UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended | September 2 |
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
| For the transition period from |
| to |
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Commission File No. 001-14605
GIGA-TRONICS INCORPORATED |
(Exact name of registrant as specified in its charter) |
California |
| 94-2656341 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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5990 Gleason Drive, Dublin CA 94568 |
| (925) 328-4650 |
(Address of principal executive offices) |
| Registrant’s telephone number, including area code |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||
Common Stock, No par value | GIGA | OTCQB Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes [ X ]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ X ]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. [ ]
Large accelerated filer |
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| Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes [ ]☐ No [ X ]☒
There were a total of 38,624,7502,635,856 shares of the Registrant’s Common Stock outstanding as of November 8, 2019.October 26, 2020.
INDEX
PART I - FINANCIAL INFORMATION | Page No. | |||
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Item 1. | Financial Statements |
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| Unaudited Condensed Consolidated Balance Sheets as of September | 4 | ||
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| Unaudited Condensed Consolidated Statements of Operations, Three and Six Months Ended September | 5 | ||
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| Unaudited Consolidated Statements of Shareholders’ Equity, Six Months Ended September | 6 | ||
| Unaudited Condensed Consolidated Statements of Cash Flows, Six Months Ended September | 7 | ||
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| Notes to Unaudited Condensed Consolidated Financial Statements | 8 | ||
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. | Controls and Procedures |
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PART II - OTHER INFORMATION |
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Item 1. | Legal Proceedings | 26 | ||
Item 1A. | Risk Factors | 26 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 | ||
Item 3. | Defaults Upon Senior Securities | 26 | ||
Item 4. | Mine Safety Disclosures | 26 | ||
Item 5. | Other information | 26 | ||
Item 6. | Exhibits | 26 | ||
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SIGNATURES | 27 | |||
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. | Exhibit Index |
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| 31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act. |
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| 31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act. |
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| 32.1 Certification of CEO pursuant to Section 906 of Sarbanes-Oxley Act. |
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| 32.1 Certification of CFO pursuant to Section |
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about Giga-tronics Incorporated (the “Company” or “we”) for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products, revenue or cost savings; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "targeted", "projected", "continue", "remain", "will", "should", "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to risks related to (1) the Company’s ability to obtain and maintain necessary capital to finance its operations; (2) the Company’s ability to develop competitive products in a market with rapidly changing technology and standards; (3) the results of pending or threatened litigation; (4) risks related to customers’ credit worthiness/profiles; (5) changes in the Company’s credit profile and its ability to borrow; (6) a potential decline in demand for certain of the Company’s products; (7) potential product liability claims; (8) the potential loss of key personnel; and (9) U.S. and international economic conditions.conditions and (10) the COVID-19 pandemic, including the effects of governmental responses to the pandemic. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. The reader is directed to the Company's annual report on Form 10-K for the year ended March 30, 201928, 2020 for further discussion of factors that could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. The Company undertakes no obligation to update any forward-looking statements in this report.
PART I – FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GIGA-TRONICS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except share data) | September 28, 2019 | March 30, 2019 | September 26, 2020 | March 28, 2020* | ||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash-equivalents | $ | 704 | $ | 878 | $ | 405 | $ | 657 | ||||||||
Trade accounts receivable, net of allowance of $8 and $8, respectively | 994 | 568 | 1,021 | 932 | ||||||||||||
Inventories, net | 3,217 | 2,734 | 3,166 | 3,261 | ||||||||||||
Prepaid expenses and other current assets | 1,864 | 1,354 | 2,438 | 2,209 | ||||||||||||
Total current assets | 6,779 | 5,534 | 7,030 | 7,059 | ||||||||||||
Property and equipment, net | 567 | 569 | 458 | 508 | ||||||||||||
Right of use asset | 1,231 | — | 1,027 | 1,183 | ||||||||||||
Other long term assets | 176 | 176 | ||||||||||||||
Other long-term assets | 176 | 176 | ||||||||||||||
Total assets | $ | 8,753 | $ | 6,279 | $ | 8,691 | $ | 8,926 | ||||||||
Liabilities and shareholders' equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 1,512 | $ | 747 | $ | 1,030 | $ | 803 | ||||||||
Loans payable, net of discounts and issuance costs | 2,073 | 1,781 | 1,490 | 1,320 | ||||||||||||
Accrued payroll and benefits | 280 | 476 | 398 | 300 | ||||||||||||
Deferred rent | 2 | 74 | ||||||||||||||
Deferred revenue | — | 159 | ||||||||||||||
Lease obligations | 396 | 41 | 430 | 426 | ||||||||||||
Deferred liability related to asset sale | 29 | 40 | ||||||||||||||
Other current liabilities | 591 | 754 | 330 | 364 | ||||||||||||
Total current liabilities | 4,883 | 3,913 | 3,678 | 3,372 | ||||||||||||
Other non-current liabilities | 192 | 172 | 60 | 119 | ||||||||||||
Long term deferred rent | 2 | 358 | ||||||||||||||
Long term obligations - leases | 1,268 | 21 | ||||||||||||||
Long term obligations – leases | 916 | 1,135 | ||||||||||||||
Total liabilities | 6,345 | 4,464 | 4,654 | 4,626 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Shareholders' equity: | ||||||||||||||||
Preferred stock; no par value; Authorized - 1,000,000 shares Series A convertible- designated 250,000 shares; no shares at September 28, 2019 and March 30, 2019 issued and outstanding | — | — | ||||||||||||||
Series B, C, D convertible - designated 19,500 shares; 17,781.64 shares at September 28, 2019 and 18,533.51 at March 30, 2019 outstanding; (liquidation preference of $3,367 at September 28, 2019 and $3,540 at March 30, 2019) | 2,745 | 2,911 | ||||||||||||||
Series E convertible- designated 100,000 shares; 97,800 shares at September 28, 2019 and 98,400 shares at March 30, 2019 outstanding; (liquidation preference of $3,668 at September 28, 2019 and $3,690 at March 30, 2019) | 1,878 | 1,895 | ||||||||||||||
Common stock; no par value; Authorized - 40,000,000 shares; 13,215,188 shares at September 28, 2019 and 11,360,511 shares at March 30, 2019 issued and outstanding | 26,279 | 25,557 | ||||||||||||||
Preferred stock; no par value; Authorized - 1,000,000 shares | ||||||||||||||||
Series A convertible- designated 250,000 shares; no shares at September 26, 2020 and March 28, 2020 issued and outstanding | — | — | ||||||||||||||
Series B, C, D convertible - designated 19,500 shares; 17,781.64 shares at September 26, 2020 and 17,781.64 at March 28, 2020 outstanding; (liquidation preference of $3,367 at September 26, 2020 and $3,367 at March 28, 2020) | 2,745 | 2,745 | ||||||||||||||
Series E convertible- designated 100,000 shares; 9,200 shares at September 26, 2020 and 9,200 shares at March 28, 2020 outstanding; (liquidation preference of $345 at September 26, 2020 and $345 at March 28, 2020) | 177 | 177 | ||||||||||||||
Common stock; no par value; Authorized – 13,333,333 shares; 2,635,856 shares at September 26, 2020 and 2,635,856 shares at March 28, 2020 issued and outstanding | 32,094 | 31,952 | ||||||||||||||
Accumulated deficit | (28,494 | ) | (28,548 | ) | (30,979 | ) | (30,574 | ) | ||||||||
Total shareholders' equity | 2,408 | 1,815 | 4,037 | 4,300 | ||||||||||||
Total liabilities and shareholders' equity | $ | 8,753 | $ | 6,279 | $ | 8,691 | $ | 8,926 |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
* Derived from the audited consolidated financial statements as of and for the fiscal year ended March 28, 2020.
GIGA-TRONICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
(In thousands except per share data) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||||||
Net revenue | ||||||||||||||||||||||||||||||||
Goods | $ | 373 | $ | 109 | $ | 2,311 | $ | 316 | $ | 822 | $ | 373 | $ | 1,931 | $ | 2,311 | ||||||||||||||||
Services | 2,662 | 2,571 | 4,222 | 5,414 | 1,870 | 2,662 | 4,309 | 4,222 | ||||||||||||||||||||||||
Total revenue | 3,035 | 2,680 | 6,533 | 5,730 | 2,692 | 3,035 | 6,240 | 6,533 | ||||||||||||||||||||||||
Cost of goods and services | 1,787 | 1,554 | 3,754 | 3,298 | 1,652 | 1,787 | 3,686 | 3,754 | ||||||||||||||||||||||||
Gross profit | 1,248 | 1,126 | 2,779 | 2,432 | 1,040 | 1,248 | 2,554 | 2,779 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Engineering | 349 | 343 | 704 | 718 | 554 | 349 | 991 | 704 | ||||||||||||||||||||||||
Selling, general and administrative | 751 | 900 | 1,798 | 1,901 | 926 | 751 | 1,895 | 1,798 | ||||||||||||||||||||||||
Total operating expenses | 1,100 | 1,243 | 2,502 | 2,619 | 1,480 | 1,100 | 2,886 | 2,502 | ||||||||||||||||||||||||
Operating income (loss) | 148 | (117 | ) | 277 | (187 | ) | ||||||||||||||||||||||||||
Operating income (loss) | (440 | ) | 148 | (332 | ) | 277 | ||||||||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||||||||||
Interest expense, net | (66 | ) | (87 | ) | (124 | ) | (173 | ) | (32 | ) | (66 | ) | (65 | ) | (124 | ) | ||||||||||||||||
Interest expense from accretion of loan discount | — | (54 | ) | (19 | ) | (105 | ) | — | — | — | (19 | ) | ||||||||||||||||||||
Total interest expense, net | (66 | ) | (141 | ) | (143 | ) | (278 | ) | (32 | ) | (66 | ) | (65 | ) | (143 | ) | ||||||||||||||||
Income (loss) before income taxes | 82 | (258 | ) | 134 | (465 | ) | (472 | ) | 82 | (397 | ) | 134 | ||||||||||||||||||||
Provision for income taxes | 2 | 2 | 2 | 42 | 2 | 2 | 2 | 2 | ||||||||||||||||||||||||
Net income (loss) | $ | 80 | $ | (260 | ) | $ | 132 | $ | (507 | ) | ||||||||||||||||||||||
Net income (loss) | $ | (474 | ) | $ | 80 | $ | (399 | ) | $ | 132 | ||||||||||||||||||||||
Deemed dividend on Series E shares | $ | (36 | ) | $ | (22 | ) | $ | (73 | ) | $ | (62 | ) | $ | (3 | ) | $ | (36 | ) | $ | (6 | ) | $ | (73 | ) | ||||||||
Net income (loss) attributable to common shareholders | $ | 44 | $ | (282 | ) | $ | 59 | $ | (569 | ) | $ | (477 | ) | $ | 44 | $ | (405 | ) | $ | 59 | ||||||||||||
Income (loss) per common share - basic | $ | 0.00 | $ | (0.03 | ) | $ | 0.01 | $ | (0.06 | ) | $ | (0.18 | ) | $ | 0.06 | $ | (0.15 | ) | $ | 0.08 | ||||||||||||
Income (loss) per common share - diluted | $ | 0.00 | $ | (0.03 | ) | $ | 0.00 | $ | (0.06 | ) | $ | (0.18 | ) | $ | 0.03 | $ | (0.15 | ) | $ | 0.04 | ||||||||||||
Weighted average shares used in per share calculation: | ||||||||||||||||||||||||||||||||
Basic | 11,693 | 10,546 | 11,693 | 10,254 | 2,636 | 780 | 2,636 | 780 | ||||||||||||||||||||||||
Diluted | 23,699 | 10,546 | 23,699 | 10,254 | 2,636 | 1,580 | 2,636 | 1,580 |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
GIGA-TRONICS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) |
Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||
(In thousands except share data) | Shares | Amount | Shares | Amount | Deficit | Total | ||||||||||||||||||
Balance at March 31, 2018 | 62,334 | $ | 3,613 | 10,312,653 | $ | 25,200 | $ | (28,682 | ) | $ | 131 | |||||||||||||
Cumulative effect of ASC 606 adoption | — | — | — | — | 1,176 | 1,176 | ||||||||||||||||||
Net loss | — | — | — | — | (287 | ) | (287 | ) | ||||||||||||||||
Share based compensation | — | — | — | 57 | — | 57 | ||||||||||||||||||
Warrant exercises, net of issuance costs | — | — | 60,300 | 15 | — | 15 | ||||||||||||||||||
Equity issuance for PFG Loan | — | — | 7,500 | — | — | — | ||||||||||||||||||
Restricted stock granted | — | — | 38,500 | — | — | — | ||||||||||||||||||
Series E preferred stock issuance, net of offering costs of $15 | 8,800 | 205 | — | — | — | 205 | ||||||||||||||||||
Balance at June 30, 2018 | 71,134 | $ | 3,818 | 10,418,953 | $ | 25,272 | $ | (27,793 | ) | $ | 1,297 | |||||||||||||
Net loss | — | — | — | — | (282 | ) | (282 | ) | ||||||||||||||||
Share based compensation | — | — | — | 46 | — | 46 | ||||||||||||||||||
Warrant exercises, net of issuance costs | — | — | 512,558 | 97 | — | 97 | ||||||||||||||||||
Equity issuance for PFG Loan | — | — | 7,500 | — | — | — | ||||||||||||||||||
Series E preferred stock issuance, net of offering costs of $15 | 17,400 | 371 | — | — | — | 371 | ||||||||||||||||||
Balance at September 29, 2018 | 88,534 | $ | 4,189 | 10,939,011 | $ | 25,415 | $ | (28,075 | ) | $ | 1,529 |
Preferred Stock | Common Stock | Accumulated | Preferred Stock | Common Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
(In thousands except share data) | Shares | Amount | Shares | Amount | Deficit | Total | Shares | Amount | Shares | Amount | Deficit | Total | ||||||||||||||||||||||||||||||||||||
Balance at March 30, 2019 | 116,934 | $ | 4,806 | 11,360,511 | $ | 25,557 | $ | (28,548 | ) | $ | 1,815 | 116,934 | $ | 4,806 | 757,367 | $ | 25,557 | $ | (28,548 | ) | $ | 1,815 | ||||||||||||||||||||||||||
Net income | — | — | — | — | 15 | 15 | — | — | — | — | 15 | 15 | ||||||||||||||||||||||||||||||||||||
Share based compensation | — | — | — | 95 | — | 95 | — | — | — | 95 | — | 95 | ||||||||||||||||||||||||||||||||||||
Equity issuance for PFG Loan | — | — | 2,500 | — | — | — | — | — | 167 | — | — | — | ||||||||||||||||||||||||||||||||||||
