Fellow Shareholders:
This last year saw major changes for Giga‐tronics as the company moved aggressively to focus on
subsystems and test and measurement systems for the Electronic Warfare (EW) market.
Five years ago, we had three discrete lines of business: our Giga‐tronics branded general purpose Test and
Measurement (T&M) equipment, our ASCOR customized RF switch matrices, and our Microsource RF filter
subsystems. While each business is manageable individually, the reality of supporting these product lines
together is more complicated.
Our general purpose test and measurement product line offered a fairly broad array of products, many
with a collection of optional dedicated accessories. This required substantial inventory to support
reasonable delivery times. In addition, many of these had been manufactured for years, and parts
availability issues required ongoing engineering resources. And even though we are proud of our legacy
and the ways our product innovations supported technology development worldwide, the test and
measurement industry had become more competitive for these types of products thereby reducing the
price premium that we once commanded.
Our ASCOR switch products offered different challenges. Jeff Lum, our former Chief Technology Officer,
was largely responsible for the clever ways in which our products addressed the needs of automated RF
testing for a variety of customers, but the customized nature of our product offering combined with our
relatively small footprint in the industry reduced our ability to grow the business in a consistent, profitable
way.
Meanwhile, our Microsource business thrived. Investments made years ago to understand how to make
extremely reliable fast‐tuning filters made the company uniquely qualified to satisfy then‐emerging needs
for flightworthy components for the EW market. However, this success came at a price: since lives
depend on these components, the manufacture of these devices requires significant overhead associated
with quality requirements. In recent years, this overhead has impacted all of our products and further
eroded the margins associated with our legacy and ASCOR products.
John Regazzi, the company’s CEO at the time, recognized these challenges. He also recognized an unmet
need in the EW market for a disruptive type of test and measurement system – equipment that Giga‐
tronics had the talent to design; that used many of the same processes required to manufacture our
Microsource products; that would require much less extensive inventory management; that would
demand similar quality requirements as those satisfied by the Microsource division because of the market
it addressed; and that had unique features that made it highly differentiated relative to competitors’
products.
The company had a choice to make. Five years ago, Giga‐tronics began the journey toward focusing
exclusively on the EW market. We completed two major components of this transition during FY2016 by
reaching agreements to divest the ASCOR and legacy businesses. In each case, our goals were fourfold:
ensure that the customers of these products are adequately supported in the future, recoup value within
each product line, reduce expenses when possible, and enable a more focused business going forward.
As of this writing, these divestitures are not complete. The acquisition of the ASCOR business is
proceeding apace, and we expect it to be largely complete by the time of the shareholder meeting.
However, we are disappointed to see that the acquisition of the legacy T&M business has resulted in
disagreements with the acquirer that we are trying to resolve. Regardless of the complications, our
original four reasons for divesting the legacy T&M business remain the guiding principles in our attempt
to drive the process forward.
Other substantive changes since last year include a new VP of Operations who brings significant
experience in lean manufacturing and who is having a substantial impact on the company, a smaller
Finance organization which is more aligned with the overall size of the company, and changes in our
customer‐facing personnel where we have chosen to hire from the EW industry to give us better insight
into our customers’ needs. Most pertinent to this letter is a change in management where John Regazzi
assumed the role of CTO, and I am supporting him as acting CEO. This will free John and enable him to
more thoroughly engage customers while pursuing the continued development of our new Advanced
Signal Generation product as aggressively as possible. Regardless of our titles, John, I, and the rest of the
team are committed to sustained profitability as soon as possible.
While we have made progress with some of our plans, we are not finished. We are still not profitable,
and we remain constrained due to our overall capitalization. We must grow revenue, particularly with
our Advanced Signal Generator product, while simultaneously using capital more efficiently. I encourage
you to read through our recent 10‐K filing to better understand the changes that have occurred in the
company over the last few years as well as the challenges that remain.
We recognize that we serve you, our shareholders; and we hope that our next annual letter will
demonstrate that our efforts over the upcoming year are both well‐chosen and well‐executed.
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 26, 2016
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
Non-accelerated filer
(Do not check if a smaller reporting company)
[ ]
[ ]
Accelerated filer
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, 2015 was $6,455,711.
There were a total of 9,549,703 shares of the Registrant’s Common Stock outstanding as of June 2, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into the parts indicated:
PART OF FORM 10-K DOCUMENT
PART III
Registrant’s PROXY STATEMENT for its 2016 Annual Meeting of Shareholders to be filed no later than 120
days after the close of the fiscal year ended March 26, 2016.
TABLE OF CONTENTS
PART I
Page
ITEM 1. Business ...........................................................................................................................................................
ITEM 1A. Risk Factors ......................................................................................................................................................
ITEM 1B. Unresolved Staff Comments ............................................................................................................................
ITEM 2. Properties .........................................................................................................................................................
ITEM 3. Legal Proceedings ............................................................................................................................................
ITEM 4. Mine Safety Disclosures...................................................................................................................................
3
7
9
9
9
9
PART II
ITEM 5. Market for Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities .......
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 26, 2016 and March 28, 2015 ........................................................
Consolidated Statements of Operations for the years ended March 26, 2016 and March 28, 2015 .................
Consolidated Statements of Shareholders' Equity for the years ended March 26, 2016 and March 28, 2015 .
Consolidated Statements of Cash Flows for the years ended March 26, 2016 and March 28, 2015 ................
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 .............................................................................................................................................
10
11
12
21
22
23
24
25
26
27
46
47
47
48
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 ..........................................................................................................
49
49
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49
ITEM 15. Exhibits and Financial Statements Schedules ..................................................................................................
SIGNATURES ....................................................................................................................................................................
50
51
PART IV
i
Unless the context otherwise requires, we use the terms “Giga-tronics Incorporated,” “Giga-tronics,” “we,” “us,” “the
Company” and “our” in this Annual Report on Form 10-K to refer to Giga-tronics Inc. and its wholly owned subsidiary.
FOWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995, including but not limited to certain disclosures contained in Item 1A,
“Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and
contentions, and are not historical facts and typically are identified by the use of terms such as "may," "will," "should,"
"could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue" and similar words, although
some forward-looking statements are expressed differently. You should be aware that the forward-looking statements
included herein represent management's current judgment and expectations, but our actual results, events and performance
could differ materially from those expressed or implied by forward-looking statements. We do not intend to update any of
these forward-looking statements or publicly announce the results of any revisions to these forward-looking statements, other
than as is required under the federal securities laws.
PART 1
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 the
new Advanced Signal Generator (ASG) for the electronic warfare market, and switching systems that are used in automatic
testing systems primarily in aerospace, defense and telecommunications.
Microsource 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. Microsource’s two largest customers are prime contractors for which it develops and
manufactures YIG RADAR filters used in fighter jet aircraft.
In an effort to improve long term sales growth and profitability, Giga-tronics has embarked on a strategy of concentrating
our efforts on the Giga-tronics Division’s newly developed ASG, and Microsource YIG RADAR filters. Giga-tronics has
started to move away from the Giga-tronics legacy products. These products were developed ten to twenty five years ago,
and have been steadily decreasing in both sales and gross margins. For example, we sold our SCPM line to Teradyne in 2013,
and in December 15, 2015 we entered into an agreement for the sale of much of our power meter, amplifier and legacy signal
generator business to Spanawave Corporation. Both of these transactions will allow us to increase our focus on the ASG and
Microsource YIG RADAR filters.
Giga-tronics was incorporated on March 5, 1980, and Microsource was acquired by Giga-tronics on May 18, 1998.
The combined Company principal executive offices are located at 4650 Norris Canyon Road, San Ramon, California, and
our telephone number at that location is (925) 328-4650.
Operating Segments
The Company has two reporting segments: Giga-tronics Division and Microsource.
For more information regarding the Company’s two reporting segments, see “Part II-Item 8. Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements-Significant Customers and Industry Segment
Information.”
3
Products and Markets
Giga-tronics
Our Giga-tronics Division produces modular signal sources, up-converters, receivers and down-converters in the AXIe format
covering a radio frequency (RF) range of 100 megahertz (MHz) to 18 gigahertz (GHz). The Company also produces a 5-slot
and a 9-slot AXIe chassis and a high-performance AXIe frequency reference module for use with its signal sources. Available
within each product family are a number of options allowing customers to select specialized capabilities, features and
functions. The end-user markets for these products can be divided into three segments: RADAR Target Generation, Threat
simulation and Surveillance. These instruments are used in the design, evaluation and calibration of RADAR, Electronic
Countermeasures (ECM) and Direction Finding (DF) systems.
The Giga-tronics Division also produces switching systems that operate with a bandwidth from direct current (DC) to optical
frequencies. These switch systems may be incorporated within 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
Our Microsource segment develops and manufactures a broad line of YIG tuned oscillators, filters, filter components, and
microwave synthesizers, which are used by its customers in operational applications and in manufacturing a wide variety of
microwave instruments or devices. Microsource’s two largest customers are prime contractors for which it develops and
manufactures YIG RADAR filters used in fighter jet aircraft.
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.
We occasionally use sole source arrangements to obtain leading-edge technology or favorable pricing or supply terms, but
not in any material volume. In our opinion, the loss of any sole source arrangement we have would not be material to our
operations. Some suppliers are also competitors of Giga-tronics. In the event a competitor-supplier chooses not sell its
products to us, production delays could occur as we seek new suppliers or re-design components to our products.
Although extended delays in receipt of components from our suppliers could result in longer product delivery schedules for
us, we believe that our protection against this possibility stems from our practices of dealing with well-established suppliers
and maintaining good relationships with such suppliers.
Patents and Licenses
Our competitive position is largely dependent upon our ability to provide performance specifications for our 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 our industry, such protection is most often, although
not always, short-lived. Therefore, although we occasionally pursue patent coverage, we place major emphasis on the
development of new products with superior performance specifications and the upgrading of existing products toward this
same end.
Our products are based on our own designs, which are derived from our own engineering abilities. If our new product
engineering efforts fall behind, our competitive position weakens. Conversely, effective product development greatly
enhances our competitive status.
We presently hold 31 patents. Capitalized costs relating to these patents were both incurred and fully amortized prior to
March 27, 2011. Accordingly, these patents have no recorded value included in our consolidated financial statements for the
fiscal years ended March 26, 2016 (“fiscal 2016”) and March 28, 2015 (“fiscal 2015”).
We are not dependent on trademarks, licenses or franchises. We utilize certain software licenses in certain functional aspects
for some of our products. Such licenses are readily available, non-exclusive and are obtained at either no cost or for a
relatively small fee.
4
In September 2015, we entered into a software development agreement with a major aerospace and defense company whereby
the aerospace company would develop and license its simulation software to us. The simulation software (also called Open
Loop Simulator or OLS technology) is currently the aerospace company’s intellectual property. The OLS technology
generates threat simulations and enables various hardware to generate signals for performing threat analysis on systems under
test. We intend to license the OLS software as a bundled or integrated solution with our ASG system.
Seasonal Nature of Business
Our business is not seasonal.
Working Capital Practices
We generally strive to maintain adequate levels of inventory and we generally sell to customers on 30-day payment terms in
the U.S. and generally allow more time for overseas payments. Typically, we receive payment terms of 30 days from our
suppliers. We believe that these practices are consistent with typical industry practices.
Importance of Limited Number of Customers
We are 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 2017. U.S. and international defense-related agencies accounted for 73% of net sales in both
fiscal 2016 and 2015. Commercial business accounted for the remaining 27% of net sales in both fiscal 2016 and fiscal 2015.
At the Giga-tronics Division, U.S. defense agencies and their prime contractors accounted for 56% and 40% of net sales in
fiscal 2016 and fiscal 2015, respectively. Microsource reported 98% of net sales to prime contractors of U.S. defense agencies
in both fiscal 2016 and fiscal 2015.
During fiscal 2016, the Boeing Company accounted for 32% of our consolidated revenues and was included in the
Microsource reporting segment. A second customer, Defense Finance and Accounting Services (DFAS) accounted for 11%
of our consolidated revenues during fiscal 2016 and was included in the Giga-tronics Division reporting segment.
During fiscal 2015, Lockheed Martin accounted for 28% of our consolidated revenues. A second customer, the Boeing
Company accounted for 23% of our consolidated revenues. Both were included in the Microsource reporting segment. A
third customer, DFAS accounted for 14% of our consolidated revenues during fiscal 2015 and was included in the Giga-
tronics Division reporting segment.
In management’s opinion, we could experience a material adverse effect on our financial stability if there was a significant
loss of either our defense or commercial customers.
Our Giga-tronics Division products are largely capital investments for our customers, and our belief is that our customers
have economic cycles in which capital investment budgets for the kinds of products that we produce expand and contract.
We therefore, expect that a major Giga-tronics Division customer in one year will often not be a major customer in the
following year. Accordingly, our net sales and earnings will decline if we are unable to find new customers or increase our
business with other existing customers to replace declining net sales from the previous year’s major customers. A substantial
decline in net sales to the U.S. government defense agencies and their prime contractors would also have a material adverse
effect on our net sales and results of operations unless replaced by net sales in the commercial sector.
Backlog of Orders
On March 26, 2016, our backlog of unfilled orders was approximately $14.6 million compared to approximately $5.7 million
at March 28, 2015. As of March 26, 2016, there were approximately $8.6 million of orders scheduled for shipment beyond
one year, compared to $521,000 at March 28, 2015. Orders for our products include program orders from prime 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. In April of 2016, Microsource received a $4.5
million YIG RADAR filter order that is not reflected in the backlog numbers above. In June 2016, the Gigatronics Division
received a $3.3 million order from the United States Navy for our Real-Time Threat Emulation System (Real-Time TEmS)
which is a combination of our new ASG Hardware Platform, along with software developed and licensed to us from a major
aerospace and defense company. We expect to ship both orders throughout fiscal 2017.
5
Backlog includes only those customer orders for which binding agreement exists, a delivery schedule has been agreed upon
between us and our customer and, in the case of U.S. government orders, for which funding has been appropriated.
Competition
Giga-tronics serves two very different markets.
The first is the electronic test equipment market with applications ranging from complex RF signal simulation used in the
evaluation of military RADAR and Electronic Warfare systems to high performance signal switching used in the automated
testing of commercial avionics. These applications represent niche segments within the broader test equipment market and
their unique requirements allow Giga-tronics to win against a variety of larger competitors, such as Agilent/Keysight, Rohde
& Schwarz and Anritsu, by focusing our limited resources squarely on the specific features needed. We do not attempt to
compete ‘across the board’, but selectively based upon our particular strengths, the competitors’ perceived limitations, the
customer’s needs and market opportunities. To maintain our position against competitors that have greater resources in
research, development and manufacturing with substantially broader product lines and channels, we (a) place strong emphasis
on maintaining a high degree of technical competence as it relates to the development of new products, (b) are highly selective
in establishing technological objectives and (c) focus sales and marketing activities in the selected niche areas that are weakly
served or underserved. Others competitors are of comparable size or have small product divisions with more limited product
lines, such as Racal Instrument (a division of Astronics), VTI Instruments (a division of AMETEK), ELCOM (a division of
Frequency Electronics Inc.), COMSTRON (a division of Cobham Plc) and EWST (a division of Ultra Electronics Plc).
