UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  ☒

Filed by a party other than the Registrant  ☐

Check the appropriate box:

 

☒	Preliminary Proxy Statement

 

☐	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

☐	Definitive Proxy Statement

 

☐	Definitive Additional Materials

 

☐	Soliciting Material under §240.14a-12

GIGA-TRONICS INCORPORATED

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

☐	No fee required

 

☐	Fee paid previously with preliminary materials.

 

☒	Fee computed on table in exhibit required by Item 25(b) per Exchange Act Rules 14a6(i)(1) and 0-11.

 

 

 

PRELIMINARY PROXY STATEMENT DATED JULY 21, 2022 — SUBJECT TO COMPLETION

GIGA-TRONICS INCORPORATED

TRANSACTION PROPOSED — YOUR VOTE IS VERY IMPORTANT

Dear Giga-tronics Shareholder:

You are invited to attend a special meeting of shareholders of Giga-tronics Incorporated, a California corporation (“Giga-tronics,” the “Company,” “we,” “us,” or “our”) to be held on September 7, 2022 at 10:00 Pacific time.

The board of directors of Giga-tronics (the “Board”) has approved a Share Exchange Agreement dated as of December 27, 2021 (as amended from time to time, the “Share Exchange Agreement”) by and among the Giga-tronics, BitNile Holdings, Inc., a Delaware corporation (“BitNile”), and Gresham Worldwide, Inc., a Delaware corporation and subsidiary of BitNile (“Gresham”). Under the terms of the Share Exchange Agreement, Giga-tronics will acquire all of the outstanding shares of Gresham in exchange for 2,920,085 shares of Giga-tronics common stock and 514.8 shares of a new series of preferred stock (the “Series F Convertible Preferred Stock” or the “Series F Preferred Stock”) that are convertible into an aggregate of 3,960,043 shares of Giga-tronics common stock, subject to potential adjustments (the “Share Exchange”). We will also assume Gresham’s outstanding equity awards representing the right to receive up to 749,626 shares of Giga-tronics common stock, on an as-converted basis. The Share Exchange is subject to customary closing conditions, including the condition that our shareholders approve the Share Exchange Agreement. We refer to the Share Exchange and the other transactions contemplated by the Share Exchange Agreement, including the approval of the issuance of our common stock upon the conversion of the Series F Convertible Preferred Stock in excess of 19.99%, as the “Transactions.”

Upon completion of the Share Exchange, outstanding shares of Giga-tronics common stock will remain outstanding and will continue to trade on the OTC Market Group’s OTCQB Market (“OTCQB”), under the symbol “GIGA.” On July 19, 2022, the closing price per share of Giga-tronics’s common stock as reported by the OTCQB was $1.10. We urge you to obtain current market quotations for Giga-tronics common stock.

In addition, as we agreed in the Share Exchange Agreement, we are also seeking approval of shareholders to (1) complete a reverse split of our common stock, (2) increase the number of shares of common stock that we are authorized to issue to 100 million shares, and (3) to change our state of incorporation from California to Delaware.

We will hold the special meeting of its shareholders to vote on these matters. The Board also asks that you approve a proposal to approve an adjournment of the special meeting, if necessary, to solicit additional proxies in favor of the foregoing proposals.

Whether or not you plan to attend the special meeting, please take the time to cause your shares to be voted by completing and mailing the enclosed proxy card or submitting your proxy by telephone or through the Internet, using the procedures in the proxy voting instructions included with your proxy card. Even if you return the proxy, you may attend the special meeting and vote your shares in person at the meeting.

YOUR VOTE IS IMPORTANT. We cannot complete the Share Exchange unless our shareholders approve the Share Exchange Agreement.

This document describes the Share Exchange Agreement, the Share Exchange and other matters to be considered at the special meeting in more detail. You should read this entire document carefully, including the Share Exchange Agreement, which is included as Annex A, and the section discussing “Risk Factors” relating to the Transactions beginning on page 19.

We look forward to seeing you at the special meeting and to the successful completion of the Transactions.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the matters described in this proxy statement or determined if this proxy statement is accurate or adequate. Any representation to the contrary is a criminal offense.