Restricted stock forfeited | — | — | (20,000 | ) | — | — | — | — | — | (1,333 | ) | — | — | — | ||||||||||||||||||||||||||||||||||
Series E preferred stock issuance, reclass of offering costs of $2 | — | (2 | ) | — | 2 | — | — | — | (2 | ) | — | 2 | — | — | ||||||||||||||||||||||||||||||||||
Balance at June 29, 2019 | 116,934 | $ | 4,804 | 11,343,011 | $ | 25,654 | $ | (28,533 | ) | $ | 1,925 | 116,934 | $ | 4,804 | 756,201 | $ | 25,654 | $ | (28,533 | ) | $ | 1,925 | ||||||||||||||||||||||||||
Net income | — | — | — | — | 44 | 44 | — | — | — | — | 44 | 44 | ||||||||||||||||||||||||||||||||||||
Share based compensation | — | — | — | 67 | — | 67 | — | — | — | 67 | — | 67 | ||||||||||||||||||||||||||||||||||||
Warrant exercises | — | — | 1,227,120 | 230 | — | 230 | — | — | 81,808 | 230 | — | 230 | ||||||||||||||||||||||||||||||||||||
Series E dividends | — | — | 509,870 | 142 | — | 142 | — | — | 33,991 | 142 | — | 142 | ||||||||||||||||||||||||||||||||||||
Series E converted to common stock | (600 | ) | (15 | ) | 60,000 | 20 | (5 | ) | — | (600 | ) | (15 | ) | 4,000 | 20 | (5 | ) | — | ||||||||||||||||||||||||||||||
Series B converted to common stock | (752 | ) | (166 | ) | 75,187 | 166 | — | — | (752 | ) | (166 | ) | 5,012 | 166 | — | — | ||||||||||||||||||||||||||||||||
Balance at September 28, 2019 | 115,582 | $ | 4,623 | 13,215,188 | $ | 26,279 | $ | (28,494 | ) | $ | 2,408 | 115,582 | $ | 4,623 | 881,012 | $ | 26,279 | $ | (28,494 | ) | $ | 2,408 |
Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||
(In thousands except share data) | Shares | Amount | Shares | Amount | Deficit | Total | ||||||||||||||||||
Balance at March 28, 2020 | 26,982 | $ | 2,922 | 2,635,856 | $ | 31,952 | $ | (30,574 | ) | $ | 4,300 | |||||||||||||
Net income | — | — | — | — | 72 | 72 | ||||||||||||||||||
Share based compensation | — | — | — | 76 | — | 76 | ||||||||||||||||||
Balance at June 27, 2020 | 26,982 | $ | 2,922 | 2,635,856 | $ | 32,028 | $ | (30,502 | ) | $ | 4,448 | |||||||||||||
Net income | — | — | — | — | (477 | ) | (477 | ) | ||||||||||||||||
Share based compensation | — | — | — | 66 | — | 66 | ||||||||||||||||||
Balance at September 26, 2020 | 26,982 | $ | 2,922 | 2,635,856 | $ | 32,094 | $ | (30,979 | ) | $ | 4,037 |
GIGA-TRONICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended | Six Months Ended | |||||||||||||||
(In thousands) | September 28, 2019 | September 29, 2018 | September 26, 2020 | September 28, 2019 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 59 | $ | (569 | ) | $ | (405 | ) | $ | 59 | ||||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||||||
Depreciation and amortization | 95 | 142 | 81 | 95 | ||||||||||||
Share based compensation | 162 | 103 | 142 | 162 | ||||||||||||
Accretion of discounts and issuance costs on debt | 20 | 105 | — | 20 | ||||||||||||
Accrued interest and fees on loan payable | (192 | ) | 56 | (31 | ) | (192 | ) | |||||||||
Change in deferred rent | 1 | (29 | ) | — | 1 | |||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Trade accounts receivable | (426 | ) | (383 | ) | (89 | ) | (426 | ) | ||||||||
Inventories | (483 | ) | 695 | 95 | (483 | ) | ||||||||||
Prepaid expenses and other assets | (510 | ) | (792 | ) | (229 | ) | (510 | ) | ||||||||
Right of use asset | 130 | — | 156 | 130 | ||||||||||||
Accounts payable | 765 | (155 | ) | 227 | 765 | |||||||||||
Accrued payroll and benefits | (196 | ) | 24 | 98 | (196 | ) | ||||||||||
Deferred revenue | — | (807 | ) | (159 | ) | — | ||||||||||
Other current and non-current liabilities | (12 | ) | (24 | ) | (62 | ) | (12 | ) | ||||||||
Net cash used in operating activities | (587 | ) | (1,634 | ) | (176 | ) | (587 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property and equipment | (94 | ) | — | (31 | ) | (94 | ) | |||||||||
Net cash used in investing activities | (94 | ) | — | (31 | ) | (94 | ) | |||||||||
Cash flows from financing activities: | ||||||||||||||||
Principal payments on leases | (188 | ) | (27 | ) | (215 | ) | (188 | ) | ||||||||
Proceeds from issuance of preferred stock, net of issuance costs | — | 576 | ||||||||||||||
Proceeds from exercise of warrants | 230 | 112 | — | 230 | ||||||||||||
Proceeds from borrowings, net of issuance costs | 889 | — | 1,462 | 889 | ||||||||||||
Repayments of borrowings | (424 | ) | — | (1,292 | ) | (424 | ) | |||||||||
Net cash provided by financing activities | 507 | 661 | ||||||||||||||
Net cash (used in) provided by financing activities | (45 | ) | 507 | |||||||||||||
Decrease in cash and cash-equivalents | (174 | ) | (973 | ) | (252 | ) | (174 | ) | ||||||||
Beginning cash and cash-equivalents | 878 | 1,485 | 657 | 878 | ||||||||||||
Ending cash and cash-equivalents | $ | 704 | $ | 512 | $ | 405 | $ | 704 | ||||||||
Supplementary disclosure of cash flow information: | ||||||||||||||||
Cash paid for income taxes | $ | 2 | $ | 2 | $ | 2 | $ | 2 | ||||||||
Cash paid for interest | $ | 66 | $ | 114 | $ | 69 | $ | 66 | ||||||||
Supplementary disclosure of noncash financing activities: | ||||||||||||||||
Cumulative effect of adoption of ASC 606 on inventory | $ | — | $ | (1,581 | ) | |||||||||||
Cumulative effect of adoption of ASC 606 on prepaid expenses and other current assets | $ | — | $ | 189 | ||||||||||||
Cumulative effect of adoption of ASC 606 on deferred revenue | $ | — | $ | 2,567 | ||||||||||||
Cumulative effect of adoption of ASC 842 on right of use assets | $ | 1,361 | $ | — | $ | — | $ | 1,361 | ||||||||
Cumulative effect of adoption of ASC 842 on deferred rent | $ | 429 | $ | — | $ | — | $ | 429 | ||||||||
Cumulative effect of adoption of ASC 842 on lease liability | $ | 1,790 | $ | — | $ | — | 1,790 | |||||||||
Issuance of dividends in kind | $ | 142 | $ | — | $ | — | $ | 142 |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Significant Accounting Policies
The condensed consolidated financial statements included herein have been prepared by Giga-tronics Incorporated (“Giga-tronics,” “Company” or “we”), pursuant to the rules and regulations of the Securities and Exchange Commission.Commission (“SEC”). The consolidated results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects all adjustments (consisting of normal recurring entries) necessary to make the consolidated results of operations for the interim periods a fair statement of such operations. Please refer to the Company’s Annual Report on Form 10-K for the year ended March 28, 2020 for a discussion of our significant accounting policies. During the six months ended September 26, 2020, there were no material changes to these policies other than as disclosed below. For further information, refer to the consolidated financial statements and footnotes thereto, included in the Annual Report on Form 10-K, filed with the Securities and Exchange CommissionSEC for the year ended March 30, 2019.28, 2020.
On December 12, 2019, the Company completed a one-for-fifteen reverse stock split of its common stock. All shares and per share amounts included in the financial statements have been adjusted to reflect the effect of the reverse stock split.
Principles of Consolidation The consolidated financial statements include the accounts of Giga-tronics and its wholly-ownedwholly owned subsidiary, Microsource, Inc. (“Microsource”). All significant intercompany balances and transactions have been eliminated in consolidationconsolidation.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 - Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted for similar to guidance for operating leases existing prior to ASC 842. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The Company adopted ASC 842 as of March 31, 2019. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASC Topic 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. The Company has one long term office lease. The adoption of ASU 2016-02 on March 31, 2019 resulted in the recognition of right-of-use assets of approximately $1.4 million, lease liabilities for operating leases of approximately $1.8 million and no material impact to the Consolidated Statements of Operations or Cash Flows. See below for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.
Revenue Recognition and Deferred Revenue Beginning April 1, 2018, the Company follows the provisions of ASU 2014-09 as subsequently amended by the FASB between 2015 and 2017 and collectively known as ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Amounts for prior periods are not adjusted and continue to be reported in accordance with the Company’s historic accounting practices. The guidance provides a unified model to determine how revenue is recognized. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identifies the promised goods or services in the contract; (ii) determines whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measures the transaction price, including the constraint on variable consideration; (iv) allocates the transaction price to the performance obligations based on estimated selling prices; and (v) recognizes revenue when (or as) the Company satisfies each performance obligation.
The Company generates revenue through the design, manufacture, and sale of products used in the defense industry to major prime defense contractors, the armed services (primarily in the U.S.) and research institutes. There is generally one performance obligation in the Company’s contracts with its customers. For highly engineered products, the customer typically controls the work in process as evidenced either by contractual termination clauses or by the Company’s right to payment for costs incurred to date plus a reasonable profit for products or services that do not have an alternative use. In these circumstances, the performance obligation is the design and manufacturing service. As control transfers continuously over time on these contracts, revenue is recognized based on the extent of progress towards completion of the performance obligation using a cost-to-cost method. Engineering services are also satisfied over time and recognized on the cost-to-cost method. These types of revenue arrangements are typical for the Company’s defense contracts within the Microsource segment for its RADAR filter products used in fighter jet aircrafts.
For the sale of standard or minimally customized products, the performance obligation is the series of finished products which are recognized at the points in time the units are transferred to the control of the customer, typically upon shipment. This type of revenue arrangement is typical for our commercial contracts within the Giga-tronics segment for its Advanced Signal Generation and Analysis system products used for testing RADAR and Electronic Warfare (“EW”) equipment.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. The Company’s performance obligations include:
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The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct.
Transaction Price
The Company has both fixed and variable consideration. Under the Company’s highly engineered design and manufacturing arrangements, advance payments and unit prices are considered fixed, as product is not returnable and the Company has an enforceable right to reimbursement in the event of a cancellation. For standard and minimally customized products, payments can include variable consideration, such as product returns and sales allowances. The transaction price in engineering services arrangements may include estimated amounts of variable consideration, including award fees, incentive fees, or other provisions that can either increase or decrease the transaction price. Milestone payments are identified as variable consideration when determining the transaction price. At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. The Company estimates variable consideration at the amount to which they expect to be entitled, and determines whether to include estimated amounts as a reduction in the transaction price based largely on an assessment of the conditions that might trigger an adjustment to the transaction price and all information (historical, current and forecasted) that is reasonably available to the Company. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved.
Allocation of Consideration
As part of the accounting for arrangements that contain multiple performance obligations, the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. When a contract contains more than one performance obligation, the Company uses key assumptions to determine the stand-alone selling price of each performance obligation. Because of the customized nature of products and services, estimated stand-alone selling prices for most performance obligations are estimated using a cost-plus margin approach. For non-customized products, list prices generally represent the standalone selling price. The Company allocates the total transaction price to each performance obligation based on the estimated relative stand-alone selling prices of the promised goods or service underlying each performance obligation.
Timing of Recognition
Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the cost-to-cost measure of progress as this measure best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue is recognized for design and manufacturing services and for engineering services over time proportionate to the costs that the Company has incurred to perform the services using the cost-to-cost input method and for products at a point in time.
Changes in Estimates
The effect of a contract modification on the transaction price and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
For contracts using the cost-to-cost method, management reviews the progress and execution of the performance obligations. This process requires management judgment relative to estimating contract revenue and cost, and making assumptions for delivery schedule. This process requires management’s judgment to make reasonably dependable cost estimates. Since certain contracts extend over a longer period of time, the impact of revisions in cost and revenue estimates during the progress of work may adjust the current period earnings through a cumulative catch-up basis. This method recognizes, in the current period, the cumulative effect of the changes on current and prior quarters. Contract cost and revenue estimates for significant contracts are generally reviewed and reassessed quarterly.
