Giga-tronics produces instruments, subsystems and sophisticated microwave components that have broad applications in both defense electronics and wireless telecommunications. The Company has two reporting segments: Giga-tronics Division and Microsource.
The Giga-tronics Division produces signal sources, generators, power measurement and amplification instruments for use in the microwave and radio frequency (RF) range (10 kilohertz (kHz) to 50 gigahertz (GHz)). Within each product line are a number of different models and options allowing customers to select frequency range and specialized capabilities, features and functions. The end-user markets for these products can be divided into three broad segments: electronic warfare, radar and commercial telecommunications. These instruments are used in the design, production, repair and maintenance and calibration of other manufacturers' products, from discrete components to complex systems.
The Giga-tronics Division also produces switching systems that operate with a bandwidth from direct current (DC) to optical frequencies. These switch systems may be incorporated in customers' automated test equipment. The end-user markets for these products are primarily related to defense, aeronautics, communications, satellite and electronic warfare, commercial aviation and semiconductors.
The Microsource segment develops and manufactures a broad line of YIG tuned oscillators, filters, filter components, and microwave synthesizers, which are used by its customers in operational applications and in manufacturing a wide variety of microwave instruments or devices. The end-user markets for these products are primarily related to defense and commercial aerospace.
In fiscal 2014 and fiscal 2013 almost all of the sales for Microsource were to one large aerospace customer associated with programs for retrofitting radar filter components on existing military aircraft, and radar filter components for new military aircraft being manufactured. The timing of orders and the contractual shipment schedule associated with this customer cause significant differences in orders, sales, deferred revenue, inventory and cash flow when comparing one fiscal period to another.
A second large aerospace company has engaged Microsource for design services and a production bid associated with a similar radar filter program. On
In fiscal 2014 the Company saw a continuation of substantial losses as legacy Giga-tronics Division products sales and gross margins decreased, while the Company continued to invest heavily in the development of a new Giga-tronics Division product platform. The Company anticipates long-term revenue growth and improved gross margins from the new product platform, but delays in completing it have contributed to the existence of substantial doubt about the Company's ability to continue as a going concern.
In fiscal 2014 the Microsource business unit completed its move from
Results of Operations
New orders by reporting segment are as follows for the fiscal years ended:
NEW ORDERS % change 2014 2013 vs. vs.
(Dollars in thousands) 2014 2013 2013 2012 Giga-tronics Division
4,947 8,679 (43.0% ) 334.0 % Total
$ 13,631 $ 17,692(23.0% ) 33.0 %
New orders received in fiscal 2014 decreased 23% to
New orders received in fiscal 2013 increased 33% to
The following table shows order backlog and related information at fiscal year-end: Backlog % change 2014 2013 vs. vs. (Dollars in thousands) 2014 2013 2013 2012 Backlog of unfilled orders
$ 6,669 $ 7,344(9% ) 91 % Backlog of unfilled orders shippable within one year 5,438 6,706 (19% ) 75 % Long term backlog reclassified during year as shippable within one year 931 2,162 (57% ) 31 %
The decreases in backlog at the end of fiscal 2014 when compared to fiscal 2013 are primarily due to the Microsource business unit's fulfilling
The increase in backlog at year-end 2013 of 91% was primarily due to the Microsource business unit's receipt of long term contracts from a large aerospace company.
The allocation of net sales by reporting segment was as follows for the fiscal years shown:
Allocation of Net Sales % change 2014 2013 vs. vs.
(Dollars in thousands) 2014 2013 2013 2012 Giga-tronics Division
6,019 4,802 25 % 84 % Total
$ 13,309 $ 14,187(6% ) 8 %
Net sales in fiscal 2014 were
Net sales in fiscal 2013 were
The allocation of cost of sales by reporting segment was as follows for the fiscal years shown: Cost of Sales % change 2014 2013 vs. vs. (Dollars in thousands) 2014 2013 2013 2012 Giga-tronics Division
$ 5,093 $ 5,727(11 %) (18 %) Microsource 3,718 2,983 25 % 0 % Total $ 8,811 $ 8,7101 % (13 %)
Cost of sales as a percentage of sales increased in fiscal 2014 to 66.2%, compared to 61.4% for fiscal 2013. The increase in fiscal 2014 was primarily due to the change in product mix of Giga-tronics Division, which saw an increase in the sales of lower margin legacy products in fiscal 2014 when compared to fiscal 2013.