The second is the aftermarket for operational hardware associated with the US Government’s RADAR Modernization
Program (RMP) for prior generation fighter aircraft. The F/A-18E, the F-15D and F-16 jets are receiving new RADARs to
extend their useful lives. Giga-tronics’ Microsource business unit supplies YIG filters specifically designed for military
aircraft to solve interference problems. The prime contractors responsible for integrating the new RADARs have flight
qualified our filters at considerable expense. Only a few companies possess the technical know-how to design and
manufacture filters of this nature, such as Teledyne and Micro-Lambda Wireless, but the expense of requalifying a new
component is prohibitive to the point where the integrator would only undertake such an effort when insurmountable technical
deficiencies arose, which do not exist in this case. Microsource is the sole-source supplier of these filters and presently does
not have any competition for this business. Microsource routinely maintains a “gold supplier” rating from its customers and
received the Supplier of the Year award from one of the integrators. Microsource must maintain the Aerospace Industry’s
AS9100C certification for its Quality Management System which it currently does. In October 2015, we announced a lapse
in our AS9100C certification for our Supplier Quality Management System. In May 2016, our Microsource segment regained
its AS9100C certification, during the lapse in certification we worked with one of the major customers to allow continued
shipping and orders and we were pursuing a similar solution with the second customer, but this is no longer required since
we regained certification.
Sales and Marketing
Giga-tronics and Microsource sell their products primarily direct to end customers and prime contractors.
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. Our future success is dependent on our
ability to steadily incorporate advancements in component technologies into our new products. In fiscal 2016 and fiscal 2015,
product development expenses totaled approximately $2.8 million and $3.2 million respectively.
Recent activities have focused primarily on the development of the new ASG product and the improvement of existing
products. It is our intention to maintain product development at levels required to sustain our competitive position. Our
product development activities are funded internally, through product line sales, or through outside equity investment and
debt financing. Product development activities are expensed as incurred, except software development costs associated with
the ASG.
We expect 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 our current product offerings obsolete or that we 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. Failure to do so could adversely affect our business.
6
Manufacturing
The assembly and testing of Giga-tronics Division and Microsource’s products are done at our San Ramon facility.
Environment
To the best of our knowledge, we are in compliance with all Federal, state and local laws and regulations involving the
protection of the environment.
Employees
As of March 26, 2016 and March 28, 2015, we employed 63 and 71 individuals on a full-time basis, respectively. We believe
that our future success depends on our ability to attract and retain skilled personnel. None of our employees are represented
by a labor union, and we consider our employee relations to be good.
Information about Foreign Operations
We sell to our international customers through a network of foreign technical sales representative organizations. All
transactions between us and our international customers are in U.S. dollars.
Geographic Distribution of Net Sales
(Dollars in thousands)
Domestic
International
Total
2016
13,998 $
598
14,596 $
2015
16,985
1,467
18,452
$
$
2016
96 %
4 %
100 %
2015
92 %
8 %
100 %
See Item 8, (Note 12, Significant Customers and Industry Segment Information) of the consolidated financial statements for
further breakdown of international sales for the last two years.
ITEM 1A. RISK FACTORS
Future liquidity is uncertain
We incurred net losses of $4.1 million in fiscal 2016, and $1.7 million in fiscal 2015. These losses have contributed to an
accumulated deficit of $24.0 million as of March 26, 2016.
Beginning in fiscal 2012, we invested substantially in the research and development of our new product line, ASG. We
anticipate long-term revenue growth and improved gross margins from the ASG platform, but delays in completing it have
contributed to our losses. We also experienced delays in the development of features, orders, and shipments for the new ASG.
These delays have significantly contributed to a decrease in working capital from $3.0 million at March 28, 2015, to $1.8
million at March 26, 2016. The new Advanced Signal Generator product has now shipped to several customers, but potential
delays in the development of features, longer than anticipated sales cycles, or the ability to continue shipments in volume
quantities, could significantly contribute to additional future losses. The losses in fiscal 2016 caused working capital
restraints, resulting in delayed payments to suppliers.
These matters raise substantial doubt as to our ability to continue as a going concern.
To address these matters, our management has taken several actions to provide additional liquidity and reduce costs and
expenses going forward. These actions are described in Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in the “Notes to the Consolidated Financial Statements” (Note 2, Going Concern
and Management’s Plan).
Customer orders and production of new product platform
We invested heavily in the development of our new ASG product platform but delays in completing it have contributed to
our losses. Longer than anticipated sales cycles in future fiscal years, or delays in production and shipping volume quantities,
could significantly contribute to additional losses.
7
Ability to stay listed for trading on The NASDAQ Capital Market
Our Common Stock is current listed on the NASDAQ Capital Market. NASDAQ has minimum requirements that a Company
must meet in order to remain listed on the NASDAQ Capital Market. These requirements include maintaining a minimum
shareholders’ equity of $2.5 million. If our shareholders’ equity falls below $2.5 million, NASDAQ could delist us from the
NASDAQ Capital Market. If our Common Stock were to be delisted, the liquidity of our Common Stock would be adversely
affected and the market price of our Common Stock could decrease. If our Common Stock ceases to be listed for trading on
the NASDAQ Capital Market, we expect that our Common Stock would be traded on the Over-the-Counter Bulletin Board
on or about the same day.
Giga-tronics’ sales are substantially dependent on the defense industry
We have 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. Our product backlog has a number of risks and uncertainties
such as the cancellation or deferral of orders, dispute over performance and our ability to collect amounts due under these
orders. If any of these events occur, actual shipments could be lower than projected shipments and revenues could decline
which would have an adverse effect on our operating results and liquidity.
Giga-tronics’ markets involve rapidly changing technology and standards
The market for electronics equipment is characterized by rapidly changing technology and evolving industry standards. We
believe that our future success will depend in part upon our ability to develop and commercialize our existing products, and
in part on our ability 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 we will successfully complete the
development of current or future products, or that such products will achieve market acceptance. The inability to develop
new products in a timely manner could have a material adverse impact on our operating performance and liquidity.
Giga-tronics’ common stock price is volatile
The market price of our common stock could be subject to significant fluctuations in response to variations in quarterly
operating results, reduction in revenues or lower earnings or increased losses and reduced levels of liquidity when compared
to previous quarterly periods, and other factors such as announcements of technological innovations or new products by us
or by our competitors, government regulations or developments in patent or other proprietary rights. In addition, NASDAQ
and other stock markets have experienced significant price fluctuations in recent years. 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 our
common stock.
Our stock at any time has historically traded on low volume on the NASDAQ Capital Market. Sales of a significant volume
of stock could result in a decline of our share price.
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 we produce 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,
our customers generally use our 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 our reputation generally. To date, performance problems in our
products or in other products used together with our products have not had a material adverse effect on our business. However,
management cannot be certain that a material adverse impact will not occur in the future.
8
Giga-tronics’ competition has greater resources
Our instrument, switch, oscillator and synthesizer products compete with Agilent/Keysight, Anritsu, and Rohde & Schwarz.
All of these companies have substantially greater research and development, manufacturing, marketing, financial, and
technological personnel and managerial resources than us. These resources also make these competitors better able to
withstand difficult market conditions than us. There can be no assurance that any products developed by the competitors will
not gain greater market acceptance than any developed by us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal executive office and the marketing, sales and engineering offices and manufacturing facilities are located in a
47,300 square feet facility in San Ramon, California, which we occupy under a lease agreement expiring December 31, 2016.
We believe that our facilities are adequate for our business activities.
We are currently evaluating staying at our existing facility or moving to a smaller facility in the San Ramon area at the
expiration of our current lease.
ITEM 3. LEGAL PROCEEDINGS
As of March 26, 2016, we have no material pending legal proceedings. From time to time, we are involved in various disputes
and litigation matters that arise in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
REPURCHASES OF EQUITY SECURITIES
Common Stock Market Prices
Our common stock is traded on the Nasdaq Capital Market using the symbol ‘GIGA’. The number of record holders of our
common stock as of March 26, 2016 was approximately 124. A significantly larger number of stockholders may be "street
name" or beneficial holders, whose shares of record are held by banks, brokers and other financial institutions. 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 mark-ups, mark-downs, or commission and may not reflect actual transactions.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Quarter
Low
2016 High
(3/29 - 6/27) $ 3.15 $ 1.43
(6/28 - 9/26) 1.89 1.04
(9/27 - 12/26) 3.85 0.86
(12/27 - 3/26) 1.85 1.11
Fiscal Quarter
2015 High Low
(3/30 - 6/28) $ 3.45 $ 1.16
3.21 1.84
(6/29 - 9/27)
2.00 1.40
(9/28 - 12/27)
1.95 1.43
(12/28 - 3/28)
We have not paid cash dividends in the past and have no current plans to do so in the future, believing the best use of our
available capital is in the enhancement of our product position. In addition, in the absence of positive retained earnings,
California law permits payment of cash dividends only to the extent total assets exceed the sum of total liabilities and the
liquidation preference amounts of preferred securities. At March 26, 2016, the Company’s assets were less than this sum by
$560,000.
On January 29, 2016, we consummated the sale of 2,787,872 Units, each consisting of one share of common stock and a
warrant to purchase 0.75 shares of common stock, to approximately 20 private investors pursuant to a Securities Purchase
Agreement dated as of January 19, 2016. The purchase price for each Unit was $1.24375. Gross proceeds were approximately
$3.5 million. Net proceeds to the Company after fees were approximately $3.1 million. The portion of the purchase price
attributable to the common shares included in each Unit was $1.15, the consolidated closing bid price for our common stock
on January 15, 2016. The warrant price was $.09375 per Unit (equivalent to $0.125 per whole warrant share), with an exercise
price of $1.15 per share. The term of the warrants is five years from the date of completion of the transaction. Emerging
Growth Equities, Ltd also received warrants to purchase 292,727 shares of common stock as part of its consideration for
serving as placement agent in connection with the private placement. All such transactions were previously reported in current
reports on Form 8-K.
10
Equity Compensation Plan Information
The following table provides information on options and other equity rights outstanding and available at March 26, 2016.
Equity Compensation Plan Information
No. of
securities
remaining
available for
future issuance
under equity
compensation
No. of
Plan Category
Equity compensation plans approved by security holders (1)
Equity compensation plans not approved by security holders
Total
securities to be Weighted
average
exercise price
of outstanding
options
(b)
issued upon
exercise of
outstanding
options
(a)
1,592,200 $
—
1,592,200 $
plans
(excluding
securities
reflected in
column (a))
(c)
1.52
—
1.52
955,427
n/a
955,427
(1) Excludes warrants issued to purchasers of units consisting of stock and warrants in private placements, to a placement
agent for services in connection with the private placement and to lenders in connection with debt financing.
Issuer Repurchases
We did not repurchase any of our equity securities during the fiscal year ended March 26, 2016.
ITEM 6. SELECTED FINANCIAL DATA
Pursuant to Item 301(c) of Regulation S-K., the Company, as a smaller reporting company, is not required to provide the
information required by this item.
11
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
Overview and Refocusing Giga-tronics
We produce sophisticated test and measurement equipment primarily used in the aerospace and defense markets. We also
produce YIG (Yttrium, Iron, Garnet) RADAR filters used in fighter jet aircraft. We have two reporting segments: Giga-
tronics Division and Microsource.
● The Giga-tronics Division historically produces a broad line of test and measurement equipment used primarily for
the design, production, repair and maintenance of products in aerospace, telecommunications, RADAR, and
electronic warfare.
● Microsource primarily develops and manufactures YIG RADAR filters used in fighter jet aircraft for two prime
contractors.
In an effort to improve long term sales growth and profitability, Giga-tronics has embarked on a strategy of concentrating
our efforts on the Giga-tronics Division’s newly developed Advanced Signal Generator (ASG) and Microsource YIG
RADAR filters. The ASG addresses a technology gap within the RADAR and electronic warfare market segment, and has
prospects for greater growth in sales and margins than our legacy Giga-tronics division product lines. In fiscal 2016 Giga-
tronics moved the ASG from development to manufacturing, and received $2.5 million in customer orders. The Microsource
YIG RADAR filters provide us with long term production and development contracts with strong gross margins. In recent
years we have produced these RADAR filters for two fighter jet platforms, and will start production for a third platform in
fiscal year 2017.
Giga-tronics has started to move away from the Giga-tronics legacy products. These products were developed ten to twenty-
five years ago, and have been steadily decreasing in both sales and gross margins. We sold our SCPM line to Teradyne in
2013, and in December 15, 2015 we entered into an agreement for the sale of much of our power meter, amplifier and legacy
signal generator business to Spanawave Corporation (see Note 10, Sale of Product Lines). We expect these transactions will
allow us to focus on the ASG and Microsource YIG RADAR filters, while providing additional cash for operations and
reducing related personnel expenses. We will continue to aggressively look for other opportunities to sell product lines for
additional cash.
The ASG has the potential to significantly grow sales and achieve strong gross margins. However, Giga-tronics has
experienced significant delays developing, manufacturing and receiving ASG customer orders. The ASG is the most
technically complex and advanced product Giga-tronics has developed and manufactured, and we have experienced delays
in bringing the product to market. It is also priced significantly higher than any other Giga-tronics product, and we have
experienced longer than anticipated procurement cycles in the electronic warfare market it services. The delays in the
development and manufacturing of the ASG, along with the longer than anticipated procurement cycles, have contributed to
the increased losses in fiscal 2016. Giga-tronics could experience similar losses in fiscal 2017 if there are further delays in
ASG features currently being developed, manufacturing efficiencies are not achieved, and customer orders are delayed. To
bring the ASG to its full potential, Giga-tronics may be required to seek additional working capital from product line sales,
however, there are no assurances that such sales will be available, or on terms acceptable to the Company.
Significant Orders
Both the Giga-tronics Division and Microsource receive large customer orders each year. The timing of orders, and any
associated milestones achievement, causes significant differences in orders received, backlog, sales, deferred revenue,
inventory and cash flow when comparing one fiscal period to another. Below is a review of recently received significant
orders:
Our Giga-tronics Division received orders of $1.5 million and $2.4 million in fiscal 2016 and 2015, respectively, from the
United States Navy for our Model 8003 Precision Scalar Analyzers and associated accessories (“8003”). We shipped all of
the $1.5 million order in fiscal 2016 and the $2.4 million order in fiscal 2015. The 8003 was designed about 25 years ago,
and Giga-tronics is no longer able to purchase key components and materials used to manufacture the 8003. The Navy orders
mark the end of life of the 8003.