This proxy statement is dated August 1, 2022 and, together with the accompanying proxy card, is first being mailed or otherwise delivered to Giga-tronics shareholders as of August 1, 2022, the Record Date for the special meeting, on or about August 4, 2022.

THIS PROXY STATEMENT INCORPORATES ADDITIONAL INFORMATION

This document incorporates by reference important business and financial information about Giga-tronics from other documents filed with the Securities and Exchange Commission (the “SEC”) that are not included in or delivered with this proxy statement. For a list of the documents incorporated by reference into this proxy statement, see “Where You Can Find More Information.” The SEC maintains a website at www.sec.gov where you can access these filings without charge. You can obtain electronic or hardcopy versions of the documents that are incorporated by reference in this proxy statement, without charge, from the Investors section of our website or by requesting the documents in writing or by telephone, in each case as set forth below:

 

Electronic:		www.gigatronics.com (please see “SEC Filings” page in the Investor Relations portion of the site)
By Mail:		Giga-tronics Incorporated 5990 Gleason Drive Dublin, California 94568 Attention: Investor Relations
By E-mail:		lhenckels@gigatronics.com
By Telephone:		(925) 328-4650 ext. 4698

If you would like to request documents, please do so by August 30, 2022 in order to receive them before the special meeting.

SUBMITTING A PROXY ELECTRONICALLY, BY INTERNET, TELEPHONE OR BY MAIL

Giga-tronics shareholders of record on August 1, 2022 may submit their proxies as follows:

 

•

Through the Internet, by visiting the website established for that purpose at www.fcrvote.com/GIGA by 11:59 p.m. Eastern Time on September 6, 2022 and following the instructions;

 

•

By telephone, by calling the toll-free number 1-866-402-3905 in the United States, Canada, or Puerto Rico on a touch-tone phone by 11:59 p.m. Eastern Time on September 6, 2022 and following the recorded instructions; or

 

•

By mail, by marking, signing, and dating the enclosed proxy card and returning it in the postage-paid envelope provided or returning it pursuant to the instructions provided in the proxy card.

If you are a beneficial owner, please refer to your proxy card or the information forwarded by your bank, broker or other holder of record to see which options are available to you.

GIGA-TRONICS INCORPORATED

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To Be Held On September 7, 2022

Dear Giga-tronics Shareholder:

Giga-tronics Incorporated (“Giga-tronics”) is pleased to invite you to attend a special meeting of the shareholders of Giga-tronics which will be held on September 7, 2022 at 10:00 a.m., Pacific Time, at Giga-tronics headquarters located at 5990 Gleason Drive, Dublin, California 94568.

The purpose of the special meeting is to consider and to vote upon the following proposals:

 

1.

Share Exchange Proposal — a proposal to adopt and approve a Share Exchange Agreement dated as of December 27, 2021, as amended, by and among Giga-tronics, BitNile Holdings, Inc., a Delaware corporation (“BitNile”), and Gresham Worldwide, Inc., a Delaware corporation and a direct wholly-owned subsidiary of the BitNile (“Gresham”), pursuant to which Giga-tronics will acquire all of the outstanding shares of Gresham in exchange for 2,920,085 shares of Giga-tronics common stock and 514.8 shares of a new series of preferred stock that are convertible into an aggregate of 3,960,043 shares of Giga-tronics’ common stock, subject to potential adjustments (the “Share Exchange”) and the other transactions contemplated therein, including the assumption of Gresham’s outstanding equity awards representing the right to receive up to 749,626 shares of Giga-tronics common stock on an as-converted basis. For information on the vesting of these award, see page 51 of this proxy statement;

 

2.

Reverse Split Proposal — a proposal to approve a reverse split of Giga-tronics common stock at ratio of not less than 1-for-2 nor more than 1-for-20;

 

3.

Share Increase Proposal — a proposal to approve an amendment to the Giga-tronics articles of incorporation increasing the number of authorized shares of common stock that may be issued from 13,333,333 to 100,000,000;

 

4.

Delaware Reincorporation Proposal — a proposal to reincorporate Giga-tronics from California to Delaware; and

 

5.

Adjournment Proposal — a proposal to approve an adjournment of the special meeting, if necessary, to solicit additional proxies in favor of the foregoing proposals.