In fiscal 2013 cost of sales as a percentage of sales decreased to 61.4%, compared to 76.2% for fiscal 2012. The decrease is primarily due to a
Operating expenses were as follows for the fiscal years shown:
Operating Expenses % change 2014 2013 vs. vs. (Dollars in thousands) 2014 2013 2013 2012 Engineering
$ 3,897 $ 4,282(9 %) 48 % Selling, general and administrative 4,809 4,976 (3 %) (18 %) Restructuring 331 418 (21 %) 1248 % Total $ 9,037 $ 9,676(7 %) 8 %
Operating expenses decreased 7%, or
The Company is currently spending approximately
In order to reduce its manufacturing and facilities costs, Giga-tronics made the decision during the fourth quarter of fiscal 2012 to consolidate its
The major types of costs associated with this move and estimates of their respective totals were as follows:
Type of cost (In thousands) Retention agreements for employees
$ 542Preparation of San Ramonfacility 59 Training of San Ramonemployees 4 Moving expenses 24 Clean-up of Santa Rosafacility 151 Total $ 780
Of the total estimated expense of
Gain on the Sale of Product Line
Net Interest Expense
Net interest expense in fiscal 2014 was
Giga-tronics recorded a pre-tax loss of
Inventories consisted of the following:
Net Inventories % change 2014 March 29, March 30, vs.
(Dollars in thousands) 2014 2013 2013 Raw materials
$ 1,501 $ 2,157(30 %) Work-in-progress 1,400 2,049 (32 %) Finished goods 353 50 606 % Demonstration inventory 67 304 (78 %) Total $ 3,321 $ 4,560(27 %)
Net inventories decreased by
Financial Condition and Liquidity
Working capital at the end of fiscal year 2014 was
The current ratio (current assets divided by current liabilities) at
Cash used in operating activities amounted to
Additions to property and equipment were
Cash provided by financing activities in fiscal year 2014 was
The loan agreement also provided for the issuance of warrants convertible into 300,000 shares of the Company's common stock, of which 180,000 were exercisable upon receipt of the First Draw and 120,000 would be exercisable if the Second Draw is funded. Each warrant issued under the loan agreement has a term of five years and an exercise price of
In the event of any acquisition or other change in control of the Company, future public issuance of Company securities, liquidation (or substantially similar event) of the Company, or expiration of the warrants, the warrants associated with the First Draw can be exchanged for
The proceeds from the First Draw were allocated between the PFG Debt and the Warrant Debt (inclusive of its conversion feature) based on their relative fair values on the date of issuance which resulted in initial carrying values of
The Company has incurred net losses of
In fiscal 2014 and 2013 the Company invested heavily in the development of a new Giga-tronics Division product platform. The Company anticipates long-term revenue growth and improved gross margins from the new product platform, but delays in completing it have contributed significantly to the losses of the Company. The new product platform is forecasted to start shipping in the second quarter of fiscal 2015, but further delays could cause additional losses.
To help fund operations, the Company relies on advances under the line of credit with Silicon Valley Bank. However the Bank may terminate or suspend advances under the line of credit if the Bank determines there has been a material adverse change in the Company's general affairs, financial forecasts or general ability to repay. (see Note 15, Line of Credit). As of
These matters, along with recurring losses in prior years, raise substantial doubt as to the ability of the Company to continue as a going concern.
To address this matter, the Company's management has taken several actions to provide additional liquidity during fiscal 2014, and reduce costs and expenses going forward. These actions are described in the following paragraph.
March 13, 2014the Company entered into a three year, $2.0 millionterm loan agreement with PFG under which the Company received $1.0 millionon March 14, 2014. Pursuant to the agreement, the Company may borrow an additional $1.0 millionfollowing the Company's achievement of certain performance milestones which includes achieving $7.5 millionin net sales during the first half of fiscal 2015 and two consecutive quarters of net income greater than zero during fiscal 2015. The PFG loan agreement provides for a fixed interest rate of 9.75% and requires monthly interest only payments during the first six months of the agreement followed by monthly principal and interest payments over the remaining thirty months. The Company may prepay the loan at any time prior to maturity by paying all future scheduled principal and interest payments. The PFG Loan is secured by all of the assets of the Company under a lien that is junior to the SVB position described in Note 15, and limits borrowing under the SVB credit line limit to $3.0 million. The loan agreement contains financial covenants associated with the Company achieving minimum quarterly net sales and maintaining a minimum monthly shareholders' equity. In the event of default by the Company, all or any part of the Company's obligation to PFG could become immediately due. (see Note 16, Term Loan). On June 16, 2014the Company amended the term loan agreement with PFG creating a $500,000revolving line of credit that the Company drew $500,000. (see note 20, Subsequent Events). ? On July 8, 2013the Company received $817,000in net cash proceeds from Alara Capital AVI II, LLC, a Delawarelimited liability company (the "Investor"). Under a Securities Purchase Agreement ("SPA"), the Company sold to the Investor 5,111.86 shares of a new Series D Convertible Voting Perpetual Preferred Stock and warrants to purchase up to 511,186 additional shares of common stock at the price of $1.43per share. (see Note 19, Series D Convertible Voting Perpetual Preferred Stock and Warrants). ? To assist with the upfront purchases of inventory required for future product deliveries, the Company entered into an advance payment arrangements with a large customer, whereby the customer reimburses the Company for raw material purchases prior to the shipment of the finished products. In fiscal 2014 the Company entered into advance payment arrangements totaling $1.3 million, and will seek similar terms in future agreements with this customer, and other customers. ? A second large aerospace company has engaged Microsource for design services and a production bid associated with a similar radar filter program. On August 13, 2013Microsource received an initial order for $733,000, on May 6, 2014a follow on order of $659,000was received, and then on May 20, 2014the complete order for an additional $5.5 millionwas received. The total orders for the design and production bid for the associated program is $6.9 million. The Company anticipates the associated multi-year production agreement to be for approximately $10.0 millionand for it to finalize in calendar 2014. No assurances can be given that the parties will agree on the final multi-year production agreement, or what the actual terms will be. (see Note 20, Subsequent Events)
Management also plans to further improve asset management by continuing to reduce product inventories that are on hand at
Management will also continue to seek additional working capital through debt, equity financing or possible product line sales, but there are no assurances that such financings or sales will be available at all, or on terms acceptable to the Company.