12
Through fiscal 2016 we received $3.3 million of orders for the ASG, of which, $2.3 million shipped to several customers.
Orders and shipments for the ASG may not be consistent when comparing one fiscal period to another due to delays in the
development of features, longer than anticipated sales cycles, or the ability to ship volume quantities.
In June 2016, the Gigatronics Division received a $3.3 million order from the United States Navy for our Real-Time TemS
which is a combination of the ASG hardware platform, along with software developed and licensed to the Company from a
major aerospace and defense company. The complete order includes engineering services to integrate the Real-Time TEmS
product with additional third party hardware and software for the customer. The Company expects to fulfill the order in the
second half of the current fiscal year.
In May of 2015, Microsource received a $3.0 million order YIG RADAR filter order (Ongoing Production Order) associated
with a fighter jet platform we have been manufacturing since fiscal 2014. We shipped all of the $3.0 million order in fiscal
2016. In April of 2016, Microsource received a $4.5 million YIG RADAR filter for the same fighter jet platform. We expect
to ship this order throughout fiscal 2017.
In fiscal 2015 Microsource received a $6.5 million order (“NRE Order”) for non-recurring engineering and for delivery of a
limited number of flight-qualified prototype hardware from a second prime defense contractor to develop a variant of our
high performance fast tuning YIG RADAR filters for an aircraft platform. In fiscal 2016 our Microsource business unit also
finalized an associated multiyear $10.0 million YIG production order (“YIG Production Order”). We expect to start shipping
the YIG Production Order in the summer of 2016, and to continue shipping it through fiscal 2020.
The Microsource NRE Order received in fiscal 2015 resulted in significant improvements to sales and results from operations
in fiscal 2015, compared to fiscal 2016. With a majority of the associated services from the NRE Order being completed in
fiscal 2015, and the YIG Production Order not scheduled to ship until fiscal 2017, the Company experienced a decrease in
sales and results from operations in fiscal 2016.
Results of Operations
New orders by reporting segment are as follows for the fiscal years ended:
Orders
(Dollars in thousands)
Giga-tronics Division
Microsource
Total
2016
9,688 $
13,739
23,427 $
2015
9,095
8,416
17,511
$
$
% change
2016
vs.
2015
7 %
63 %
34 %
2015
vs.
2014
5 %
70 %
28 %
New orders received in fiscal 2016 increased 34% to $23.4 million from the $17.5 million received in fiscal 2015. The
increase in orders was primarily due to Microsource’s receipt of the $10.0 million YIG Production Order and the $3.0 million
Ongoing Production Order in fiscal 2016, compared to the $6.5 million NRE order in fiscal 2015. The increase in the Giga-
tronics Division was primarily due to the $2.3 million increase of orders for the ASG, partially offset by the decrease in the
Navy 8003 order, and by decreasing orders for legacy products being sold to Spanawave Corporation (See Note 10, Sale of
Product Lines).
New orders received in fiscal 2015 increased 28% to $17.5 million from the $13.6 million received in fiscal 2014. The
increase was primarily due to Microsource’s receipt in fiscal 2015 of the $6.5 million NRE order.
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
Backlog of unfilled orders shippable after one year
$
2016
14,560 $
5,984
8,576
2015
5,729
5,208
521
% change
2016
vs.
2015
154%
15%
1546%
2015
vs.
2014
(14%)
(4%)
(44%)
13
Backlog at the end of fiscal 2016 increased 154% compared to the end of fiscal 2015. The increase in backlog is primarily
due to the $10.0 million YIG Production Order our Microsource business unit received in fiscal 2016. In April of 2016,
Microsource received a $4.5 million YIG radar filter; in June 2016 Gigatronics received a $3.3 million order for Real-Time
TEmS, both new orders are not reflected in the backlog numbers above. We expect to ship both orders throughout fiscal
2017.
The allocation of net sales by reporting segment was as follows for the fiscal years shown:
Allocation of Net Sales
(Dollars in thousands)
Giga-tronics Division
Microsource
Total
2016
8,679 $
5,917
14,596 $
2015
9,123
9,329
18,452
$
$
% change
2016
vs.
2015
(5%)
(37%)
(21%)
2015
vs.
2014
25%
55%
39%
Net sales in fiscal 2016 were $14.6 million, a 21% decrease from $18.5 million in fiscal 2015. Sales for the Giga-tronics
Division decreased 5%, or $444,000, primarily due to the $1.2 million decrease in the legacy products sold to Spanawave
Corporation (See Note 10, Sale of Product Lines), the $905,000 decrease in the size of the Navy 8003 order in fiscal 2016,
partially offset by a $1.3 million increase in ASG shipments and a $383,000 increase in 4600 Switch product shipments. Net
sales for Microsource decreased 37% primarily due to the winding down of the NRE Order.
Net sales in fiscal 2015 were $18.5 million, a 39% increase from $13.3 million in fiscal 2014. Sales for the Giga-tronics
Division increased 25%, or $1.8 million, primarily due to the fulfillment of the $2.4 million Navy 8003 order. Sales for the
Microsource business unit increased 55%, or $3.3 million, largely due to recognizing $4.7 million of sales associated with
the $6.5 million NRE Order received during the year. This was partially offset by a $1.4 million decrease in the delivery of
YIG filter production units associated with the contractual timing of shipments to a prime defense contractor.
The allocation of gross margins by reporting segment was as follows for the fiscal years shown:
Gross Margin
(Dollars in thousands)
Giga-tronics Division
Microsource
Total
2016
2,360 $
2,261
4,621 $
2015
3,523
4,484
8,007
$
$
% change
2016
vs.
2015
(33%)
(50%)
(42%)
2015
vs.
2014
63%
95%
79%
Gross margin decreased in fiscal 2016 to $4.6 million from $8.0 million for fiscal 2015. The decrease in Giga-tronics gross
margin was due to rework associated with the initial pilot manufacturing run of the ASG, and overhead being absorbed by
fewer shipments. The decrease in Microsource was primarily due to the decrease in net sales associated the NRE Order,
which had a lower cost of sales compared to product sales and overhead being absorbed by fewer shipments.
Gross margin increased in fiscal 2015 to $8.0 million from $4.5 million for fiscal 2014. The increase in fiscal 2015 was
primarily due to the fulfillment of the Microsource NRE Order, which had a lower cost of sales compared to product sales.
Operating expenses were as follows for the fiscal years shown:
Operating Expenses
(Dollars in thousands)
Engineering
Selling, general and administrative
Total
2016
2,806 $
5,522
8,328 $
2015
3,210
4,783
7,993
$
$
% change
2016
vs.
2015
(13%)
15%
4%
2015
vs.
2014
(18% )
(1% )
(12% )
14
Operating expenses increased 4%, or $335,000 in fiscal 2016 compared to fiscal 2015. Engineering expenses decreased
$404,000 during fiscal 2016 when compared to fiscal 2015 primarily due to development costs incurred in fiscal 2015
associated with our Switch product which we are now shipping. Selling, general and administrative expenses increased 15%
or $739,000 primarily due to a $200,000 increase in outside services related to financial services and management
consulting, a $167,000 increase in sales and marketing efforts associated with our new ASG, a $155,000 increase in officer
salaries, and a $113,000 increase in non-cash stock based compensation.
Operating expenses decreased 12%, or $1.0 million, in fiscal 2015 compared to fiscal 2014. Engineering expenses decreased
$687,000 during fiscal 2015 when compared to fiscal 2014, which was primarily due to certain engineers being assigned to
a Microsource nonrecurring engineering project that is recorded as cost of sales. Selling, general and administrative expenses
were approximately $4.8 million for both fiscal 2015 and fiscal 2014. Restructuring expenses decreased $331,000 in fiscal
2015 when compared to fiscal 2014, primarily due to Giga-tronics completion of its closure of the Santa Rosa facility in
fiscal 2014.
Operating Income (Loss)
Operating loss was $3.7 million in fiscal 2016 compared to an operating income of $14,000 in fiscal 2015. The decline in
operating results in fiscal 2016 compared to fiscal 2015 was primarily due to decreased revenues associated with the
Microsource NRE Order and the Navy 8003 order. Operating loss was also impacted by the delays in the development and
manufacturing of the ASG, along with its longer than anticipated sales cycle.
Derivative Liability
In fiscal 2016, we recorded a loss of $12,000 related to revaluation of the derivative liability, associated with warrants issued
with the PFG Loan. There was no gain or loss recorded in fiscal 2015 related to the revaluation of the PFG warrant liability
(see Note 8, Term Loan, Revolving Line of Credit and Warrants).
Warrant Charge Expense
In fiscal 2015 we recorded a $1.2 million non-cash charge related to the issuance of new warrants in connection with a Stock
Purchase Agreement and Warrant Agreement with Alara Capital dated February 16, 2015. Pursuant to the agreements, we
received during February 2015 total cash proceeds of approximately $1.5 million through Alara’s exercise of its existing
Series C and Series D warrants to purchase common shares, all of which had an exercise price of $1.43 per share for total
cash proceeds of $1,434,000, which was recorded net of $42,000 of stock issuance costs. As part of the consideration for this
exercise, we sold to Alara two new warrants to purchase an additional 898,634 and 194,437 common shares at an exercise
price of $1.78 and $1.76 per share, respectively, for a total purchase price of $137,500 or $0.125 per share. The new warrants
were accounted for and resulted in the charges described above (see Note 20, Exercise of Series C and Series D Warrants).
There was no warrant charge expense recorded in fiscal 2016.
Net Interest Expense
Net interest expense in fiscal 2016 was $383,000 a decrease of $23,000 over fiscal 2015. Interest expense decreased in fiscal
2016 over fiscal 2015 primarily due to the lower principal balances in both loans with PFG. For fiscal 2016, interest expense
includes $165,000 of accretion of discounts on the PFG Loan and Warrant Debt compared to $152,000 recorded in fiscal
2015 (see Note 8, Term Loan, Revolving Line of Credit and Warrants).
Net Loss
Net loss was $4.1 million in fiscal 2016, compared to a net loss of $1.7 million in fiscal 2015. The higher net loss recorded
in fiscal 2016 was primarily due to decreased revenues associated with the Microsource NRE Order and the Navy 8003
orders. Net loss was also impacted by the delays in the development and manufacturing of the ASG, along with it’s longer
than anticipated sales cycle. The net loss for fiscal 2015 was impacted by the $1.2 million Alara Capital non-cash warrant
charge described above.
15
Net Inventories
Inventories consisted of the following:
Net Inventories
(Dollars in thousands)
Raw materials
Work-in-progress
Finished goods
Demonstration inventory
Total
March 26,
2016
3,489 $
2,156
2
47
5,694 $
March 28,
2015
1,631
1,598
15
121
3,365
$
$
% change
2016
vs.
2015
114%
35%
(87%)
(61%)
69%
Net inventories increased by $2.3 million from March 28, 2015 to March 26, 2016. Inventories associated with the ASG
increased by $1.3 million, as it moved from development to production. Microsource inventory also increased by $1.0 million
primarily due to the raw material buy associated with the $10.0 million YIG Production Order. Giga-tronics has an advance
payment arrangement with the customer associated with the YIG Production Order raw materials, allowing Giga-tronics to
purchase all of the related raw materials prior to the start of manufacturing.
Financial Condition and Liquidity
As of March 26, 2016, Giga-tronics had $1.3 million in cash and cash-equivalents, compared to $1.2 million as of March 28,
2016. Working capital at the end of fiscal year 2016 was $1.7 million as compared to $3.0 million at the end of fiscal year
2015. The current ratio (current assets divided by current liabilities) at March 26, 2016 was 1.23 as compared to 1.69 at
March 28, 2015. The fiscal 2016 decrease in working capital was primarily attributable to a $1.7 million increase in deferred
revenue related to advance payment arrangements for raw materials for our customer, a $951,000 increase in accounts payable
associated with inventory purchases and amounts due under a software development agreement with a major aerospace and
defense company and $800,000 owed on the line of credit. This was partially offset by a $2.3 million increase in inventories
described above.
Cash used in operating activities was $3.0 million in fiscal 2016. Cash used in operating activities is primarily due to the net
loss of $4.1 million, partially offset by non-cash charges of $925,000 for stock based compensation, $321,000 for depreciation
and amortization, and $165,000 for accretion of discounts on loan and warrant debt. Cash used in operating activities
amounted to $542,000 in fiscal 2015, primarily due to the net loss of $1.7 million, a $508,000 increase in accounts receivable
due to increased sales, and a $457,000 decrease in accounts payable associated with the timing of vendor payments. These
were partially offset by non-cash charges of $1.2 million for the Alara Capital warrants and $827,000 for share based
compensation.
Cash provided by investing activities was $183,000 and included $375,000 received from Spanawave for the initiation of
data transfer pertaining to the sale of our legacy product lines as well as additions to property and equipment of $192,000 in
fiscal 2016 compared to $16,000 in fiscal 2015. The additions in both fiscal 2016 and fiscal 2015 were associated with
equipment required to manufacture the ASG.
Cash provided by financing activities in fiscal year 2016 was $3.0 million, primarily due to $3.1 million in net proceeds from
a Private Placement completed in the fourth quarter of fiscal 2016. Cash provided by financing activities in fiscal year 2015
was $669,000, primarily due to $1.5 million in net proceeds from the exercise of existing Alara Capital warrants and $500,000
in proceeds from a line of credit with PFG. These proceeds were partially offset by a $1.2 million repayment of the Company’s
line of credit with SVB and a $200,000 repayment on the term loan with PFG.
On January 29, 2016, we consummated the sale of 2,787,872 Units, each consisting of one share of common stock and a
warrant to purchase 0.75 shares of common stock, to approximately 20 private investors pursuant to a Securities Purchase
Agreement dated as of January 19, 2016. The purchase price for each Unit was $1.24375. Gross proceeds were approximately
$3.5 million. Net proceeds to the Company after fees were approximately $3.1 million. The portion of the purchase price
attributable to the common shares included in each Unit was $1.15, the consolidated closing bid price for the Company’s
common stock on January 15, 2016. The warrant price was $.09375 per Unit (equivalent to $0.125 per whole warrant share),
with an exercise price of $1.15 per share. The term of the warrants is five years from the date of completion of the transaction.
