relationships with such suppliers.
Patents and Licenses
The Company’s competitive position is largely dependent upon its ability to provide performance specifications for its
instruments and systems that (a) are easy to use and effectively and reliably meet customers’ needs and (b) selectively
surpass competitors’ specifications in competing products. Patents may occasionally provide some short-term protection of
proprietary designs. However, because of the rapid progress of technological development in the Company’s industry, such
protection is most often, although not always, short-lived. Therefore, although the Company occasionally pursues patent
coverage, it places major emphasis on the development of new products with superior performance specifications and the
upgrading of existing products toward this same end.
The Company’s products are based on its own designs, which in turn derive from its own engineering abilities. If the
Company’s new product engineering efforts fall behind, its competitive position weakens. Conversely, effective product
development greatly enhances its competitive status.
The Company presently holds 31 patents. Some of these are critical to the Company’s ongoing business, and the Company
intends to actively maintain them. Capitalized costs relating to these patents were both incurred and fully amortized prior
to March 27, 2010. Accordingly, these patents have no recorded value included in the Company’s fiscal 2012 and 2011
consolidated financial statements.
The Company is not dependent on trademarks, licenses or franchises. It does utilize certain software licenses in certain
functional aspects for some of its products. Such licenses are readily available, non-exclusive and are obtained at either no
cost or for a relatively small fee.
Seasonal Nature of Business
The business of the Company is not seasonal.
Working Capital Practices
The Company generally strives to maintain adequate levels of inventory and generally sells to customers on 30-day
payment terms in the U.S. and generally allows more time for overseas payments. Typically, the Company receives
payment terms of 30 days. The Company believes that these practices are consistent with typical industry practices.
Importance of Limited Number of Customers
The Company is a supplier of microwave and RF test instruments to various United States (U.S.) government defense
agencies, as well as to their prime contractors. Management anticipates sales to U.S. government agencies and their prime
contractors will remain significant in fiscal 2013. U.S. and international defense-related agencies accounted for 57% and
44% of net sales in fiscal 2012 and 2011, respectively. Commercial business accounted for the remaining 43% and 56% of
net sales in fiscal 2012 and 2011, respectively. The change in business was driven by increased defense sector
opportunities
Giga-tronics, during fiscal year 2012, reports 46.1 % of total sales from the U.S. defense agencies and prime contractors.
During fiscal year 2011 Giga-tronics Division derived 40% of its net sales from equipment manufacturers and system
integrators.
Microsource, reports 87.8 % of total sales from the U.S. defense agencies and prime contractors during fiscal year 2012.
During fiscal 2011, Microsource derived 12% of its net sales from an electronic instrument manufacturer and 81% of its net
sales from the U.S. government defense agencies and their prime contractors.
5
5
During fiscal 2012, one customer accounted for 17% of the Company’s consolidated revenues at March 31, 2012 and was
included in the Microsource segment. A second customer accounted for 12% of the Company’s consolidated revenues at
March 31, 2012 and was included in the Giga-tronics Division.
During fiscal 2011, one customer accounted for 27% of the Company’s consolidated revenues at March 26, 2011 and was
included in the Giga-tronics Division. During fiscal 2011, two customers accounted for 13% and 11% of the Company’s
consolidated revenues at March 26, 2011 and was included in the Microsource segment.
In management’s opinion, the Company could experience a material adverse effect on its financial stability if there was a
significant loss of either its commercial or defense customers.
The Company’s products are largely capital investments for its customers, and the Company’s belief is that its customers
have economic cycles in which capital investment budgets for the kinds of products that the Company produces expand and
contract. The Company, therefore, expects that a major customer in one year will often not be a major customer in the
following year. Accordingly, the Company’s net sales and earnings will decline if the Company is unable to find new
customers or increase its business with other existing customers to replace declining net sales from the previous year’s
major customers. A substantial decline in net sales from U.S. government defense agencies and their prime contractors
would also have a material adverse effect on the Company’s net sales and results of operations unless replaced by net sales
from the commercial sector.
Backlog of Orders
On March 31, 2012, the Company’s backlog of unfilled order was approximately $3,839,000 compared to approximately
$3,649,000 at March 26, 2011. As of March 31, 2012, there were no unfilled orders scheduled for shipment beyond one
year, as compared to approximately $316,000 at March 26, 2011. Orders for the Company’s products include program
orders from both the U.S. government and defense contractors with extended delivery dates. Accordingly, the backlog of
orders may vary substantially from year to year and the backlog entering any single quarter may not be indicative of sales
for any period.
Backlog includes only those customer orders for which a delivery schedule has been agreed upon between the Company
and the customer and, in the case of U.S. government orders, for which funding has been appropriated.
Competition
Giga-tronics serves the broad market for electronic instrumentation with applications ranging from the design, test,
calibration and maintenance of other electronic devices to providing sophisticated components for complex electronic
systems to sub-systems capable of sorting and identifying high frequency communication signals. These applications cut
across the commercial, industrial and military segments of the broad market. The Company has a variety of competitors.
Several of its competitors are much larger than the Company and have greater resources and substantially broader product
lines. Others are of comparable size with more limited product lines.
Competition from numerous existing companies is intense and potential new entrants are expected to increase. The
Company’s instrument, switch, oscillator and synthesizer products compete with Agilent, Anritsu, EADS, Aeroflex and
Rohde & Schwarz. Many of these companies have substantially greater research and development, manufacturing,
marketing, financial, technological, personnel and managerial resources than Giga-tronics. There can be no assurance that
any products developed by these competitors will not gain greater market acceptance than any developed by Giga-tronics.
To compete effectively in this circumstance, the Company (a) places strong emphasis on maintaining a high degree of
technical competence as it relates to the development of new products and the upgrading of existing products and (b) is
highly selective in establishing technological objectives. The Company does not attempt to compete ‘across the board’, but
selectively based upon its particular strengths and the competitors’ perceived limitations.
6
6
Specification requirements of customers in this market vary widely. The Company is able to compete by offering products
that meet a customer’s particular specification requirements; by being able to offer certain product specifications at lower
cost resulting from the Company’s past production of products with those of similar specifications; and by being able to
offer certain product specifications at a higher quality level. All of these advantages are attributable to the Company’s
continuing investment in research and development and in a highly trained engineering staff.
The customer’s decision is most often based on the best match of its particular requirements and the supplier’s operating
specifications. In most cases, attracting and retaining customers does not require the Company to offer the best overall
product with respect to each of the customer’s requirements, but rather the best product relative to the specifications that are
most important to the customer.
When the opportunity involves custom solutions, price is not the only consideration. Satisfying the customer’s specific
requirements becomes more important and the Company believes it has more flexibility in making modifications and
enhancements than its larger and more structured competitors.
Sales and Marketing
Giga-tronics and Microsource market their products through various independent distributors and representatives to
commercial and government customers for its instrument product but sells primarily direct on its switch and component
products, although not necessarily through the same distributors and representatives.
Product Development
Products of the type manufactured by Giga-tronics historically have had relatively long product life cycles. However, the
electronics industry is subject to rapid technological changes at the component level. The future success of the Company is
dependent on its ability to steadily incorporate advancements in component technologies into its new products. In fiscal
2012, product development expenses totaled approximately $2,893,000 excluding non-recurring engineering (NRE) costs.
In fiscal 2011, product development expenses were $2,159,000 excluding NRE costs.
Activities included the development of new products and the improvement of existing products. It is management’s
intention to increase product development at levels required to sustain its competitive position. All of the Company’s
product development activities are internally funded and expensed as incurred.
Giga-tronics expects to continue to make significant investments in research and development. There can be no assurance
that future technologies, processes or product developments will not render Giga-tronics’ current product offerings obsolete
or that Giga-tronics will be able to develop and introduce new products or enhancements to existing products that satisfy
customer needs, in a timely manner or achieve market acceptance. The failure to do so could adversely affect Giga-tronics’
business.
Manufacturing
The assembly and testing of Giga-tronics Division microwave synthesizers, RF and power measurement products and its
switching and connecting devices are done at its San Ramon facility. The assembly and testing of Microsource’s line of
YIG tuned oscillators, filters and microwave synthesizers are done at its Santa Rosa facility.
Environment
To the best of its knowledge, the Company is in compliance with all Federal, state and local laws and regulations involving
the protection of the environment.
Employees
As of March 31, 2012, Giga-tronics employed 89 individuals on a full-time basis compared to 94 as of March 26, 2011.
Management believes that the future success of the Company depends on its ability to attract and retain skilled personnel.
None of the Company’s employees are represented by a labor union, and the Company considers its employee relations to
be good.
Information about Foreign Operations
The Company sells to its international customers through a network of foreign technical sales representative organizations.
All transactions between the Company and its international customers are in U.S. dollars.
7
7
Geographic Distribution of Net Sales
(Dollars in thousands)
Domestic
International
Total
2012
$ 10,553
2,563
$ 13,116
2011
$ 12,547
8,482
$ 21,029
2012
80.0%
20.0%
2011
60.0%
40.0%
See Item 8, footnote 5 of the consolidated financial statements for further breakdown of international sales for the last two
years.
ITEM 1A. RISK FACTORS
Business climate is volatile
The current financial crisis/recession represents a continued risk for the Company and has resulted in delays of orders
and/or cancellations. Giga-tronics has a significant number of defense-related orders. If the defense market demand
decreases, actual shipments could be less than projected shipments with a resulting decline in sales. The Company’s
commercial product backlog has a number of risks and uncertainties such as the cancellation or deferral of orders, dispute
over performance and the Company’s ability to collect amounts due under these orders. If any of these events occur, actual
shipments could be less than projected shipments and earnings could decline.
Giga-tronics sales are substantially dependent on the wireless industry
Giga-tronics sells directly or indirectly to customers and equipment manufacturers in the wireless industry. Currently, this
industry is undergoing dramatic and rapid change. As such, the business that Giga-tronics records could decrease or
existing recorded backlog could be stretched or deferred resulting in lower than projected shipments. Reduced shipments
may have a material adverse effect on operations.
Giga-tronics’ markets involve rapidly changing technology and standards
The market for electronics equipment is characterized by rapidly changing technology and evolving industry standards.
Giga-tronics believes that its future success will depend in part upon its ability to develop and commercialize its existing
products, develop new products and applications, and in part to develop, manufacture and successfully introduce new
products and product lines with improved capabilities and to continue to enhance existing products. There can be no
assurance that Giga-tronics will successfully complete the development of current or future products, or that such products
will achieve market acceptance.
