Significant Accounting Policies (Policies)

9 Months Ended

Dec. 28, 2019

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

Use of Estimates, Policy [Policy Text Block]

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.

Lessee, Leases [Policy Text Block]

Leases

February 2016,

the Financial Accounting Standards Board (“FASB”) issued ASU

2016

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

months regardless of their classification. Leases with a term of

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

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

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

on the Company's financial statements.

Revenue from Contract with Customer [Policy Text Block]

Revenue Recognition and Deferred Revenue

Beginning

April

2018,

the Company follows the provisions of ASU

2014

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 U.S. armed services 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:

●

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.

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.

Conversion of Convertible Preferred Stock [Policy Text Block]

Conversion of convertible preferred stock

ASC

260

S99

provides guidance on the accounting for induced conversions of convertible preferred stock and states that issuers should consider the guidance in ASC

470

through

to determine whether a conversion of preferred stock is pursuant to an inducement offer. ASC

470

through

addresses the accounting for induced conversions of convertible debt (other than cash convertible debt instruments) that (

) occur pursuant to changed conversion privileges that are exercisable only for a limited period of time, (

) include the issuance of all of the equity securities issuable pursuant to conversion privileges included in the terms of the debt at issuance for each debt instrument that is converted and (

) involve any of the following:

• Reduction of the original conversion price (thereby resulting in the issuance of additional shares of stock)

• Issuance of warrants or other securities

not

provided for in the original conversion terms

• Payment of cash or other consideration (sometimes called a convertible stock sweetener) to those shareholders who convert during the specified time period. The additional consideration is usually offered to induce prompt conversion of the stock to another class of equity.

ASC

470

further explains that an induced conversion includes an exchange of a convertible debt instrument for equity securities or a combination of equity securities and other consideration, whether or

not

the exchange involves legal exercise of the contractual conversion privileges included in the terms of the debt.

If a conversion of preferred stock is an inducement offer pursuant to ASC

470,

the fair value of the additional securities or other consideration issued to induce conversion should be subtracted from net income to arrive at income available to common stockholders in the calculation of EPS pursuant to ASC

260

S99

The deemed dividend is reflected on the face of the statement of operations as an increase in net loss or a decrease in net income to arrive at net income (loss) attributable to common shareholders. See Note

14.

New Accounting Pronouncements, Policy [Policy Text Block]

New Accounting Standards

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 be aligned with the requirements for share-based compensation granted to employees. This standard will be 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.

February 2016,

the FASB issued authoritative guidance under ASU

2016

02,

Leases (Topic

842

). ASU

2016

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

effect on accumulated deficit at adoption.

Practical expedients elected

The Company has elected to apply the package of practical expedients under ASU

2016

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):

	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

	(a) Represents net book value of capital lease assets reclassified to Finance right of use assets.

	(b) Represents current portion of deferred rent reclassified to Operating lease obligation, current portion.

	(c) Represents current portion of capital lease liability reclassified to Finance lease obligation - current portion.

	(d) Represents noncurrent portion of deferred rent reclassified to Operating lease liability - non-current portion.

	(e) Represents noncurrent portion of capital lease obligation reclassified to Finance lease obligation - non-current portion.

Adoption of the standards related to leases had

impact to cash from or used in operating, financing, or investing activities on our consolidated cash flows statements.