16
Emerging Growth Equities, Ltd also received warrants to purchase 292,727 shares of common stock as part of its
consideration for serving as placement agent in connection with the private placement.
On February 16, 2015, we entered into a Securities Purchase Agreement and Warrant Agreement with Alara Capital AVI II,
LLC (“Alara Capital”), an investment vehicle sponsored by AVI Partners, LLC (“AVI”) (with both entities collectively
referred to herein as “Alara”), in which we received total gross cash proceeds of approximately $1.5 million. Funds were
received from Alara in separate closings dated February 16, 2015 and February 23, 2015 in which Alara exercised a total of
1,002,818 of its existing Series C and Series D warrants to purchase common shares, all of which had an exercise price of
$1.43 per share for total cash proceeds of $1,434,000, which was recorded net of $42,000 of stock issuance costs. As part of
the consideration for this exercise, we sold to Alara two new warrants to purchase an additional 898,634 and 194,437 common
shares at an exercise price of $1.78 and $1.76 per share, respectively, for a total purchase price of $137,000 or $0.125 per
share. The new warrants have a term of five years and may be paid in cash or through a cashless net share settlement. The
Company and Alara amended the remaining 14,587 warrants as part of the February closings. On May 14, 2015, Alara
exercised the remaining 14,587 warrants by acquiring 7,216 of shares of the Company’s common stock through a cashless
net share settlement.
We incurred net losses of $4.1 million for fiscal 2016, which have contributed to an accumulated deficit of $24.0 million as
of March 26, 2016.
We experienced delays in the development of features, orders, and shipments for the new ASG. These delays have
significantly contributed to a decrease in working capital from $3.0 million at March 28, 2015, to $1.8 million at March 26,
2016. The new ASG product has now shipped to several customers, but potential delays in the development of features,
longer than anticipated sales cycles, or the ability to efficiently manufacture the ASG, could significantly contribute to
additional future losses and decreases in working capital.
To help fund operations, we rely on advances under the line of credit with Bridge Bank. The line of credit expires on May 7,
2017. The agreement includes a subjective acceleration clause, which allows for amounts due under the facility to become
immediately due in the event of a material adverse change in our business condition (financial or otherwise), operations,
properties or prospects, or ability to repay the credit based on the lender’s judgement. As of March 26, 2016, outstanding
borrowings and additional borrowing capacity under the line of credit were $800,000 and $906,000, respectively.
These matters raise substantial doubt as to our ability to continue as a going concern.
To address these matters, our management has taken several actions to provide additional liquidity and reduce costs and
expenses going forward. These actions are described in the following paragraphs.
●
In April 2016 the Microsource Business Unit regained AS9100C certification of its Supplier Quality Management
System. The AS9100C Certification is commonly required in the aircraft manufacturing industry. The Company’s
Microsource division sells components used on military aircrafts to two major customers that require such
certification. During the lapse in certification the Company worked with one of the major customers to allow
continued shipping and orders. The Company was pursuing a similar solution with the second customer, but this is
no longer required with the regained certification.
● Giga-tronics plans to work with Bridge Bank to renew the line of credit prior to its May 7, 2017 expiration.
● On January 29, 2016, we completed the sale of approximately 2.7 million shares of Common Stock yielding gross
proceeds of approximately $3.5 million. Net proceeds to the Company were approximately $3.1 million. The sale
included Warrants to purchase approximately 2.4 million shares of Common Stock at $1.15 per share (see Note 18,
Private Placement Offering). The proceeds were used to pay suppliers past due accounts, and will be used to fund
operations and the forecasted increases in sales and manufacturing activities associated with the Advanced Signal
Generator.
● On December 15, 2015, we entered into an Asset Purchase Agreement with Spanawave, whereby Spanawave agreed
to purchase the Giga-tronics’ Division product lines for its Power Meters, Amplifiers and Legacy Signal Generators
for $1.5 million. (see Note 10, Sale of Product Lines). As of March 26, 2016, we had received $375,000 from
Spanawave under the agreement. We are entitled to receive another $375,000 between July and September 2016, the
final installment of $750,000 is expected to be paid between July and December 2016. Proceeds from the asset sale
will be used for working capital and general corporate purposes.
17
● In the first quarter of fiscal 2016, our Microsource business unit also finalized a multiyear $10.0 million YIG
production order (“YIG Production Order”). We expect to start shipping the YIG Production Order in the fall of
2016.
● In April of 2016, Microsource received a $4.5 million YIG RADAR filter order for the same fighter jet platform,
which we expect to ship throughout fiscal 2017. This was a $1.5 million increase compared to the order received in
fiscal 2016 for the same platform. In June 2016, the Gigatronics Division also received a $3.3 million order from the
United States Navy for the Real-Time TEmS which we also expect to ship in the second half of fiscal 2017.
● To assist with the upfront purchases of inventory required for future product deliveries, we entered into advance
payment arrangements with two large customers, whereby the customers reimburse us for raw material purchases
prior to the shipment of the finished products. In fiscal 2016, we entered into advance payment arrangements totaling
$3.9 million. We will continue to seek similar terms in future agreements with these customers and other customers.
Management will continue to review all aspects of the business in an effort to improve cash flow and reduce costs and
expenses, while continuing to invest, to the extent possible, in new product development for future revenue streams.
Management will also continue to seek additional working capital through product line sales, debt, or possible equity
financing. However, there are no assurances that such financings or sales will be available at all, or on terms acceptable to
the Company.
The current year loss has had a significant negative impact on the financial condition of the Company and raises substantial
doubt about our ability to continue as a going concern. Management believes that through the actions to date and possible
future actions described above, we should have the necessary liquidity to continue its operations at least for the next twelve
months, though no assurances can be made in this regard based on uncertainties with respect the ASG associated with
potential delays in the development of features, longer than anticipated sales cycles, or the ability to efficiently manufacture
it. No assurances can be given that we can renew the Bridge Bank line of credit. The Consolidated Financial Statements have
been prepared assuming we will continue as a going concern and do not include any adjustments that might result if we were
unable to do so.
Contractual Obligations
We lease our facility under an operating lease that expires in December 2016 and lease certain equipment under operating
leases. Total future minimum lease payments under these leases amount to approximately $553,000, of which $529,000 is
scheduled to be paid in fiscal 2017.
We lease equipment under capital leases that expire through September 2020. The future minimum lease payments under
these leases are approximately $271,000.
We are committed to repay the PFG loan with a maturity date of January 2017. Future payments under this loan consist of
$400,000 in principal and $17,000 in interest.
We are committed to purchase certain inventory under non-cancelable purchase orders. As of March 26, 2016, total non–
cancelable purchase orders were approximately $2.3 million and are scheduled to be delivered to the Company at various
dates through March 2017.
Critical Accounting Policies
Our discussion and analysis of our 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, we re-evaluate our judgments, estimates and
assumptions. We base our judgment and estimates on historical experience, knowledge of current conditions, and our beliefs
of what could occur in the future considering available information. Actual results may differ from these estimates under
different assumptions or conditions. We have identified the following as our critical accounting policies:
18
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. Revenue
recognized under the milestone method is recognized once milestones are met. 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. Our 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
our performance to achieve the milestone.
b. It relates solely to past performance.
c. It is reasonable relative to all of the deliverables and payment terms (including other potential milestone
consideration) within the arrangement.
Milestones for revenue recognition are agreed upon with the customer prior to the start of the contract and some milestones
will be tied to product shipping while others will be tied to design review.
On certain contracts with one of our significant customers we receive payments in advance of manufacturing. Advanced
payments are recorded as deferred revenue until the revenue recognition criteria described above have been met.
Product Warranties
Our warranty policy generally provides one to three years of coverage depending on the product. We record a liability for
estimated warranty obligations at the date products are sold. The estimated cost of warranty coverage is based on our actual
historical experience with our 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 and Allowance for Doubtful Accounts
Accounts receivable are stated at their net realizable values. We have estimated an allowance for uncollectible accounts based
on our analysis of specifically identified problem accounts, outstanding receivables, consideration of the age of those
receivables, our historical collection experience, and adjustments for other factors management believes are necessary based
on perceived credit risk.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. We periodically review
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.
19
We consider 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. We also recognize accrued interest and penalties, if any, related to unrecognized tax
benefits as a component of the provision for income taxes in the consolidated statements of operations.
Share Based Compensation
We have a stock incentive plan that provides for the issuance of stock options and restricted stock to employees and directors.
We calculate share based compensation expense for stock options using a Black-Scholes-Merton option pricing model and
record the fair value of stock option and restricted stock awards expected to vest over the requisite service period. In so doing,
we make certain key assumptions in making estimates used in the model. We believe the estimates used, which are presented
in the Notes to Consolidated Financial Statements, are appropriate and reasonable.
Going Concern
We evaluate our relevant conditions and events that is known and reasonably knowable at the date that our financial
statements are issued. This includes Management’s preparation and review of a robust forecasting process that evaluates a
twelve month horizon period. Management responds to the known and reasonably knowable circumstances that give rise to
our initial doubt as a going concern by implementing plans that are reasonably sufficient to overcome the conditions that give
rise to our ability to continue as a going concern. Our Consolidated Financial Statements have been prepared assuming we
will continue as a going concern and do not include any adjustments that might result if we were unable to do so.
Software Development Costs
We expense development costs included in the research and development of new products and enhancements to existing
products as incurred, until technological feasibility in the form of a working model has been established. Development costs
of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning our product’s
technological feasibility has been established and ending when the product is available for general release to our customers.
20
Off-Balance-Sheet Arrangements
We have 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item 305 of Regulation S-K, the Company, as a smaller reporting company, is not required to provide the
information required by this item.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
Consolidated Balance Sheets - As of March 26, 2016 and March 28, 2015 .................................................................
Consolidated Statements of Operations - Years ended March 26, 2016 and March 28, 2015 ......................................
Consolidated Statements of Shareholders’ Equity - Years ended March 26, 2016 and March 28, 2015 ......................
Consolidated Statements of Cash Flows - Years ended March 26, 2016 and March 28, 2015 .....................................
Page
23
24
25
26
Notes to Consolidated Financial Statements ................................................................................................................. 27-45
Report of Independent Registered Public Accounting Firm ..........................................................................................
46
22
GIGA-TRONICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
Assets
Current assets:
Cash and cash-equivalents
Trade accounts receivable, net of allowance of $45, respectively
Inventories, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Other long term assets
Capitalized software development costs
Total assets
Liabilities and shareholders' equity
Current liabilities:
Line of credit
Current portion of long term debt, net of discount
Accounts payable
Accrued payroll and benefits
Deferred revenue
Deferred rent
Capital lease obligations
Other current liabilities
Total current liabilities
Long term loan
Warrant liability, at estimated fair value
Long term obligations - deferred rent
Long term obligations - capital lease
Total liabilities
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock of no par value; Authorized - 1,000,000 shares
$
$
$
March 26,
2016
March 28,
2015
1,331 $
2,129
5,694
327
9,481
837
8
876
11,202 $
800 $
379
1,924
647
2,804
110
44
996
7,704
—
353
—
165
8,222
1,170
2,354
3,365
373
7,262
718
74
—
8,054
—
811
973
678
1,127
127
69
501
4,286
392
252
111
58
5,099
Series A - designated 250,000 shares; no shares at March 26, 2016 and March 28,
2015 issued and outstanding
Series B, C, D- designated 19,500 shares; 18,533.51 shares at March 26, 2016 and
March 28, 2015 issued and outstanding; (liquidation preference of $3,540 at
March 26, 2016 and March 28, 2015)
Common stock of no par value; Authorized - 40,000,000 shares; 9,549,703 shares at
March 26, 2016 and 6,706,065 at March 28, 2015 issued and outstanding
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
$
—
—
2,911
2,911
24,104
(24,035 )
2,980
11,202 $
19,975
(19,931)
2,955
8,054
See Accompanying Notes to Consolidated Financial Statements
23
GIGA-TRONICS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
March 26,
2016
14,596 $
9,975
4,621
March 28,
2015
18,452
10,445
8,007
$
2,806
5,522
8,328
3,210
4,783
7,993
(3,707 )
14
(12 )
—
—
(218 )
(165 )
(383 )
(4,102 )
2
(4,104 ) $
(0.59 ) $
(0.59 ) $
—
(1,232)
(2)
(254)
(152)
(406)
(1,626)
47
(1,673)
(0.32)
(0.32)
6,941
6,941
5,279
5,279
$
$
$
(In thousands except per share data)
Net sales
Cost of sales
Gross margin
Operating expenses:
Engineering
Selling, general and administrative
Total operating expenses
Operating (loss)/income
Loss on adjustment of warrant liability to fair value
Warrant expense
Other loss
Interest expense:
Interest expense, net
Interest expense from accretion of loan discount
Total interest expense, net
Loss before income taxes
Provision for income taxes
Net loss
Loss per common share - basic
Loss per common share - diluted
Weighted average common shares used in per share calculation:
Basic
Diluted
See Accompanying Notes to Consolidated Financial Statements
24
GIGA-TRONICS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share data)
Balance at March 29, 2014
Net loss
Restricted stock granted
Option exercises
Share based compensation
Warrant charge expense
Warrant exercise and newly issued
warrant, net of issuance cost
Balance at March 28, 2015
Net loss
Restricted stock granted
Option exercises
Share based compensation
Shares issued for net settlement of warrant
Proceeds from common offering, net
Preferred Stock
Shares Amount
18,534 $
2,911 5,181,247 $
Common Stock
Shares Amount
Accumulated
Deficit
(18,258) $
(1,673)
Total
877
(1,673)
432,000
90,000
—
16,224 $
—
163
827
1,232
18,534
1,002,818
2,911 6,706,065
1,529
19,975
(19,931)
(4,104)
—
48,550
7,216
—
77
925
—
163
827
1,232
1,529
2,955
(4,104)
77
925
—
3,127
2,980
of issuance cost
Balance at March 26, 2016
18,534 $
2,787,872
2,911 9,549,703 $
3,127
24,104 $
(24,035) $
See Accompanying Notes to Consolidated Financial Statements
25
GIGA-TRONICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities: Warrant
Years Ended
March 26,
2016
March 28,
2015
$
(4,104) $
(1,673)
issuance expense
Depreciation and amortization
Share based compensation
Accretion of discounts on debt
Adjustment of warrant liability to fair value
Capitalized software development costs
Change in other long term assets
Change in deferred rent
Changes in operating assets and liabilities:
Trade accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued payroll and benefits
Deferred revenue
Other current liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Cash received from sale of product line
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from exercise and issuance of warrants, net of issuance costs of $42
Proceeds from exercise of stock options
Payments on capital leases
Proceeds from line of credit
Proceeds from issuance of debt
Repayments of line of credit
Repayments of debt
Proceeds from issuance of common stock, net of issuance costs of $278
Net cash provided by financing activities
Increase in cash and cash-equivalents
Beginning cash and cash-equivalents
Ending cash and cash-equivalents
Supplementary disclosure of cash flow information:
Cash paid for income taxes
Cash paid for interest
Supplementary disclosure of noncash investing and financing activities:
Equipment acquired under capital lease
Equipment acquired with reduction of other current asset
Equipment acquired with an increase in accounts payable
$
$
$
$
$
$
See Accompanying Notes to Consolidated Financial Statements
26
—
321
925
165
12
(876)
66
(128)
225
(2,329)
(3)
915
(31)
1,677
120
(3,045)
(192)
375
183
—
77
(81)
1,800
—
(1,000)
(900)
3,127
3,023
161
1,170
1,331 $
2 $
165 $
163 $
49 $
36 $
1,232
311
827
152
—
—
(5)
(103)
(508)
(44)
(24)
(457)
(77)
(202)
29
(542)
(16)
—
(16)
1,529
163
(158)
8,624
500
(9,789)
(200)
—
669
111
1,059
1,170
2
219
61
—
—
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of Giga-tronics Incorporated (“Giga- tronics”) and
its wholly-owned subsidiary, Microsource Incorporated (“Microsource”), collectively the “Company”. The Company’s
corporate office and manufacturing facilities are located in San Ramon, California.