Future liquidity is uncertain
Based on current levels of sales and expenses, management believes that cash and cash equivalents remain adequate to meet
current operating needs for the next twelve months. However, this estimate is based on projections that may or may not be
realized, and therefore actual cash usage could be greater than projected. To operate beyond the next twelve months would
require the Company to earn additional cash from operations, renew or obtain a line of credit or obtain additional funds
from other sources. The Company maintains a line of credit for $2,500,000.
Giga-tronics’ common stock price is volatile
The market price of the Company’s common stock could be subject to significant fluctuations in response to variations in
quarterly operating results, shortfalls in revenues or earnings from levels expected by securities analysts and other factors
such as announcements of technological innovations or new products by Giga-tronics or by competitors, government
regulations or developments in patent or other proprietary rights. In addition, the NASDAQ Capital Market and other stock
markets have experienced significant price fluctuations in recent periods. Some of these fluctuations often have been
unrelated to the reported operating performance of the specific companies whose stocks are traded. Broad market
fluctuations, as well as general foreign and domestic economic conditions, may adversely affect the market price of the
common stock.
Giga-tronics stock at any time has historically traded on thin volume on the NASDAQ Capital Market. Sales of a
significant volume of stock could result in a decline of Giga-tronics’ share price.
8
8
Performance problems in Giga-tronics’ products or problems arising from the use of its products together with
other vendors’ products may harm its business and reputation
Products as complex as those Giga-tronics produces may contain unknown and undetected defects or performance
problems. For example, it is possible that a product might not comply with stipulated specifications under all
circumstances. In addition, Giga-tronics’ customers generally use its products together with their own products and
products from other vendors. As a result, when problems occur in a combined environment, it may be difficult to identify
the source of the problem. A defect or performance problem could result in lost revenues, increased warranty costs,
diversion of engineering and management time and effort, impaired customer relationships and injury to Giga-tronics’
reputation generally. To date, performance problems in Giga-tronics’ products or in other products used together with
Giga-tronics’ products have not had a material adverse effect on its business. However, management cannot be certain that
a material adverse impact will not occur in the future.
Giga-tronics competition has greater resources
The Company’s instrument, switch, oscillator and synthesizer products compete with Agilent, Anritsu, EADS, Aeroflex
and Rohde & Schwarz. Many of these companies have substantially greater research and development, manufacturing,
marketing, financial, and technological personnel and managerial resources than Giga-tronics. These resources also make
these competitors better able to withstand difficult market conditions than the Company. There can be no assurance that
any products developed by the competitors will not gain greater market acceptance than any developed by Giga-tronics.
Giga-tronics acquisitions may not be effectively integrated and their integration may be costly
As part of its business strategy, Giga-tronics may broaden its product lines and expand its markets, in part through the
acquisition of other business entities. Giga-tronics is subject to various risks in connection with any future acquisitions.
Such risks include, among other things, the difficulty of assimilating the operations and personnel of the acquired
companies, the potential disruption of the Company’s business, the inability of management to maximize the financial and
strategic position of the Company by the successful incorporation of acquired technology and rights into its product
offerings, the maintenance of uniform standards, controls, procedures and policies, and the potential loss of key employees
of acquired companies. The Company has not made any acquisitions in the past several years. No assurance can be given
that any acquisition by Giga-tronics will or will not occur, that if an acquisition does occur, that it will not materially harm
the Company or that any such acquisition will be successful in enhancing the Company’s business. The Company currently
contemplates that future acquisitions may involve the issuance of additional shares of common stock. Any such issuance
may result in dilution to all Giga-tronics’ shareholders, and sales of such shares in significant volume by the shareholders of
acquired companies may depress the price of its common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
As of March 31, 2012, Giga-tronics’ principal executive office and the marketing, sales and engineering offices and
manufacturing facilities for its microwave and RF signal generator and power measurement products are located in
approximately 47,300 square feet in San Ramon, California, which the Company occupies under a lease agreement expiring
December 31, 2016.
Microsource’s manufacturing facilities for its YIG tuned oscillators, filters and microwave synthesizers are located in an
approximately 33,400 square foot facility in Santa Rosa, California, which it occupies under a lease expiring May 31, 2013.
The Company believes that its facilities are adequate for its business activities.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 2012, the Company has no material pending legal proceedings. From time to time, Giga-tronics is
involved in various disputes and litigation matters that arise in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
9
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER REPURCHASES OF EQUITY SECURITIES
Common Stock Market Prices
Giga-tronics’ common stock is traded on the NASDAQ Capital Market (formerly the NASDAQ Small Cap Market) using
the symbol ‘GIGA’. The number of record holders of the Company’s common stock as of March 31, 2012 was
approximately 1,700. The table below shows the high and low closing bid quotations for the common stock during the
indicated fiscal periods. These quotations reflect inter-dealer prices without retain mark-ups, mark-downs, or commission
and may not reflect actual transactions.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2012
(3/27 - 6/25)
(6/26 - 9/24)
(9/25 - 12/31)
(1/1 - 3/31)
High
$ 2.88
2.30
1.60
1.70
Low
$ 2.02
1.28
1.26
1.17
2011
(3/28 - 6/26)
(6/27 - 9/25)
(9/26 - 12/25)
(12/26 - 3/26)
High
$ 2.54
2.36
2.76
2.88
Low
$ 2.15
2.11
2.11
2.33
Giga-tronics has not paid cash dividends in the past and has no plans to do so in the future, believing the best use of its
available capital is in the enhancement of its product position.
In fiscal year 2012 Giga-tronics issued 9,997 shares of Series B convertible preferred stock at no par value to Alara Capital
AVI II, LLC for $220 per share. Other than the shares issued to Alara Capital AVI II, LLC, Giga-tronics has not issued any
unregistered securities or repurchased any of its securities during the past fiscal year.
Equity Compensation Plan Information
The following table provides information on options and other equity rights outstanding and available at March 31, 2012.
Equity Compensation Plan Information
No. of securities to
be issued upon
exercise of
outstanding option,
warrants and rights
(1)
(a)
Weighted average
exercise price of
outstanding option,
warrants and rights
(b)
No. of securities remaining available for
future issuance under equity
compensation plans (excluding securities
reflected in column (a))
(c)
2,153,496
$2.3548
n/a
2,153,496
n/a
$2.3548
225,867
n/a
225,867
Plan Category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
(1) Includes 313,002 shares issuable under the 2000 Stock Option Plan, 991,810 shares issuable under the 2005
Equity Incentive Plan, and 848,684 warrants.
Issuer Repurchases
The Company did not repurchase any of its equity securities during the fiscal year ended March 31, 2012.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company’s last five fiscal years. This information is derived
from the Company’s audited consolidated financial statements, unless otherwise stated. This data should be read in
conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in
this report.
10
10
SELECTED CONSOLIDATED FINANCIAL DATA
Summary of Operations:
(Dollars in thousands except per share date)
Net sales
Gross margin
Operating expenses
Interest (expense) income, net
Pre-tax (loss) income from continuing
operations
Provision for income taxes
(Loss) income from continuing operations
(Loss) income on discontinued operations,
net of income taxes
Net (loss) income
Basic (loss) earnings per share:
From continuing operations
On discontinued operations
Net (loss) earnings per share - basic
Diluted (loss) earnings per share:
From continuing operations
On discontinued operations
Net earnings (loss) per share - dilutive
Shares of common stock - basic
Shares of common stock - dilutive
Financial Position:
(Dollars in thousands)
Current ratio
Working Capital
Total assets
Shareholders' equity
Percentage Data:
March 31, 2012
$ 13,116
3,130
8,978
(2)
(5,850)
2
(5,852)
-
$ (5,852)
$ (1.17)
-
$ (1.17)
$
(1.17)
-
$ (1.17)
5,012
5,012
March 31, 2012
4.14
$ 6,568
$ 9,290
$ 6,747
(Percentage of net sales)
Gross margin
Operating expenses
Interest (expense) income, net
Pre-tax (loss) income from continuing
operations
Income (loss) on discontinued operations,
net of income taxes
Net (loss) income
March 31, 2012
23.9%
68.5%
(0.0%)
(44.6%)
0.0%
(44.6%)
March 26,
2011
$ 21,029
8,929
8,086
4
847
31
816
Years Ended
March 27,
2010
$ 19,057
8,435
7,117
(16)
1,302
2
1,300
March 28, 2009
$ 17,421
7,504
7,914
7
(403)
2
(405)
-
$ 816
-
$ 1,300
75
$ (330)
March 29, 2008
$ 18,331
7,748
7,939
36
(201)
2
(203)
(31)
$ (234)
$ (0.04)
(0.01)
$ (0.05)
$ (0.04)
(0.01)
$ (0.05)
4,813
4,813
$ (0.08)
0.01
$ (0.07)
$ (0.08)
0.01
$ (0.07)
4,824
4,824
March 28, 2009
3.14
$ 7,131
$ 10,789
$ 7,332
March 29, 2008
3.68
$ 7,231
$ 10,361
$ 7,392
March 28, 2009
43.1%
45.4%
0.0%
March 29, 2008
42.3%
43.3%
0.2%
6.8%
0.0%
6.8%
(2.3%)
0.4%
(1.9%)
(1.1%)
(0.2%)
(1.3%)
$ 0.27
-
$ 0.27
$ 0.26
-
$ 0.26
4,846
4,907
Years Ended
March 27,
2010
2.77
$ 8,683
$ 13,919
$ 8,943
Years Ended
March 27,
2010
44.3%
37.3%
(0.1%)
$
0.17
-
0.17
$
$
0.16
-
0.16
$
4,935
5,040
March 26,
2011
4.75
$10,142
$13,392
$10,265
March 26,
2011
42.5%
38.5%
0.0%
4.0%
0.0%
3.9%
11
11
SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of unaudited quarterly results of operations for the fiscal years ended March 31, 2012 and March 26, 2011.