The Giga-tronics Board of Directors (the “Board”) has approved the Share Exchange Agreement and the other agreements and transactions contemplated by the Share Exchange Agreement and determined that the Share Exchange Agreement and the other agreements and transactions contemplated by the Share Exchange Agreement, are advisable and in the best interests of Giga-tronics and its shareholders and unanimously recommends that Giga-tronics shareholders vote “FOR” the adoption and approval of the Share Exchange Agreement and “FOR” each of the other proposals listed above, including the proposals to adjourn the special meeting, if necessary, to solicit additional proxies in favor of the Share Exchange Proposal or other proposals.

Your vote is very important. Giga-tronics shareholders must approve the Share Exchange Proposal is a condition to completing the transactions contemplated by the Share Exchange.

THE BOARD UNANIMOUSLY RECOMMENDS THAT GIGA-TRONICS SHAREHOLDERS APPROVE THE SHARE EXCHANGE PROPOSAL, THE ADJOURNMENT PROPOSAL AND THE OTHER PROPOSALS LISTED ABOVE.

The close of business on August 1, 2022 has been fixed as the record date for the special meeting (the “Record Date”). Only holders of record of Giga-tronics shareholders on the Record Date are entitled to notice of, and to vote at, the special meeting or any adjournments or postponements of the special meeting.

The proxy statement accompanying this notice provides for more detailed information regarding the matters to be acted upon at the special meeting. You are encouraged to read the entire proxy statement carefully, including the Share Exchange Agreement, which is included as Annex A to the proxy statement, and the section titled “Risk Factors” beginning on page 19.

In connection with the Share Exchange, holders of Giga-tronics common stock will be given the opportunity to exercise dissenters’ rights in accordance with certain procedures specified in California Corporations Code Sections 1300, et. seq. If the Share Exchange is completed and you meet all of the requirements under applicable California law, and follow all of its required procedures, you may receive cash in the amount equal to the fair value of your shares of Giga-tronics common stock. For additional details about dissenters’ rights, please refer to “Dissenters’ Rights” beginning on page 111 and Annex C to this proxy statement.

SO THAT YOUR SHARES WILL BE REPRESENTED WHETHER OR NOT YOU ATTEND THE SPECIAL MEETING, PLEASE SUBMIT A PROXY AS SOON AS POSSIBLE BY MAIL, BY TELEPHONE OR THROUGH THE INTERNET. INSTRUCTIONS ON THESE DIFFERENT WAYS TO SUBMIT YOUR PROXY ARE FOUND ON THE ENCLOSED PROXY CARD. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED AT THE SPECIAL MEETING. REMEMBER, YOUR VOTE IS IMPORTANT, SO PLEASE ACT TODAY!

 

TABLE OF CONTENTS

 

		Page
SUMMARY			1
QUESTIONS AND ANSWERS			11
RISK FACTORS			19
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			47
PROPOSAL 1: THE SHARE EXCHANGE PROPOSAL			49
GRESHAM’S BUSINESS			79
THE SHARE EXCHANGE AGREEMENT			94
DISSENTERS RIGHTS			111
GRESHAM MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			114
PROPOSAL 2: THE PROPOSAL TO APPROVE A REVERSE SPLIT OF THE SHARES OF GIGA-TRONICS COMMON STOCK			119
PROPOSAL 3: THE PROPOSAL TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF GIGA-TRONICS COMMON STOCK TO 100,000,000 SHARES			127
PROPOSAL 4: THE DELAWARE REINCORPORATION PROPOSAL			130
PROPOSAL 5: THE ADJOURNMENT PROPOSAL			153
THE SPECIAL MEETING			153
AUDITORS, TRANSFER AGENT AND REGISTRAR			157
FUTURE SHAREHOLDER PROPOSALS			157
WHERE YOU CAN FIND MORE INFORMATION			158
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS			159
INDEX TO FINANCIAL STATEMENTS			F-1
ANNEX A — SHARE EXCHANGE AGREEMENT AND AMENDMENT NO. 1.			A-1
ANNEX B — OPINION OF ROTH CAPITAL PARTNERS			B-1
ANNEX C — CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW			C-1
ANNEX D — REINCORPORATION AGREEMENT			D-1
ANNEX E — PROPOSED DELAWARE CERTIFICATE OF INCORPORATION			E-1
ANNEX F — PROPOSED DELAWARE BYLAWS			F-1