Giga-tronics Division designs, manufactures and markets the new Advanced Signal Generator (ASG) for the electronic
warfare market, and switching systems that are used in automatic testing systems primarily in aerospace, defense and
telecommunications.
Microsource 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. Microsource’s two largest customers are prime contractors for which it develops and
manufactures YIG RADAR filters used in fighter jet aircraft.
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.
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 2016 ended on March 26, 2016 resulting in a 52 week year. Fiscal year 2015 ended on
March 28, 2015, also resulting in 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 loss or shareholders’ equity, have been
made to prior year balances in order to conform to the current year presentation.
Revenue Recognition and Deferred Revenue 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
are based on product shipping while others are based on design review. In fiscal 2015 the Company’s Microsource business
unit received a $6.5 million order from a major aerospace company for non-recurring engineering services to develop a
variant of its high performance fast tuning YIG filters for an aircraft platform and to deliver a limited number of flight-
qualified prototype hardware units (the “NRE Order”) which is being accounted for on a milestone basis. The Company
considered factors such as estimated completion dates and product acceptance of the order prior to accounting for the NRE
Order as milestone revenue. During the fiscal years ended March 26, 2016 and March 28, 2015, revenue recognized on a
milestone basis were $1.0 million and $4.7 million, respectively.
27
On certain contracts with several of the Company’s significant customers the Company receives payments in advance of
manufacturing. Advanced payments are recorded as deferred revenue until the revenue recognition criteria described above
has been met.
Accounts receivable are stated at their net realizable value. The Company has estimated an allowance for uncollectable
accounts based on analysis of specifically identified accounts, outstanding receivables, consideration of the age of those
receivables, the Company’s historical collection experience, and adjustments for other factors management believes are
necessary based on perceived credit risk.
The activity in the allowance account for doubtful accounts is as follows for the years ended March 26, 2016 and March 28,
2015:
(Dollars in thousands)
Beginning balance
Provisions for doubtful accounts
Write-off of doubtful accounts
Ending balance
March 26,
2016
March 28,
2015
$
$
45 $
—
—
45 $
44
1
—
45
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 fair value 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. Research and development costs totaled approximately $2.8 million and $3.2 million for
the years ended March 26, 2016 and March 28, 2015, respectively.
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 26, 2016 and March 28, 2015, management believes there has been no impairment of the
Company’s long-lived assets.
Derivatives The Company accounts for certain of its warrants as derivatives. Changes in fair values are reported in earnings
as gain or loss on adjustment of warrant liability to fair value.
Deferred Rent Rent expense is recognized in an amount equal to the guaranteed base rent plus contractual future minimum
rental increases amortized on the straight-line basis over the terms of the leases, including free rent periods.
28
Income Taxes Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. Future tax benefits are subject to a valuation
allowance when management is unable to conclude that its deferred tax assets will more likely than not be realized. The
ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers both positive and negative evidence and tax planning
strategies in making this assessment.
The Company considers all tax positions recognized in its financial statements for the likelihood of realization. When tax
returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the positions taken or the amounts of the positions that would be
ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based
on all available evidence, management believes it is more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds
the amount measured as described above, if any, would be reflected as unrecognized tax benefits, as applicable, in the
accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the
taxing authorities upon examination. The Company recognizes accrued interest and penalties, if any, related to unrecognized
tax benefits as a component of the provision for income taxes in the consolidated statements of operations.
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.
Capitalized pre-production costs included in inventory were immaterial as of March 26, 2016 and March 28, 2015.
Software Development Costs Development costs included in the research and development of new software products and
enhancements to existing software products are expensed as incurred, until technological feasibility in the form of a working
model has been established. Capitalized development costs are amortized over the expected life of the product and evaluated
each reporting period for impairment. As of March 26, 2016, capitalized software development costs were $876,000 and
there was no amortization for the year ended March 26, 2016. There were no software development costs capitalized as of
March 28, 2015.
Share-based Compensation The Company has established the 2005 Equity Incentive Plan, which provides for the granting
of options for up to 2,850,000 shares of Common Stock. In 2014, the term of the 2005 Equity Incentive Plan was extended
to 2025. 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 years ended March 26, 2016 or March 28, 2015.
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 risk free interest rate for the
expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected dividend
yield was not considered in the option pricing formula since the Company has not paid dividends and has no current plans to
do so in the future.
The 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.
29
Earnings or Loss Per Common Share Basic earnings or loss per common 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 and warrants using the treasury stock method. Anti-dilutive options are
not included in the computation of diluted earnings per share. Non-vested shares of restricted stock have non-forfeitable
dividend rights and are considered participating securities for the purpose of calculating basic and diluted earnings per share
under the two-class method.
Comprehensive Income or Loss There are no items of comprehensive income or loss other than net income or loss.
Financial Instruments and Concentration of Credit Risk Financial instruments that potentially subject the Company to credit
risk consist of cash, cash-equivalents and trade accounts receivable. The Company’s cash-equivalents consist of overnight
deposits with federally insured financial institutions. 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 26, 2016, and March 28, 2015, three customers combined accounted for
52% and 65% of consolidated gross accounts receivable respectively.
Fair Value of Financial Instruments and Fair Value Measurements The Company’s financial instruments consist principally
of cash and cash-equivalents, line of credit, term debt, and warrant derivative liability. The fair value of a financial instrument
is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the
asset or transfer the liability. The Company uses fair value measurements based on quoted prices (unadjusted) for identical
assets or liabilities in active markets that the entity can access as of the measurement date (Level 1), significant other
observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by observable market data (Level 2), or significant
unobservable inputs reflect a company’s own assumptions about the assumptions that market participants would use in pricing
an asset or liability (Level 3), depending on the nature of the item being valued.
Recently Issued Accounting Standards
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 provides guidance on
determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires
management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year
of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise
substantial doubt about the entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective
for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The
Company is currently evaluating the impact this accounting standard update may have on its financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) – Simplifying the
Presentation of Debt Issuance Costs,” or ASU 2015-03. ASU 2015-03 simplifies the presentation of debt issuance costs by
requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction
from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance
for debt issuance costs are not affected by this ASU. The amendments in this ASU are effective for financial statements
issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this
ASU by the Company, along with the adoption of ASU 2015-15 which amended ASU 2015-03 and is discussed on the next
page will change the presentation of certain debt issuance costs, which will be reported as a direct offset to the applicable
debt on the balance sheet.
In July 2015, the FASB issued ASU No, 2015-11, Inventory (Topic 330): “Simplifying the Measurement of Inventory”. Topic
330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement
cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments do not apply
to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other
inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure
in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent
measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments more closely
align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting
Standards. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years
30
beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The
amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual
reporting period. The Company is currently evaluating the impact this accounting standard update may have on its financial
statements.
In August 2015, the FASB issued ASU 2015-14 – “Revenue from Contracts with Customers” (Topic 606). The amendments
in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. ASU 2014-09 affects any entity using
GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of
nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts).
Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU
2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that
reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016,
including interim reporting periods within that reporting period. The Company is currently evaluating the impact this
accounting standard update may have on its financial statements.
Also in August 2015, the FASB issued ASU 2015-15 – “ Interest—Imputation of Interest (Subtopic 835-30) - Presentation
and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”, Previously, on April
7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of
Debt Issuance Costs, which required entities to present debt issuance costs related to a recognized debt liability as a direct
deduction from the carrying amount of that debt liability. The guidance in ASU 2015-03 (see paragraph 835-30-45-1A) does
not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the
absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC
staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently
amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether
there are any outstanding borrowings on the line-of-credit arrangement. For public business entities, the guidance in the ASU
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company
does not expect a material impact on its financial statements as a result of the adoption of ASU No. 2015-03 or 2015-15,
however certain debt issuance costs will be reported as a direct offset to the applicable debt on the balance sheet.
In November 2015, the FASB issued ASU 2015-17 – Income Taxes (Topic 740): “Balance Sheet Classification of Deferred
Taxes”. Topic 740 is effective for public business entities for financial statements issued for annual periods beginning after
December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for
financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods
beginning after December 15, 2018. The amendments may be applied prospectively to all deferred tax liabilities and assets
or retrospectively to all periods presented. The amendments in ASU 2015-17 eliminates the current requirement for
organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead,
organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The Company is currently
evaluating the impact this accounting standard update may have on its financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The update intends to enhance the reporting model for financial
instruments to provide users of financial instruments with more decision-useful information and addresses certain aspects of
the recognition, measurement, presentation, and disclosure of financial instruments. The new standard affects all entities that
hold financial assets or owe financial liabilities. The recognition and measurement standard will take effect for public
companies for fiscal years beginning after Dec. 15, 2017, including interim periods within those fiscal years. The standard
takes effect for private companies, not-for-profits, and employee benefit plans for fiscal years beginning after Dec. 15, 2018,
and for interim periods within fiscal years beginning after Dec. 15, 2019. The Company is currently evaluating the impact
this accounting standard update may have on its financial statements.
In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 requires that lessees recognize
assets and liabilities for the rights and obligations for leases with a lease term of more than one year. The amendments in this
ASU are effective for annual periods ending after December 15, 2018. Early adoption is permitted. The Company is currently
evaluating the impact this accounting standard update may have on its financial statements.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in
Debt Instruments. ASU 2016-06 applies to all entities that are issuers of or investors in debt instruments (or hybrid financial
instruments that are determined to have a debt host) with embedded call (put) options. For public business entities, the
amendments in ASU 2016-06 are effective for financial statements issued for fiscal years beginning after 15 December 2016,
31
and interim periods within those fiscal years. The Company is currently evaluating the impact this accounting standard update
may have on its financial statements.
In March 2016, the FASB issued ASU 2016-09 (“ASU 2016-09”), Compensation — Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for
employee share-based payments, including accounting for income taxes, forfeitures, statutory tax withholding requirements,
and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning
after December 15, 2016. Early adoption is permitted. The Company has not determined the impact of adoption on its
condensed consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing. ASU 2016-10 addresses implementation issues identified under ASC Topic 606. The amendments
in ASU 2016-10 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet
effective. The effective date and transition requirements in ASU 2016-10 are the same as the effective date and transition
requirements of ASU 2014-09. ASU 2015-14, Revenue from Contracts with Customers (Topic 606). The amendments in this
ASU is effective for public business entities with annual reporting periods beginning after 15 December 2017, including
interim reporting periods within that reporting period. The Company is currently evaluating the impact this accounting
standard update may have on its financial statements.
2 Going Concern and Management’s Plan
The Company incurred net losses of $4.1 million and $1.7 million in the fiscal years ended March 26, 2016 and March 28,
2015, respectively. These losses have contributed to an accumulated deficit of $24.0 million as of March 26, 2016.
The Company has experienced delays in the development of features, orders, and shipments for the new ASG. These delays
have significantly contributed to a decrease in working capital from $3.0 million at March 28, 2015, to $1.8 million at March
26, 2016. The new ASG product has now shipped to several customers, but potential delays in the development of features,
longer than anticipated sales cycles, or the ability to efficiently manufacture the ASG, could significantly contribute to
additional future losses and decreases in working capital.
To help fund operations, the Company relies on advances under the line of credit with Bridge Bank. The line of credit expires
on May 7, 2017. The agreement includes a subjective acceleration clause, which allows for amounts due under the facility to
become immediately due in the event of a material adverse change in the Company’s business condition (financial or
otherwise), operations, properties or prospects, or ability to repay the credit based on the lender’s judgement. As of March
26, 2016, the line of credit had a balance of $800,000, and additional borrowing capacity of $906,000.
These matters raise substantial doubt as to the Company’s ability to continue as a going concern.
To address these matters, the Company’s management has taken several actions to provide additional liquidity and reduce
costs and expenses going forward. These actions are described in the following paragraphs.
●
In April 2016 the Microsource Business Unit regained AS9100C certification of its Supplier Quality Management
System. The AS9100C Certification is commonly required in the aircraft manufacturing industry. The Company’s
Microsource division sells components used on military aircrafts to two major customers that require such
certification. During the lapse in certification the Company worked with one of the major customers to allow
continued shipping and orders. The Company was pursuing a similar solution with the second customer, but this is
no longer required with the regained certification.
● Giga-tronics plans to work with Bridge Bank to renew the line of credit prior to its May 7, 2017 expiration.
● On January 29, 2016, the Company completed the sale of approximately 2.7 million shares of Common Stock
yielding gross proceeds of approximately $3.5 million. Net proceeds to the Company were approximately $3.1
million. The sale included Warrants to purchase approximately 2.4 million shares of Common Stock at $1.15 per
share (see Note 18, Private Placement Offering). The proceeds were used to pay suppliers past due accounts, and
will be used to fund operations and the forecasted increases in sales and manufacturing activities associated with the
Advanced Signal Generator.
● On December 15, 2015, the Company entered into an Asset Purchase Agreement with Spanawave, whereby
Spanawave agreed to purchase the Giga-tronics’ Division product lines for its Power Meters, Amplifiers and Legacy
Signal Generators for $1.5 million (see Note 10, Sale of Product Lines). As of March 26, 2016, the Company had
received $375,000 from Spanawave under the agreement. The Company is entitled to receive another $375,000
32
between July and September 2016, the final installment of $750,000 is expected to be paid between July and
December 2016. Proceeds from the asset sale will be used for working capital and general corporate purposes.