Quarterly Financial Information (Unaudited)
(In thousands except per share data)
Net sales
Gross margin
Operating expenses
Interest expense, net
Pre-tax loss from continuing operations
Provision (benefit) for income taxes
Net loss
First
$ 3,497
1,443
2,114
-
(671)
3
$ (674)
Second
$ 4,086
1,532
2,197
(1)
(666)
(1)
$ (665)
2012
Third
$ 2,799
(470)
2,142
(1)
(2,613)
-
$ (2,613)
Fourth
$ 2,734
625
2,525
-
(1,900)
-
$(1,900)
Year
$ 13,116
3,130
8,978
(2)
(5,850)
2
$ (5,852)
Net loss per share - basic
$ (0.13)
$ (0.13)
$ (0.52)
$ (0.38)
$ (1.17)
Net loss per share - diluted
$ (0.13)
$ (0.13)
$ (0.52)
$ (0.38)
$ (1.17)
Shares of common stock - basic
Shares of common stock - diluted
4,995
4,995
5,006
5,006
5,024
5,024
5,024
5,024
5,012
5,012
Quarterly Financial Information (Unaudited)
(In thousands except per share data)
Net sales
Gross margin
Operating expenses
Interest (expense) income, net
Pre-tax income (loss) from continuing operations
Provision for income taxes
Net Income / (loss)
First
$ 4,701
1,933
1,876
(1)
56
-
$ 56
Second
$ 4,749
1,910
2,086
1
(175)
-
$ (175)
2011
Third
$ 4,640
2,066
2,052
4
18
-
$ 18
Fourth
$ 6,939
3,020
2,072
-
948
31
$ 917
Year
$ 21,029
8,929
8,086
4
847
31
$ 816
Net earnings (loss) per share - basic
$ 0.01
$ (0.04)
$ 0.00
$ 0.18
$ 0.17
Net earnings (loss) per share - diluted
$ 0.01
$ (0.04)
$ 0.00
$ 0.18
$ 0.16
Shares of common stock - basic
Shares of common stock - diluted
4,901
5,000
4,913
4,913
4,946
5,062
4,982
5,116
4,935
5,040
12
12
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Giga-tronics produces instruments, subsystems and sophisticated microwave components that have broad applications in
both defense electronics and wireless telecommunications. In fiscal years 2012 and 2011 Giga-tronics business consisted
of two operating and reporting segments: Giga-tronics Division and Microsource.
Company business is highly dependent on government spending in the defense electronics sector and on the wireless
telecommunications market. Commercial orders have declined on a year-to-date basis for fiscal 2012 versus fiscal 2011
whereas on a year-to-date basis, defense orders have improved in fiscal 2012 versus fiscal 2011.
The Company continues to monitor costs, including personnel, facilities and other expenses, to more appropriately align
costs with revenues.
Results of Operations
New orders by segment are as follows for the fiscal years ended:
New Orders
(Dollars in thousands)
Giga-tronics Division
Microsource
Total
2012
$ 11,305
2,001
$ 13,306
2011
$ 14,603
1,579
$ 16,182
% change
2012
vs.
2011
(23%)
2011
vs.
2010
28%
27% (78%)
(12%)
(18%)
New orders received in fiscal 2012 decreased 18% to $13,306,000 from the $16,182,000 received in fiscal 2011. New
orders decreased primarily due to a decrease in commercial orders partially offset by an increase in military orders.
New orders received in fiscal 2011 decreased 12% to $16,182,000 from the $18,448,000 received in fiscal 2010. New
orders decreased primarily due to a decrease in military orders partially offset by an increase in commercial orders.
In fiscal 2012, orders at Giga-tronics Division decreased primarily due to a decrease in commercial demand for its products
whereas orders at Microsource increased primarily due to a shifting of military orders from fiscal 2011 to fiscal 2012.
In fiscal 2011, orders at Giga-tronics Division increased primarily due to an increase in commercial demand for its products
whereas orders at Microsource decreased primarily due to a shifting of military orders from fiscal 2011 to fiscal 2012.
The following table shows order backlog and related information at fiscal year-end:
Backlog
(Dollars in thousands)
Backlog of unfilled orders
Backlog of unfilled orders shippable within one year
Long term backlog reclassified during year as shippable within one year
Net cancellations during year of previous FYE one-year backlog
2012
$ 3,839
3,839
1,648
-
2011
$ 3,649
3,333
1,123
-
% change
2011
2012
vs.
vs.
2010
2011
5% (57%)
15% (56%)
47% (53%)
-
-
The increase in backlog at year-end 2012 of 5% was primarily due to orders received from switch and component
customers.
The decrease in backlog at year-end 2011 of 57% was primarily due to receiving only the first year order release of a four-
year contract for products installed on military planes.
13
13
The allocation of net sales was as follows for the fiscal years shown:
Allocation of Net Sales
(Dollars in thousands)
Commercial
Government / Defense
Total
2012
$ 5,673
7,443
$ 13,116
2011
$ 11,600
9,429
$ 21,029
The allocation of net sales by segment was as follows for the fiscal years shown:
Allocation of Net Sales by Segment
% change
2012
vs.
2011
(51%)
(21%)
(38%)
2011
vs.
2010
72%
(23%)
10%
% change
2012
vs.
2011
2011
vs.
2010
(48%)
111%
40% (49%)
16%
(25%)
2012
2011
$ 5,355
5,148
$ 10,503
$ 10,281
3,665
$ 13,946
$ 318
2,295
$ 2,613
$ 1,319
5,764
$ 7,083
(76%)
(60%)
(63%)
(29%)
11%
0%
(Dollars in thousands)
Giga-tronics Division
Commercial
Government / Defense
Total
Microsource
Commercial
Government / Defense
Total
Fiscal 2012 net sales were $13,116,000, a 38% decrease from the $21,029,000 of net sales in 2011. The decrease in sales
was primarily due to a decrease in commercial shipments. Sales at Giga-tronics Division decreased 25% or $3,443,000.
Microsource sales decreased by $4,470,000. The decrease in sales has two main factors: sales to a major consumer
electronics manufacturer contributed heavily to total sales in fiscal year 2011; however, additional orders from that
manufacturer were not received in fiscal year 2012. Secondly, there was a delay in a large defense contract for
Microsource components.
Fiscal 2011 net sales were $21,029,000, a 10% increase from the $19,057,000 of net sales in 2010. The increase in sales
was primarily due to an increase in commercial shipments. Sales at Giga-tronics Division increased 16% or $1,945,000.
Microsource sales increased by $27,000.
The allocation of cost of sales by segment was as follows for the fiscal years shown:
Allocation of Cost of Sales by Segment
(Dollars in thousands)
Giga-tronics Division
Microsource
Total
2012
$ 6,990
2,996
$ 9,986
2011
$ 7,734
4,366
$ 12,100
% change
2011
vs.
2010
8%
26%
14%
2012
vs.
2011
(10%)
(31%)
(17%)
In fiscal 2012, cost of sales decreased 17% to $9,986,000 from $12,100,000 in fiscal 2011, driven primarily by lower sales
volume at both Giga-tronics Division and Microsource, which was partially offset by increases in cost of sales at both Giga-
tronics Division and Microsource from $1,549,000 in excess and obsolete inventory reserves including reserves placed on
products that reached the end of their life.
In fiscal 2011, cost of sales increased 14% to $12,100,000 from $10,622,000 in fiscal 2010, driven primarily by an increase
in sales.
14
14
Operating expenses were as follows for the fiscal years shown:
Operating Expenses
(Dollars in thousands)
Engineering
Selling, general and administrative
Total
2012
$ 2,893
6,085
$ 8,978
2011
$ 2,159
5,927
$ 8,086
% change
2011
2012
vs.
vs.
2010
2011
34% 42%
6%
3%
11% 14%
Operating expenses increased $892,000 in fiscal 2012 over 2011 due to an increase of $734,000 in product development
expenses excluding NRE costs and an increase of $158,000 in selling, general and administrative expense. The increase in
product development expenses is due to a more aggressive investment in instrument products. In fiscal year 2012 Giga-
tronics strengthened marketing activities with a new Vice President of Marketing along with increased travel and spending
on advertising. The increase in selling, general and administrative expense is a result of higher marketing expense of
$255,000, higher commission expense of $96,000 offset by lower administrative expense of $193,000. The Company
recorded $289,000 of share based compensation expense in fiscal 2012.
Net interest income in 2012 was not materially different than 2011.
Net interest income in 2011 increased by $20,000 due to improved cash management procedures.
Giga-tronics recorded a pretax loss of $5,850,000 for fiscal year 2012 versus pretax income of $847,000 for the same
period last year. The loss before income taxes in fiscal 2012 was primarily due to a decrease in sales volume and an
increase in operating expenses primarily associated with an increase in R&D efforts in fiscal 2012. Giga-tronics recorded
net loss of $5,852,000 or $1.16 per fully diluted share for fiscal 2012 versus net income of $816,000 or $0.17 per fully
diluted share in fiscal 2011.
Inventories consist of the following:
Net Inventories
(Dollars in thousands)
Raw materials
Work-in-progress
Finished goods
Demonstration inventory
Total
2012
$ 2,313
1,651
241
495
$ 4,700
2011
$ 3,518
1,349
134
385
$ 5,386
% change
2012
vs.
2011
(34%)
22%
80%
29%
(13%)
Inventories decreased by $686,000 at the end of fiscal year 2012 compared to the prior fiscal year end, primarily due to
inventory reserve adjustments of $1,549,000 for excess and obsolete inventories offset by purchase of new inventory.
Giga-tronics began a shift in strategy where future product offerings will not compete directly with similar product
offerings from substantially larger competitor companies. To this end existing product lines were pruned and excess
inventories were written off. Items deemed at end of life amounted to $150,000 at Giga-tronics and $697,000 at
Microsource.
Financial Condition and Liquidity
As of March 31, 2012, Giga-tronics had $2,365,000 in cash and cash-equivalents, compared to $1,408,000 as of March 26,
2011.
Working capital at the end of fiscal year 2012 is $6,568,000 as compared to $10,142,000 at the end of fiscal year 2011.
The current ratio (current assets divided by current liabilities) at March 31, 2012 is 4.14 as compared to 4.75 at March 26,
2011. The decrease in working capital was due primarily to operating losses for fiscal year 2012, with the cash received
from collection of accounts receivable funding operating expenses and the volume of sales not sufficient to replenish
accounts receivable balances. While overall working capital decreased, cash and cash equivalents at year end increased
$957,000 from the prior year. The increase in cash is largely due to investment in the Company by Alara Capital.
15
15
Cash used in operations amounted to $806,000 in 2012 and $1,503,000 in 2011. Cash used in fiscal year 2012 operations is
primarily attributed to the loss for the year. Cash used in fiscal year 2011 operations is primarily attributed to the increase
in accounts receivable and a reduction in deferred revenue.
