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GIGA > SEC Filings for GIGA > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for GIGA TRONICS INC

Form 10-Q for GIGA TRONICS INC


9-Aug-2013

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

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, 2013 Part I, under the heading "Certain Factors Which May Adversely Affect Future Operations or an Investment in Giga-tronics", and Part II, under the heading "Management's Discussion and Analysis of Financial Conditions and Results of Operations".

Overview

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.

Giga-tronics Division produces a broad line of test and measurement equipment used in the development, test and maintenance of wireless communications products and systems, flight navigational equipment, electronic defense systems and automatic testing systems and designs, manufactures, and markets a line of switching devices that link together many specific purpose instruments that comprise automatic test systems. These products are used primarily in the design, production, repair and maintenance of commercial telecommunications, radar, and electronic warfare equipment. Microsource develops and manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers, which are used by its customers in operational applications and in manufacturing a wide variety of microwave instruments and devices.

In the first three months of fiscal 2014 and fiscal 2013 the Giga-tronics division had a broad range of customers, both domestic and international, and there were not any significant customers.

In the first three months of fiscal 2014 and fiscal 2013 almost all of the orders and sales for the Microsource business unit were from 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 milestone achievements associated with this customer causes significant differences in orders, sales, deferred revenue, inventory and cash flow when comparing one fiscal period to another.

Results of Operations

New orders received by segment are as follows:

NEW ORDERS
                                  Three Months Ended
(Dollars in thousands)     June 29, 2013        June 30, 2012      % change
Giga-tronics Division    $         2,251      $         2,181             3 %
Microsource                           72                6,499           (99 %)
Total                    $         2,323      $         8,680           (73 %)

New orders received in the first quarter of fiscal 2014 decreased by 73% to $2.3 million from the $8.7 million received in the first quarter of fiscal 2013. The decrease in orders is primarily due to the Microsource business unit in the first quarter of fiscal 2013 being awarded approximately $6.5 million in long term contracts from a large aerospace company.


The following table shows order backlog and related information at the end of the respective periods:

BACKLOG
(Dollars in thousands)                           June 29, 2013       June 30, 2012         % change
Backlog of unfilled orders at end of period:
Giga-tronics Division                          $         1,396     $         1,627              (14 %)
Microsource                                              4,384               6,834             (36% %)
Total                                          $         5,780     $         8,461              (32 %)

Backlog of unfilled orders shippable within
one year:
Giga-tronics Division                          $         1,396     $         1,627              (14 %)
Microsource                                              4,384               4,040                9 %
Total                                          $         5,780     $         5,667                2 %

Backlog at the end of the first quarter of fiscal 2014 decreased 32% compared to the end of the same period last year. The decrease in backlog is primarily due to the Microsource business unit's achieving certain milestones over the past year of long term contracts awarded for approximately $6.5 million in the first quarter of fiscal 2013 from a large aerospace company.

The allocation of net sales was as follows for the periods shown:

ALLOCATION OF NET SALES
                                   Three Months Ended
(Dollars in thousands)      June 29, 2013        June 30, 2012      % change
Giga-tronics Division     $         1,906      $         2,827           (33 %)
Microsource                         1,131                1,231            (8 %)
Total                     $         3,037      $         4,058           (25 %)

Fiscal 2014 first quarter net sales were $3.0 million, a 25% decrease from the $4.1 million in the first quarter of fiscal 2013. Sales at Giga-tronics Division decreased 33% or $921,000 primarily due lower international orders associated with the Signal Generators product line. Sales at Microsource decreased 8% or $100,000 largely due to the timing of milestone billings associated with long term contracts from a large aerospace company.

Cost of sales was as follows for the periods shown:

COST OF SALES

Three Months Ended
(Dollars in thousands) June 29, 2013 June 30, 2012 % change Cost of sales $ 1,913 $ 2,428 (21 %)

Cost of sales as a percentage of sales increased for the first quarter of fiscal 2014 to 63.0% compared to 59.8% from the first quarter of fiscal 2013. This is primarily due to Giga-tronics having consistent fixed factory overhead costs in both periods, but less sales in the three months ended June 29, 2013.