● In the first quarter of fiscal 2016, the Company’s Microsource business unit also finalized a multiyear $10.0 million
YIG production order (“YIG Production Order”). The Company expects to start shipping the YIG Production Order
in the fall of 2016.
● In April of 2016, Microsource received a $4.5 million YIG RADAR filter order for the same fighter jet platform,
which the Company expects to ship throughout fiscal 2017. This was a $1.5 million increase compared to the order
received in fiscal 2016 for the same platform. In June 2016, the Gigatronics Division also received a $3.3 million
order from the United States Navy for the Real-Time TEmS which the Company also expects to ship in the second
half of fiscal 2017.
● To assist with the upfront purchases of inventory required for future product deliveries, the Company entered into
advance payment arrangements with two large customers, whereby the customers reimburse the Company for raw
material purchases prior to the shipment of the finished products. In fiscal 2016, the Company entered into advance
payment arrangements totaling $3.9 million. The Company will continue to seek similar terms in future agreements
with these customers and other customers.
Management will continue to review all aspects of the business in an effort to improve cash flow and reduce costs and
expenses, while continuing to invest, to the extent possible, in new product development for future revenue streams.
Management will also continue to seek additional working capital through debt, equity financing or possible product line
sales, however there are no assurances that such financings or sales will be available at all, or on terms acceptable to the
Company.
The current year losses has had a significant negative impact on the financial condition of the Company and raise substantial
doubt about the Company’s ability to continue as a going concern. The Consolidated Financial Statements have been prepared
assuming the Company will continue as a going concern and do not include any adjustments that might result if the Company
were unable to do so.
3 Cash and Cash-Equivalents
Cash and cash-equivalents of $1.3 million and $1.2 million at March 26, 2016 and March 28, 2015, respectively, consisted
of demand deposits with a financial institution that is a member of the Federal Deposit Insurance Corporation (FDIC). At
March 26, 2016, $1.0 million of the Company’s demand deposits exceeded FDIC insurance limits.
4
Inventories
Inventories, net of reserves, consisted of the following:
(Dollars in thousands)
Raw materials
Work-in-progress
Finished goods
Demonstration inventory
Total
5 Property, Plant and Equipment, net
Property, plant and equipment, net is comprised of the following:
(Dollars in thousands)
Leasehold improvements
Machinery and equipment
Computer and software
Furniture and office equipment
Less: accumulated depreciation and amortization
Total
$
$
$
March 26,
2016
3,489 $
2,156
2
47
5,694 $
March 28,
2015
1,631
1,598
15
121
3,365
March 26,
2016
327
4,604
647
121
5,699
(4,862)
March 28,
2015
327
4,334
459
121
5,241
(4,523)
718
$
837 $
33
6 Software Development Costs
On September 3, 2015, the Company entered into a software development agreement with a major aerospace and defense
company whereby the aerospace company would develop and license its simulation software to the Company. The simulation
software (also called Open Loop Simulator or OLS technology) is currently the aerospace company’s intellectual property.
The OLS technology generates threat simulations and enables various hardware to generate signals for performing threat
analysis on systems under test. The Company intends to license the OLS software as a bundled or integrated solution with its
Advanced Signal Generator system. The Company is obligated to pay the aerospace company software development costs
and fees for OLS of $919,000 in the aggregate, which is payable in monthly installments as the work is performed by the
aerospace company through August 2016. The OLS technology is a perpetual license agreement that may be terminated by
the Company at any time as long as the Company provides a notice to the aerospace company and pays for the development
costs incurred through the notice termination date. The Company is also obligated to pay royalties to the aerospace company
on net sales of its Advanced Signal Generator product sold with the OLS software equal to a percentage of net sales price of
each ASG system sold and subject to certain minimums. The Company expenses research and development costs as they are
incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization
beginning when a product’s technological feasibility has been established and ending when a product is available for general
release to customers. Capitalized software costs for the fiscal year ended March 26, 2016 were $876,000. The Company
intends to begin amortizing the costs of capitalized software to cost of sales once the product is released to its customers.
7 Accounts Receivable Line of Credit
On June 1, 2015 the Company entered into a $2.5 million Revolving Accounts Receivable Line of Credit agreement with
Bridge Bank. The credit facility agreement replaced the line of credit with Silicon Valley Bank which expired April 15, 2015.
The agreement provides for a maximum borrowing capacity of $2.5 million of which $2.0 million is subject to a borrowing
base calculation and $500,000 is non-formula based.
The loan is secured by all assets of the Company including intellectual property and general intangibles and provides for a
borrowing capacity equal to 80% of eligible accounts receivable. The loan matures on May 6, 2017 and bears an interest rate,
equal to 1.5% over the bank’s prime rate of interest (which was 3.5% March 26, 2016 resulting in an interest rate of 5.0%).
Interest is payable monthly with principal due upon maturity. The Company paid a commitment fee of $12,500, and an
additional $12,500 is due in May 2016. The loan agreement contains financial and non-financial covenants that are customary
for this type of lending and includes a covenant to maintain an asset coverage ratio of at least 135% (defined as unrestricted
cash and cash equivalents maintained with Bridge Bank, plus eligible accounts receivable aged less than 90 days from the
invoice date, divided by the total amount of outstanding principal of all obligations under the loan agreement). As of March
26, 2016, the Company was in compliance with all the financial covenants under the agreement. The line of credit requires a
lockbox arrangement, which provides for receipts to be swept daily to reduce borrowings outstanding at the discretion of
Bridge Bank. This arrangement, combined with the existence of the subjective acceleration clause in the line of credit
agreement, necessitates the line of credit be classified as a current liability on the balance sheet. The acceleration clause
allows for amounts due under the facility to become immediately due in the event of a material adverse change in the
Company’s business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit based
on the lender's judgment. As of March 26, 2016, the Company’s total outstanding borrowings and remaining borrowing
capacity under the Bridge Bank line of credit were $800,000 and $906,000, respectively.
8 Term Loan, Revolving Line of Credit and Warrants
On March 13, 2014 the Company entered into a three year, $2.0 million term loan agreement with PFG under which the
Company received $1.0 million on March 14, 2014. Pursuant to the agreement, the Company had the ability to borrow an
additional $1.0 million following the Company’s achievement of certain performance milestones which included achieving
$7.5 million in net sales during the first half of fiscal 2015 and two consecutive quarters of net income greater than zero
during fiscal 2015.
34
On June 16, 2014, the Company amended its loan agreement with PFG (the “Amendment”). Under the terms of the
Amendment, PFG made a revolving credit line available to Giga-tronics in the amount of $500,000, and the Company
borrowed the entire amount on June 17, 2014. The revolving line had a thirty-three month term. The Amendment reduced
the future amount potentially available for the Company to borrow under the PFG Loan agreement from $1.0 million to
$500,000. The interest on the PFG revolving credit line was fixed, calculated on a daily basis at a rate of 12.50% per annum.
The Company was allowed to prepay the loan at any time prior to its March 13, 2017 maturity date without a penalty.
On June 3, 2015, the Company further amended its loan agreement with PFG (the “Second Amendment”). The Second
Amendment cancelled the Company’s $500,000 of borrowing availability under the June 2014 Amendment and required the
Company to pay PFG $150,000 towards its existing $500,000 outstanding balance under the revolving line of credit, which
the Company paid in July 2015. The Company also agreed to pay PFG an additional $10,000 per month towards its remaining
credit line balance until repaid, followed by like payments towards its term loan balance until repaid. As of March 26, 2016,
the $500,000 borrowed with the June 2014 Amendment had been fully repaid.
Interest on the initial $1.0 million term loan is fixed at 9.75% and required monthly interest only payments during the first
six months of the agreement followed by monthly principal and interest payments over the remaining thirty months. The
Company may prepay the loan at any time prior to maturity by paying all future scheduled principal and interest payments.
As of March 26, 2016, the Company’s total outstanding debt associated with the initial PFG loan was $400,000.
The PFG Loan is secured by all of the assets of the Company under a lien that is junior to the Bridge Bank debt described in
Note 7, and limits borrowing under the Bridge Bank credit line limit to $2.5 million. The Company paid a loan fee of $30,000
upon the initial draw (“First Draw”) and $15,000 for the June 2014 Amendment. The loan fees paid are recorded as prepaid
expenses and amortized to interest expense over the remaining term of the PFG amended loan agreement, although the loan
fee for the June 2014 Amendment was fully amortized because that portion of the PFG loan was fully repaid as March 26,
2016.
The future payments under the initial loan and all the Amendments, were $400,000 in principal payments and $17,000 in
interest as of March 26, 2016, all of which is due during fiscal year 2017 since the second Amendment described above
requires an accelerated repayment schedule which should fully repay the loan in January 2017.
The loan agreement contains financial covenants associated with the Company achieving minimum quarterly net sales and
maintaining a minimum monthly shareholders’ equity. In the event of default by the Company, all or any part of the
Company’s obligation to PFG could become immediately due. As of March 26, 2016, the Company was in compliance with
all the financial covenants under the agreement.
The loan agreement also initially provided for the issuance of warrants convertible into 300,000 shares of the Company’s
common stock, of which 180,000 were exercisable upon receipt of the initial $1.0 million from the First Draw, 80,000 became
exercisable with the First Amendment and 40,000 were cancelled as a result of the Second Amendment. Each warrant issued
under the loan agreement has a term of five years and an exercise price of $1.42 which was equal to the average NASDAQ
closing price of the Company’s common stock for the ten trading days prior to the First Draw.
If the warrants are not exercised before expiration on March 13, 2019, the Company would be required to pay PFG $150,000
and $67,000 as settlement for warrants associated with the First Draw and the Amendment, respectively. The warrants could
be settled for cash at an earlier date in the event of any acquisition or other change in control of the Company, future public
issuance of Company securities or liquidation (or substantially similar event) of the Company. The Company currently has
no definitive plans for any of the aforementioned events, and as a result, the cash payment date is estimated to be the expiration
date unless warrants are exercised before then. The warrants have the characteristics of both debt and equity and are accounted
for as a derivative liability measured at fair value each reporting period with the change in fair value recorded in earnings.
The initial fair value of the warrants associated with the First Draw and Amendment were $173,000 and $168,000,
respectively.
As of March 26, 2016, the estimated fair values of the derivative liabilities associated with the warrants issued in connection
with the First Draw and Amendment were $212,000 and $141,000, respectively, for a combined value of $353,000. As of
March 28, 2015, the estimated fair value of the derivative liability associated with the warrant issued in connection with the
First Draw and Amendment was $235,000 and $106,000, respectively for a combined value of $341,000, of which $89,000
was reported as part of the PFG Loan on the balance sheet. The change in the fair value of the warrant liability totaled $12,000
for the fiscal year ended March 26, 2016 and is reported in the accompanying statement of operations as a loss on adjustment
of derivative liability to fair value.
35
The initial $1.0 million in proceeds under the term loan agreement were allocated between the PFG Loan and the warrants
based on their relative fair values on the date of issuance which resulted in initial carrying values of $822,000 and $178,000,
respectively. The resulting discount of $178,000 on the PFG Loan is being accreted to interest expense under the effective
interest method over the three-year term of the PFG Loan.
The proceeds from the $500,000 credit line issued in connection with the Amendment were allocated between the PFG Loan
and the warrants based on their relative fair values on the date of issuance which resulted in initial carrying values of $365,000
and $135,000, respectively. The resulting discount of $135,000 on the PFG Loan was being accreted to interest expense under
the effective interest method over the remaining term of the PFG Loan, and as of March 26,2016 had been fully accreted
since the $500,000 from the Amendment had been fully repaid.
For the fiscal years ended March 26, 2016 and March 28, 2015, the Company recorded accretion of discount expense
associated with the warrants issued with the PFG Loan of $165,000 and $152,000, respectively.
9 Fair Value
Pursuant to the accounting guidance for fair value measurement and its subsequent updates, fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between
market participants at the measurement date. The accounting guidance establishes a hierarchy for inputs used in measuring
fair value that minimizes the use of unobservable inputs by requiring the use of observable market data when available.
Observable inputs are inputs that market participants would use in pricing the asset or liability based on active market data.
Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability
based on the best information available in the circumstances.
The fair value hierarchy is broken down into the three input levels summarized below:
• Level 1 —Valuations are based on quoted prices in active markets for identical assets or liabilities and readily
accessible by us at the reporting date. Examples of assets and liabilities utilizing Level 1 inputs are certain money
market funds, U.S. Treasuries and trading securities with quoted prices on active markets.
• Level 2 —Valuations based on inputs other than the quoted prices in active markets that are observable either
directly or indirectly in active markets. Examples of assets and liabilities utilizing Level 2 inputs are U.S.
government agency bonds, corporate bonds, commercial paper, certificates of deposit and over-the- counter
derivatives.
• Level 3 —Valuations based on unobservable inputs in which there are little or no market data, which require us to
develop our own assumptions.
The carrying amounts of the Company’s cash and cash-equivalents and line of credit approximate their fair values at each
balance sheet date due to the short-term maturity of these financial instruments, and generally result in inputs categorized as
Level 1 within the fair value hierarchy. The fair values of term debt are based on the present value of expected future cash
flows and assumptions about current interest rates and the creditworthiness of the Company, and generally result in inputs
categorized as Level 3 within the fair value hierarchy. At March 26, 2016 and March 28, 2015, the carrying amounts of the
Company’s term debt totaled $379,000 and $1.1 million, respectively and the estimated fair value totaled $384,000 and $1.2
million, respectively. The fair value was calculated using a discounted cash flow model and utilized a 20% and 18% discount
rate, respectively. The rates are commensurate with market rates given the remaining term, principal repayment schedule, the
Company’s creditworthiness and outstanding loan balance.
The Company’s derivative warrant liability is measured at fair value on a recurring basis and is categorized as Level 3 in the
fair value hierarchy. The derivative warrant liability is valued using a Monte Carlo simulation model, which used the
following assumptions as of March 26, 2016: (i) the remaining expected life of 3.0 years, (ii) the Company’s historical
volatility rate of 115.1%, (iii) risk-free interest rate of 1.05%, and (iv) a discount rate of twenty percent.
36
The aforementioned derivative warrant liability is the Company’s only asset and liability recognized and measured at fair
value on a recurring or non-recurring basis and was follows:
Fair Value Measurements as of Mar. 26, 2016
(In Thousands) :
Warrant Liability
Total
Fair Value Measurements as of March 28, 2015
(In Thousands):
Warrant Liability
Total
Level 1
$
$
Level 2
Level 3
—
—
— $
— $
Level 1
$
$
Level 2
Level 3
—
— $
— $
— $
353
353
341
341
There were no transfers between Level 1, Level 2 or Level 3 for the fiscal years ended March 26, 2016 and March 28, 2015.
