Note 6 - Term Loans, Revolving Line of Credit and Warrants

3 Months Ended

12 Months Ended

Jun. 30, 2018

Mar. 31, 2018

Notes to Financial Statements

Long-term Debt [Text Block]

(

)

Term Loan

, Revolving Line of Credit and Warrants

April 27, 2017,

the Company entered into a

$1,500,000

loan agreement with Partners For Growth V, L.P. (“PFG”), which was funded by PFG on

April 28, 2017 (

the

“2017

Loan”). The

2017

Loan, which matures on

April 27, 2019,

provides for interest only payments during the term of the loan with principal and any accrued interest and fees due upon maturity. The

2017

Loan 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 upon maturity (the “back-end fee”),

$76,000

of which was earned on

April 27, 2017,

and

$24,000

of which is earned at the rate of

$1,000

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.

Additionally, the

2017

Loan provides for the Company’s issuance of up to

250,000

common shares to PFG, of which

190,000

was eaned 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. The

2017

Loan is subordinate to the Bridge Bank line of credit (see Note

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

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
Back-end 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 fiscal year ended

March 31, 2018,

the Company amortized discounts of approximately

$127,000

to interest expense. As of

June 30, 2018,

the Company had issued to PFG

375,000

common shares under the loans.

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 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.

March 26, 2018,

concurrent with the execution of the Securities Purchase Agreement for the Series E Shares (see Note

– 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 the

2014

Loan Agreement and Credit Line to purchase

260,000

shares of the Company’s common stock from

$1.42

$0.25

per share and extended the exercisability of the warrants by

one

year to

March 13, 2020.

The amendments to the

2017

Loan 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.

The Company anticipates it will need to seek additional funds through the issuance of new debt, equity securities or product line sales in order to repay the

2017

Loan (including accrued interest and back end fees) in full upon maturity or otherwise enter into a refinancing agreement with PFG. However, there can be

assurances that such financings, re-financing or product line sales will be available at all, or on terms acceptable to the Company.

8	Term Loans, Revolving Line of Credit and Warrants

2017

Loan Agreement

April 27, 2017,

the Company entered into a

$1,500,000

loan agreement with Partners For Growth V, L.P. (“PFG”), which was funded by PFG on

April 28, 2017 (

the

“2017

Loan”). The

2017

Loan, which matures on

April 27, 2019,

provides for interest only payments during the term of the loan with principal and any accrued interest and fees due upon maturity. The

2017

Loan 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 upon maturity (the “back-end fee”),

$76,000

of which was earned on

April 27, 2017,

and

$24,000

of which is earned at the rate of

$1,000

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. If the Company meets or exceeds certain revenue and net income minimums in fiscal

2018,

the amount could be reduced by

percent.

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, including all its accounts, inventory, equipment, deposit accounts, intellectual property and all other personal property. The

2017

Loan is subordinate to the Bridge Bank line of credit (see Note

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

25.

The embedded derivative is

not

clearly and closely related to the debt host instrument and therefore has been separately measured at fair value, with subsequent changes in fair value recognized in the consolidated statements of operations.

The proceeds received upon issuing the loan was 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
Back-end 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 amortized to interest expense over the loan’s term using the effective interest method. During the fiscal year ended

March 31, 2018,

the Company amortized discounts of approximately

$127,000

to interest expense. As of

March 31, 2018,

the Company had issued to PFG

367,500

common shares under the loans.

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 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.

March 26, 2018,

concurrent with the execution of the Securities Purchase Agreement for the Series E Shares (see Note

$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%,

2014

Loan Agreement and Credit Line to purchase

260,000

shares of the Company’s common stock (see

2014

Loan Agreement, Line Credit and Warrants below) from

$1.42

$0.25

per share and extended the exercisability of the warrants by

one

year to

March 13, 2020.

The amendments to the

2017

Loan 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.

The Company anticipates it will need to seek additional funds through the issuance of new debt, equity securities or product line sales in order to repay the

2017

Loan (including accrued interest and back end fees) in full upon maturity or otherwise enter into a refinancing agreement with PFG. However, there can be

assurances that such financings, re-financing or product line sales will be available at all, or on terms acceptable to the Company.

2014

Loan Agreement, Line of Credit and Warrants

March 13, 2014,

the Company entered into a

three

year,

$2.0

million term loan agreement with PFG under which the Company received

$1.0

million on

March 14, 2014.