Operating expenses were as follows for the periods shown:

OPERATING EXPENSES
                                            Three Month Periods Ended
(Dollars in thousands)                  June 29, 2013         June 30, 2012      % change
Engineering                           $         1,106       $           933            19 %
Selling, general and administrative             1,313                 1,310             0 %
Restructuring                                     195                    92           112 %
Total                                 $         2,614       $         2,335            12 %


Operating expenses increased 12% or $279,000 in the first quarter of fiscal 2014 over fiscal 2013. The increase was primarily due to an increase of $173,000 in engineering expenses which was primarily due to material costs associated with constructing prototype and beta units of our new product platform. Restructuring increased $103,000 due to the Company completing its closure of the Santa Rosa facility in May 2013 and incurring an increase of associated employee retention bonuses of $41,000, clean-up costs of the Santa Rosa facility of $36,000, moving expenses of $15,000, and preparation costs of the San Ramon facility of $11,000.

In the fourth quarter of fiscal 2012, Giga-tronics made the decision to move ahead with the relocation of its Santa Rosa, CA operation into one facility in San Ramon, CA. The Company expects to save approximately $500,000 annually in facility costs once the consolidation is completed. The Company announced its intentions to employees in February, 2012 and entered into employment agreements with all key Santa Rosa employees to retain the talent needed to continue shipments during the transition and to help ensure the new operation in San Ramon will run smoothly.

The major types of cost associated with this move and estimates of their respective total costs are as follows:

Type of cost (In thousands)
Retention agreements for employees   $ 571
Preparation of San Ramon facility       71
Training of San Ramon employees          4
Moving expenses                         22
Clean-up of Santa Rosa facility         73
Total                                $ 741

Of the total estimated expense, $195,000 was expensed during the first quarter of fiscal 2014. A prorated portion of the retention agreements (93%) were accrued for as of June 29, 2013. Of the total estimated expense, $418,000 was expensed during fiscal 2013 and $31,000 during fiscal 2012. The Company vacated its Santa Rosa facility on May 31, 2013.

Gain on the sale of product line

On March 18, 2013, the Company entered into an Asset Purchase agreement with Teradyne Inc. ("Teradyne"), whereby Teradyne agreed to purchase the Giga-tronics Division product line known as SCPM for $1.0 million, resulting in a net gain of $816,000 in the first quarter of fiscal 2014. In April 2013 the Company received $800,000 in proceeds at the closing of the transaction and delivery of electronic data associated with the purchase. The Company also earned an additional $50,000 associated with training of Teradyne employees, offset by $34,000 of associated costs. The balance of the consideration ($150,000) is subject to a hold back arrangement until December 31, 2013 to cover certain contingent liabilities, if any, and delivery of certain inventory. The $150,000 had not been recognized as income by the Company as of June 29, 2013, and is expected to be recognized in the third quarter of fiscal 2014 upon delivery of certain inventory and Teradyne's agreement to remove the hold back provisions. Net sales for the SCPM product line were $430,000 for the fiscal quarter ended June 30, 2012. There were no SCPM product line sales in the fiscal quarter ended June 29, 2013.

Financial Condition and Liquidity

As of June 29, 2013, Giga-tronics had $778,000 in cash and cash equivalents, compared to $1.9 million as of March 30, 2013.

Working capital at June 29, 2013 and March 30, 2013 was $3.3 million. The current ratio (current assets divided by current liabilities) at June 29, 2013 was 1.77 compared to 1.61 on March 30, 2013. The increase in current ratio was primarily attributable to the $577,000 decrease in the current portion of the line of credit. With the signing of the New Amended Credit Facility in June 2013 that extended the line through April 2015, all amounts associated with the credit facility are considered long term.


