Significant Accounting Policies (Policies)

3 Months Ended

Jun. 30, 2018

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The consolidated financial statements include the accounts of Giga-tronics and its wholly-owned subsidiary, Microsource, Inc. (“Microsource”). All significant intercompany balances and transactions have been eliminated in consolidation

Derivatives, Policy [Policy Text Block]

Derivatives

The Company accounts for certain of its warrants and embedded debt features as derivatives. Changes in fair values are reported in earnings as gain or loss on adjustment of these instruments to fair value.

Revenue Recognition, Policy [Policy Text Block]

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 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 our defense contracts within the Microsource segment for its YIG 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:

● Design and manufacturing services

● Product supply – Distinct goods or services that are substantially the same

● Engineering services

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. The Company’s revenue in fiscal

2019

under ASC

606

primarily relates to design and manufacturing services, there was

no

product supply, and engineering services were

$56,000.

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. Approximately

99%

of the Company’s revenue is recognized over time, with the remaining

1%

recognized 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. Revenue recognized over time using the cost-to-cost method represented approximately

99%

of revenue for the

first

quarter of

2019.

The aggregate effects of these changes on contracts in the

first

quarter of

2019

was nominal.

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.

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 Pronouncements, Policy [Policy Text Block]

New Accounting Standards

In

February 2016,

the FASB issued ASU

2016

-

02

(“ASU

2016

-

02”

), Leases. ASU

2016

-

02

requires that lessees recognize assets and liabilities for the rights and obligations for leases with a lease term of more than

one

year. The amendments in this ASU are effective for annual periods ending after

December 15, 2018.

Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU

2016

-

02

on its consolidated financial statements.

In 

May 2014, 

the FASB issued ASU 

2014

-

09

 (“ASC

606”

), Revenue from Contracts with Customers. In 

August 2015 

and 

March, 

April, 

May 

and 

December 2016, 

the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. Collectively these are referred to as ASC Topic

606,

which replaces all legacy GAAP guidance on revenue recognition and eliminates all industry-specific guidance. ASC

606

 establishes a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. ASU ASC

606

 was further updated to provide clarification on a number of specific issues as well as requiring additional disclosures. ASC

606

 

may 

be applied either retrospectively or through the use of a modified-retrospective method. The full retrospective method requires companies to recast each prior reporting period presented as if the new guidance had always existed. Under the modified retrospective method, companies would recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application. ASC

606

is effective for annual reporting periods beginning after

December 

15,

2017,

and early adoption is permitted beginning in the

first

quarter of

2017.

The Company adopted ASC

606

on 

April 1, 2018 (

beginning of the Company’s fiscal year) using the modified retrospective method. Under this approach, 

no

 restatement of fiscal years 

2017

 or 

2018

 was required. Rather, the effect of the adoption was recorded as a cumulative adjustment decreasing the opening balance of accumulated deficit at 

April 1, 2018.

The most significant change relates to the timing of revenue and cost recognition on the Company’s customer contracts. Under ASC

606,

revenue is recognized as the customer obtains control of the goods and services promised in the contract. Given the nature of the Company’s products and terms and conditions in the contracts, the customer typically obtains control as the Company performs work under such contract. Therefore, the Company expects to recognize revenue over time for substantially all of its contracts using the percentage-of-completion cost-to-cost method. As a result, the Company now recognizes revenue for these contracts as it incurs costs, as opposed to when units are delivered. This change has generally resulted in earlier revenue recognition in the performance period as compared to the legacy method for those contracts, giving rise to a decrease to the Company’s opening balance of accumulated deficit as of

April 1, 2018.

Adopting ASC

606,

Revenue from Contracts with Customers, involves significant new estimates and judgments such as estimating stand-alone selling prices, variable consideration, and total costs to complete the contract. All of the estimates are subject to change during the performance of the contract which

may

cause more variability due to significant estimates involved in the new accounting.

The cumulative effect of the changes made to the Company’s consolidated

April 1, 2018

balance sheet for the adoption of Topic

606

were as follows (in thousands):

	Balance at March 31, 2018			Topic ASC 606 Adjustments			Balance at April 1, 2018
Assets
Prepaid and other current assets	$	87		$	188		$	275
Inventories, net		5,487			(1,581	)		3,906
Liabilities
Deferred revenue	$	3,374		$	(2,568	)	$	806
Stockholders' Equity
Accumulated deficit	$	(28,682	)	$	1,176		$	(27,506	)

In accordance with the requirements of Topic

606,

the disclosure of the impact of adoption on our condensed consolidated income statement and balance sheet for the

first

quarter ended

June 30, 2018

was as follows (in thousands except for net loss per share):

For the first quarter ended June 30, 2018	Without ASC 606 Adoption			Topic ASC 606 Adjustments			As Reported
Assets
Prepaid and other current assets	$	149		$	643		$	792
Inventories, net		5,406			(1,968	)		3,438
Liabilities
Deferred revenue	$	2,966		$	(2,709	)		257
Stockholders' Equity
Accumulated deficit	$	(29,177	)	$	1,384			(27,793	)
Revenue
Revenue	$	2,247		$	596		$	2,843
Costs of services
Costs of services	$	416		$	358			774
Net loss	$	(525	)	$	(238	)		(287	)
Net loss per share, basic and fully diluted	$	(0.05	)	$	0.02		$	(0.03	)