Balance Sheet Presentation
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the Condensed Consolidated Balance Sheet. Under the typical payment terms of over time contracts, the customer pays either performance-based payments or progress payments. Amounts billed and due from customers are classified as receivables on the Condensed Consolidated Balance Sheet. Interim payments may be made as work progresses, and for some contracts, an advance payment may be made. A liability is recognized for these interim and advance payments in excess of revenue recognized and is presented as a contract liability which is included within accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheet. Contract liabilities typically are not considered a significant financing component because these cash advances are used to meet working capital demands that can be higher in the early stages of a contract. When revenue recognized exceeds the amount billed to the customer, an unbilled receivable (contract asset) is recorded for the amount the Company is entitled to receive based on its enforceable right to payment and is included in Prepaid Expenses and Other Current Assets on the Condensed Consolidated Balance Sheet.
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the period end date and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity).
Recognition Prior to April 1, 2018
Prior to April 1, 2018 under the legacy GAAP, the Company recorded revenue when there was persuasive evidence of an arrangement, delivery had occurred, the price was fixed and determinable, and collectability was reasonably assured. This occurred when products were shipped or the customer accepted title transfer. If the arrangement involved acceptance terms, the Company deferred revenue until product acceptance was received. On certain large development contracts, revenue was recognized upon achievement of substantive milestones. Advanced payments were recorded as deferred revenue until the revenue recognition criteria described above had been met. Amounts for periods ending prior to April 1, 2018 have not been adjusted for ASC 606 and continue to be reported in accordance with the Company’s previous accounting practices.
New Accounting Standards
In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” to simplify the accounting for share based transactions with nonemployees in which the grantor acquires goods or services to be used or consumed. Under the new standard, most of the guidance on recording share-based compensation granted to nonemployees will beare aligned with the requirements for share-based compensation granted to employees. This standard will bewas effective in the first quarter of fiscal 2020, and early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued authoritative guidance under ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize right-of-use assets and lease liabilities for most leases on the balance sheet and to provide expanded disclosures about leasing arrangements. The Company adopted the standard effective March 31, 2019 using the optional transition method and did not restate comparative periods. There was no effect on accumulated deficit at adoption.
Practical expedients electedExpedients Elected
The Company has elected to apply the package of practical expedients under ASU 2016-02 to (a) not reassess whether expired or existing contracts are or contain leases, (b) not reassess the lease classification for any expired or existing leases and (c) not reassess the accounting for initial direct costs. As a result, leases classified as operating leases prior to adoption of the new lease standard remain as operating leases and leases classified as capital leases prior to adoption of the new lease standard are now finance leases.
The adoption of the new leases standard resulted in the following adjustments to the consolidated balance sheet as of March 30, 2019 (in thousands):
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Balance at 3/30/2019
| Adoption Adjustment | Balance at 3/31/2019 | |||||||||
Assets: | ||||||||||||
Right of use assets- Operating lease | $ | — | $ | 1,361 | $ | 1,361 | ||||||
Right of use assets- Finance lease | 49 | 49 | ||||||||||
Property and equipment, net (a) | 49 | (49 | ) | — | ||||||||
Liabilities: | ||||||||||||
Deferred rent (b) | $ | 71 | $ | (71 | ) | $ | — | |||||
Operating lease liability, current portion | — | 337 | 337 | |||||||||
Finance lease obligation, current portion | — | 41 | 41 | |||||||||
Capital lease obligation, current portion (c) | 41 | (41 | ) | — | ||||||||
Long term deferred rent (d) | 358 | (358 | ) | — | ||||||||
Long term obligations – capital lease (e) | 19 | (19 | ) | — | ||||||||
Operating lease liability, non-current portion | — | 1,453 | 1,453 | |||||||||
Finance lease obligation, long-term portion | — | 19 | 19 |
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Adoption of the standards related to leases had no impact to cash from or used in operating, financing, or investing activities on our consolidated cash flows statements.
((22) Inventories, net
Inventories consisted of the following:
(In thousands) | September 28, 2019 | March 30, 2019 | September 26, 2020 | March 28, 2020 | ||||||||||||
Raw materials | $ | 1,040 | $ | 759 | $ | 1,008 | $ | 890 | ||||||||
Work-in-progress | 1,770 | 1,523 | 1,822 | 1,828 | ||||||||||||
Finished goods | 77 | 57 | 175 | 263 | ||||||||||||
Demonstration inventory | 330 | 395 | 161 | 280 | ||||||||||||
Total | $ | 3,217 | $ | 2,734 | $ | 3,166 | $ | 3,261 |
(33))Financed Receivables
On March 11, 2019, the Company entered into an Amended and Restated Business Financing Agreement (the “Restated Financing Agreement”) with Western Alliance Bank, as successor to Bridge Bank. The Restated Financing Agreement amends, restates and replaces a credit agreement with Bridge Bank dated May 6, 2015 (as previously amended, the “Previous Financing Agreement”) in its entirety.
Under the Restated Financing Agreement, Western Alliance Bank may advance up to 85% of the amounts of invoices issued by the Company, up to a maximum of $2.5 million in aggregate advances outstanding at any time. The Restated Financing Agreement eliminateseliminated a $500,000 non-formula borrowing base and an asset coverage ratio financial covenant included in the Previous Financing Agreement.
Under the Restated Financing Agreement, interest accrues on outstanding amounts at an annual rate equal to the greater of prime or 4.5% plus, in either case, an additional one percent. The Company is required to pay certain fees, including an annual facility fee of $14,700, to be paid in two equal semiannual installments. The Company’s obligations under the Restated Financing Agreement are secured by a security interest in substantially all of the assets of the Company and any domestic subsidiaries, subject to certain customary exceptions. The Restated Financing Agreement has no specified term and may be terminated by either the Company or Western Alliance Bank at any time.
The Restated Financing Agreement contains customary events of default, including, among others: non-payment of principal, interest or other amounts when due; providing false or misleading representations and information; Western Alliance Bank failing to have an enforceable first lien on the collateral; cross-defaults with certain other indebtedness; certain undischarged judgments; bankruptcy, insolvency or inability to pay debts; and a change of control of the Company. Upon the occurrence and during the continuance of an event of default, the interest rate on the outstanding borrowings increases by 500 basis points and Western Alliance Bank may declare the loans and all other obligations under the Restated Financing Agreement immediately due and payable.
As of September 28, 201926, 2020 and March 30, 2019,28, 2020, the Company’s total outstanding borrowings under the Restated Financing Agreement were $839,290$257,846 and zero,$527,468, respectively, and are included in Loans payable, net of discounts and issuance costs on the Condensed Consolidated Balance Sheet.
((4)4) Term Loan and Warrants
On April 27, 2017, the Company entered into a $1,500,000$1.5 million loan agreement with Partners For Growth V, L.P. (“PFG”), which was funded by PFG on April 28, 2017 (the “2017 Loan”“PFG Loan Agreement”). The 2017PFG Loan which was scheduled to mature on April 27, 2019, providesAgreement originally provided for interest only payments during the term of the loan with principal and any accrued interest and fees due upon maturity.maturity, originally April 27, 2019. The 2017PFG Loan Agreement bears interest at a fixed aggregate per annum rate equal to 16% per annum, of which 9.5% per annum rate is payable monthly in cash and 6.5% per annum rate is accrued monthly and due upon maturity. In addition, the Company agreed to pay PFG a cash fee of up to $100,000 payable uponon maturity (the “back-end fee”), $76,000 of which was earned on April 27, 2017, and $24,000 of which iswas earned at the rate of $1,000 per month on the first day of each month ifthereafter provided any amount of the loan principal (or any amount thereof) iswas outstanding during any day of the prior month.
Additionally, the 2017 Loan provides for the Company’s issuance of up to 250,000 common shares to PFG, of which 190,000 was earned by PFG upon signing (April 27, 2017) and 60,000 of which is earned at the rate of 2,500 per month on the first day of each month if the loan principal (or any amount thereof) is outstanding during any day of the prior month. The 2017 Loan provided for certain financial covenants related to the revenue achievement and maintenance of tangible net worth. PFG can accelerate the maturity of the loan in case of a default and the Company can prepay the loan before maturity without interest prepayments or penalty. The Company has pledged all of its assets as collateral for the 2017 Loan, including all its accounts, inventory, equipment, deposit accounts, intellectual property and all other personal property; however, the 2017 Loan is subordinate to the Bridge Bank line of credit (see Note 3, Accounts Receivable Line of Credit).
The requirement to issue 60,000 shares of the Company’s common stock over the term of the loan is an embedded derivative (an embedded equity forward). The Company evaluated the embedded derivative in accordance with ASC 815-15-25. The embedded derivative is not clearly and closely related to the debt host instrument and therefore is being separately measured at fair value, with subsequent changes in fair value being recognized in the consolidated statements of operations.
The proceeds received upon issuing the loan were allocated to: i) common stock, for the fair value of the 190,000 shares of common stock initially issued to the lender; ii) the fair value of the embedded derivative; and iii) the loan host instrument. Upon issuance of the loan, the Company recognized $1,576,000 of principal payable to PFG, representing the stated principal balance of $1,500,000 plus the initial back-end fee of $76,000. The initial carrying value of the loan was recognized net of debt discount aggregating approximately $326,000, which is comprised of the following:
Fees paid to the lender and third parties | $ | 44,000 | ||
Backend fee | 76,000 | |||
Estimated fair value of embedded equity forward | 49,000 | |||
Fair value of 190,000 shares of common stock issued to lender | 157,000 | |||
Aggregate discount amount | $ | 326,000 |
The bifurcated embedded derivative and the debt discount are presented net with the related loan balance in the consolidated balance sheets. The debt discount is being amortized to interest expense over the loan’s term using the effective interest method. During the six months ended September 28, 2019, the Company amortized discounts of approximately $20,000 to interest expense.
PFG’s ability to call the debt on default (contingent put) and its ability to assess interest rate at a default rate (contingent interest) are embedded derivatives, which the Company evaluated. The fair value of these embedded features was determined to be immaterial and was not bifurcated from the debt host for accounting purposes.
Between June 24, 2017 and March 25, 2018, the Company was not in compliance with the 2017 Loan’s revenue and tangible net worth financial covenants and was subject to a default interest rate of 22% per annum which it accrued and paid when due during this period.
On March 26, 2018, concurrent with the execution of the Securities Purchase Agreement for the Series E Shares (see Note 12 – Preferred Stock and Warrants - Series E Senior Convertible Voting Perpetual Preferred Stock), the Company and PFG entered into a modification agreement providing for the restructuring of certain terms associated with approximately $1.7 million in indebtedness under the 2017 Loan. Subject to the sale of at least $1.0 million in Series E Shares, PFG agreed to waive all current defaults and cease applying the applicable default interest rate, returning to the stated non-default rate of 16%, and to lower the revenue and tangible net worth covenants for the remaining term of the loan. As consideration for the modifications, the Company reduced the exercise price of outstanding warrants previously granted to PFG (pursuant to its 2014 Loan Agreement and Credit Line with PFG) to purchase 260,000 shares of the Company’s common stock from $1.42 to $0.25 per share and extended the exercisability of the warrants by one year to March 13, 2020. The Company and PFG also agreed to eliminate PFG’s cash put provision associated with these warrants in exchange for the issuance of 150,000 shares of the Company’s common stock. As of September 28, 2019, the Company had issued to PFG 400,000 common shares under the loans.
The amendments to the 2017 Loan Agreement were recognized as a loan modification. The change in fair value of the warrants of $43,700, resulting from the reduced strike price and extension of term, was recognized as a discount to the 2017 Loan and is being amortized to interest expense over the remaining term of the 2017 Loan Agreement.
In December 2018, the Company and PFG agreed to modify the 2017PFG Loan Agreement to extend the maturity date from April 27, 2019 to November 1, 2019, to require the Company to pay all accrued interest on May 1, 2019 and to require the Company to make monthly prepayments of principal of $75,000 and accrued interest from May 1, 2019 until maturity. The effectiveness of the modification was conditioned on the Company raising $500,000 in additional equity capital. As ofThe Company satisfied this condition on March 30, 2019, the Company had satisfied this condition.2019.
On March 11, 2019, the Company and PFG agreed to further modify the 2017PFG Loan Agreement to extend the maturity date to March 1, 2020 and to add financial covenants requiring the Company to maintain a minimum tangible net worth and minimum revenues.
On June 28, 2019, the Company and PFG agreed to further modify the 2017PFG Loan Agreement to adjust the financial covenants requiring the Company to maintain a minimum tangible net worth and minimum revenues. At SeptemberDecember 28, 2019, the Company wasdid not meet a covenant in compliance with thesethe amended PFG Loan Agreement requiring the Company to achieve minimum cumulative revenues of $11 million for the first three quarters of its 2020 fiscal year, which constituted an event of default under the agreement. PFG waived this default on January 31, 2020.
On January 31, 2020, the Company and PFG further amended the PFG Loan Agreement to, among other things, extend the maturity date from March 1, 2020 to March 1, 2021, to require the Company make a single principal payments of $75,000 on February 1, 2020 and monthly principal payments of $57,700 thereafter until maturity, and to modify and extend the minimum revenue financial covenants under ASC 606.covenant through the new maturity date. The PFG Loan Agreement continues to provide for an annual interest rate of 16%, of which 9.5% is payable monthly and 6.5% is deferred until maturity or payoff. Based on the current payment schedule, the remaining balance at maturity would be less than $200,000.
As of September 28, 201926, 2020 and March 30, 2019,28, 2020, the Company’s total outstanding loan balances were $1.2 million$446,100 and $1.8 million,$792,300, respectively, and are included in Loans payable, net of discounts and issuance costs on the Condensed Consolidated Balance Sheet.