The current year losses and the impacts of recurring losses in prior years have had a significant negative impact on the financial condition of the Company and raise substantial doubt about the Company's ability to continue as a going concern. Management believes that through the actions to date and possible future actions described above, the Company should have the necessary liquidity to continue its operations at least for the next twelve months, though no assurances can be made in this regard based on uncertainties with respect to the continued development, manufacturing and marketing efforts of the Company's new product platform and the material adverse change clause in the Company's line of credit agreement discussed above. The Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result if the Company were unable to do so.
The Company leases its facility under an operating lease that expires in
The Company leases equipment under capital leases that expire through
The Company is committed to pay the PFG loan with a maturity date of
The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and the results of operations are based upon the consolidated financial statements included in this report and the data used to prepare them. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
Revenues are recognized when there is evidence of an arrangement, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. This generally occurs when products are shipped and the risk of loss has passed. Revenue related to products shipped subject to customers' evaluation is recognized upon final acceptance. Revenue recognized under the milestone method is recognized once milestones are met. Determining whether a milestone is substantive is a matter of judgment and that assessment is performed only at the inception of the arrangement. The consideration earned from the achievement of a milestone must meet all of the following for the milestone to be considered substantive:
a. It is commensurate with either of the following:
1. The Company's performance to achieve the milestone
2. The enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the Company's performance to achieve the milestone.
b. It relates solely to past performance.
c. It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
Milestones for revenue recognition are agreed upon with the customer prior to the start of the contract and some milestones will be tied to product shipping while others will be tied to design review.
On certain contracts with one of the Company's significant customers the Company receives payments in advance of manufacturing. Advanced payments are recorded as deferred revenue until the revenue recognition criteria described above has been met.
The Company's warranty policy generally provides one to three years of coverage depending on the product. The Company records a liability for estimated warranty obligations at the date products are sold. The estimated cost of warranty coverage is based on the Company's actual historical experience with its current products or similar products. For new products, the required reserve is based on historical experience of similar products until sufficient historical data has been collected on the new product. Adjustments are made as new information becomes available.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at their net realizable values. The Company has estimated an allowance for uncollectible accounts based on analysis of specifically identified problem accounts, outstanding receivables, consideration of the age of those receivables, the Company's historical collection experience, and adjustments for other factors management believes are necessary based on perceived credit risk.
Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company periodically reviews inventory on hand to identify and write down excess and obsolete inventory based on estimated product demand.
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future tax benefits are subject to a valuation allowance when management is unable to conclude that its deferred tax assets will more likely than not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers both positive and negative evidence and tax planning strategies in making this assessment.
The Company considers all tax positions recognized in the consolidated financial statements for the likelihood of realization. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amounts of the positions that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above, if any, would be reflected as unrecognized tax benefits, as applicable, in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of the provision for income taxes in the consolidated statements of operations.
Share Based Compensation
The Company has a stock incentive plan that provides for the issuance of stock options and restricted stock to employees and directors. The Company calculates share based compensation expense for stock options using a Black-Scholes-Merton option pricing model and records the fair value of stock option and restricted stock awards expected to vest over the requisite service period. In so doing, the Company makes certain key assumptions in making estimates used in the model. The Company believes the estimates used, which are presented in Note 1 of Notes to Consolidated Financial Statements, are appropriate and reasonable.
The Company has no other off-balance-sheet arrangements (including standby letters of credit, guaranties, contingent interests in transferred assets, contingent obligations indexed to its own stock or any obligation arising out of a variable interest in an unconsolidated entity that provides credit or other support to the Company), that have or are likely to have a material effect on its financial conditions, changes in financial conditions, revenue, expense, results of operations, liquidity, capital expenditures or capital resources.