 

1

 

2

 

3

 

4

 

5

 

6

 

7

 

8

 

9

 

10

 

11

 

12

 

13

 

14

 

15

 

16

 

17

 

18

RISK FACTORS

In addition to the other information included and incorporated by reference into this proxy statement, including the matters addressed in “Cautionary Statement Regarding Forward-Looking Statements” below, you should carefully consider the following risk factors before deciding how to vote on the matters presented to shareholders at the special meeting. In addition to the risk factors set forth below, you should read and consider other risk factors specific to our business and securities that will also affect the combined company after the Share Exchange, which are described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended March 26, 2022, which was filed with the SEC on June 24, 2022, and all of which are incorporated by reference into this proxy statement. If any of the risks described below or in the periodic reports incorporated by reference into this proxy statement actually occur, the business, financial condition, results of operations, prospects, or stock price of Giga-tronics or the combined company could be materially adversely affected. For more information, see “Where You Can Find More Information.”

Risk Factor Summary

We are providing the following summary of the risk factors contained in this proxy statement to enhance the readability and accessibility of our risk factor disclosures. We encourage you to carefully review the full risk factors in the proxy statement in their entirety for additional information regarding the material factors that make the Transactions, the Proposals and an investment in our securities speculative or risky. These risks and uncertainties include, but are not limited to, the following:

 

•

We may not complete the Share Exchange, yet we have incurred and will continue to incur substantial costs related to the Share Exchange.

 

•

The pendency of the proposed Share Exchange may cause disruption in our and Gresham’s businesses.

 

•

The Share Exchange Agreement contains provisions that could discourage a potential competing acquirer that might be willing to acquire or merge with Giga-tronics.

 

•

After the Share Exchange, current Giga-tronics shareholders will have reduced ownership and voting interest in the Company as compared to their current ownership and voting interest in the Company and therefore will be able to exercise less influence over management.

 

•

Uncertainties associated with the Share Exchange may cause a loss of our and Gresham’s management personnel and other key employees.

 

•

Our failure to complete the Share Exchange in a timely manner could negatively impact the market price of Giga-tronics common stock and, if the Share Exchange is eventually completed, the business of the combined company.

 

•

The combined company may not fully realize the anticipated benefits of the Transactions within the timing anticipated or at all.

 

•

We and Gresham have historically incurred net losses and negative cash flow, so the combined company may not be able to achieve or sustain profitability.

 

•

The combined company will require additional capital to fund its operations, but we may be unable to obtain such capital on acceptable terms, or at all.

 

•

We cannot assure you whether or when we will be able to complete the Proposed Public Offering or the planned Nasdaq listing, even if we complete the Share Exchange.

 

•

Our directors and officers potentially have interests in the Transactions that differ from, or are in addition to, the interests of Giga-tronics shareholders generally.

 

•

Failure to complete the Share Exchange could negatively impact the price of shares of Giga-tronics common stock, as well as our future businesses and financial results.

 

19

•

The combined company may not realize certain expected synergies and other benefits.

 

•

The combined company will face challenges in integrating Giga-tronics’ and Gresham’s operations and management.

 

•

The combined company will be affected by factors beyond its control, which could have a material adverse effect on the combined company’s business, results of operations and financial condition.

 

•

The combined business will be susceptible to risks associated with international sales, which risks are not currently material to us on a standalone basis.

Risks Related to the Transactions

Completion of the Share Exchange is subject to the conditions contained in the Share Exchange Agreement and if these conditions are not satisfied, we may not complete the Share Exchange and the other Transactions.

The completion of the Share Exchange is subject to various closing conditions, including but not limited to Giga-tronics shareholders approving the Share Exchange Proposal, the accuracy of the parties’ representations and warranties in the Share Exchange Agreement (subject to the standards set forth in the Share Exchange Agreement) and the parties’ compliance with their covenants in the Share Exchange Agreement.