Additions to property and equipment were $214,000 in 2012 compared to $368,000 in 2011 Capital equipment spending
in fiscal 2012 and 2011included upgraded computer network infrastructure and electronic document scanning equipment. .
Other cash inflows in fiscal year 2012 are due to the $1.997 million investment by Alara Capital in exchange for
convertible preferred stock shares and from the sale of common stock in connection with the exercise of stock options. In
fiscal year 2011 other cash inflow was mainly from the sale of common stock in connection with the exercise of stock
options.
We believe the funds generated by the collection of our accounts receivable, the anticipated revenues of our operations and
reductions in operating expenses, continued management of our supply chain, and potential funds available to us through
debt or equity financing, are adequate to fund our anticipated cash needs through the next twelve months. Although our line
of credit expires in September 2012, we expect to renew the line of credit at maturity. Additionally, we do not have any
outstanding balances on the line of credit. We anticipate that we will retain all earnings, if any, to fund future growth in the
business. We believe we have effectively implemented cash management controls to meet ongoing obligations and as such
believe that we will have sufficient liquidity to continue to operate over the next twelve months.
Should unforeseen circumstances occur, there are no assurances that we will not be required to seek additional working
capital through debt or equity offerings. If such additional working capital is required, there are no assurances that such
financing will be available on favorable terms to the Company, if at all, though we have been successful in the past in
obtaining the levels of capital needed to continue operations and believe that we would be able to do so if necessary for the
foreseeable future
Contractual Obligations
The Company leases various facilities under operating leases that expire through December 2016. Total future minimum
lease payments under these leases amount to approximately $3,550,000.
The Company leases equipment under capital leases that expire through July 2014. The future minimum lease payments
under these leases amount to approximately $26,000.
The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of March 31, 2012,
total non–cancelable purchase orders were approximately $887,000 through fiscal 2013 and are scheduled to be delivered to
the Company at various dates through January 2013.
Critical Accounting Policies
The Company’s discussion and analysis of its financial condition and the results of operations are based upon the
consolidated financial statements included in this report and the data used to prepare them. The consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America
and management is required to make judgments, estimates and assumptions in the course of such preparation. The
Summary of Significant Accounting Policies included with the consolidated financial statements describes the significant
accounting policies and methods used in the preparation of the consolidated financial statements. On an ongoing basis, the
Company re-evaluates its judgments, estimates and assumptions, including those related to revenue recognition, product
warranties, allowance for doubtful accounts, valuation of inventories, valuation allowance on deferred tax assets, product
development costs and share based compensation. The Company bases its judgment and estimates on historical experience,
knowledge of current conditions, and its beliefs of what could occur in the future considering available information. Actual
results may differ from these estimates under different assumptions or conditions. Management of Giga-tronics has
identified the following as the Company’s critical accounting policies:
Revenue Recognition
Revenues are recognized when there is evidence of an arrangement, delivery has occurred, the price is fixed or
determinable, and collectability is reasonably assured. This generally occurs when products are shipped and the risk of loss
has passed. Revenue related to products shipped subject to customers’ evaluation is recognized upon final acceptance.
16
16
Product Warranties
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 sufficient historical data has
been collected on the new product. Adjustments are made as new information becomes available.
Accounts Receivable
Accounts receivable are stated at their net realizable value. The Company has estimated an allowance for uncollectible
accounts based on analysis of specifically identified problem accounts, outstanding receivables, consideration of the age of
those receivables, and the Company’s historical collection experience.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company
periodically reviews inventory on hand to identify and write down excess and obsolete inventory based on estimated
product demand.
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 the consolidated 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 income.
Product Development Costs
The Company incurs pre-production costs on certain long-term supply arrangements. The costs, which represent non-
recurring engineering and tooling costs, are capitalized as other assets and amortized over their useful lives when
reimbursable by the customer. All other pre-production and product development costs are expensed as incurred.
Share Based Compensation
The Company has a stock incentive plan that provides for the issuance of stock options and restricted stock to employees
and directors. The Company calculates share based compensation expense using a Black-Scholes-Merton option pricing
model and records the fair value of awards expected to vest over the requisite service period. In so doing, the Company
makes certain key assumptions in making estimates used in the model. The Company believes the estimates used, which
are presented in Note 1 of Notes to Consolidated Financial Statements, are appropriate and reasonable.
17
17
Off-Balance-Sheet Arrangements
The Company has no other off-balance-sheet arrangements (including standby letters of credit, guaranties, contingent
interests in transferred assets, contingent obligations indexed to its own stock or any obligation arising out of a variable
interest in an unconsolidated entity that provides credit or other support to the Company), that have or are likely to have a
material effect on its financial conditions, changes in financial conditions, revenue, expense, results of operations, liquidity,
capital expenditures or capital resources.
Management believes that the Company has adequate resources to meet its anticipated operating and capital expenditure
needs for the foreseeable future. Giga-tronics intends to maintain research and development expenditures for the purpose
of broadening its product base. From time to time, Giga-tronics considers a variety of acquisition opportunities to also
broaden its product lines and expand its markets. Such acquisition activity could also increase the Company’s operating
expenses and require the additional use of capital resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
Consolidated Balance Sheets - As of March 31, 2012 and March 26, 2011
Consolidated Statements of Operations - Years ended March 31, 2012 and March 26, 2011
Consolidated Statements of Shareholders’ Equity - Years ended March 31, 2012 and March 26, 2011
Consolidated Statements of Cash Flows - Years ended March 31, 2012 and March 26, 2011
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Page No.
19
20
21
22
23 - 33
34 - 35
18
18
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
Assets
Current Assets
Cash and cash equivalents
Trade accounts receivable, net of allowance of $96 and $248, respectively
Inventories, net
Prepaid expenses and other current assets
Total current assets
Property and equipment
Leasehold improvements
Machinery and equipment
Office furniture and fixtures
Total property and equipment
Less accumulated depreciation and amortization
Property and equipment, net
Other assets
Total assets
Liabilities and shareholders' equity
Current liabilities
Accounts payable
Accrued commission
Accrued payroll and benefits
Accrued warranty
Income taxes payable
Deferred revenue
Deferred rent
Capital lease obligations
Other current liabilities
Total current liabilities
Long term obligation - Deferred rent
Long term obligation - Capital lease
Total liabilities
Commitments and contingencies
Shareholders' equity:
Convertible Preferred stock of no par value;
Authorized - 1,000,000 shares
March 31, 2012
March 26, 2011
$ 2,365
1,270
4,700
328
8,663
583
15,578
786
16,947
16,336
611
16
$ 9,290
$ 613
129
739
210
-
7
59
20
318
2,095
433
15
2,543
-
$ 1,408
5,632
5,386
420
12,846
490
15,565
786
16,841
16,311
530
16
$ 13,392
$ 972
139
455
200
30
586
36
93
193
2,704
413
10
3,127
-
Series A - designated 250,000 shares; 0 shares at March 31, 2012
and March 26, 2011 issued and outstanding
-
-
Series B - designated 10,000 shares; 9,997 shares at March 31, 2012
and 0 shares at March 26, 2011 issued and outstanding;
(liquidation preference of $2,309)
Common stock of no par value;
Authorized - 40,000,000 shares; 5,029,747 shares at March 31, 2012
and 4,994,157 shares at March 26, 2011 issued and outstanding
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
1,997
-
14,822
(10,072)
6,747
$ 9,290
14,485
(4,220)
10,265
$ 13,392
See Accompanying Notes to Consolidated Financial Statements
19
19
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-share data)
Net sales
Cost of sales
Gross margin
Engineering
Selling, general and administrative
Total operating expenses
Operating (loss) income
Interest (expense) income, net
(Loss) income before income taxes
Provision for income taxes
Net (loss) income
(Loss) earnings per share - basic
(Loss) earnings per share - diluted
Shares used in per share calculation:
Basic
Diluted
Years Ended
March 31, 2012
$ 13,116
9,986
3,130
March 26, 2011
$ 21,029
12,100
8,929
2,893
6,085
8,978
(5,848)
(2)
(5,850)
2
$ (5,852)
$ (1.17)
$ (1.17)
5,012
5,012
2,159
5,927
8,086
843
4
847
31
$ 816
$ 0.17
$ 0.16
4,935
5,040
See Accompanying Notes to Consolidated Financial Statements
20
20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share data)
Balance at March 27, 2010
Net income
Share based compensation
Stock issuance under stock options plans
Balance at March 26, 2011
Net (loss)
Share based compensation
Stock issuance under stock options plans
Preferred stock issuance,
Common Stock
Preferred Stock
Shares
4,891,394
Amount
$ 13,979
Shares
-
Amount
$ -
-
102,763
4,994,157
311
195
14,485
-
-
-
-
-
-
-
35,590
289
48
-
-
-
-
Accumulated
Deficit
$ (5,036)
816
-
-
(4,220)
(5,852)
-
-
Total
$ 8,943
816
311
195
10,265
(5,852)
289
48
net of offering costs of $202
Balance at March 31, 2012
-
5,029,747
-
$ 14,822
9,997
9,997
1,997
$ 1,997
-
$ (10,072)
1,997
$ 6,747
See Accompanying Notes to Consolidated Financial Statements
21
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share data)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash
used in operations:
Net provision for doubtful accounts
Net provision for excess and obsolete inventory
Depreciation and amortization
Share based compensation
Change in deferred rent
Changes in operating assets and liabilities:
Trade accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued commissions
Accrued payroll and benefits
Accrued warranty
Income taxes payable
Deferred revenue
Other current liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
(Payments) proceeds on capital leases
Proceeds from exercise of stock options
Proceeds from issuance of preferred stock, net of stock offering costs
Net cash provided by financing activities
Years Ended
March 31, 2012
March 26, 2011
$ (5,852)
$ 816
(148)
1,549
133
289
43
4,510
(863)
92
(359)
(10)
284
10
(30)
(579)
125
(806)
154
80
149
311
418
(1,454)
337
(37)
91
(88)
(243)
61
30
(2,096)
(32)
(1,503)
(214)
(214)
(368)
(368)
(68)
48
1,997
1,977
10
195
-
205
Increase (decrease) in cash and cash equivalents
957
(1,666)
Beginning cash and cash equivalents
Ending cash and cash equivalents
1,408
$ 2,365
3,074
$ 1,408
Supplementary disclosure of cash flow information:
Cash paid for income taxes
Cash paid for interest
$ 2
$ 2
$ 2
$ 4
See Accompanying Notes to Consolidated Financial Statements
22
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
Summary of Significant Accounting Policies
The Company The accompanying consolidated financial statements include the accounts of Giga-tronics Incorporated
(“Giga-tronics”) and its wholly-owned subsidiary, Microsource Incorporated (“Microsource”), collectively the “Company”.