The table below summarizes changes in gains and losses recorded in earnings for Level 3 assets and liabilities that are still
held at March 26, 2016:
(In thousands)
Warrant liability at beginning of year
Additional warrant liability from warrants issued with June 2014 Amendment
Losses on adjustment of warrant liability to fair value
Warrant liability at end of period
$
$
Years Ended
Mar. 26,
2016
341 $
—
12
353 $
Mar. 28,
2015
173
168
—
341
There were no assets measured at fair value on a recurring basis and there were no assets or liabilities measured on a non-
recurring basis at December 26, 2015 and March 28, 2015.
The following table presents quantitative information about recurring Level 3 fair value measurements at March 26, 2015
and March 28, 2015:
March 26, 2016
Warrant liability
Valuation Technique(s)
Monte Carlo
Unobservable Input
Discount rate
March 28, 2015
Warrant liability
Valuation Techniques(s)
Black Scholes Merton with discounted cash flow
Unobservable Input
Discount rate
20%
18%
The discount rate of twenty percent is management’s estimate of the cost of capital given the Company’s credit worthiness.
A significant increase in the discount rate would significantly decrease the fair value, but the magnitude of this decrease
would be less significant in a scenario where the Company’s stock price is significantly higher than the exercise price since
the holder’s option to take a cash payment at maturity represents a smaller component of the total fair value when the
Company’s stock price is higher. The Monte Carlo simulation model simulated the Company’s stock price through the
maturity date of March 31, 2019. At the end of the simulated period, the value of the warrant was determined based on the
greater of (1) the net share settlement value, (2) the net exercise value, or (3) the fixed cash put value.
37
10 Sale of Product Lines
On December 15, 2015, the Company entered into an Asset Purchase Agreement with Spanawave, whereby Spanawave
agreed to purchase the Giga-tronics’ Division product lines for its Power Meters, Amplifiers and Legacy Signal Generators
for $1.5 million. The product lines will transfer to Spanawave sequentially in six phases beginning with certain sensor and
amplifier products effective the fourth quarter of fiscal 2016, with the final product line transfer (legacy Signal Generators)
estimated to be completed by December 2016. As of March 26, 2016, the Company had received $375,000 in connection
with the initiation of data transfer to Spanawave for phases 1 through 5, this amount is included in other current liabilities in
the consolidated financial statements. No gain was recognized in fiscal 2016 as the Company had not fully completed the
asset transfer as required by the provisions of the agreement and final acceptance by Spanawave was pending. The Company
is entitled to receive another $375,000 between July and September 2016 upon the initiation of the last phase. The final
installment of $750,000 is expected to be paid between July and December 2016. In addition, the Company will sell to
Spanawave existing inventory for these products in phases. The Company will continue to manufacture the related products
until the respective product line transfer is complete. These product lines accounted for total revenues of $1.7 million and
$2.7 million respectively, for the fiscal years ended March 26, 2016 and March 28, 2015. Due to the low profit margins on
these product lines, the contribution to pre-tax operating results for the fiscal years ended March 26, 2016 and March 28,
2015 were immaterial to the consolidated financial statements.
11 Selling and Advertising Expenses
Selling expenses consist primarily of salaries to employees and commissions paid to various sales representatives and
marketing agencies. Commission expense totaled $172,000 and $237,000 for fiscal 2016 and 2015, respectively. Advertising
costs, which are expensed as incurred, totaled $123,000 and $7,000 for fiscal 2016 and 2015, respectively.
12 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 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 or loss by operating segment.
The tables below present information for the fiscal years ended in 2016 and 2015.
March 26, 2016 (Dollars in thousands)
Revenue
Interest expense, net
Depreciation and amortization
Capital expenditures
Income/(Loss) before income taxes
Assets
Giga-tronics
Division
Microsource
$
8,679 $
383
301
192
(4,119)
8,068
5,917 $
—
20
—
17
3,134
Total
14,596
383
321
192
(4,102)
11,202
38
March 28, 2015 (Dollars in thousands)
Revenue
Other expense
Interest expense, net
Depreciation and amortization
Capital expenditures
Income/(Loss) before income taxes
Assets
Giga-tronics
Division
Microsource
$
9,123 $
1,386
406
277
81
(3,068)
6,103
9,329 $
—
—
34
—
1,442
1,951
Total
18,452
1,386
406
311
81
(1,626 )
8,054
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 2016 and 2015, U.S. government and U.S. defense-related customers accounted for 71% and 69%
of sales, respectively. During fiscal 2016, the Boeing Company accounted for 32% of the Company’s consolidated revenues
at March 26, 2016 and was included in the Microsource segment. A second customer, DFAS accounted for 11% of the
Company’s consolidated revenues at March 26, 2016 was included in the Giga-tronics Division reporting segment.
During fiscal 2015, Lockheed Martin accounted for 28% of the Company’s consolidated revenues at March 28, 2015 and
was included in the Microsource segment. A second customer, the Boeing Company accounted for 23% of the Company’s
consolidated revenues at March 28, 2015 and was also included in the Microsource segment. A third customer, DFAS
accounted for 14% of the Company’s consolidated revenues during fiscal 2015 and was included in the Giga-tronics Division
reporting segment.
Export sales accounted for 4% and 8% of the Company’s sales in fiscal 2016 and 2015, respectively. Export sales by
geographical area for these fiscal years are shown below:
(Dollars in thousands)
Americas
Europe
Asia
Rest of world
Total
13 Loss per Common Share
March 26,
2016
10 $
326
140
122
598 $
March 28,
2015
26
179
1,085
177
1,467
$
$
Net loss and common shares used in per share computations for the fiscal years ended March 26, 2016 and March 28, 2015
are as follows:
(In thousands except per-share data)
Net loss
Weighted average: Common shares outstanding
Potential common shares
Common shares assuming dilution
Loss per common share – basic
Loss per common 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 26,
2016
(4,104)
March 28,
2015
(1,673)
$
$
$
6,941
—
6,941
(0.59)
(0.59)
1,592
—
1,853
3,737
5,279
—
5,279
(0.32)
(0.32)
1,727
482
1,853
1,368
39
The stock options, restricted stock, convertible preferred stocks and warrants not included in the computation of diluted
earnings per share (EPS) for the fiscal years ended March 26, 2016 and March 28, 2015 is a result of the Company’s net loss
and, therefore, the effect of these instruments would be anti-dilutive.
14 Income Taxes
Following are the components of the provision for income taxes:
Fiscal years ended
(in thousands)
Current
Federal
State
Deferred
Federal
State
Change in liability for uncertain tax positions
Change in valuation allowance
Provision for income taxes
March 26,
March 28,
2016
2015
$
$
— $
2
2
(1,297)
215
(1,082)
13
(1,069)
2 $
—
47
47
210
391
601
23
(624)
47
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows:
Fiscal years ended (In thousands)
Net operating loss carryforwards
Income tax credits
Inventory reserves and additional costs capitalized
Accrued vacation
Deferred rent
Non-qualified stock options and restricted stock
Other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
$
March 26,
2016
15,065 $
296
1,935
131
44
(10)
68
17,529
March 28,
2015
13,657
306
1,974
133
95
247
48
16,460
$
(17,529)
— $
(16,460)
—
The following summarizes the difference between the income tax expense and the amount computed by applying the statutory
federal income tax rate of 34% to income before income tax. The items comprising these differences consisted of the
following for the fiscal years ended March 26, 2016 and March 28, 2015:
Fiscal 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
$
$
40
March 26, 2016
(1,395)
1,069
(239)
451
107
(35)
13
31
2
34.0% $
(26.1)
5.8
(11.0)
(2.6)
0.9
(0.3)
(0.8)
(0.1)
$
March 28, 2015
(553)
(624)
(95)
861
593
(187)
23
29
47
34.0 %
38.4
5.8
(53.0 )
(36.5 )
11.5
(1.4 )
(1.8 )
(3.0% )
The increase in valuation allowance from March 28, 2015 to March 26, 2016 was $1.1 million.
As of March 26, 2016, the Company had pre-tax federal net operating loss carryforwards of $40.5 million and state net
operating loss carryforwards of $21.9 million available to reduce future taxable income. The federal and state net operating
loss carryforwards begin to expire from fiscal 2023 through 2036 and from 2016 through 2036, 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 2023 through 2036 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 26, 2016, the Company recorded unrecognized tax benefits of $106,000 related to uncertain tax positions. The
unrecognized tax benefit is netted against the noncurrent deferred tax asset on the Consolidated Balance Sheet. The Company
has not recorded a liability for any penalties or interest related to the unrecognized tax benefits.
The Company files U.S federal and California state income tax returns. The Company is generally no longer subject to tax
examinations for years prior to the fiscal year 2012 for federal purposes and fiscal year 2011 for California purposes, except
in certain limited circumstances. The Company does have a California Franchise Tax Board audit that is currently in process.
The Company is working with the California Franchise Tax Board to resolve all audit issues and does not believe any material
taxes or penalties are due. However, as a result of the ongoing examination, the Company eliminated certain income tax
credit carryovers. The write-off of these income tax credit carryovers did not have a significant impact on total income tax
expense as the majority had an uncertain tax position reserve with the balance having a full valuation allowance against the
deferred tax asset.
A reconciliation of the beginning and ending amount of the liability for uncertain tax positions, excluding potential interest
and penalties, is as follows:
(In thousands)
Balance as of beginning of year
Additions based on current year tax positions
(Reductions) additions for prior year tax positions
Balance as of end of year
Fiscal Year
2016
Fiscal Year
2015
$
$
93 $
13
—
106 $
70
23
—
93
The total amount of interest and penalties related to unrecognized tax benefits at March 26, 2016 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 next twelve (12) months.
15 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 stock options and restricted stock for up to 2,850,000 shares of common stock at 100% of fair market value at the date of
grant, with each grant requiring approval by the Board of Directors of the Company. Options granted generally vest in one
or more installments in a four or five year period and must be exercised while the grantee is employed by the Company or
within a certain period after termination of employment. Options granted to employees shall not have terms in excess of 10
years from the grant date. Holders of options may be granted stock appreciation rights (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 26, 2016, no SAR’s have been granted under the option plan. As of March 26, 2016, the total number of
shares of common stock available for issuance is 955,427. All outstanding options have a ten year life from the date of grant.
41
Stock Options
The weighted average grant date fair value of stock options granted during the fiscal years ended March 26, 2016 and March
28, 2015 was $1.04 and $1.66, respectively, and was calculated using the following weighted-average assumptions:
Fiscal years ended
Dividend yield
Expected volatility
Risk-free interest rate
Expected term (years)
March 26,
2016
—
98 %
1.55 %
8.36
March 28,
2015
—
92 %
1.61 %
8.34
A summary of the changes in stock options outstanding for the fiscal years ended March 26, 2016 and March 28, 2015 is
presented below:
(Dollars in thousands except share prices)
Outstanding at March 29, 2014
Granted
Exercised
Forfeited / Expired
Outstanding at March 28, 2015
Granted
Exercised
Forfeited / Expired
Outstanding at March 26, 2016
Weighted
Average
Exercise
Price
1.53
2.01
1.80
1.81
1.57
1.22
1.59
2.15
1.52
Shares
1,738,750 $
306,500
90,000
228,275
1,726,975 $
35,000
48,550
121,225
1,592,200 $
Weighted
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
113
6.8 $
6.9 $
219
6.8 $
69
41
15
Exercisable at March 26, 2016
900,350 $
1.47
6.4 $
At March 26, 2016, expected to vest in the future
467,071 $
1.58
7.4 $
As of March 26, 2016, there was $414,000 of total unrecognized compensation cost related to non-vested options granted
under the 2005 Plan and outside of the 2005 Plan. That cost is expected to be recognized over a weighted average period of
2.4 years and will be adjusted for subsequent changes in estimated forfeitures. There were 419,050 and 280,650 options
vested during the fiscal years ended March 26, 2016 and March 28, 2015 respectively. The total fair value of options vested
during the fiscal years ended March 26, 2016 and March 28, 2015 was $104,000 and $120,000, respectively. Cash received
from the exercise of stock options during fiscal 2016 and fiscal 2015 was $77,000 and $163,000, respectively. Share based
compensation cost recognized in operating results for the fiscal years ended March 26, 2016 and March 28, 2015 totaled
$403,000 and $370,000, respectively.
Restricted Stock
The Company granted 432,000 shares of restricted stock during fiscal 2015 to certain members of the Board of Directors in
lieu of cash fees for services performed in fiscal 2015 and fiscal 2016. These restricted stock fully vested in fiscal 2016 and
the vesting date fair value totaled $761,000. The weighted average grant date fair value was $2.11. The restricted stock awards
are considered fixed awards as the number of shares and fair value at the grant date is amortized over the requisite service
period net of estimated forfeitures. Compensation cost recognized for restricted stock awards for fiscal 2016 and fiscal 2015
totaled $522,000 and $457,000, respectively.
42
A summary of the changes in non-vested restricted stock awards outstanding for the fiscal years ended March 26, 2016 and
March 28, 2015 is presented below:
Non-vested at March 29, 2014
Granted
Vested
Forfeited or cancelled
Non-vested at March 28, 2015
Granted
Vested
Forfeited or cancelled
Non-vested at March 26, 2016
Weighted
Average Grant
Date Fair Value
Shares
121,500 $
432,000
71,500
—
482,000 $
—
482,000
—
— $
1.39
2.11
1.53
—
2.02
—
2.02
—
—
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 2016 and 2015 were approximately $41,000 and $39,000,
respectively.
16 Commitments and Contingencies
The Company leases a 47,300 square foot facility located in San Ramon, California that expires in December 31, 2016. All
of the Company’s operations are in the San Ramon facility as of March 26, 2016.
The Company also leases certain other equipment under operating leases.
Total future minimum lease payments under these leases are as follows. Fiscal year (Dollars in thousands)
Fiscal year (Dollars in thousands)
2017
2018
2019
2020
Thereafter
Total
529
6
6
6
6
553
$
The aggregate rental expense was $677,000 and $654,000 in fiscal 2016 and 2015, respectively.
The Company leases certain equipment under capital leases that expire through May 2021. Capital leases with costs totaling
$249,000 and $319,000 are reported net of accumulated depreciation of $32,000 and $60,000 at March 26, 2016 and March
28, 2015, respectively.
Total future minimum lease payments under these capital leases are as follows.
Fiscal year (Dollars in thousands)
2017
2018
2019
2020
2021
Total
Principal
Interest
$
$
44 $
50
52
40
23
209 $
25 $
19
12
5
1
62 $
Total
69
69
64
45
24
271
The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of March 26, 2016, total
non–cancelable purchase orders were approximately $2.3 million and are scheduled to be delivered to the Company at various
dates through March 2017.