Many of the conditions to the closing of the Transactions are not within our control, and we cannot predict with certainty when or if these conditions will be satisfied. The failure to satisfy any of the required conditions could delay the completion of the Transactions or prevent it from occurring. Any delay in completing the Transactions could cause us not to realize some or all of the benefits that we expect to achieve if the Transactions are successfully completed within the expected timeframe. There can be no assurance that the conditions to the closing of the Share Exchange will be satisfied or that the Share Exchange and the other Transactions will be completed or that, if completed, we will realize the anticipated benefits.

Our failure to complete the Transactions could negatively impact our stock price, our financial condition and our future business and financial results.

If the Transactions are not completed for any reason, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Transactions, we could be subject to a number of negative consequences, including, among others: (i) we may experience negative reactions from the financial markets, including negative impacts on our stock price; (ii) we will still be required to pay certain significant costs relating to the Transactions, including legal, accounting, and financial advisor costs; and (iii) we will be required to repay outstanding loans from BitNile with a current aggregate principal amount of $1,300,000. If the Transactions are not completed or if completion of the Transactions is delayed, any of these risks could occur and may adversely affect our business, financial condition, financial results, and stock price.

The Transactions involve substantial costs.

We have incurred, and expect to continue to incur, a number of non-recurring costs associated with the Transactions. Most of the non-recurring expenses will consist of transaction and regulatory costs related to the Transactions. We have already incurred and will continue to incur transaction fees and costs related to formulating and implementing integration plans, including system consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred from the Share Exchange and integration. Although we anticipate that the elimination of duplicative costs and the realization of other efficiencies and synergies related to the integration should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.

 

20

The number of shares of common stock and Series F Convertible Preferred stock is fixed and will not be adjusted in the event of any change in the price of Giga-tronics common stock or adverse changes to Gresham’s business.

Under the terms of the Share Exchange Agreement, on the closing date of the Share Exchange, we will issue to BitNile 2,920,085 shares of our common stock and 514.8 shares of a new series of preferred stock, Series F Convertible Preferred Stock. We have also agreed to assume Gresham’s outstanding equity awards representing the right to receive up to 749,626 shares of Giga-tronics common stock on an as-converted basis. These share amounts are fixed in the Share Exchange Agreement and will not be adjusted for changes in the market price of Giga-tronics common stock or adverse changes in Gresham’s business or circumstances, even if such changes materially change our perceived value of Gresham. Neither Giga-tronics nor BitNile is permitted to terminate the Share Exchange Agreement solely due to a change in the trading price of Giga-tronics common stock or most changes in Gresham’s business.

Until the completion of the Share Exchange or the termination of the Share Exchange Agreement in accordance with its terms, we are prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to us or our shareholders.

The Share Exchange Agreement prohibits us from taking specified actions without the consent of BitNile and generally requires that our business be conducted in the ordinary course in all material respects. These restrictions may prevent us from taking actions prior to the Share Exchange that might otherwise be beneficial. Adverse effects arising from these restrictions could be exacerbated by any delays in completing the Share Exchange. See “Covenants — Conduct of Business Pending the Closing.”

Our directors and executive officers may have interests in the Transactions that may be different from, or in addition to, the interests of Giga-tronics shareholders generally.

In considering the recommendations of the Board to vote in favor of the proposals described in this proxy statement, shareholders should be aware that our directors and executive officers may have interests in the Transactions, including financial interests, which may be different from, or in addition to, the interests of Giga-tronics shareholders generally.

You should be aware of these interests when you consider the recommendation of the Board that you vote to approve the Share Exchange Proposal. The Board was aware of and considered these interests, among other matters, in reaching its determination that the Share Exchange Agreement and the Transactions are fair to and in the best interests of Giga-tronics and its shareholders, approving and declaring advisable the Share Exchange Agreement and the transactions contemplated thereby, including the Share Exchange, and recommending that Giga-tronics shareholders approve the Share Exchange Proposal. The interests of our directors and executive officers are described in more detail under “Interests of Giga-tronics Directors and Executive Officers in the Transactions.”

We may waive one or more of the closing conditions without re-soliciting shareholder approval from shareholders.