The Company’s corporate office and manufacturing facilities are located in Northern California. Giga-tronics and its
subsidiary company design, manufacture and market a broad line of test and measurement equipment used in the
development, test, and maintenance of wireless communications products and systems, flight navigational equipment,
electronic defense systems, and automatic testing systems. The Company also manufactures and markets a line of test,
measurement, and handling equipment used in the manufacturing of semiconductor devices. The Company’s products are
sold worldwide to customers in the test and measurement and semiconductor industries. The Company currently has no
foreign-based operations or material amounts of identifiable assets in foreign countries. Its gross margins on foreign and
domestic sales are similar, and all non-U.S. sales are made in U.S. dollars.
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 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.
The allowance for doubtful accounts, inventory reserves, warranty reserves, share-based compensation and income taxes
are particularly subject to change.
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 2012, ended on March 31, 2012 was a 53 week year, while fiscal year 2011,
ended on March 26, 2011 was a 52 week year. All references to years in the consolidated financial statements relate to
fiscal years rather than calendar years.
Reclassifications Certain reclassifications, none of which affected the prior year’s net income or shareholders’ equity,
have been made to prior year balances in order to conform to the current year presentation.
Revenue Recognition The Company records revenue when there is persuasive evidence of an arrangement, delivery has
occurred, the price is fixed and determinable, and collectability is reasonably assured. This occurs when products are
shipped or the customer accepts title transfer. If the arrangement involves acceptance terms, the Company defers revenue
until product acceptance is received. On certain large development contracts, revenue is recognized upon achievement of
substantive milestones. Determining whether a milestone is substantive is a matter of judgment and that assessment is
performed only at the inception of the arrangement. The consideration earned from the achievement of a milestone must
meet all of the following for the milestone to be considered substantive:
a. It is commensurate with either of the following:
1. The Company’s performance to achieve the milestone
2. The enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the
Company's performance to achieve the milestone.
b. It relates solely to past performance.
c. It is reasonable relative to all of the deliverables and payment terms (including other potential milestone
consideration) within the arrangement.
Milestones for revenue recognition are agreed upon with the customer prior to the start of the contract and some milestones
will be tied to product shipping while others will be tied to design review.
23
23
Accounts receivable are stated at their net realizable value. The Company has estimated an allowance for uncollectable
accounts based on analysis of specifically identified accounts, outstanding receivables, consideration of the age of those
receivables and the Company’s historical collection experience. The activity in the reserve account is as follows:
(Dollars in thousands)
Beginning balance
Provision for doubtful accounts
Recoveries of doubtful accounts
Write-off of doubtful accounts
Ending balance
March 31, 2012
$ 248
(148)
-
(4)
$ 96
March 26, 2011
$ 95
154
-
(1)
$ 248
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 market using full absorption and standard costing. Cost is
determined on a first-in, first-out basis. 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.
Property and Equipment Property and equipment are stated at cost. 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 31, 2012 and March 26, 2011, management believes there has been no impairment of
the Company’s long-lived assets.
Deferred Rent Rent expense is recognized in an amount equal to the minimum guaranteed base rent plus future rental
increases amortized on the straight-line basis over the terms of the leases, including free rent periods.
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are
Income Taxes
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
24
24
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 income.
Product Development Costs The Company incurs pre-production costs on certain long-term supply arrangements. The
costs, which represent non-recurring engineering and tooling costs, are capitalized as other assets and amortized over their
useful life when reimbursable by the customer. All other product development costs are charged to operations as incurred.
There were no capitalized pre-production costs included in other assets as of March 31, 2012 or March 26, 2011.
Software Development Costs Development costs included in the research and development of new products and
enhancements to existing products are expensed as incurred, until technological feasibility in the form of a working model
has been established. To date, completion of software development has been concurrent with the establishment of
technological feasibility, and accordingly, no costs have been capitalized.
Share-based Compensation The Company has established the 2005 Equity Incentive Plan, which provides for the granting
of options for up to 1,400,000 shares of Common Stock. The Company records share-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 statements of cash flows. These
excess tax benefits were not significant for the Company for the fiscal year ended March 31, 2012. There were no excess
tax benefits for the fiscal year ended March 26, 2011.
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.
The fair value of restricted stock awards is based on the fair value of the underlying shares at the date of the grant.
Management makes estimates regarding pre-vesting forfeitures that will impact timing of compensation expense recognized
for stock option and restricted stock awards.
Earnings Per Share Basic earnings per share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share incorporate the incremental shares issuable upon the assumed
exercise of stock options using the treasury stock method. Anti-dilutive options are not included in the computation of
diluted earnings per share.
Comprehensive Income (Loss) There are no items of comprehensive income (loss) other than net income (loss).
Financial Instruments and Concentration of Credit Risk Financial instruments that potentially subject the Company to
credit risk consist of cash, cash equivalents and trade accounts receivable. The Company’s cash equivalents consist of
overnight deposits with federally insured financial institutions. Under Section 343 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, those funds on deposit are covered by unlimited deposit insurance until December 31, 2012.
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. At
March 31, 2012, three customers combined accounted for 36% of consolidated gross accounts receivable primarily due to
the timing of the receivables. At March 26, 2011, one customer comprised 64% of consolidated gross accounts receivable
primarily due to the timing of the receivable.
Fair Value of Financial Instruments The carrying amount for the Company’s cash-equivalents, trade accounts receivable
and accounts payable approximates fair market value because of the short maturity of these financial instruments.
25
25
In September 2011, the Financial Accounting Standards Board (FASB)
Recently Issued Financial Accounting Standards
issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment. The objective of this Update is to
simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an
entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit
is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill
impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than
50 percent. Previous guidance under Topic 350 required an entity to test goodwill for impairment, on at least an annual
basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair
value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the
amount of the impairment loss, if any. Under the amendments in this Update, an entity is not required to calculate the fair
value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying
amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011, and early adoption is permitted. Management does not believe this Update will have a
significant impact on the Company’s consolidated financial condition, results of operations or cash flows.
2
Cash and Cash-Equivalents
Cash and cash-equivalents of $2,365,000 and $1,408,000 at March 31, 2012 and March 26, 2011, respectively, consist of
demand deposits with a financial institution insured by the Federal Deposit Insurance Corporation.
3
Inventories
Inventories, net of reserves, consist of the following:
(Dollars in thousands)
Raw materials
Work-in-progress
Finished goods
Demonstration inventory
Total
March 31, 2012
$ 2,313
1,651
241
495
$ 4,700
March 26, 2011
$ 3,518
1,349
134
385
$ 5,386
Inventories decreased by $686,000 at the end of fiscal year 2012 compared to the prior fiscal year end, primarily due to
inventory reserve adjustments of $1,549,000 for excess and obsolete inventories offset by purchase of new inventory.
Giga-tronics began a shift in strategy where future product offerings will not compete directly with similar product
offerings from substantially larger competitor companies. To this end existing product lines were pruned and excess
inventories were written off. Items deemed at end of life amounted to $150,000 at Giga-tronics and $697,000 at
Microsource.
4
Selling and Advertising Expenses
Selling expenses consist primarily of commissions paid to various marketing agencies. Commission expense totaled
$661,000 and $565,000 for fiscal 2012 and 2011, respectively. Advertising costs, which are expensed as incurred, totaled
$146,000 and $98,000 for fiscal 2012 and 2011, respectively.
5
Significant Customers and Industry Segment Information
The Company has two reportable segments: Giga-tronics Division and Microsource. Giga-tronics Division produces a
broad line of test and measurement equipment used in the development, test and maintenance of wireless communications
products and systems, flight navigational equipment, electronic defense systems and automatic testing systems and designs,
manufactures, and markets a line of switching devices that link together many specific purpose instruments that comprise
automatic test systems. Microsource develops and manufactures a broad line of Yttrium, Iron and Garnet (YIG) tuned
oscillators, filters and microwave synthesizers, which are used in a wide variety of microwave instruments or devices.
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 sales include sales to external customers. Inter-segment activities are eliminated in
26
26
consolidation. Assets include accounts receivable, inventories, equipment, cash, deferred income taxes, prepaid expenses
and other long-term assets. The Company accounts for inter-segment sales and transfers at terms that allow a reasonable
profit to the seller. During the periods reported there were no significant inter-segment sales 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 (“CEO”). The CEO
reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues
and pre-tax income by operating segment. The tables below present information for the fiscal years ended in 2012 and
2011.
March 31, 2012 (Dollars in thousands)
Revenue
Interest expense net
Depreciation and amortization
Capital expenditures
(Loss) before income taxes
Assets
March 26, 2011 (Dollars in thousands)
Revenue
Interest income, net
Depreciation and amortization
Capital expenditures
Income (loss) before income taxes
Assets
Giga-tronics Division
$ 10,503
(2)
115
213
(3,358)
7,336
Giga-tronics Division
$ 13,946
-
127
357
980
9,917
Microsource
2,613
$
-
18
1
(2,492)
1,954
Microsource
$ 7,083
4
22
11
(133)
3,475
Total
$ 13,116
(2)
133
214
(5,850)
9,290
Total
$ 21,029
4
149
368
847
13,392
The Company’s Giga-tronics Division and Microsource segments sell to agencies of the U.S. government and U.S. defense-
related customers. In fiscal 2012 and 2011, U.S. government and U.S. defense-related customers accounted for 57% and
44% of sales, respectively. During fiscal 2012, one customer accounted for 17% of the Company’s consolidated revenues at
March 31, 2012 and was included in the Microsource segment. A second customer accounted for 12% of the Company’s
consolidated revenues at March 31, 2012 and was included in the Giga-tronics Division. During fiscal 2011, one customer
accounted for 27% of the Company’s consolidated revenues at March 26, 2011 and was included in the Giga-tronics
Division. During fiscal 2011, two customers accounted for 13% and 11% of the Company’s consolidated revenues at
March 26, 2011 and was included in the Microsource segment.