43
17 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.
(In thousands)
Balance as of beginning of year
Provision, net
Warranty costs incurred
Balance as of end of year
18 Private Placement Offering
March 26,
2016
March 28,
2015
$
$
76 $
55
(71 )
60 $
61
81
(66)
76
On January 19, 2016, the Company entered into a Securities Purchase Agreement for the sale of 2,787,872 Units, each
consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock, to approximately 20 private
investors. The purchase price for each Unit was $1.24375. Gross proceeds were approximately $3.5 million. Net proceeds to
the Company after fees was approximately $3.1 million. The portion of the purchase price attributable to the common shares
included in each Unit was $1.15, the consolidated closing bid price for the Company’s common stock on January 15, 2016.
The warrant price was $.09375 per Unit (equivalent to $0.125 per whole warrant share), with an exercise price of $1.15 per
share. The term of the warrants is five years from the date of completion of the transaction. Emerging Growth Equities, Ltd
also received warrants to purchase 292,727 shares of common stock at an exercise price of $1.15 per share as part of its
consideration for serving as placement agent in connection with the private placement.
19 Series B, C, D Convertible Voting Perpetual Preferred Stock and Warrants
On November 10, 2011, the Company received $2,199,000 in cash proceeds from Alara Capital AVI II, LLC, a Delaware
limited liability company (the “Investor”), an investment vehicle sponsored by Active Value Investors, LLC, under a
Securities Purchase Agreement entered into on October 31, 2011. Under the terms of the Securities Purchase Agreement, the
Company issued 9,997 shares of its Series B Convertible Voting Perpetual Preferred Stock (“Series B Preferred Stock”) to
the Investor at a price of $220 per share. The Company has recorded $2.0 million as Series B Preferred Stock on the
consolidated balance sheet which is net of stock offering costs of approximately $202,000 and represents the value
attributable to both the convertible preferred stock and warrants issued to the Investor. After considering the value of the
warrants, the effective conversion price of the preferred stock was greater than the common stock price on date of issue and
therefore no beneficial conversion feature was present.
On February 19, 2013, the Company entered into a Securities Purchase Agreement pursuant to which it agreed to sell 3,424.65
shares of its Series C Convertible Voting Perpetual Preferred Stock (“Series C Preferred Stock”) to the Investor, for aggregate
consideration of $500,000, which is approximately $146.00 per share. The Company has recorded $457,000 as Series C
Preferred Stock on the consolidated balance sheet, which is net of stock offering costs of approximately $43,000. As part of
this transaction, the Company and the Investor agreed to reduce the number of shares exercisable under the previously issued
warrant, and after considering the reduction in the value of the warrant, the effective conversion price of the preferred stock
was greater than the common stock price on the date of issue and therefore no beneficial conversion feature was present.
On July 8, 2013 the Company received $817,000 in net cash proceeds from the Investor under a Securities Purchase
Agreement. The Company sold to the Investor 5,111.86 shares of its Series D Convertible Voting Perpetual Preferred Stock
(Series D Preferred Stock) and a warrant to purchase up to 511,186 additional shares of common stock at the price of $1.43
per share. The allocation of the $858,000 in gross proceeds from issuance of Series D Preferred Stock based on the relative
fair values resulted in an allocation of $498,000 (which was recorded net of $41,000 of issuance costs) to Series D Preferred
Stock and $360,000 to Common Stock. In addition, because the effective conversion rate based on the $498,000 allocated to
Series D Preferred Stock was $0.97 per common share which was less than the Company’s stock price on the date of issuance,
a beneficial conversion feature was present at the issuance date. The beneficial conversion feature totaled $238,000 and was
recorded as a reduction of common stock and an increase to accumulated deficit.
Each share of Series B, Series C and Series D Preferred Stock is convertible into one hundred shares of the Company’s
common stock. In connection with the preferred stock issuance described above, the Company issued to the investor warrants
44
to purchase a total of 1,017,405 common shares at an exercise price of $1.43 per share. These warrants were exercised in
February 2015, and May 2015 as discussed in Note 20, Exercise of Series C and Series D Warrants.
The table below present information for the periods ended March 26, 2016 and March 28, 2015:
Preferred Stock
As of March 26, 2016 and March 28, 2015
Series B
Series C
Series D
Total
Designated
Shares
10,000.00
3,500.00
6,000.00
19,500.00
Shares
Issued
9,997.00
3,424.65
5,111.86
18,533.51
Shares
Outstanding
9,997.00 $
3,424.65
5,111.86
18,533.51 $
Liquidation
Preference
(in thousands)
2,309
500
731
3,540
20 Exercise of Series C and Series D Warrants
On February 16, 2015, the Company entered into a Securities Purchase Agreement and Warrant Agreement with Alara Capital
AVI II, LLC (“Alara Capital”), an investment vehicle sponsored by AVI Partners, LLC (“AVI” ) (with both entities
collectively referred to herein as “Alara”), in which the Company received total gross cash proceeds of approximately $1.5
million. Funds were received from Alara in separate closings dated February 16, 2015 and February 23, 2015 in which Alara
exercised a total of 1,002,818 of its existing Series C and Series D warrants to purchase common shares, all of which had an
exercise price of $1.43 per share for total cash proceeds of $1,434,000, which was recorded net of $42,000 of stock issuance
costs. As part of the consideration for this exercise, the Company sold to Alara two new warrants to purchase an additional
898,634 and 194,437 common shares at an exercise price of $1.78 and $1.76 per share, respectively, for a total purchase price
of $137,000 or $0.125 per share, The new warrants have a term of five years and may be paid in cash or through a cashless
net share settlement. The Company and Alara amended the remaining 14,587 warrants as part of the February closings. On
May 14, 2015, Alara exercised the remaining 14,587 warrants by acquiring 7,216 of shares of the Company’s common stock
through a cashless net share settlement. The Company recorded the issuance of the new Warrants using their estimated fair
value on the date of issuance. The Company estimated the fair value of the new Warrants using the Black-Scholes option
valuation model with the following assumptions: expected term of 5 years, a risk-free interest rate of 1.54%, expected
volatility of 90% and 0% expected dividend yield. The resulting $1.2 million from the issuance of the new Warrants was
recorded as a charge to other expense in the fiscal year ended March 28, 2015.
45
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 sheets of Giga-tronics Incorporated (the “Company”) as of March
26, 2016 and March 28, 2015 and the related consolidated statements of operations, shareholders’ equity and cash flows for
the years 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 audits.
We conducted our audits 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 audits provide 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, 2016 and March 28, 2015, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the Company incurred a net loss of $4.1 million for
the year ended March 26, 2016, had an accumulated deficit of $24.0 million as of March 26, 2016, has experienced delays in
the development of features, orders and shipments of its new product line, and has relied on its line of credit to fund
operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
San Francisco, California
June 7, 2016
/s/ Crowe Horwath LLP
46
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 maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) that are designed to ensure that information required
to be disclosed in the Company’s reports under the Exchange Act, is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to
management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company periodically reviews the design and effectiveness of its disclosure
controls and internal control over financial reporting. The Company makes modifications to improve the design and
effectiveness of its disclosure controls and internal control structure, and may take other corrective action, if its reviews
identify a need for such modifications or actions. The Company’s disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives.
As of the end of the period covered by this Form 10-K, an evaluation was completed under the supervision and with the
participation of our management, including our principal executive officer and principal financial officer, regarding the
design and effectiveness of our disclosure controls and procedures. Based on this evaluation, our management, including our
principal executive officer and principal financial officer, has concluded that our disclosure controls and procedures were
effective as of March 26, 2016.
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 26, 2016. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 1992
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 the above described procedures and actions taken, the Company’s management, including its Chief Executive
Officer and its Chief Financial Officer have concluded that as of March 26, 2016, the Company’s internal control over
financial reporting was effective based on the criteria described in the 1992 “COSO Internal Control – Integrated
Framework.”
47
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 26,
2016, 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.
Changes in Internal Control
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act) during the fiscal quarter ended March 26, 2016, that have materially affected, or are reasonably
likely to materially affect, the Company’s 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.
48
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 2016 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 26, 2016.
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 2016 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 26, 2016.
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 2016 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
2016 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 26, 2016.
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 26, 2016.
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 26, 2016.
49
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following consolidated financial statements of Giga-tronics Incorporated and the related independent
registered public accounting firm are filed herewith:
1. Financial Statements. See Index to Financial Statements on page 23. 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.
50
SIGNATURES
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.
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.
June 7, 2016
Date
June 7, 2016
Date
June 7, 2016
Date
June 7, 2016
Date
June 7, 2016
Date
June 7, 2016
Date
June 7, 2016
Date
June 7, 2016
Date
/s/ GARRETT A. GARRETTSON
Garrett A. Garrettson
Chairman of the Board
of Directors
/s/ JOHN R. REGAZZI
John R. Regazzi
/s/ STEVEN D. LANCE
Steven D. Lance
/s/ GORDON L. ALMQUIST
Gordon L. Almquist
/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 & Secretary
(Principal Financial Officer)
Director
Director
Director
Director
Director
51
The following exhibits are filed by reference or herewith as a part of this report:
INDEX TO EXHIBITS
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
10.1
10.2
Articles of Incorporation of the Company, as amended, incorporated by reference to Exhibit 3.1 to the Company’s
Annual Report on Form 10-K for the fiscal year ended March 27, 1999.
Certificate of Determination of Preferences of Preferred Stock Series A of the Company, incorporated by reference
to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 27, 1999.
Certificate of Determination of Series B Convertible Voting Perpetual Preferred Stock of the Company,
incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 14,
2011.
Certificate of Determination of Series C Convertible Voting Perpetual Preferred Stock of the Company,
incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 25,
2013.
Certificate of Determination of Series D Convertible Voting Perpetual Preferred Stock of the Company,
incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 3, 2013.
Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.2 to the Company’s Annual
Report on Form 10-K for the fiscal year ended March 29, 2008..
Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC dated January 23,
2013, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 25,
2013.
Amendment No. 1 to Rights Agreement between the Company and American Stock Transfer & Trust Company,
LLC dated June 27, 2013, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-
K filed on July 3, 2013.
Amendment No. 2 to Rights Agreement between the Company and American Stock Transfer & Trust Company,
LLC dated February 16, 2015, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form
8-K filed on February 20, 2015.
Form of Indemnification Agreement between the Company and each of its directors and officers, incorporated by
reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 27,
2010.
First Amendment to Office Lease Agreement between the Company and VIF/ZKS Norris Tech Center, LLC dated
March 29, 2010 and relating to space located at 4650 Norris Canyon Road, San Ramon, CA, incorporated by
reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 27,
2010.
10.3
2000 Stock Option Plan, incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on
Form S-8 (File No. 33-45476) filed on September 8, 2000. *
52
10.4
2005 Equity Incentive Plan, incorporated by reference to Attachment A to the Company’s Proxy Statement on
Form DEF 14A filed on July 21, 2005. *
10.5 Amended and Restated Loan and Security Agreement between the Company and Partners for Growth IV, L.P.
dated June 16, 2014, incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K
for the fiscal year ended March 29, 2014.
10.6 Amended and Restated Warrant between the Company and Partners for Growth IV, L.P. dated June 16, 2014,
incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended
March 29, 2014.
10.7 Amended and Restated Warrant between the Company and SVB Financial Group dated June 16, 2014,
incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended
March 29, 2014.
10.8 Amended and Restated Warrant between the Company and PFG Equity Investors, LLC dated June 16, 2014,
incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended
March 29, 2014.
10.9
Securities Purchase Agreement between the Company and Alara Capital AVI II, LLC dated June 27, 2013,
incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 3, 2013.
10.10 Securities Purchase Agreement between the Company and Alara Capital AVI II, LLC dated February 16, 2015,
incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 20,
2015.
10.11 Warrant to Purchase 506,219 Shares of Common Stock between the Company and Alara Capital AVI II, LLC
dated July 8, 2013, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed
on July 12, 2013.
10.12 Warrant to Purchase 511,186 Shares of Common Stock between the Company and Alara Capital AVI II, LLC
dated July 8, 2013, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed
on July 12, 2013.
10.13 Warrant to Purchase 898,634 Shares of Common Stock between the Company and Alara Capital AVI II, LLC
dated February 16, 2015, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-
K filed on February 20, 2015.
10.14 Warrant to Purchase 194,437 Shares of Common Stock between the Company and Alara Capital AVI II, LLC
dated February 23, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-
K filed on February 27, 2015.
10.15 Amended and Restated Warrant to Purchase 14,587 Shares of Common Stock between the Company and Alara
Capital AVI II, LLC dated February 23, 2015.
10.16
Investor Rights Agreement between the Company and Alara Capital AVI II, LLC dated November 10, 2011,
incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 14,
2011.
10.17
Investor Rights Agreement between the Company and Alara Capital AVI II, LLC dated July 8, 2013, incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 12, 2013.
53
10.18
Investor Rights Agreement between the Company and Alara Capital AVI II, LLC dated February 16, 2015,
incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 20,
2015.
10.19 Amendment No. 1 to Securities Purchase Agreement and Investor Rights Agreement between the Company and
Alara Capital AVI II, LLC dated February 23, 2015, incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on February 27, 2015.
10.20 Severance Agreement between the Company and John R. Regazzi dated June 3, 2010, incorporated by reference
to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2010. *
10.21 Severance Agreement between the Company and Michael R. Penta dated July 16, 2012, incorporated by reference
to Exhibit 10.21 to the Company’s Annual Report on Form 10-K filed on June 9, 2015.*
10.22 Severance Agreement between the Company and Steven D. Lance dated June 1, 2015, incorporated by reference
to Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed on June 9, 2015.*
10.23 Asset Purchase Agreement between the Company and Spanawave Corporation, incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on February 8, 2016.
10.24 Form of Securities Purchase Agreement dated January 19, 2016, between the Company and individual investors,
incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-3 (File No. 333-
210157) filed on March 14, 2016.
10.25 Form of Warrant Agreement dated January 29, 2016, between the Company and individual investors, incorporated
by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-3 (File No. 333-210157) filed
on March 14, 2016.
10.26 Form of Rights Agreement dated January 29, 2016, between the Company and individual investors
21
Significant Subsidiaries.
23
Consent of Independent Registered Public Accounting Firm, Crowe Horwath LLP.
31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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.
101.1 The following materials from the Company’s Annual Report on Form 10K for the year ended March 26, 2016,
formatted in XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balances Sheets, (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.
54