To the extent permitted by law, if the Giga-tronics shareholders approve the Share Exchange Proposal at the special meeting, we may determine to waive, in whole or part, one or more of the conditions to our obligations to consummate the Share Exchange. We expect to evaluate the materiality of any waiver and its effect on Giga-tronics shareholders in light of the facts and circumstances at the time to determine whether any amendment of this proxy statement/prospectus or any re-solicitation of proxies is required in light of such waiver. Any determination as to whether to waive any condition to the consummation of the Transactions, and as to whether to re-solicit shareholder approval and/or amend this proxy statement/prospectus as a result of such waiver, will be made by us at the time of such waiver based on the facts and circumstances as they exist at that time.

 

21

The Share Exchange Agreement contains provisions that could discourage a potential competing acquirer that might be willing to acquire or merge with us.

The Share Exchange Agreement contains “no shop” provisions that restrict our ability to, among other things (each as described under “The Share Exchange Agreement — No Solicitation of Acquisition Proposals”):

 

•

solicit, initiate, knowingly encourage or knowingly facilitate any inquiries regarding, or the submission or announcement by any person of, any proposal or offer that constitutes, or would reasonably be expected to lead to, an acquisition proposal;

 

•

furnish any information regarding Giga-tronics or our subsidiaries in connection with, or for the purpose of soliciting, initiating, encouraging or facilitating, or in response to, any inquiry, proposal or offer that constitutes or would reasonably be expected to lead to an acquisition proposal;

 

•

engage in, enter into, continue or otherwise participate in any discussions or negotiations with any person with respect to any acquisition proposal or any inquiry, proposal or offer that would reasonably be expected to lead to any acquisition proposal; or

 

•

approve, adopt, recommend, agree to or enter into, or propose to approve, adopt, recommend, agree to or enter into, any letter of intent, memorandum of understanding or similar document, agreement, commitment, or agreement in principle with respect to any acquisition proposal.

Furthermore, there are only limited exceptions to the Share Exchange Agreement’s requirement that the Board not withdraw, modify, amend or qualify its required recommendation to Giga-tronics shareholders to adopt the Share Exchange Agreement. Although the Board is permitted to effect a change of recommendation, after complying with certain procedures set forth in the Share Exchange Agreement, in response to a superior proposal or to an intervening event (if the Board determines in good faith that a failure to do so would be reasonably likely to be inconsistent with its fiduciary duties under applicable law), such change of recommendation would entitle Gresham to terminate the Share Exchange Agreement and we would be required to pay Gresham a termination fee. See “The Share Exchange Agreement — Termination of the Share Exchange Agreement” and “The Share Exchange Agreement — Termination Fee.”

In addition, if we terminate the Share Exchange Agreement under these circumstances, we would be required to immediately repay the Bridge Loan and the Warrant would become exercisable.

These provisions could discourage a potential competing acquirer from considering or proposing an acquisition or merger of Giga-tronics that may be more favorable to Giga-tronics shareholders than the Transactions or might result in a potential competing acquirer proposing to pay a lower per share price than it might otherwise have proposed to pay because of the added expense of the termination fee, the repayment of the Bridge Loan and the potential exercise of the Warrant.

Our business relationships, those of Gresham or the combined company may be subject to disruption due to uncertainty associated with the Transactions.

Parties with which we or Gresham do business may experience uncertainty associated with the Transactions, including with respect to current or future business relationships with us, Gresham or the combined company. Our and Gresham’s business relationships may be subject to disruption, as customers, distributors, suppliers, vendors, and others may seek to receive confirmation that their existing business relationships with us or Gresham, as the case may be, will not be adversely impacted as a result of the Transactions or attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us, Gresham, or the combined company as a result of the Transactions. Any of these other disruptions could have a material adverse effect on our or Gresham’s business, financial condition, or results of operations or on the business, financial condition or results of operations of the combined company, and could also have an adverse effect on our ability to realize the anticipated benefits of the Transactions.

 

22

Risks Related to the Combined Company if the Transactions are Completed

Gresham may have liabilities that are not known, probable or estimable at this time.