(5)Paycheck Protection Program (the “PPP”) under the CARES Act
On April 23, 2020, the Company borrowed $786,200 from Western Alliance Bank (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The loan has been accounted for as a loan under ASC 470 Debt.
The PPP Loan is evidenced by a promissory note dated April 21, 2020 (the “Promissory Note”), which matures on April 23, 2022 and bears interest at a rate of 1.0% per annum. Principal and interest are payable monthly commencing on November 1, 2020 and may be prepaid by the Company anticipates it will needat any time prior to achieve significant product shipmentsmaturity with no prepayment penalties. The Promissory Note contains other customary terms, including representations, events of defaults and resulting cash inflowsremedies.
A portion of the principal outstanding and or seek additional funds through the issuance of new debt or equity securities to repay the 2017 Loan (including accrued interest under the PPP Loan is forgivable by the U.S. Small Business Administration if the Company uses the loan proceeds for certain purposes designated in the CARES Act, including payroll costs (as defined in the CARES Act), rents and back end fees) in full upon maturityutilities during the 24 weeks following the origination of the PPP Loan (“Eligible Purposes”) and otherwise complies with PPP requirements. To obtain forgiveness of the PPP Loan, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable requirements. The Company must repay any unforgiven principal amount of the PPP Loan, with interest. The Company has used a substantial majority of the PPP Loan proceeds for Eligible Purposes and intends to seek forgiveness for those amounts after the 24 week period, although the Company may take action that could cause some or otherwise enter intoall of the PPP Loan to become ineligible for forgiveness. However, if any portions of the PPP Loan proceeds are forgiven, any such amounts will be accounted for as a refinancing agreement with PFG.gain under ASC 958-605 which would be shown outside of operating income or loss, since it is not a part of the Company’s ongoing major or central business.
(65)) LLeaseseases
Operating leases
Building - The Company has a non-cancelable operating lease for an office, research and development, engineering, laboratory, storage and/or warehouse uses in Dublin, California for 77 months from April 1, 2017 through August 31, 2023. The Company agreed to pay an aggregate base rent of $2,384,913 for the period of 77 months, with an annual increase of $0.05 per rentable square foot for each subsequent year. The agreementlease provided for rent abatement of $173,079 during the initial five months of the lease term, subject to the Company performing the terms and conditions required under the lease, and certain tenant improvements completed at the landlord’s expense of $358,095.
The Company also has a non-cancelable operating lease for an office it uses for research and development and engineering in Nashua, New Hampshire for 36 months from March 1, 2020 through February 28, 2023. The Company agreed to pay an aggregate base rent of $90,000 for the period of 36 months. This office lease amends and restates in its entirety the Office Lease executed as of December 28, 2018 for the primary purposes of adding additional office space and extending the term from January 31, 2022 to February 28, 2023.
Per the terms of the Company’s lease agreements, the Company does not have any residual value guarantees. In calculating the present value of the lease payments, the Company has elected to utilize its incremental borrowing rate. The Company has elected for facility operating leases to not separate each lease component from its associated non-lease components. The building lease includes variable payments (i.e. common area maintenance) which are charged and paid separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and liability but reflected in operating expense in the period incurred.
Lease costs
For the threesix months ended (in thousands):ended:
June 29, | September 26, | |||||||||
Classification | 2019 | Classification | 2020 | |||||||
Operating lease costs | Operating expenses | $ | 125 | Operating expenses | $ | 133 | ||||
Finance lease: | ||||||||||
Amortization of lease asset | Depreciation and amortization | 10 | Depreciation and amortization | 7 | ||||||
Interest on lease liability | Interest expense | 2 | Interest expense | — | ||||||
Total lease costs | Total lease costs | $ | 137 | Total lease costs | $ | 140 |
For the six months ended (in thousands):
September 28, | |||||
Classification | 2019 | ||||
Operating lease costs | Operating expenses | $ | 125 | ||
Finance lease: | |||||
Amortization of lease asset | Depreciation and amortization | 18 | |||
Interest on lease liability | Interest expense | 3 | |||
Total lease costs | $ | 146 |
Other information (in thousands except weighted average amounts):information:
For the three months ended: June 29, 2019 | Operating leases | Finance leases | ||||||
Operating cash used for leases | $ | 143 | — | |||||
Financing cash used for leases | — | $ | 13 | |||||
Weighted average remaining lease term | 4.17 | 1.21 | ||||||
Weighted-average discount rate | 6.50 | % | 12.00 | % |
For the six months ended: September 28, 2019 | Operating leases | Finance leases | ||||||
Operating cash used for leases | $ | 143 | — | |||||
Financing cash used for leases | — | $ | 24 | |||||
Weighted-average remaining lease term | 3.85 | 0.96 | ||||||
Weighted average discount rate | 6.60 | % | 12.00 | % |
For the six months ended: | ||||||||
September 26, 2020 | Operating leases | Finance leases | ||||||
Operating cash used for leases | $ | 147 | — | |||||
Financing cash used for leases | — | $ | 9 | |||||
Weighted-average remaining lease term (years) | 3.21 | 0.00 | ||||||
Weighted-average discount rate | 6.50 | % | 0.00 | % |
Future lease payments as of September 28, 201926, 2020 were as follows (in thousands):follows:
Operating leases | Finance leases | Total | Operating leases | Finance leases | Total | |||||||||||||||||||
Remainder current year | $ | 222 | $ | 22 | $ | 244 | ||||||||||||||||||
2021 | 458 | 20 | 478 | |||||||||||||||||||||
Remainder 2021 | $ | 244 | $ | — | $ | 244 | ||||||||||||||||||
2022 | 473 | — | 473 | 503 | — | 503 | ||||||||||||||||||
2023 | 487 | — | 487 | 514 | — | 514 | ||||||||||||||||||
Thereafter | 209 | — | 209 | 209 | — | 209 | ||||||||||||||||||
Total future minimum lease payments | 1,849 | 42 | 1,891 | 1,470 | — | 1,470 | ||||||||||||||||||
Less: imputed interest | (225 | ) | (2 | ) | (227 | ) | (129 | ) | — | (129 | ) | |||||||||||||
Present value of lease liabilities | $ | 1,624 | $ | 40 | $ | 1,664 | $ | 1,341 | $ | — | $ | 1,341 |
((7)6) FFair Value
Pursuant to the accounting guidance for fair value measurement and its subsequent updates, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a hierarchy for inputs used in measuring fair value that minimizes the use of unobservable inputs by requiring the use of observable market data when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on active market data. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.
The fair value hierarchy is broken down into the three input levels summarized below:
• | Level 1 —Valuations are based on quoted prices in active markets for identical assets or liabilities and readily accessible by us at the reporting date. Examples of assets and liabilities utilizing Level 1 inputs are certain money market funds, U.S. Treasuries and trading securities with quoted prices on active markets. |
• | Level 2 —Valuations based on inputs other than the quoted prices in active markets that are observable either directly or indirectly in active markets. Examples of assets and liabilities utilizing Level 2 inputs are U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit and over-the- counter derivatives. |
• | Level 3 —Valuations based on unobservable inputs in which there are little or no market data, which require us to develop our own assumptions. |
The carrying amounts of the Company’s cash and cash-equivalents and line of credit approximate their fair values at each balance sheet date due to the short-term maturity of these financial instruments, and generally result in inputs categorized as Level 1 within the fair value hierarchy. The carrying value of the outstanding PFG loanLoan approximates the estimated aggregate fair value and classified with the loan host. The fair value estimate of the embedded equity forward is based on the closing price of the Company’s common stock on the measurement date, the risk-free rate, the date of expiration, and any expected cash distributions of the underlying asset before expiration. The estimated fair value of the embedded equity forward represents a Level 2 measurement.
On March 26, 2018, the Company and PFG agreed to eliminate the cash put provision contained in warrants in exchange for the Company issuing 150,000 shares of the Company’s common stock. Upon removal of the put, the warrants were re-valued using the Black-Scholes option-pricing model with the following assumptions: (i) remaining term of 0.96 years, (ii) expected volatility of 85%, (iii) risk-free interest rate of 2.12%, and (iv) no expected dividends. The resulting change in fair value of the warrants, along with the fair value of the common stock issued to PFG, was recognized as an adjustment of warrant liability in the consolidated statements of operations.
There were no assets measured at fair value on a recurring basis and there were no assets or liabilities measured on a non-recurring basis at September 28, 201926, 2020 and March 30, 2019.28, 2020.
((8)7) Sale of Common Stock
On November 8, 2019, the Company completed an underwritten public offering of 699,333 shares of its common stock at $3.75 per share. The net proceeds from the offering after deducting underwriting discounts and commissions and offering expenses were approximately $2.1 million. The Company’s use of the net proceeds of this offering was for general corporate purposes, which included the repayment of debt. In connection with the offering, the Company granted the underwriter a warrant to purchase 20,980 shares of common stock at the price of $4.50 per share. The warrant is immediately exercisable and has a five-year term.
In addition, on November 8, 2019, the Company completed a private exchange offer in which it issued an aggregate of 896,636 shares of common stock in exchange for 88,600 shares of its Series E preferred shares and the dividends thereon. As a result, 9,200 shares of Series E preferred stock with an aggregate liquidation preference of $345,000 remained outstanding as of September 26, 2020 and March 28, 2020.
On March 11, 2020, the Company entered into Securities Purchase Agreements with two private investors for the sale of a total of 146,668 common shares at the price of $3.75 per share, for aggregate gross proceeds of $550,004. Net proceeds to the Company after fees and expenses of this private placement were $510,000.
(9)Reverse Stock Split
On December 12, 2019, the Company amended its Articles of Incorporation to implement a 1-for-15 reverse split of its common stock.
The reverse stock split reduced the number of shares of common stock outstanding from 37,154,730 to 2,476,982 shares on December 12, 2019. The number of authorized shares of the Company’s common stock was reduced in the same proportion to 13,333,333 shares of common stock.
As a result of the reverse stock split, each of the Company’s holders of common stock received one share of common stock for every 15 shares of common stock held immediately prior to the reverse stock split. No fractional shares were issued in connection with the reverse stock split and cash was paid in lieu of any fractional shares. The reverse stock split also reduced the number of shares of common stock issuable upon the conversion of the Company’s outstanding shares of preferred stock and the exercise of its outstanding stock options and warrants in proportion to the ratio of the reverse stock split and caused a proportionate increase in the conversion and exercise prices of such preferred stock, stock options and warrants.
All share and per share amounts included in the financial statements have been adjusted to reflect the effect of the reverse stock split.
(10)Income (l(Lossoss)) Per Share
Basic income (loss) per share is calculated by dividing net income or loss by the weighted average common shares outstanding during the period. Diluted earnings per share (EPS) reflects the net incremental shares that would be issued if unvested restricted shares became vested and dilutive outstanding stock options were exercised, using the treasury stock method. In the case of a net loss, it is assumed that no incremental shares would be issued because they would be antidilutive. In addition, certain options are considered antidilutive because assumed proceeds from exercise price, related tax benefits and average future compensation was greater than the weighted average number of options outstanding multiplied by the average market price during the period.
Shares included in the diluted EPS calculation for the six month period ended September 28, 2019 are as follows:
September 28, | ||||
(In thousands except per share data) | 2019 | |||
Net income (loss) | $ | 59 | ||
Weighted average basic shares outstanding | 11,694 | |||
Effect of dilutive securities | 12,005 | |||
Weighted-average dilutive shares | 23,699 | |||
Basic earnings per share | $ | 0.01 | ||
Diluted earnings per share | $ | 0.00 |
Shares excluded from the diluted EPS calculation for the six month period ended September 29, 201826, 2020 because they would be anti-dilutive are as follows:
| September | |||
(In thousands) |
| |||
Common shares issuable upon exercise of stock options | ||||
Restricted stock awards | ||||
| ||||
Common shares issuable upon conversion of convertible preferred stock | ||||
Common shares issuable upon exercise of warrants |
The stock options, restricted stock, convertible preferred stocks and warrants not
Shares included in the computation of diluted earnings per share (EPS)EPS calculation for the six month periodperiods ended September 29, 2018 is a result of the Company’s net loss26, 2020 and therefore, the effect of these instruments would be anti-dilutive.September 28, 2019 are as follows:
September 26, | September 28, | |||||||
(In thousands except per share data) | 2020 | 2019 | ||||||
Net income (loss) | $ | (405 | ) | $ | 59 | |||
Weighted average basic shares outstanding | 2,636 | 780 | ||||||
Effect of dilutive securities | — | 800 | ||||||
Weighted-average dilutive shares | 2,636 | 1,580 | ||||||
Basic earnings per share | $ | (0.15 | ) | $ | 0.08 | |||
Diluted earnings per share | $ | (0.15 | ) | $ | 0.04 |
((118) Share-b-based Compensation and Employee Benefits Plans
On September 20, 2018, shareholders approved17, 2020, the Company’sCompany amended its 2018 Equity Incentive Plan to increase the number of shares issuable under which the Company may issue upplan by 250,000 shares to 2,500,000416,667 shares of common stock upon the exercise of options, stock awards and grants. With the adoptionAs of September 26, 2020, there were 268,493 shares of common stock available for issuance of additional awards under the 2018 Equity Incentive Plan, noPlan. No further awards will be issued under the Company’s 2005 Equity Incentive Plan or its 2000 Stock Option Plan, though all awards under the 2005 Equity Incentive Plan that are outstanding will continue to be governed by the terms, conditions and procedures set forth in the plan and any applicable award agreement. Option grants under the Company’s previous 2000 Stock Option Plan are no longer available.