June 16, 2014,

the Company amended its loan agreement with PFG (the “Amendment”). Under the terms of the Amendment, PFG made a revolving credit line available to Giga-tronics in the amount of

$500,000,

which the Company borrowed the entire amount on

June 17, 2014.

The revolving credit line had a

thirty-three

month term. The Amendment also reduced the remaining borrowing capacity under the PFG Loan agreement from

$1.0

million to

$500,000.

Interest on the initial

$1.0

million term loan was fixed at

9.75%

and required monthly interest only payments during the

first

six

months of the agreement followed by monthly principal and interest payments over the remaining

thirty

months. The interest on the PFG revolving credit line was fixed, calculated on a daily basis at a rate of

12.50%

per annum. The Company was allowed to prepay the loan at any time prior to its

March 13, 2017

maturity date without a penalty.

June 3, 2015,

the Company further amended its loan agreement with PFG (the “Second Amendment”). The Second Amendment cancelled the Company’s

$500,000

of borrowing availability under the

June 2014

Amendment and required the Company to pay PFG

$150,000

towards its existing

$500,000

outstanding balance under the revolving line of credit, which the Company paid in

July 2015.

The Company also agreed to pay PFG an additional

$10,000

per month towards its remaining credit line balance until repaid, followed by like payments towards its term loan balance until repaid. As of

March 26, 2016,

the

$500,000

borrowed with the

June 2014

Amendment had been fully repaid. The

$500,000

credit line and the

$1.0

million term loan were fully repaid by the Company as of

March 25, 2017.

The Company paid a loan fee of

$30,000

upon the initial draw (“First Draw”) and

$15,000

for the

June 2014

Amendment. The loan fees paid were recorded as prepaid expenses and amortized to interest expense over the term of the PFG amended loan agreement. In addition, the loan agreement provided for the issuance of warrants convertible into

300,000

shares of the Company’s common stock, of which

180,000

were exercisable upon receipt of the initial

$1.0

million from the First Draw,

80,000

became exercisable with the First Amendment and

40,000

were cancelled as a result of the Second Amendment. Each warrant issued under the loan agreement has a term of

five

years and an exercise price of

$1.42

per common share.

If the warrants are

not

exercised before expiration on

March 13, 2019,

the Company would be required to pay PFG

$150,000

and

$67,000

as settlement for warrants associated with the First Draw and the Amendment, respectively. The warrants could be settled for cash at an earlier date in the event of any acquisition or other change in control of the Company, future public issuance of Company securities or liquidation (or substantially similar event) of the Company. The cash “put” provision results in the warrants being recognized as a derivative liability measured at fair value each reporting period with the change in fair value recorded in the accompanying statement of operations as a gain on adjustment of derivative liability to fair value.

As of

March 25, 2017,

the estimated fair values of the derivative liabilities associated with the warrants issued in connection with the First Draw and Amendment were

$133,000

and

$89,000,

respectively, for a combined value of

$222,000.

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 prior to being reclassified to equity. The resulting change in fair value of the warrants, along with the fair value of the common stock approximately

$50,000

issued to PFG, was recognized as gain on adjustment of warrant liability in the consolidated statements of operations.

The initial

$1.0

million in proceeds under the term loan agreement were allocated between the PFG Loan and the warrants based on their relative fair values on the date of issuance, which resulted in initial carrying values of

$822,000

and

$178,000,

respectively. The resulting discount of

$178,000

on the PFG Loan was accreted to interest expense under the effective interest method over the term of the PFG Loan, and as of

March 25, 2017

had been fully accreted since the

$1.0

million had been fully repaid.

The proceeds from the

$500,000

credit line issued in connection with the Amendment were allocated between the PFG Loan and the warrants based on their relative fair values on the date of issuance, which resulted in initial carrying values of

$365,000

and

$135,000,

respectively. The resulting discount of

$135,000

on the PFG Loan was accreted to interest expense under the effective interest method over the term of the PFG Loan, and as of

March 26, 2016

had been fully accreted since the

$500,000

from the Amendment had been fully repaid.

For the fiscal year ended

March 25, 2017,

the Company recorded accretion of discount expense associated with the warrants issued with the PFG Loan of

$22,000.