Export sales accounted for 20% and 40% of the Company’s sales in fiscal 2012 and 2011, respectively. Export sales by
geographical area are shown below:
(Dollars in thousands)
Americas
Europe
Asia
Rest of world
Total
March 31, 2012
$ 195
996
1,297
75
$ 2,563
March 26, 2011
$ 1,603
1,148
5,477
254
$ 8,482
27
27
6
Earnings per Share
Net income and shares used in per share computations for the years ended March 31, 2012 and March 26, 2011 are as
follows:
(In thousands except per share data)
Net (loss) income
Weighted average:
Common shares outstanding
Potential common shares
Common shares assuming dilution
Net (loss) earnings per share - basic
Net (loss) earnings per share - diluted
Stock options not included in computation that
could potentially dilute EPS in the future
Restricted stock awards not included in computation
that could potentially dilute EPS in the future
Convertible preferred stock not included in computation
that could potentially dilute EPS in the future
Warrants not included in computation that could
potentially dilute EPS in the future
March 31, 2012
$ (5,852)
March 26, 2011
$ 816
5,012
-
5,012
$ (1.17)
$ (1.17)
4,935
105
5,040
$ 0.17
$ 0.16
1,305
636
60
90
1,000
-
849
-
The number of stock options not included in the computation of diluted earnings per share (EPS) for the period ended
March 31, 2012 is a result of the Company’s net loss and, therefore, the options are anti-dilutive. The number of stock
options not included in the computation of diluted EPS for the period ended March 26, 2011 reflects stock options where
the exercise prices were greater than the average market price of the common shares and are, therefore, anti-dilutive. The
number of restricted stock awards not included in the computation of diluted EPS for the periods ended March 31, 2012 and
March 26, 2011 reflect contingently issuable shares for which the performance conditions necessary for the awards to vest
had not been met as of March 31, 2012 and March 26, 2011. The number of convertible preferred shares not included in
the computation of diluted EPS for period ended March 31, 2012 reflects convertible preferred stock where the assumed
proceeds from conversion were greater than the average market price of the common shares and are, therefore, anti-dilutive.
7
Income Taxes
Following are the components of the provision for income taxes:
March 31, 2012
March 26, 2011
Years ended (In thousands)
Current
Federal
State
Total current
Deferred
Federal
State
Total deferred
$
$
2
-
2
(1,964)
(340)
(2,304)
29
2
31
2,283
41
2,324
714
(3,038)
31
Change in liability for uncertain tax positions
Change in valuation allowance
Provision for income taxes
16
2,288
2
$
$
28
28
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows:
Year ended (In thousands)
Net operating loss carryforwards
Income tax credits
Inventory reserves and additional capitalized costs
Fixed asset depreciation
Accrued vacation
Accrued warranty
Deferred rent
Other accrued liabilities
Allowance for doubtful accounts
Non-qualified stock options
State taxes benefit
Total deferred tax assets
$
March 31, 2012
11,016
1,453
2,459
73
125
84
196
-
38
100
-
15,544
$
March 26, 2011
9,410
1,426
1,785
100
117
79
179
-
100
60
-
13,256
Valuation allowance
Net deferred tax assets
(15,544)
-
$
(13,256)
-
Years ended (In thousands except percentages)
Statutory federal income tax (benefit)
Valuation allowance
State income tax, net of federal benefit
Net operating loss expiration
Non tax-deductible expenses
Tax credits
Liability for uncertain tax positions
Other
Effective income tax
March 31, 2012
March 26, 2011
$
$
(1,989)
2,288
(341)
-
78
(43)
16
(7)
2
34.0%
(39.1)
5.8
-
(1.3)
0.7
(0.3)
0.1
(0.1)%
$
$
288
(3,038)
49
2,023
72
(85)
714
8
31
34.0%
(358.7)
5.8
238.8
8.5
(10.0)
84.3
1.0
3.7%
The increase in valuation allowance from March 26, 2011 to March 31, 2012 was $2,288,000.
As of March 31, 2012 the Company had pre-tax federal net operating loss carryforwards of $28,234,000 and state net
operating loss carryforwards of $23,440,000 available to reduce future taxable income. The federal and state net operating
loss carryforwards begin to expire from fiscal 2016 through 2032 and from 2014 through 2032, respectively. 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 2020 through 2032
and state income tax credit carryforwards are carried forward indefinitely.
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 31, 2012, the Company has unrecognized tax benefits of $850,000 related to uncertain tax positions. The
unrecognized tax benefits reduce the “Income tax credits” disclosed in the table of deferred tax assets above. The Company
has not recorded a liability for any penalties or interest related to the unrecognized tax benefits.
The Company files U.S. federal and California state tax returns. The Company is generally no longer subject to tax
examinations for years prior to the fiscal year 2009 for federal purposes and fiscal year 2008 for California purposes, except
in certain limited circumstances. The Company does not have any tax audits or other issues pending.
29
29
A reconciliation of the beginning and ending amount of uncertain tax positions, excluding potential interest and penalties, is
as follows:
Balance as of beginning of year
Additions based on current year tax positions
Reductions for prior year tax positions and lapses of applicable statute
Additions based on prior year tax positions
Balance as of end of year
Fiscal Year
2012
834,000
16,000
-
-
$ 850,000
Fiscal Year
2011
$ 120,000
34,000
(72,000)
752,000
$ 834,000
The total amount of interest and penalties related to unrecognized tax benefits at March 31, 2012 and March 26, 2011 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
months.
8
Share-based Compensation and Employee Benefit Plans
Share-based Compensation The Company has established the 2005 Equity Incentive Plan, which provides for the granting
of options and restricted stock for up to 1,400,000 shares of common stock at 100% of fair market value at the date of grant,
with each grant requiring approval by the Board of Directors of the Company. Options granted vest in one or more
installments through 2017 and must be exercised while the grantee is employed by the Company or within a certain period
after termination of employment. Options granted to employees shall not have terms in excess of 10 years from the grant
date. Holders of options may be granted stock appreciation rights (SAR), which entitle them to surrender outstanding
options for a cash distribution under certain changes in ownership of the Company, as defined in the stock option plan. As
of March 31, 2012, no SAR’s have been granted under the option plan. As of March 31, 2012, the total number of shares
of common stock available for issuance is 225,867. All outstanding options have either a five year or a ten year life.
The weighted average grant date fair value of stock options granted during the fiscal years ended March 31, 2012 and
March 26, 2011 was $1.30and $1.60, respectively, and was calculated using the following weighted-average assumptions:
Years Ended
Dividend yield
Expected volatility
Risk-free interest rate
Expected term (years)
March 31, 2012
Zero
92%
0.94%
8.32
March 26, 2011
Zero
101%
1.13%
3.17
A summary of the changes in stock options outstanding for the years ended March 31, 2012 and March 26, 2011 is
presented below:
Outstanding at March 27, 2010
Granted
Exercised
Forfeited / Expired
Outstanding at March 26, 2011
Granted
Exercised
Forfeited / Expired
Outstanding at March 31, 2012
Weighted
Average
Exercise Price
$ 1.89
2.41
1.90
2.18
$ 1.96
1.58
1.36
1.96
$ 1.74
Shares
868,027
140,000
102,763
20,250
885,014
827,500
35,590
372,112
1,304,812
Weighted Average
Remaining Contractual
Terms (Years)
Aggregate
Intrinsic
Value
6.9
$ 3,041
Exercisable at March 31, 2012
319,187
$ 1.89
2.1
$ 3,041
Expected to vest at March 31, 2012
744,202
$ 1.69
9.5
$ -
30
30
As of March 31, 2012, there was $818,341 of total unrecognized compensation cost related to non-vested options granted
under the plans. That cost is expected to be recognized over a weighted average period of 2.15 years. There were 175,000
and 252,224 options vested during the years ended March 31, 2012 and March 26, 2011 respectively. The total fair value
of options vested during the years ended March 31, 2012 and March 26, 2011 was $230,571 and $314,017, respectively.
Cash received from stock option exercises for the years ended March 31, 2012 and March 26, 2011 was $48,000 and
$195,000, respectively.
There were no restricted stock awards granted during the year ended March 31, 2012 and 90,000 restricted stock awards
granted during the year ended March 26, 2011 with a weighted average grant date fair value of $2.34 per share. 30,000 of
the restricted stock awards with the same weighted average grant date fair value were forfeited during the fiscal year ended
March 31, 2012 and none were forfeited during fiscal 2011. The restricted stock awards are considered fixed awards as the
number of shares and fair value are known at the grant date and the fair value at the grant date is amortized over the
requisite service period net of estimated forfeitures. The restricted stock awards are performance-based and one-third will
vest annually each year through 2013 only if certain sales and profit goals are achieved by the Company. None of the
restricted stock awards were vested at March 31, 2012 or March 26, 2011 and no compensation cost was recognized for
restricted stock awards during fiscal 2012 and fiscal 2011 because management believes it is more likely than not that the
performance criteria will not be met.
Employee Stock Purchase Plan This plan expired in September 2006 and is no longer available.
401(k) Plans The Company has established 401(k) plans which cover substantially all employees. Participants may make
voluntary contributions to the plans for up to 100% of their defined compensation. The Company matches a percentage of
the participant’s contributions in accordance with the plan. Participants vest ratably in Company contributions over a four-
year period. Company contributions to the plans for fiscal 2012 and 2011 were approximately $37,000 and $24,000,
respectively.
9
Commitments
The Company leases a 47,300 square foot facility located in San Ramon, California, under a twelve-year lease that
commenced in April 1994, which was amended on April 1, 2010 and now expires December 31, 2016. The amendment
resulted in a reduction of monthly lease costs. The Company leases a 33,400 square foot facility located in Santa Rosa,
California, under a twenty-year lease that commenced in July 1993 and was amended in April 2003, to now expire May 31,
2013.
These facilities accommodate all of the Company’s present operations. The Company also leases other equipment under
operating leases.
Total future minimum lease payments under these leases amount to approximately $3,550,000 and are as follows.
Fiscal year (Dollars in thousands)
2013
2014
2015
2016
2017
Thereafter
Total
1,000
696
654
677
523
-
$ 3,550
The aggregate rental expense was $1,028,000 and $1,025,000 in fiscal 2012 and 2011, respectively.
The Company leases equipment under capital leases that expire through July 2014. Capital leases with costs totaling
$31,000 and $130,000 are reported net of accumulated depreciation of $3,000 and $45,000at March 31, 2012 and March
26, 2011, respectively. The future minimum lease payments under these leases amount to approximately $26,000 at March
31, 2012.