Cash used in operating activities amounted to $1.0 million for the three month period ended June 29, 2013 and $882,000 for the three month period ended June 30, 2012. Cash used in operating activities for the first quarter of fiscal year 2014 was primarily attributed to an operating loss of $1.5 million and a $483,000 decrease in deferred revenue during the quarter with associated milestone achievements of the Microsource business for a large aerospace company. These were partially offset by proceeds on the sale of a product line to Teradyne of $816,000 (see Note 4, Gain on Sale of Product Line). Cash used in operating activities in the first quarter of fiscal year 2013 was primarily attributed to the net loss of $707,000 for the quarter.

Additions to property and equipment were $91,000 in the first quarter of 2014 compared to $45,000 in additions for the same period last year. The increase in capital equipment spending was primarily due to lease-hold improvements associated with the move of Microsource manufacturing to the San Ramon facility.

On June 11, 2013 the Company entered into an amendment to the Second Amended Credit Facility (the "New Amended Credit Facility") with Silicon Valley Bank (the "Bank"). The New Amended Credit Facility amended the Second Amended Credit Facility by expanding the definition of eligible accounts, increasing the maximum limit, and extending the maturity date. The New Amended Credit Facility, which expires on April 15, 2015, is secured by all assets of the Company, provides for a borrowing capacity equal to 80% of eligible accounts receivable on an aggregate basis, up to a maximum $3.0 million, provided the Company maintains borrowing base eligibility, that is, a minimum cash balance of $750,000.

As of June 29, 2013, the Company's outstanding borrowings under the New Amended Credit Facility was $891,000. Management intends to draw upon the New Amended Credit Facility throughout fiscal 2014 to meet any shortfalls in cash.

The Company has incurred net losses of $681,000 in the first quarter of fiscal 2014, $4.2 million in fiscal year 2013, and $5.9 million in fiscal year 2012. These net losses have contributed to an accumulated deficit of $15.0 million at June 29, 2013, and elevate a cause for concern regarding the Company's future. To address this concern Management has taken several actions to provide additional working capital over the current fiscal year, and reduce the costs and expenses going forward. On March 18, 2013 the Company entered into an Asset Purchase agreement with Teradyne Inc. ("Teradyne"), whereby Teradyne agreed to purchase the Giga-tronics Division product line known as SCPM for $1.0 million. The $1.0 million for SCPM is payable over the first nine months of fiscal 2014 (see Note 4, Gain on Sale of Product Line). To ensure the Company has the ability to continue borrowing over the next two fiscal years, on June 11, 2013 the Company extended its line of credit from October 12, 2012 to April 15, 2015, and increased the maximum advances associated with the Company's accounts receivable from $2.0 million to $3.0 million (see Note 11, Line of Credit). To provide additional working capital for operations, on July 8, 2013 the Company received $858,000 in cash proceeds from Alara Capital AVI II, LLC, a Delaware limited 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 $1.43 per share. (see Note 13, Subsequent Event).

To assist with the upfront purchases of inventory required for future product deliveries, the Company has entered into 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 2013 these advance payments totaled approximately $2.3 million. In fiscal 2014 the Company has currently contracted approximately $1.3 million of advance payments, and will seek similar terms with future agreements with the Customer, and other customers. On May 31, 2013 the Company completed the consolidation of its Santa Rosa, California facility into its headquarters in San Ramon, California. The Company expects to save approximately $500,000 annually in facility costs, and the Company expects other operational efficiencies associated with having the majority of the company at one location. Management also plans to further increase operational efficiencies by continuing to work down product inventories that are on hand at June 29, 2013, and paid for. In addition, Management will continue to review all aspects of the business in an effort to reduce costs and expenses, while continuing to invest in new product development for future revenue streams. Management believes that through these efforts the Company will have the working capital required to continue its operations through fiscal 2014.

In order to increase working capital, the Company may seek to obtain additional debt or equity financing, including from existing major shareholders. However, the Company cannot assure that such financing will be available or on terms favorable to the Company.


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