Options grantedOutstanding options generally vest in one or more installments in a four or five-year period and must be exercised while the grantee is employed by the Company (or while providing services under a service arrangement in the case of non-employees) or within a certain period after termination of employment or service arrangement in the case of non-employees. Options granted to employees shall notAll outstanding options have terms in excess of 10 yearsa ten-year life from the grant date.date of grant. Holders of options may be granted SARs,stock appreciation rights (SARs), which entitle them to surrender outstanding awards for a cash distribution under certain changes in ownership of the Company, as defined in the stock option plan. As of September 28, 2019,26, 2020, no SARs have been granted under any option plan. As of September 28, 2019, the total number of shares of common stock available for issuance was 638,500. All outstanding options have a ten-year life from the date of grant. The Company records compensation cost associated with share-based compensation equivalent to the estimated fair value of the awards over the requisite service period.
Stock Options
In calculating compensation related to stock option grants, the fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option-pricing model and the following weighted average assumptions:
Three Month Periods Ended | Six Month Periods Ended | Three Month Periods Ended | Six Month Periods Ended | |||||||||||||||||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||||||||||||||
Dividend yield | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Expected volatility | 103.26 | % | 92.94 | % | 101.97 | % | 92.89 | % | 168.81 | % | 103.26 | % | 168.81 | % | 101.97 | % | ||||||||||||||||
Risk-free interest rate | 1.83 | % | 2.82 | % | 2.25 | % | 2.82 | % | 0.34 | % | 1.83 | % | 0.34 | % | 2.25 | % | ||||||||||||||||
Expected term (years) | 8.36 | 8.35 | 8.36 | 8.35 | 8.36 | 8.36 | 8.36 | 8.36 |
The computation of expected volatility used in the Black-Scholes-Merton option-pricing model is based on the historical volatility of the Company’s share price. The expected term is estimated based on a review of historical employee exercise behavior with respect to option grants. The risk-free interest rate is based on the U.S. Treasury rates with maturity similar to the expected term of the option on the date of grant.
A summary of the changes in stock options outstanding for the six-month period ended September 28, 201926, 2020 and the fiscal year ended March 30, 201928, 2020 is as follows:
Shares |
Weighted Average Exercise Price | Weighted Average Remaining Contractual Terms (Years) |
Aggregate Intrinsic Value (in thousands) | Shares | Weighted Average Exercise Price per share | Weighted Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | |||||||||||||||||||||||||
Outstanding at March 31, 2018 | 1,478,700 | $ | 0.56 | 8.0 | $ | — | ||||||||||||||||||||||||||
Granted | 1,504,000 | 0.31 | 9.6 | |||||||||||||||||||||||||||||
Forfeited / Expired | (248,000 | ) | 0.69 | |||||||||||||||||||||||||||||
Outstanding at March 30, 2019 | 2,734,700 | $ | 0.41 | 8.4 | $ | — | 182,366 | $ | 6.15 | 8.4 | $ | — | ||||||||||||||||||||
Granted | 1,047,500 | 0.34 | 9.7 | 73,880 | 4.98 | 9.2 | ||||||||||||||||||||||||||
Forfeited / Expired | (32,200 | ) | 0.48 | (15,488 | ) | 5.13 | ||||||||||||||||||||||||||
Outstanding at September 28, 2019 | 3,750,000 | $ | 0.39 | 8.4 | $ | — | ||||||||||||||||||||||||||
Outstanding at March 28, 2020 | 240,758 | $ | 5.86 | 7.9 | $ | — | ||||||||||||||||||||||||||
Granted | 10,000 | 3.85 | 9.8 | |||||||||||||||||||||||||||||
Outstanding at September 26, 2020 | 250,758 | $ | 5.78 | 7.5 | $ | — | ||||||||||||||||||||||||||
Exercisable at September 28, 2019 | 1,005,664 | $ | 0.55 | 6.0 | $ | — | ||||||||||||||||||||||||||
Exercisable at September 26, 2020 | 127,229 | $ | 6.70 | 6.5 | $ | — | ||||||||||||||||||||||||||
At September 28, 2019, expected to vest in the future | 2,964,782 | $ | 0.40 | 8.1 | $ | — | ||||||||||||||||||||||||||
At September 26, 2020 expected to vest in the future | 88,132 | $ | 4.82 | 8.4 | $ | — |
As of September 28, 2019,26, 2020, there was $491,000$347,000 of total unrecognized compensation cost related to non-vested options. That cost is expected to be recognized over a weighted average period of 3.142.37 years. There were 144,67215,294 options and 15,5509,645 options that vested during the quarter ended September 28, 201926, 2020 and September 29, 2018,28, 2019, respectively. The total grant date fair value of options vested during the quarters ended September 26, 2020 and September 28, 2019 was $63,000 and September 29, 2018 was $47,000, and $20,000, respectively. There were 351,96439,987 and 22,75023,464 options that vested during the six-month period ended September 28, 201926, 2020 and September 29, 2018,28, 2019, respectively. The total grant date fair value of options vested during the six-month period ended September 26, 2020 and September 28, 2019 was $168,000 and September 29, 2018 was $100,000, and $29,000, respectively. No shares were exercised during the three and six-month periodperiods ended September 28, 201926, 2020 and September 29, 2018.28, 2019. Share based compensation cost recognized in operating results for the three-month periods ended September 26, 2020 and September 28, 2019 totaled $58,000 and September 29, 2018 totaled $52,000, and $24,000, respectively. Share based compensation cost recognized in operating results for the six-month periods ended September 26, 2020 and September 28, 2019 totaled $127,000 and September 29, 2018 totaled $103,000, and $44,000, respectively.
Restricted Stock
The Company granted no restricted awards (“RSAs”) during the second quarter and first half of fiscal 20202021 and 2019. The restricted stock awards2020. RSAs are considered fixed awards as the number of shares and fair value at the grant date is amortized over the requisite service period net of estimated forfeitures. As of September 28, 2019,26, 2020, there was $19,000$16,000 of total unrecognized compensation cost related to non-vested awards. That cost is expected to be recognized over a weighted average period of 0.50 years and will be adjusted for subsequent changes in estimated forfeitures. Compensation cost recognized for the restricted and unrestricted stock awards during the second quarter and first half of fiscal 20202021 was $15,000$8,000 and $60,000,$15,000, respectively. Compensation cost recognized for the restricted and unrestricted stock awards during the second quarter and first half of fiscal 20192020 was $23,000$15,000 and $59,000, respectively.
A summary of the changes in non-vested restricted stock awardsRSAs outstanding for the six-month period ended September 28, 201926, 2020 and the fiscal year ended March 30, 201928, 2020 is as follows:
Shares | Weighted Average Fair Value Per Share | Shares | Weighted Average Fair Value per share | |||||||||||||
Non-Vested at March 31, 2018 | 299,950 | $ | 0.65 | |||||||||||||
Granted | 310,000 | 0.31 | ||||||||||||||
Vested | (250,000 | ) | 0.32 | |||||||||||||
Forfeited or cancelled | (25,000 | ) | 0.79 | |||||||||||||
Non-Vested at March 30, 2019 | 334,950 | $ | 0.56 | 22,343 | $ | 8.40 | ||||||||||
Granted | — | — | 10,000 | 3.97 | ||||||||||||
Vested | (164,950 | ) | 0.76 | (21,009 | ) | 8.25 | ||||||||||
Forfeited or cancelled | (20,000 | ) | 0.74 | (1,334 | ) | 12.00 | ||||||||||
Non-Vested at September 28, 2019 | 150,000 | $ | 0.32 | |||||||||||||
Non-Vested at March 28, 2020 | 10,000 | $ | 3.97 | |||||||||||||
Vested | — | — | ||||||||||||||
Forfeited or cancelled | — | — | ||||||||||||||
Non-Vested at September 26, 2020 | 10,000 | $ | 3.97 |
((129) Significant Customer and Industry Segment Information
The Company has two reportable segments: Microsource and the Giga-tronics Division. Microsource’s primary business is the design of custom Microwave Integrated Components (“MIC”) as well as the production of MIC components using chip and wire assembly methods. The Company’sOur Microsource Division offers a line of tunable, synthesized Band Reject Filters (BRF) for solving interference problems in RADAR/EW applications. Self-protection systems onboard high performancehigh-performance military aircraft often require RADAR filters to block electromagnetic interference generated by other onboard electronic systems, particularly the aircraft’s main RADAR. These high-speed, tunable notch filters are designed tocan quickly block interference from both continuous wave and wide bandwidth emissions usingemissions. Using proprietary driver and phase lock technology. The Company designstechnology, these filters offer tuning speeds that are up to ten times faster than traditional filter designs. We design these filters specifically for each application. Microsource’s two largest customers are prime contractors for which it develops and manufactures RADAR filters used in fighter jet aircraft.
The Giga-tronics Division designs, manufactures and markets a family of functional test products for the RADAR and Electronic Warfare (RADAR/EW) segment of the defense electronics market. The Company’sOur RADAR/EW test products are used to evaluate and improve the performance of RADAR/EW systems.
The tables below presentspresent information for the two reportable segments:
Three Month Period Ended | Three Month Period Ended | Three Month Period Ended | Three Month Period Ended | |||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | At Sep. 28, 2019 | Sep. 28, 2019 | At Sep. 29, 2018 | Sep. 29, 2018 | At Sep. 26, 2020 | Sep. 26, 2020 | At Sep. 28, 2019 | Sep. 28, 2019 | ||||||||||||||||||||||||||||||||||||||||
Assets | Net Sales | Net Income (Loss) | Assets | Net Sales | Net Income (Loss) | Assets | Net Sales | Net Income (Loss) | Assets | Net Sales | Net Income (Loss) | |||||||||||||||||||||||||||||||||||||
Giga-tronics Division | $ | 5,639 | $ | 373 | $ | (979 | ) | $ | 4,235 | $ | 50 | $ | (1,337 | ) | $ | 5,646 | $ | 822 | $ | (1,154 | ) | $ | 5,639 | $ | 373 | $ | (979 | ) | ||||||||||||||||||||
Microsource | 3,114 | 2,662 | 1,023 | 2,170 | 2,630 | 1,055 | 3,045 | 1,870 | 677 | 3,114 | 2,662 | 1,023 | ||||||||||||||||||||||||||||||||||||
Total | $ | 8,753 | $ | 3,035 | $ | 44 | $ | 6,405 | $ | 2,680 | $ | (282 | ) | $ | 8,691 | $ | 2,692 | $ | (477 | ) | $ | 8,753 | $ | 3,035 | $ | 44 |
Six Month Period Ended | Six Month Period Ended | |||||||||||||||||||||||
(In thousands) | At Sep. 26, 2020 | Sep. 26, 2020 | At Sep. 28, 2019 | Sep. 28, 2019 | ||||||||||||||||||||
Assets | Net Sales | Net Income (Loss) | Assets | Net Sales | Net Income (Loss) | |||||||||||||||||||
Giga-tronics Division | $ | 5,646 | $ | 1,931 | $ | (1,967 | ) | $ | 5,639 | $ | 2,289 | $ | (1,526 | ) | ||||||||||
Microsource | 3,045 | 4,309 | 1,562 | 3,114 | 4,244 | 1,585 | ||||||||||||||||||
Total | $ | 8,691 | $ | 6,240 | $ | (405 | ) | $ | 8,753 | $ | 6,533 | $ | 59 |
Six Month Period Ended | Six Month Period Ended | |||||||||||||||||||||||
(In thousands) | At Sep. 28, 2019 | Sep. 28, 2019 | At Sep. 29, 2018 | Sep. 29, 2018 | ||||||||||||||||||||
Assets | Net Sales | Net Income (Loss) | Assets | Net Sales | Net Income (Loss) | |||||||||||||||||||
Giga-tronics Division | $ | 5,639 | $ | 2,289 | $ | (1,526 | ) | $ | 4,235 | $ | 179 | $ | (2,896 | ) | ||||||||||
Microsource | 3,114 | 4,244 | 1,585 | 2,170 | 5,551 | 2,327 | ||||||||||||||||||
Total | $ | 8,753 | $ | 6,533 | $ | 59 | $ | 6,405 | $ | 5,730 | $ | (569 | ) |
During the second quarter of fiscal 2021, one customer accounted for approximately 56% of the Company’s consolidated revenues and was included in the Microsource segment. A second customer accounted for 28% of the Company’s consolidated revenue and was included in the Giga-tronics division. During the second quarter of fiscal 2020, one customer accounted for approximately 57% of the Company’s consolidated revenues and was included in the Microsource segment. A second customer accounted for 31% of the Company’s consolidated revenue and was also included in the Microsource segment.
During the second quarterfirst half of fiscal 2019,2021, one customer accounted for approximately 60%55% of the Company’s consolidated revenues and was primarily included in the Microsource segment. A second customer accounted for 25%28% of the Company’s consolidated revenue and was also included in the Microsource segment.
Giga-tronics division. During the first half of fiscal 2020, one customer accounted for 47% of the Company’s consolidated revenues and was primarily included in the Microsource segment. A second customer accounted for 30% of the Company’s consolidated revenue and was included in the Giga-tronics division. During the first half of fiscal 2019, one customer accounted for 62% of the Company’s consolidated revenues and was primarily included in the Microsource segment. A second customer accounted for 28% of the Company’s consolidated revenue and was also included in the Microsource segment.
((1310) Income Taxes
The Company accounts for income taxes using the asset and liability method as codified in Topic 740. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.
The Company recorded $2,000 and $42,000$2,000 income tax expense for the six months ended September 28, 201926, 2020 and September 29, 2018,28, 2019, respectively. The effective tax rate for the six months ended September 30, 201926, 2020 and September 30, 201828, 2019 was 0% each year, primarily due to a valuation allowance recorded against the net deferred tax asset balance.