The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of March 31, 2012,
total non–cancelable purchase orders were approximately $887,000 through fiscal 2013 and are scheduled to be delivered to
the Company at various dates through January 2013.
31
31
10
Warranty Obligations
The Company records a liability in cost of sales for estimated warranty obligations at the date products are sold.
Adjustments are made as new information becomes available. The following provides a reconciliation of changes in the
Company’s warranty reserve. The Company provides no other guarantees.
(Dollars in thousands)
Balance at beginning of year
Provision, net
Warranty costs incurred
Balance at end of year
11
Line of Credit
March 31, 2012
$ 200
258
(248)
$ 210
March 26, 2011
$ 139
237
(176)
$ 200
Effective September 15, 2011, the Company obtained a revolving line of credit for $2,500,000, with interest payable at
prime rate plus 1.5%. The line of credit expires on September 15, 2012. The borrowing capacity under this line of credit is
based on the Company’s accounts receivable and is secured by all of the assets of the Company. The line of credit has
standard financial covenants that require the maintenance of prescribed levels of working capital and shareholders’ equity
of which the Company was in compliance at March 31, 2012. At March 31, 2012 and March 26, 2011 there was no
balance on the line of credit.
12 Series B Convertible Voting Perpetual Preferred Stock and Warrants
On November 10, 2011, the Company received approximately $2.2 million in new capital from Alara Capital AVI II, LLC,
a Delaware limited liability company (the “Investor”) under the Securities Purchase Agreement entered into on October 31,
2011. Under the terms of the Securities Purchase Agreement, the Company issued 9,997 shares of its new Series B
Convertible Voting Perpetual Preferred Stock to the Investor for aggregate consideration of $2,199,340, at a price of $220
per share of Series B Preferred Stock. Alara Capital Partners, LLC, a technology investment firm, is the sponsor of the
Investor.
Each share of Series B Preferred Stock initially is convertible at the option of the holder into 100 shares of the Company’s
common stock. The conversion ratio is subject to customary adjustments for stock splits, stock dividends, recapitalizations
and similar transactions. If all shares of Series B Preferred Stock were converted as of December 31, 2011, holders of such
shares would acquire 999,700 shares of common stock of the Company, or 16.6% of the pro forma number of shares of
common stock that would have been outstanding as of that date. Each share of Series B Preferred Stock has a liquidation
preference of $231, equal to 105% of the purchase price. If the Company pays a dividend on its common stock, it is
required to pay a dividend on the Series B Preferred Stock until December 31, 2013, equal to 110% and thereafter equal to
100% of the cash dividend that would be payable on the number of shares of common stock into which each share of Series
B Preferred Stock is then convertible. The Series B Preferred Stock generally votes together with the common stock, on an
as-converted basis, on each matter submitted to the vote or approval of the holders of common stock, and votes as a
separate class with respect to certain actions that adversely affect the rights of the Series B Preferred Stock and on other
matters as required by law.
The Company also issued to the Investor a Warrant to purchase up to 848,684 additional shares of common stock of the
Company. The exercise price of the Warrant is $3.30 per share, subject to anti-dilution adjustments for stock splits, stock
dividends, reclassifications and similar events. The Warrant will cease to be exercisable 30 months after the Shareholder
Approval Date, which is defined as the date on which shareholders approve exercise of the Warrant as required by rules of
NASDAQ Capital Markets relating to certain private sales of securities. The Company held a special meeting of
shareholders on February 7, 2012, at which the shareholders gave the required approval for exercise of the Warrant.
Therefore, February 7, 2012 is the Shareholder Approval Date, and the Warrant must be exercised, if at all, on or before
August 7, 2014.
As of December 31, 2011, the Company had recorded $1,997,000 as preferred stock on the consolidated balance sheet.
This amount is net of stock offering costs of approximately $202,000 and represents the value attributable to both the
convertible preferred stock and warrants issued to the Investor. After considering the value of the warrants, the effective
conversion rate of the preferred stock is greater than the common stock price on date of issue and therefore no beneficial
conversion feature is present.
32
32
13
Restatement
Subsequent to filing the Company’s annual report on Form 10-K, for the year ended March 26, 2011, the Company
determined that a full valuation allowance on its deferred tax asset should have been maintained as of March 26, 2011.
Management determined that it was necessary to maintain the valuation allowance against its deferred tax assets after
considering information that should have been used to measure the positive and negative evidence regarding the ultimate
realization of the net deferred tax assets in the original assessment.
Realization of the net deferred tax asset is dependent upon the Company’s ability to generate future taxable income. In its
reassessment, Management concluded that objective and verifiable negative evidence represented by historic losses
outweighed more subjective positive evidence of anticipated future income. As a result, the Company determined it
necessary to maintain a full valuation allowance against its net deferred tax asset as of March 26, 2011; restated its financial
statements and filed an amended Form 10-K on June 19, 2012.
Additional information related to the restatement is included in Note 2 of the financial statements included in the Form 10-
K/A filed on June 19, 2012.
33
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Giga-tronics Incorporated
San Ramon, California
We have audited the accompanying consolidated balance sheet of Giga-tronics Incorporated (the “Company”) as of March
31, 2012 and the related consolidated statements of operations, shareholders’ equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Giga-tronics Incorporated as of March 31, 2012, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
San Francisco, California
June 19, 2012
/s/ Crowe Horwath LLP
34
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Giga-tronics Incorporated
We have audited the accompanying consolidated balance sheet of Giga-tronics Incorporated (the “Company”) as
of March 26, 2011 and the related consolidated statements of operations, shareholders’ equity and cash flows for the year
then ended. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Giga-tronics Incorporated as of March 26, 2011, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 13 to the consolidated financial statements, the March 26, 2011 financial statements have been
restated.
San Francisco, California
May 19, 2011 (June 19, 2012 as to the effects
of the restatement discussed in Note 13)
/s/ Perry-Smith LLP
35
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure controls and procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of March 31, 2012,
of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-
15(e) promulgated under the Exchange Act. Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this
Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified by the
SEC. Disclosure controls and procedures are also designed to ensure that such information is accumulated and
communicated to our management, including our Chief Financial Officer and Chief Executive Officer, as appropriate to
allow timely decisions regarding required disclosure.
At the time that our Annual Report on Form 10-K for the year ended March 26, 2011 was filed on May 19, 2011, our Chief
Executive Officer and then Chief Financial Officer concluded that our disclosure controls and procedures were effective as
of March 26, 2011. Subsequent to that evaluation, on May 17, 2012, we determined a restatement of the year ended March
26, 2011 Annual Report on Form 10-K/A was required. Accordingly, our management, including our Chief Executive
Officer and current acting Chief Financial Officer, re-evaluated our disclosure controls and procedures and concluded that
our disclosure controls and procedures were not effective as of March 26, 2011 and March 31, 2012 because of a material
weakness in internal control over the assessment of the valuation allowance against deferred tax assets, as discussed below.
Report of Management on Internal Control over Financial Reporting
Management of Giga-tronics is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The
Company's management, under the supervision of the Chief Executive Officer and Chief Financial Officer, has assessed the
effectiveness of the Company's internal control over financial reporting as of March 31, 2012. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Our internal control over financial reporting includes policies and
procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with United States generally accepted accounting
principles and that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company;
and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company's assets that could have a material effect on the financial statements.
Based on this assessment, management identified the following material weakness in connection with the restatement of the
year ended March 26, 2011 financial statements.
The Company has not designed and implemented adequate controls over assessment of the valuation allowance against
deferred tax assets in that adequate criteria have not been established to assess positive and negative evidence and that an
independent review process over the inputs and conclusion in this assessment was not in place. As a result, a restatement
of the financial statements for the year ended March 26, 2011, was necessary to present the financial statements in
accordance with generally accepted accounting principles.
A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote
likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
The Company filed an amended annual report on Form 10K/A for the year ended March 26, 2011, and amended quarterly
reports on Form 10Q/A for the three interim quarters for fiscal 2012 to reflect a full valuation allowance against our
36
36
deferred tax assets, as more fully discussed in Note 13 to the Consolidated Financial Statements. In connection with the
restatement, our management, including our Chief Executive Officer and Chief Financial Officer, has determined that the
lack of adequate controls over the assessment of the valuation allowance against deferred tax assets constituted a material
weakness in internal control over financial reporting.
Controls relating to the material weakness identified in connection with the restatement of our consolidated financial
statements have not been put in place as of March 31, 2012 and Management has thus concluded that the Company did not
maintain effective internal control over financial reporting as of March 31, 2012, based on the criteria described in the
COSO Internal Control — Integrated Framework.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of
March 31, 2012, has not been audited by the Company’s independent registered public accounting firm. Management’s
report is not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of
the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual
Report.
Material Weaknesses in Internal Control Over Financial Reporting
Material Weakness Relating to Internal Control Over the Assessment of the Valuation Allowance against Deferred
Tax Assets
There was lack of adequate controls over the assessment of the valuation allowance against deferred tax assets that
constituted a material weakness in internal control over financial reporting. The Company has not designed and
implemented adequate controls over assessment of the valuation allowance against deferred tax assets in that adequate
criteria have not been established to assess positive and negative evidence and that an independent review process over the
inputs and conclusion in this assessment was not in place.
Remediation of Material Weaknesses
Remediation of Material Weakness Relating to Internal Control Over the Assessment of the Valuation Allowance
against Deferred Tax Assets
The Company is in the process of creating a formal process related to the design and implementation of controls over the
assessment of the valuation allowance against deferred tax assets. Management anticipates that controls will include the
establishment of criteria for assessing positive and negative evidence and the establishment of an independent review
process over the inputs and the conclusion reached in the assessment process. Management expects that this process will
include periodic oversight by the Audit Committee. In this regard, the Company has recently added a new board member
with accounting expertise.
Changes in internal controls
There were no changes in internal control over financial reporting identified in connection with the evaluation required by
Rule 15d-15 that occurred during the year ended March 31, 2012 that have materially affected or are reasonably likely to
materially affect, the internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
The Company is not aware of any information required to be reported on Form 8-K that has not been previously reported.