As of September 30, 2019,26, 2020, the Company had recorded $123,000$132,000 for unrecognized tax benefits related to uncertain tax positions. The unrecognized tax benefit is netted against the non-current deferred tax asset on the Consolidated Balance Sheet. The Company does not expect the liability for unrecognized tax benefits to change materially within the next 12 months.
((1411) Warranty Obligations
The Company records a liability in cost of goods and services for estimated warranty obligations at the date products are sold. Adjustments are made as new information becomes available. The following provides a reconciliation of changes in the Company’s warranty reserve. The Company provides no other guarantees.
Three Month Periods Ended | Six Month Periods Ended | Three Month Periods Ended | Six Month Periods Ended | |||||||||||||||||||||||||||||
(In thousands) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||||||
Balance at beginning of period | $ | 113 | $ | 141 | $ | 104 | $ | 164 | $ | 37 | $ | 113 | $ | 34 | $ | 104 | ||||||||||||||||
Provision, net | (17 | ) | (36 | ) | (5 | ) | (25 | ) | 7 | (17 | ) | 10 | (5 | ) | ||||||||||||||||||
Warranty costs incurred | (4 | ) | (20 | ) | (7 | ) | (54 | ) | — | (4 | ) | — | (7 | ) | ||||||||||||||||||
Balance at end of period | $ | 92 | $ | 85 | $ | 92 | $ | 85 | $ | 44 | $ | 92 | $ | 44 | $ | 92 |
(1512) Preferred Stock and Warrants
Series E Senior Convertible Voting Perpetual Preferred Stock
On March 26,28, 2018, the Company entered into a Securities Purchase Agreement for the sale ofissued and sold 42,800 shares of a newly designated series of 6.0% Series E Senior Convertible Voting Perpetual Preferred Stock (“Series E Shares”) to approximately 15 investors in a private investors. The sale was completedplacement for gross proceeds of approximately $1.095 million. Net proceeds to the Company after fees and expenses were approximately $1.0 million. During the 2019 fiscal year, the Company issued and sold an additional 56,200 Series E Shares were issued on March 28, 2018.resulting in additional gross proceeds of $1,405,000 or approximately $1.2 million after fees and expenses of approximately $212,000.
Holders of Series E Shares are entitled to receive, when, as and if declared by the Company’s Board of Directors, cumulative preferential dividends, payable semiannual in cash at a rate per annum equal to 6.0% of the initial purchase price of $25.00 per share or in-kind (at the Company’s election) through the issuance of shares of the Company’s common stock, based on the preceding 10 day volume weighted average price of the common stock. The deemed dividend is reflected on the face of the income statement as an increase in net loss or a decrease in net income or increase in the case of net loss to arrive aat net income (loss)or loss attributable to common shareholders.
The purchase price for each Series E Share was $25.00. Gross proceeds received by the Company were approximately $1.095 million (the “Placement”). Net proceeds to the Company after fees and expenses of the Placement were approximately $1.0 million. Placement agent fees incurred in connection with the transaction were 5% of gross proceeds or approximately $57,000 in cash, plus warrants to purchase 5% of the number of common shares into which the Series E shares can be converted (223,000 shares) at an exercise price of $0.25 per share.
During the 2019 fiscal year, the Company issued and sold an additional 57,200 Series E Shares for the price of $25.00 per share, resulting in gross proceeds of $1,405,000. Net proceeds from sales of Series E Shares during the 2019 fiscal year were approximately $1.2 million after fees and expenses of approximately $212,000. Placement agent fees incurred in connection with the transaction were 5% of gross proceeds or approximately $56,875 in cash, plus warrants to purchase 5% of the number of common shares into which the Series E shares can be converted (100 shares) at an exercise price of $0.25 per share.
For the six months ended September 28, 2019, no additional Series E shares were issued.
The table below presents information as of September 28, 2019:
Preferred Stock | ||||||||||||||||
Shares |
Shares |
Shares | Liquidation Preference | |||||||||||||
Designated | Issued | Outstanding | (in thousands) | |||||||||||||
Series B | 10,000.00 | 9,997.00 | 9,245.13 | $ | 2,136 | |||||||||||
Series C | 3,500.00 | 3,424.65 | 3,424.65 | 500 | ||||||||||||
Series D | 6,000.00 | 5,111.86 | 5,111.86 | 731 | ||||||||||||
Series E | 100,000.00 | 100,000.00 | 97,800.00 | 3,668 | ||||||||||||
Total at September 28, 2019 | 119,500.00 | 118,533.51 | 115,581.64 | $ | 7,035 |
(13) ��Subsequent EventsSeries E Exchange
Sale of Common Stock
On November 8, 2019, the Company completed an underwritten public offering of 11,960,000 shares of its common stock at $0.25 per share. The net proceeds from the offering after deducting underwriting discounts and commissions and estimated offering expenses were approximately $2.1 million. The Company intends to use the net proceeds of this offering for general corporate purposes, which may include the repayment of debt. In connection with the offering, the Company granted the underwriter a warrant to purchase 358,800 shares of common stock at the price of $0.30 per share. The warrant is immediately exercisable and has a five year term.
Series E Exchange
Beginning on September 30, 2019, the Company offered holders of its 6.0% Series E Shares the opportunity to exchange all or some of their shares of Series E Shares for shares of the Company’s common stock in a private exchange offer at the rate of 150 shares of common stock for each Series E Share, plus an additional number of shares of common stock having a market value equal to the accrued but unpaid dividends thereon. The private exchange offer was conditioned and became effective upon the Company selling at least $2.0 million of common stock in a public offering. The Company completed thea private exchange offer on November 8,7, 2019, issuing an aggregate of 13,449,562896,636 shares of common stock in exchange for 88,600 shares of Series E Preferred Stock and the unpaid dividends accrued thereon. The shares of common stock to be issued in the exchange were issued in reliance on the exemptionsexemption from registration set forth in SectionsSection 3(a)(9) and 4(a)(2) of the Securities Act of 1933 (the “Securities Act”), though other exemptions may be available.
Reverse Stock Split AnnouncedFor the six months ended September 26, 2020, no additional Series E shares were issued.
AtThe table below presents information as of September 26, 2020 and March 28, 2020:
Preferred Stock | ||||||||||||||||
Shares |
Shares |
Shares | Liquidation Preference | |||||||||||||
Designated | Issued | Outstanding | (in thousands) | |||||||||||||
Series B | 10,000.00 | 9,997.00 | 9,245.13 | $ | 2,136 | |||||||||||
Series C | 3,500.00 | 3,424.65 | 3,424.65 | 500 | ||||||||||||
Series D | 6,000.00 | 5,111.86 | 5,111.86 | 731 | ||||||||||||
Series E | 100,000.00 | 100,000.00 | 9,200.00 | 345 | ||||||||||||
Total at September 26, 2020 and March 28, 2020 | 119,500.00 | 118,533.51 | 26,981.64 | $ | 3,712 |
(16)COVID-19 (Coronavirus)
On January 30, 2020, the Annual MeetingWorld Health Organization (“WHO”) announced a global health emergency because of Shareholdersa new strain of coronavirus (“COVID-19”) and in March 2020 classified the outbreak as a pandemic. In March 2020, the President of the United States and the Governor of California declared a state of emergency, based on September 19, 2019,the rapid increase in COVID-19 cases including in California. In response to the COVID-19 pandemic, the Company has implemented a number of measures intended to ensure the safety of personnel and the continuity of operations. Following a mandated shut down in March 2020, the Company was designated as an essential business and has largely returned to “business as usual,” though it continues to implement and follow the protective measures described above and includes most of its non-production personnel working remotely.
The COVID-19 pandemic has caused significant disruptions to the global, national and local economy. The overall economic and other impacts of the COVID-19 pandemic in the areas in which the Company and its customers and suppliers operates is not known and cannot be predicted at this time. While the disruption is currently expected to be temporary, there is uncertainty about the duration and the total economic impact. If this situation is prolonged, the pandemic could cause additional delays and could have a short- or long-term adverse impact, possibly material, on the Company’s future financial condition, liquidity, and results of operations.
(17)Subsequent Events
Shareholder Rights Plan
On October 8, 2020, the Company’s Board of Directors announced the adoption of a Shareholders Rights Plan designed to ensure that all Giga-tronics shareholders approvedwould receive fair treatment in any takeover of the Company. The Plan provides for the distribution of one right (“Right”) for each share of common stock outstanding on the record date of October 22, 2020.
The Rights Plan provides that in the event any person becomes the beneficial owner of 15% or more of the outstanding common shares, each Right (other than a reverse stock splitRight held by the 15% shareholder) will be exercisable, on and after the close of business on the tenth business day following such event, for the purchase of a number of Giga-tronics common shares (or equivalent securities, such as one-hundredths of the Company’s Series A Junior Participating Preferred Shares) equal to the exercise price (initially $15.00) divided by 25% of the then current fair market value of the common stockstock. The Rights Plan further provides that if, on or after the occurrence of such event, the Company is merged into any other corporation or 50% or more of the Company's assets or earning power are sold, each Right (other than a Right held by the 15% shareholder) will be exercisable to purchase a similar number of securities of the acquiring corporation.
The Rights expire on October 22, 2025 (unless previously triggered) and authorizedare subject to redemption by the Board of Directors at $0.001 per Right at any time prior to determine the exact ratiofirst date upon which they become exercisable to purchase common shares.
A copy of the reverse split withinRights Agreement was filed with the range of 1-for-10SEC as an exhibit to 1-for-20. On November 6, 2019,a Form 8-K filed by the Company announced that the Board of Directors approved a reverse split of the common stock at a ratio of 1-for-15. on October 13, 2020.
Paycheck Protection Program (the “PPP”) under the CARES Act
On October 12, 2020, the Company submitted an application for forgiveness after the 24 week period. The shares amounts and related financial information in this Form 10-Q do not reflect the reverse split, which is expectedforgiveness process can take up to be effective on November 29, 2019. At the effective time of the reverse stock split, every 15 shares of issued and outstanding common stock will be converted into one share of issued and outstanding common stock, and the authorized shares of common stock will be reduced from 200,000,000 to 13,333,333 shares, without par value. The reverse stock split will not modify the rights of the common stock. Proportional adjustments will be made to the conversion and exercise prices of the Company’s convertible preferred stock, common stock warrants and stock options.five months.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSOPERATIONS
The forward-looking statements included in this report including, without limitation, statements containing the words "believes", "anticipates", "estimates", "expects", "intends" and words of similar import, which reflect management’s best judgment based on factors currently known, involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including but not limited to those listed in Giga-tronics’ Annual Report on Form 10-K for the fiscal year ended March 30, 201928, 2020 Part I, under the heading “Risk Factors”, and Part II, under the heading “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”.
Overview and Refocusing of Giga-tronics
We manufacture specialized electronics equipment for use in both military test and airborne operational applications. Our operations consist of two business segments, those of our wholly-ownedwholly owned subsidiary, Microsource, and those of our Giga-tronics Division.
Microsource |
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Microsource’s primary business is the design of custom microwave products and the production of microwave components using chip and wire assembly methods. Microsource offers a line of tunable, synthesized Band Reject Filters for solving interference problems in RADAR/EW applications. Electronic attack systems onboard high-performance fighter jets often require RADAR filters to block electromagnetic interference generated by other onboard electronic systems, particularly the aircraft’s main RADAR. Our high-speed, tunable notch filters can quickly block interference from both continuous wave and wide bandwidth emissions. Using proprietary driver and phase lock technology, our filters offer tuning speeds that are up to ten times faster than traditional filter designs. We custom design these filters specifically for each application. |
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Microsource’s revenues have increased in recent yearsgrown over time as prime contractors beganhave been upgrading additionalthe RADAR systems of an increasing variety of aircraft. Initially Microsource supplied filters for one fighter jet, the F/A-18E. During our 2014 fiscal year, we began to supply the prime contractor with filters foradded a second aircraft, the F-15. Additionally, during our 2017 fiscal year, we began to supply a second prime contractor with filters forbegan to upgrade a third aircraft, the F-16. As a result, Microsource’s revenue increased to over $9.0was $8.2 million duringfor our 2019 fiscal year which ended March 30, 2019.28, 2020 as we delivered filters for approximately 100 aircrafts. We believe there are over 3,000 potential domestic and foreign F-15, F-16 and F-18 aircraft that have not been upgraded. Microsource is a sole-source supplier of filters for these three fighter jets and we expect that the sales of filters for these aircraftbusiness will continue to be a significant source of our future revenue.
In 2012, we began developmentGiga-tronics Division
Our Giga-tronics Division designs, manufactures and markets a family of functional test systems for the RADAR and Electronic Warfare (RADAR/EW) segment of the defense electronics market. Our RADAR/EW test systems are used to evaluate and improve the performance of RADAR systems and EW counter measures, such as jammers. Giga-tronics Division customers include major defense prime contractors, the armed services (primarily in the United States) and research institutes.
Our goal is to become a leading supplier of test platformsolutions for evaluating RADAR/defense RADAR and EW systems using its technical resources and industry expertise related to microwave products. We believe that, as a small company, the RADAR/EW test and evaluation market offers greater long-term opportunities for revenue growth and improved gross margins compared to its original general-purpose commodity test equipment products. As a result, we chose to focus on the development of our RADAR/EW testing platform and divested our general-purpose test product lines between calendar years 2015 and 2017.
systems. The same digital technology that has revolutionized commercial communications, consumer and automotive electronics is now being applied to advanced RADAR and EW systems. This shift in technology limits the effectiveness of traditional analog test solutions duethat are unable to the inability of these solutions to properly stimulate and actively interact with the RADAR and EW systems being tested. We believe that our digitalIn contrast to traditional test systems, we specifically architected the Giga-tronics Advanced Signal Generator & Analyzer hardware (“ASGA”)testing platform offers greaterlike a RADAR to offer sophisticated control and real-time behavior compared to traditional analog test solutions. This digital architecture enables us to offerthat supports active interaction with the devices under test. To our knowledge, no other RADAR/EW test solutions withsystem offers real time responses and closed loop behavior that we believe is not available from any competitor.in the same manner as our technology.
We believe that customer spending for our RADAR/EW systems, including test and emulation, will grow in future years due to more complex RADAR signals and foreign investment in new technology, which will require customers to have greater access to more sophisticated test and emulation equipment. We believe we can become a leading supplier of solutions for evaluating RADAR and EW systems due to the investment we have made since 2012 in our ASGA functional test platform.solution offers several competitive advantages:
1. | Our RADAR/EW solution was designed specifically for generating realistic RADAR signals for testing purposes. |
2. | Our RADAR/EW solution was architected to offer real-time, dynamic, closed-loop behavior that can interact with the devices under test for fully evaluating and improving RADAR and EW performance. |
3. | Our RADAR/EW solution features digital processing hardware and firmware, creating a test solution that may be customized with relative ease compared to traditional test systems. | |
4. | Our RADAR/EW solution is scalable, allowing us to build test systems with multiple channels that scale well both in terms of size and costs compared to traditional systems. |
Significant Orders
Both Microsource and the Giga-tronics Division have historically received a limited number of large customer orders periodically. The timing of orders is sporadic and difficult to predict, and any achievement of associated milestones, can cause 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 recentlycertain previously received significant orders:
Microsource
In fiscal 2015, Microsource received a $6.5 million order for non-recurring engineering (“NRE”) services and for delivery of a limited number of flight-qualified prototype hardware from a prime defense contractor to develop a variant of our high performance, fast tuning YIG RADAR filters for a fighter jet aircraft platform. In fiscal 2016 our Microsource business unit finalized an associated multiyear $10.0 million YIG production order (“YIG Production Order”). The Companyorder. We started shipping the YIG Production Order in the second quarter of fiscal 2017 and anticipates shipping the remainder throughcompleted deliverables in fiscal 2020.
In July 2016, Microsource received a $1.9 million non-recurring engineering services order associated with redesigning a component of its high performance YIG filter used on a fighter jet aircraft platform. Of this NRE service order, we delivered services of approximately $884,000 and $816,000 in fiscal years 2017 and 2018, respectively, and completed delivery of the remaining services during fiscal 2019.
In September 2017, Microsource received a $4.8 million order for continuing the YIG RADAR filter for a fighter jet platform. The Company began initial shipments of these filters in the fourth quarter of fiscal 2018 and recognized revenue on the majority of the order in fiscal 2019.
In February 2018, Microsource received a $1.6 million YIG RADAR filter order from one of our customers. The Company recognized $1.1$1.3 million of revenue in fiscal 2019 and expects to recognizerecognized the remainder of revenue in fiscal 2020.2020 and fiscal 2021.
In November 2018, Microsource received a $4.5 million YIG RADAR filter order from one of our customers. The Company recognized $1.1 million of revenue in fiscal 2019 and expects to recognize the majority2020 of $1.1 million and $3.0 million, respectively, and recognized the remaining revenue in fiscal year 2020.2021.
In June 2019, Microsource received two orders totaling $3.7 million from Lockheed Martin and Raytheon. The Company began to recognizerecognized revenue during the second quarter of $2.4 million in fiscal 2020 with respect to these orders and expects to recognize the remainder of the revenue in fiscal 2021.
In September 2019, Microsource received a YIG RADAR filter order totaling $2.7 million from one of our customers. The Company recognized $0.8 million in revenue associated with this order in fiscal 2020 and expects to recognize the remainder of the revenue through fiscal 2024.2023.
In October 2019. Microsource received a YIG RADAR filter order totaling $2.9 million from one of our customers. The Company recognized $610,000 in revenue associated with this order in fiscal 2020 and expects to recognize the remainder of the revenue through fiscal 2022.
In September 2020, Microsource received two orders totaling $2.9a $4.96 million YIG RADAR filter order from Boeing Company. While the orders were received duringone of our customers. The Company recognized $317,000 in revenue associated with this order in the second quarter of fiscal 2020,2021 and expects to recognize the Company recognized minimalremainder of the revenue during the quarter with respect to these orders.through fiscal 2022.
Giga-tronics Division
In February 2019, the Giga-tronics Division received a $4.0 million order from the United States Navy for our customized Real-Time Threat Emulation System (TEmS) solution, which is a combination of the ASGA hardware platform, along with software developed and licensed to the Company from a major aerospace and defense company.specifically tailored for their application. The order is comprised of two TEmS units of equal value along with approximately $671,000 of engineering services to support and upgrade currently installed systems. The Company fulfilled the first TEmS unit order in the March 2019 quarter, the Company’s fourth quarter of fiscal 2019. The second TEmS unit order was fulfilled during the June 2019 quarter, the Company’s first quarter of fiscal 2020. TheApproximately $550,000 of the engineering services arewere completed in fiscal 2020 with the remainder expected to occur overbe completed in fiscal 2021.
In March 2020, the Giga-tronics Division received a $1.5 million order from the United States Navy for mission critical upgrade kits to existing fielded Radar Threat Generation Systems. Approximately $752,000 was recognized as revenue in fiscal 2020 and approximately $708,000 was recognized as revenue in the first quarter of fiscal 2021.
In August 2020, the Giga-tronics Division received a twelve month period.$720,000 order in direct support of the United States Navy and the United States Air Force to provide a Test Range Threat Emitter Generation capability for the operational testing of advanced Electronic Warfare (EW) weapons systems and aircrew training on fourth and fifth generation fighter aircrafts. The company recognized the total revenue of this order in the second quarter of fiscal 2021.
Critical Accounting Policies
Please refer to the section of the Company’s Annual Report on Form 10-K for the year ended March 30, 201928, 2020 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Critical- Critical Accounting Policies” for a discussion of our critical accounting policies. During the three and six months ended September 28, 2019,26, 2020, there were no material changes to these policies other than as disclosed in Note 1 Organization and Significant Accounting Policies.Policies to our condensed consolidated financial statements included with this Quarterly Report on Form 10-Q.
In preparing the consolidated financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses for the reporting periods. While we believe that these accounting policies and estimates are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates and forecasts.
Results of Operations
New orders received forduring the three and six-month periods ended September 28, 201926, 2020 and September 29, 201828, 2019 by segment are as follows:
NEW ORDERS | ||||||||||||||||||||||||
Three Month Periods Ended | Three Month Periods Ended | |||||||||||||||||||||||
(Dollars in thousands) | September 28, 2019 | September 29, 2018 | % change | September 26, 2020 | September 28, 2019 | % change | ||||||||||||||||||
Giga-tronics Division | $ | 119 | $ | 50 | 138 | % | $ | 773 | $ | 119 | 550 | % | ||||||||||||
Microsource | 2,971 | 105 | 2730 | % | 5,037 | 2,971 | 70 | % | ||||||||||||||||
Total | $ | 3,090 | $ | 155 | 1894 | % | $ | 5,810 | $ | 3,090 | 88 | % |
Six Month Periods Ended | Six Month Periods Ended | |||||||||||||||||||||||
(Dollars in thousands) | September 28, 2019 | September 29, 2018 | % change | September 26, 2020 | September 28, 2019 | % change | ||||||||||||||||||
Giga-tronics Division | $ | 311 | $ | 102 | 205 | % | $ | 1,098 | $ | 311 | 253 | % | ||||||||||||
Microsource | 6,735 | 518 | 1200 | % | 5,143 | 6,735 | (24 | %) | ||||||||||||||||
Total | $ | 7,046 | $ | 620 | 1036 | % | $ | 6,241 | $ | 7,046 | (11 | %) |
New orders received in the second quarter of fiscal 20202021 increased to $3,090,000$5,810,000 from $155,000$3,090,000 received in the second quarter of fiscal 2019.2020. Both the Giga-tronics Division and Microsource segment saw increases in orders in the second quarter of fiscal 20202021 compared to the second quarter of fiscal 2019, though the2020. The increase in Giga-tronics Division had minimal ASG orders induring the second quarter of fiscal 2021 was due to the $720,000 order in direct support of the United States Navy and the United States Air Force received in August 2020. The increase in Microsource business unit orders during the second quarter of fiscal 20202021 was attributable to the $4.96 million RADAR filters orders.order received in September 2020. The timing of receipt of expected large RADAR filter contracts varies from period to period.
The following table shows order backlog and related information at the end of the respective periods:
BACKLOG | ||||||||||||||||||||||||
(Dollars in thousands) | September 28, 2019 | September 29, 2018 | % change | September 26, 2020 | September 28, 2019 | % change | ||||||||||||||||||
Backlog of unfilled orders at end of period: | ||||||||||||||||||||||||
Giga-tronics Division | $ | 264 | $ | - | - | $ | 66 | $ | 264 | (75% | ) | |||||||||||||
Microsource | 6,937 | 3,299 | 110 | % | 6,688 | 6,937 | (4% | ) | ||||||||||||||||
Total | $ | 7,201 | $ | 3,299 | 118 | % | $ | 6,754 | $ | 7,201 | (6% | ) | ||||||||||||
Backlog of unfilled orders shippable within one year: | ||||||||||||||||||||||||
Giga-tronics Division | $ | - | $ | - | - | |||||||||||||||||||
Microsource | 5,633 | 3,299 | 71 | % | ||||||||||||||||||||
Total | $ | 5,633 | $ | 3,299 | 71 | % |
Backlog at the end of the second quarter of fiscal 20202021 versus the comparable prior year date increaseddecreased by 118%6% primarily due to the timing of RADAR filter orders. Theorders where revenue recognized reduced backlog more than new orders received. Specifically, the Giga-tronics Division backlog at September 28, 201926, 2020 was $264,000, an increase$66,000, a decrease from the comparable prior year date due to a U.S. Navy order.engineering service agreement where ongoing services have been provided during the year thereby decreasing the backlog. Microsource saw a 110% increase4% decrease in backlog in the second quarter of fiscal 20202021 which was attributable to the timing of large RADAR filter orders. Two large filter orders totaling $7.9 million were received during the one year period and $8.3 million of revenue was recognized during this period.
The allocation of net sales was as follows for the periods shown:
ALLOCATION OF NET SALES | ||||||||||||||||||||||||
Three Month Periods Ended | Three Month Periods Ended | |||||||||||||||||||||||
(Dollars in thousands) | September 28, 2019 | September 29, 2018 | % change | September 26, 2020 | September 28, 2019 | % change | ||||||||||||||||||
Giga-tronics Division | $ | 373 | $ | 50 | 646 | % | $ | 822 | $ | 373 | 120 | % | ||||||||||||
Microsource | 2,662 | 2,630 | 1 | % | 1,870 | 2,662 | (30% | ) | ||||||||||||||||
Total | $ | 3,035 | $ | 2,680 | 13 | % | $ | 2,692 | $ | 3,035 | (11% | ) |
Six Month Periods Ended | ||||||||||||
(Dollars in thousands) | September 28, 2019 | September 29, 2018 | % change | |||||||||
Giga-tronics Division | $ | 2,289 | $ | 179 | 1179 | % | ||||||
Microsource | 4,244 | 5,551 | (24% | ) | ||||||||
Total | $ | 6,533 | $ | 5,730 | 14 | % |
Six Month Periods Ended | ||||||||||||
(Dollars in thousands) | September 26, 2020 | September 28, 2019 | % change | |||||||||
Giga-tronics Division | $ | 1,931 | $ | 2,289 | (16% | ) | ||||||
Microsource | 4,309 | 4,244 | 2 | % | ||||||||
Total | $ | 6,240 | $ | 6,533 | (4% | ) |
Both the Giga-tronics Division and Microsource segment saw minimal increases in net sales in the second quarter of fiscal 2020 versus the comparable prior year date. The Giga-tronics Division net sales atfor the fiscal quarter ended September 28, 2019 was $373,000,26, 2020 were $822,000, an increase from the comparable prior year quarter due to an order received in direct support of the US Navy and the US Air Force to provide a U.S. Navy order.Test Range Threat Emitter Generation capability for the operational testing of advanced Electronic Warfare (EW) weapons systems and aircrew training on fourth and fifth generation fighter aircrafts.
Net sales for the Microsource segment saw a minimal increase induring the second quarter of fiscalended September 26, 2020 versusdecreased 30% over the comparable prior year period primarily due to the delay in receiving a large order during the quarter and the resulting inability to recognize associated revenue within the quarter. The timing of receipt of expected large RADAR filter contracts that varies from period to period.
Net sales of the Giga-tronics Division for the first six months of fiscal 20202021 were $2.3$1.9 million, a $2.1 million increase16% decrease as compared to the first six months of fiscal 20192020 which was attributable to a large U.S. Navy order.order booked in fiscal 2019. Net sales for the Microsource segment during the first half of fiscal 2020 decreased 24% over the comparable prior year period due to the Company’s required adoption of ASC 606.remained relatively flat.
Gross profit was as follows for the periods shown:
GROSS PROFIT | ||||||||||||||||||||||||
Three Month Periods Ended | Three Month Periods Ended | |||||||||||||||||||||||
(Dollars in thousands) | September 28, 2019 | September 29, 2018 | % change | September 26, 2020 | September 28, 2019 | % change | ||||||||||||||||||
Total | $ | 1,248 | $ | 1,126 | 11 | % | $ | 1,040 | $ | 1,248 | (17% | ) |
Six Month Periods Ended | Six Month Periods Ended | |||||||||||||||||||||||
(Dollars in thousands) | September 28, 2019 | September 29, 2018 | % change | September 26, 2020 | September 28, 2019 | % change | ||||||||||||||||||
Total | $ | 2,779 | $ | 2,432 | 14 | % | $ | 2,554 | $ | 2,779 | (8% | ) |
Gross profit increaseddecreased in the second quarter and first half of fiscal 20202021 over the comparable periods of fiscal 20192020 primarily due to an increasedecreases in sales of 13%11% in the second quarter of fiscal 20202021 and 14%4% in the first half of fiscal 2020.2021.