37
37
PART III
ITEM 10. DIRECTOR, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding Directors of the Company is set forth under the heading “Election of Directors” of the Company’s
Proxy Statement for its 2012 Annual Meeting of Shareholders, incorporated herein by reference. This Proxy Statement is
to be filed no later than 120 days after the close of the fiscal year ended March 31, 2012.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Company’s compensation of its executive officers is set for the under the heading “Executive
Compensation” of the Company’s Proxy Statement for its 2012 Annual Meeting of Shareholders, incorporated herein by
reference. This Proxy Statement is to be filed no later than 120 days after the close of the fiscal year ended March 31,
2012.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is set forth under the heading
“Stock Ownership of Certain Beneficial Owners and Management” of the Company’s Proxy Statement for its 2012 Annual
Meeting of Shareholders, incorporated herein by reference. Information about securities authorized for issuance under
equity compensation plans is set forth under the heading “Equity Compensation Plan Information” of its Proxy Statement
for the 2012 Annual Meeting of Shareholders, incorporated herein by reference. This Proxy Statement is to be filed no
later than 120 days after the close of the fiscal year ended March 31, 2012.
ITEM 13. CERTAIN RELATONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information set forth in the Proxy Statement under the section captioned “Transactions with Management and Others” is
incorporated herein by reference. This Proxy Statement is to be filed no later than 120 days after the close of the fiscal year
ended March 31, 2012.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information set forth in the Proxy Statement under the section captioned “Appointment of Independent Registered
Accounting Firm” is incorporated herein by reference. This Proxy Statement is to be filed no later than 120 days after the
close of the fiscal year ended March 31, 2012.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) The following consolidated financial statements of Giga-tronics Incorporated and subsidiaries and the
related independent registered public accounting firm are filed herewith:
1. Financial Statements. See Index to Financial Statements on page 18. The financial statements and
Report of Independent Registered Public Accounting Firm are included in Item 8 are filed as part of this
report.
2. Exhibits. The exhibit list required by this item is incorporated by reference to the Exhibit Index filed
with this report.
38
38
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act, the Registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
GIGA-TRONICS INCORPORATED
/s/ JOHN R. REGAZZI
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act, this annual report on Form 10-K has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
06/19/2012
Date
06/19/2012
Date
06/19/2012
Date
06/19/2012
Date
06/19/2012
Date
06/19/2012
Date
06/19/2012
Date
06/19/2012
Date
/s/ GARRETT A. GARRETTSON
Garrett A. Garrettson
Chairman of the Board
of Directors
/s/ JOHN R. REGAZZI
John R. Regazzi
/s/ FRANK D. ROMEJKO
Frank D. Romejko
/s/ GEORGE H. BRUNS, JR.
George H. Bruns, Jr.
/s/ JAMES A. COLE
James A. Cole
/s/ KENNETH A. HARVEY
Kenneth A. Harvey
/s/ LUTZ P. HENCKELS
Lutz P. Henckels
/s/ WILLIAM J. THOMPSON
William J. Thompson
Chief Executive Officer
(Principal Executive Officer)
and Director
Vice President of Finance/
Chief Financial Officer, Acting
(Principal Financial Officer)
Director
Director
Director
Director
Director
39
39
The following exhibits are filed by reference or herewith as a part of this report:
INDEX TO EXHIBITS
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
21
23.1
23.2
31.1
31.2
32.1
32.2
Articles of Incorporation of the Registrant, as amended, previously filed as Exhibit 3.1 to Form 10-KSB for the fiscal year
ended March 27, 1999 and incorporated herein by reference.
Amended and Restated Bylaws of Giga-tronics Incorporated, as amended on March 7, 2008, previously filed as Exhibit 3.2
to Form 10-K for the fiscal year ended March 29, 2008, and incorporated herein by reference.
Standard form Indemnification Agreement for Directors and Officers, previously filed as Exhibit 10.1 to Form 10-K for the
fiscal year ended March 27, 2010, and incorporated herein by reference.
First Amendment to Office Lease Agreement between Giga-tronics Incorporated and VIF/ZKS Norris Tech Center, LLC,
for 4650 Norris Canyon Road, San Ramon, CA, dated March 29, 2010, previously filed as Exhibit 10.2 to Form 10-K for
the fiscal year ended March 27, 2010, and incorporated herein by reference.
2000 Stock Option Plan and form of Incentive Stock Option Agreement, previously filed on September 8, 2000 as Exhibit
99.1 to Form S-8 (33-45476) and incorporated herein by reference. *
2005 Equity Incentive Plan incorporated herein by reference to Attachment A of the Registrant’s Proxy Statement filed July
21, 2005. *
Securities Purchase Agreement dated October 31, 2011, between the Company and Alara Capital AVI II, LLC, incorporated
by reference from exhibits filed with the Company’s current report on Form 8-K filed on November 3, 2011.
Warrant to purchase 848,684 shares of common stock, dated November 10, 2011, issued to Alara Capital AVI II, LLC,
incorporated by reference from exhibits filed with the Company’s current report on Form 8-K filed on November 14, 2011.
Investor Rights Agreement dated November 10, 2011, between the company and Alara Capital AVI II, LLC, incorporated
by reference from exhibits filed with the Company’s current report on Form 8-K filed on November 14, 2011.
Form of Voting Agreement between the Investor and members of the board of directors of the Company with respect to
exercisability of the Warrant, incorporated by reference from exhibits filed with the Company’s current report on Form 8-K
filed on November 14, 2011.
Significant Subsidiaries. (See page 41 of this Annual Report on Form 10-K.)
Consent of Independent Registered Public Accounting Firm, Perry-Smith LLP. (See page 43 of this Annual Report on
Form 10-K.)
Consent of Independent Registered Public Accounting Firm, Crowe Horwath LLP. (See page 42 of this Annual Report on
Form 10-K.)
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. (See page 44 of this Annual
Report on Form 10-K.)
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. (See page 45 of this Annual
Report on Form 10-K.)
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (See page 46 of this Annual Report on Form 10-K.)
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (See page 47 of this Annual Report on Form 10-K.)
101.1
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011,
formatted in XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balances heets, (ii) the Consolidated
Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to the Consolidated Financial
Statements, tagged as blocks of text (furnished but not filed).
* Management contract or compensatory plan or arrangement.
40
40
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES
Name
Microsource, Inc.
Jurisdiction of incorporation
California
41
41
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements (Nos. 333-45476, 333-34719, 333-48889, 333-
39403, 333-69688 and 333-135578) on Form S-8 of Giga-tronics Incorporated of our report dated June 19, 2012 relating to
the consolidated financial statements, appearing in this Annual Report on Form 10-K.
San Francisco, California
June 19, 2012
/s/ Crowe Horwath LLP
42
42
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements (Nos. 333-45476, 333-34719, 333-48889, 333-
39403, 333-69688 and 333-135578) on Form S-8 of Giga-tronics Incorporated of our report dated May 19, 2011, June 19,
2012 as to the effects of the restatement discussed in our report (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to the restatement discussed in our report), relating to our audit of the
consolidated financial statements which appears in this Annual Report on Form 10-K of Giga-tronics Incorporated for the
year ended March 31, 2012.
San Francisco, California
June 19, 2012
/s/ Perry-Smith LLP
43
43
EXHIBIT 31.1
CERTIFICATIONS UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Regazzi, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Giga-tronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date:
06/19/2012
/s/ JOHN R. REGAZZI
John R. Regazzi
Chief Executive Officer
44
44
EXHIBIT 31.2
CERTIFICATIONS UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank D. Romejko, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Giga-tronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date:
06/19/2012
/s/ FRANK D. ROMEJKO
Frank D. Romejko
Vice President of Finance/
Chief Financial Officer, Acting
45
45
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Giga-tronics Incorporated (the "Company") on Form 10-K for the period ending
March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R.
Regazzi, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date:
06/19/2012
/s/ JOHN R. REGAZZI
John R. Regazzi
Chief Executive Officer
46
46
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Giga-tronics Incorporated (the "Company") on Form 10-K for the period ending
March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Frank D.
Romejko, Vice President of Finance, Chief Financial Officer (acting), certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date:
06/19/2012
/s/ FRANK D. ROMEJKO
Frank D. Romejko
Vice President of Finance,
Chief Financial Officer, Acting
47
47
(This page intentionally left blank)
(This page intentionally left blank)
CORPORATE INFORMATION
B O A R D O F D I R E C T O R S
E X E C U T I V E O F F I C E R S
Gordon Almquist 2, 3, 4
Vice President, CFO WaveConnex, Inc.
George H. Bruns, Jr.
Chairman Emeritus
James A. Cole 1, 2, 3
General Partner, Windward Ventures
General Partner, Spectra Enterprises
Garrett A. Garrettson 1, 3
Chairman of the Board
President, Garrettson Consulting
Kenneth A. Harvey 2, 3
President, Peak Consulting Group
John R. Regazzi
Chief Executive Officer
Jeffrey T. Lum
Chief Technical Officer
H E A D Q U A R T E R S
Giga-tronics Incorporated
4650 Norris Canyon Road
San Ramon, CA 94583
(925) 328-4650
(925) 328-4700 (FAX)
S U B S I D I A R I E S
Lutz Henckels 1,3
Managing Director, Alara Capital Partners
Microsource, Inc.
1269 Corporate Center Parkway
John R. Regazzi
Chief Executive Officer
William J. Thompson 2, 3
Managing Director, Alara Capital Partners
Santa Rosa, CA 95407
(707) 527-7010
(707) 527-7176 (FAX)
www.gigatronics.com
1 Member, Compensation Committee
2 Member, Audit Committee
3 Member, Nominating Committee
4 Joined Board May 17, 2012
50
L E G A L C O U N S E L
Bingham McCutchen
Three Embarcadero Center
18th Floor
San Francisco, CA 94111
www.bingham.com
T R A N S F E R A G E N T
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
www.amstock.com
I N D E P E N D E N T A U D I T O R S
Crowe Horwath LLP
575 Market Street, Suite 3300
San Francisco, CA 94105
www.crowehorwath.com
A N N U A L M E E T I N G
The Company’s Annual Shareholder Meeting
will be held at 9:30 a.m. on Wednesday,
August 22, 2012 at Giga-tronics’ corporate
office located at 4650 Norris Canyon Road,
San Ramon, CA 94583 USA
F O R M 1 0-K
A copy of the Company’s complete annual report
on Form 10-K for fiscal year 2012, filed with the
Securities and Exchange Commission, may be
obtained without charge by a written request to:
Corporate Secretary
Giga-tronics Incorporated
4650 Norris Canyon Road
San Ramon, CA 94583 USA
4650 Norris Canyon Road
San Ramon, CA 94583
(925) 328-4650 (925) 328-4700 (fax)
www.gigatronics.com