Operating expenses were as follows for the periods shown:
OPERATING EXPENSES | ||||||||||||||||||||||||
Three Month Periods Ended | Three Month Periods Ended | |||||||||||||||||||||||
(Dollars in thousands) | September 28, 2019 | September 29, 2018 | % change | September 26, 2020 | September 28, 2019 | % change | ||||||||||||||||||
Engineering | $ | 349 | $ | 343 | 2 | % | $ | 554 | $ | 349 | 59 | % | ||||||||||||
Selling, general and administrative | 751 | 900 | (17 | %) | 926 | 751 | 23 | % | ||||||||||||||||
Total | $ | 1,100 | $ | 1,243 | (12 | %) | $ | 1,480 | $ | 1,100 | 35 | % |
Six Month Periods Ended | Six Month Periods Ended | |||||||||||||||||||||||
(Dollars in thousands) | September 28, 2019 | September 29, 2018 | % change | September 26, 2020 | September 28, 2019 | % change | ||||||||||||||||||
Engineering | $ | 704 | $ | 718 | (2 | %) | $ | 991 | $ | 704 | 41 | % | ||||||||||||
Selling, general and administrative | 1,798 | 1,901 | (5 | %) | 1,895 | 1,798 | 5 | % | ||||||||||||||||
Total | $ | 2,502 | $ | 2,619 | (4 | %) | $ | 2,886 | $ | 2,502 | 15 | % |
Operating expenses decreased 12%increased 35% or $143,000$380,000 in the second quarter of fiscal 20202021 over fiscal 2019. Engineering expenses remained relatively flat.2020 primarily due to an increase in Research and Development (“R&D”) personnel and additional R&D expenditures in connection with the development efforts of EW/RADAR test products in both the Dublin and New Hampshire facilities. Selling, general and administrative decreased by $149,000 primarilyexpenses increased 23% or $175,000 in part due to a decreaseincreased personnel expenditures as well as an increase in headcountlegal expenditures in connection with adopting the Company’s Rights Agreement adopted on October 8, 2020 as well as the preparation of transfer agreements in connection with the sale of both preferred and personnel related expenses.common shares between shareholders.
Operating expenses remained relatively flatincreased 15% or $384,000 in the first six months of fiscal 20202021 over fiscal 2019.2020. Engineering expenses decreased $14,000increased $287,000 and selling, general and administrative decreasedexpenses increased by $103,000 primarily$97,000. The increase in engineering expenses was due to a decreaseincreases in both headcount and personnel related expenses.expenses as well as an increase in additional R&D expenditures in connection with the development efforts of EW/RADAR test products in both the Dublin and New Hampshire facilities. Selling, general and administrative expenses increased 5% in part due to increased personnel expenditures as well as an increase in legal expenditures in connection with adopting the Company’s Rights Agreement adopted on October 8, 2020 as well as the preparation of transfer agreements in connection with the sale of both preferred and common shares between shareholders.
Interest Expense
Net interest expense in the second quarter of fiscal 20202021 was $66,000,$32,000, a decrease of $55,000 over$34,000 from the second quarter of fiscal 2019.2020. Interest expense decreased primarily due to less interest on the PFG loan as the Company began making monthly principal payments in May 1, 2019, resulting into a reduction of the debt by approximately $1 million.
Net interest expense in the first half of fiscal 2021 was $65,000, a decrease of $58,000 over the first half of fiscal 2020. Interest expense decreased primarily due to less accretion of loan discount and less interest on the PFG loan as the Company began making monthly principal payments of $75,000 onin May 1, 2019.
Net interest expense in the first half of fiscal 2020 was $143,000, a decrease of $135,000 over the first half of fiscal 2019. Interest expense decreased primarily due to less accretion of loan discount and less interest on the PFG loan as the Company began making monthly principal payments of $75,000 on May 1, 2019.
Net Income (l(Loss)
Net incomeloss for the second quarter of fiscal 20202021 was $44,000,$477,000, compared to a net lossincome of $282,000$44,000 recorded in the second quarter of fiscal 2019.2020. The decreaseincrease in net loss during the second quarter of fiscal 2021 was primarily due to the higherlower net sales along with decreasesan increase in operating expenses in the second quarter of fiscal 2020 over 2019.2021 versus the comparable prior year period. Net incomeloss for the first half of fiscal 20202021 was $59,000,$405,000, compared to a net lossincome of $569,000$59,000 recorded in the first half of fiscal 2019.2020. The decreaseincrease in net loss was primarily due to the increasedecrease in net sales for the Giga-tronics DivisionMicrosource Segment along with decreasesan increase in operating expenses.expenses over the comparable prior year period. Additionally, COVID 19 has to a certain extent inhibited our Company’s ability to access our customers in-person and therefore has delayed the timing of orders.
Financial Condition and Liquidity
Periods Ended | ||||||||
September 28, 2019 | March 30, 2019 | |||||||
Cash and cash equivalents | $ | 704 | $ | 878 | ||||
Total current assets | $ | 6,779 | $ | 5,534 | ||||
Total current liabilities | $ | 4,883 | $ | 3,913 | ||||
Working capital | $ | 1,896 | $ | 1,621 | ||||
Current ratio | 1.39 | 1.41 |
Period Ended | ||||||||
September 26, 2020 | March 28, 2020 | |||||||
Cash and cash equivalents | $ | 405 | $ | 657 | ||||
Total current assets | 7,030 | 7,059 | ||||||
Total current liabilities | 3,678 | 3,372 | ||||||
Working capital | $ | 3,352 | $ | 3,687 | ||||
Current ratio | 1.91 | 2.09 |
As of September 28, 2019,26, 2020, Giga-tronics had $704,000$405,000 in cash and cash equivalents, compared to $878,000$657,000 as of March 30, 2019.28, 2020. The Company had working capital of $1.9$3.4 million at September 28, 201926, 2020 compared to $1.6$3.7 million at March 30, 2019.28, 2020. The current ratio (current assets divided by current liabilities) at September 28, 201926, 2020 was 1.391.91 compared to 1.412.09 at March 30, 2019.28, 2020. The increasedecrease in working capital was due primarily due to an increase in accounts receivables of $426,000, an increase in prepaids and other current assets of $510,000 and an increase in inventories of $483,000 all of which resulted from the adoption of ASC 606net loss during the first six monthshalf of fiscal 2020.2021.
Cash Flows
A summary of our net cash provided by (used in) operating activities, investing activities, and financing activities from our condensed consolidated statements of cash flows is as follows:
Six Months Ended | Six Months Ended | |||||||||||||||
September 28, 2019 | September 29, 2018 | September 26, 2020 | September 28, 2019 | |||||||||||||
Net cash (used in) provided by operating activities | $ | (587 | ) | $ | (1,634 | ) | $ | (176 | ) | $ | (587 | ) | ||||
Net cash (used in) provided by investing activities | (94 | ) | - | (31 | ) | (94 | ) | |||||||||
Net cash provided by (used in) financing activities | 507 | 661 | (45 | ) | 507 |
Cash Flows from Operating Activities
Cash used by operating activities during the six months ended September 26, 2020 was $176,000 and was primarily attributable to the net loss as well as changes in our working capital accounts, partially offset by other non-cash charges of $81,000 for depreciation and amortization and $142,000 for share-based compensation.
Cash used by operating activities during the six months ended September 28, 2019 was $587,000. Net cash used in operating activities during this period$587,000 and was primarily attributable to changes in our working capital accounts, partially offset by other non-cash charges of $95,000 for depreciation and amortization and $162,000 for share-based compensation.
During the six months ended September 29, 2018, our operating activities used cash of $1.6 million, primarily resulting from our net losses and changes in our working capital accounts, adjusted for non-cash items including stock-based compensation and depreciation and amortization.
We expect that cash flows from operating activities will fluctuate in future periods due to a number of factors including our operating results, amounts of non-cash charges, and the timing of our billings, collections and disbursements.
Cash Flows from Investing Activities
Cash used in investing activities for the six-month period ended September 26, 2020 was $31,000, primarily due to purchases of equipment for manufacturing and engineering.
Cash used in investing activities for the six-month period ended September 28, 2019 was $94,000, primarily due to purchases of equipment for manufacturing and engineering.
Cash Flows from Financing Activities
Cash used in investingfinancing activities for the six-month period ended September 29, 201826, 2020 was zero.
Cash Flows$45,000, primarily due to proceeds from Financing Activitiesfinanced receivables and the PPP CARES loan of $1.5 million, which was offset by $1.3 million of loan repayments associated with the PFG loan and financed receivables, and $215,000 of capital lease payments.
Cash provided by financing activities for the six-month period ended September 28, 2019 was $507,000, primarily due to proceeds from financed receivables of $899,000 and the exercise of warrants of $230,000 and proceeds from financed receivables of $889,000,which was partially offset by loan repayments of financed receivables of $49,000 and $375,000 loan repayments on borrowings and $188,000 of capital lease payments.
Cash providedNon-GAAP Financial Measures
A non-GAAP financial measure is generally defined by financing activities for the six-month period ended September 29, 2018 was $661,000, primarily due to net proceedsSEC as a numerical measure of $576,000a company’s historical or future performance, financial position or cash flows that includes or excludes amounts from the Company’s salemost directly comparable measure under GAAP. Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, our reported results prepared in accordance with GAAP. Users of Series E convertible preferred stockthis financial information should consider the types of events and transactions that are excluded from these measures.
We measure our operating performance in part based on EBITDA which is a non-GAAP financial measure that is commonly used but is not a recognized accounting term under GAAP. We use EBITDA to monitor and facilitate internal evaluation of the performance of our business operations, to facilitate external comparison of our business results to those of others in our industry, and to plan and evaluate operating budgets. We believe that our measure of EBITDA provides useful information to the public regarding our operating performance and ability to service debt and fund capital expenditures and may help our investors understand and compare our results to other companies that have different financing, capital and tax structures. Other companies may calculate their measures of comparative measures. EBITDA should not be considered in isolation or as wella substitute for, but instead as proceedsa supplemental to, income from the exercise of warrants of $112,000.operations, net income, cash flows from operating activities, or other income or cash flow data prepared in accordance with GAAP.
We define EBITDA as earnings before income taxes, net interest expense, net other income or expense, share based compensation and depreciation and amortization expense. In the following reconciliation, we provide amounts as reflected in our accompanying condensed consolidated financial statements unless otherwise noted.
The reconciliation of our net income (loss) to EBITDA is as follows (in thousands):
Three Month Ended | Six Month Ended | |||||||||||||||
September 26, | September 28, | September 26, | September 28, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income (loss) | $ | (474 | ) | $ | 80 | $ | (399 | ) | $ | 132 | ||||||
Deemed dividend on Series E shares | (3 | ) | (36 | ) | (6 | ) | (73 | ) | ||||||||
Net income attributable to common shareholders | $ | (477 | ) | $ | 44 | $ | (405 | ) | $ | 59 | ||||||
Adjustments: | ||||||||||||||||
Depreciation and amortization | 39 | 48 | 81 | 95 | ||||||||||||
Amortization of demo equipment | 26 | 32 | 52 | 66 | ||||||||||||
Share-based compensation | 66 | 67 | 142 | 162 | ||||||||||||
Interest, tax and dividends | 37 | 104 | 73 | 218 | ||||||||||||
EBITDA | $ | (309 | ) | $ | 295 | $ | (57 | ) | $ | 600 |
ITEM 3 – QUANTITATIVEQUANTITATIVE 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.
ITEM 4 - CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 28, 2019,26, 2020, which is the end of the fiscal quarter covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurances that (i) the information the Company is required to disclose in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period required by the Commission’sSEC’s rules and forms, and (ii) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
There were no significant changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
II - OTHER INFORMATION
ITEM 1 - LEGALPROCEEDINGS
As of September 28, 2019,26, 2020, the Company has no material pending legal proceedings. From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business.
ITEM 1A - RISKFACTORS
There has been no material change in the risk factors disclosed in the registrant’s Annual Report on Form 10-K for the fiscal year ended March 30, 2019.28, 2020.
ITEM 2 - UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTSUPON SENIOR SECURITIES
None.
ITEM 4 - MINESAFETY DISCLOSURES
Not applicable.
ITEM 5 - OTHERINFORMATION
None.
ITEM 6 - EXHIBITS
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act. |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act. |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act. |
32.1 | Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act. |
101.INS** | XBRL Instance |
101.SCH** | XBRL Taxonomy Extension Schema |
101.CAL** | XBRL Taxonomy Extension Calculation |
101.DEF** | XBRL Taxonomy Extension Definition |
101.LAB** | XBRL Taxonomy Extension Labels |
101.PRE** | XBRL Taxonomy Extension Presentation |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| GIGA-TRONICS INCORPORATED | |
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| By: | |
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Date: | November |
| /s/ John R. Regazzi | |
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| John R. Regazzi | |
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| Chief Executive Officer | |
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| (Principal Executive Officer) | |
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Date: | November |
| /s/ Lutz P. Henckels | |
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| Lutz P. Henckels | |
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| Chief Financial Officer, Chief Operating Officer and Director (Principal Financial Officer) | |
Date: | November |
| /s/ Traci K. Mitchell | |
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| Traci K. Mitchell | |
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| Corporate Controller (Principal Accounting Officer) |