After the Transactions, Gresham will remain subject to certain past, current, and future liabilities. There could be unasserted claims or assessments against or affecting Gresham, including the failure to comply with applicable laws and regulations. In addition, there may be liabilities of Gresham that are neither probable nor estimable at this time that may become probable or estimable in the future, including indemnification requests received from customers of Gresham relating to claims of infringement or misappropriation of third party intellectual property or other proprietary rights, tax liabilities arising in connection with ongoing or future tax audits and liabilities in connection with other past, current and future legal claims and litigation. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our financial results. We may learn additional information about Gresham that adversely affects us, such as unknown, unasserted, or contingent liabilities and issues relating to compliance with applicable laws or infringement or misappropriation of third party intellectual property or other proprietary rights.

Giga-tronics shareholders will experience dilution because of the issuance of the common stock in connection with the Transactions.

Giga-tronics shareholders will experience dilution upon the issuance of additional shares of common stock and Series F Convertible Preferred Stock pursuant to the Share Exchange Agreement. Such dilution will, among other things, for the foreseeable future significantly limit the ability of the current Giga-tronics shareholders to influence our management, including through the election of directors.

The integration of Gresham’s business and any future acquisitions may disrupt or have a negative impact on our business.

Achieving the anticipated benefits of the Transactions will depend in significant part upon whether we are able to integrate Gresham’s business with our own in an efficient and effective manner. The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. The companies may not be able to accomplish the integration process smoothly, successfully or on a timely basis. The necessity of coordinating geographically separated organizations, managements, systems of controls, and facilities and addressing possible differences in business backgrounds, corporate cultures and management philosophies may increase the difficulties of integration. The companies operate numerous systems and controls, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance. The integration of operations following the Transactions will require the dedication of significant management and external resources, which may temporarily distract management’s attention from the day-to-day business of the combined company and be costly. Employee uncertainty and lack of focus during the integration process may also disrupt the business of the combined company. Any inability of management to successfully and timely integrate the operations of the two companies could have a material adverse effect on the business and results of operations of the combined company.

In addition, Gresham has plans to make additional acquisitions as part of its growth strategy, and following the Share Exchange, we will assume that goal. Whenever we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect any expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:

 

•

difficulty of integrating acquired products, services or operations;

 

23

•

integration of new employees and management into our culture while maintaining focus on operating efficiently and providing consistent, high-quality goods and services;

 

•

potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;

 

•

complexity associated with managing our combined company;

 

•

difficulty of incorporating acquired rights or products into our existing business;

 

•

difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities;

 

•

difficulties in maintaining uniform standards, controls, procedures and policies;

 

•

potential impairment of relationships with employees and customers as a result of any integration of new management personnel;

 

•

potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers;

 

•

effect of any government regulations which relate to the business acquired; and

 

•

potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition.

Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.

The combined company may not fully realize the anticipated benefits of the Transactions within the timing anticipated or at all.

We and Gresham entered into the Share Exchange Agreement because each company believes that the Transactions will be beneficial primarily as a result of the anticipated benefits resulting from the combined company’s operations. The companies may not be able to achieve the anticipated long-term strategic benefits of the Transactions. An inability to realize the full extent of, or any of, the anticipated benefits of the Transactions, as well as any delays that may be encountered in the integration process, which may delay the timing of such benefits, could have an adverse effect on the business and results of operations of the combined company, and may affect the value of Giga-tronics common stock after the completion of the Transactions.

Charges to earnings resulting from the application of the acquisition method of accounting may adversely affect the market value of Giga-tronics common stock following the Transactions.

In accordance with generally accepted accounting principles (“GAAP”), Gresham will be considered the acquiror of Giga-tronics for accounting purposes. Giga-tronics will account for the Transactions using the acquisition method of accounting. There may be charges related to the acquisition that are required to be recorded to the combined company’s earnings that could adversely affect the market value of Giga-tronics common stock following the completion of the Transactions. Under the acquisition method of accounting, we will allocate the total purchase price to the assets acquired, including identifiable intangible assets, and liabilities assumed from Gresham based on their fair values as of the date of the completion of the Transactions, and record any excess of the purchase price over those fair values as goodwill. For certain tangible and intangible assets, revaluating them to their fair values as of the completion date of the Transactions may result in the combined

 

24

company incurring additional depreciation and amortization expense that may exceed the combined amounts recorded by Giga-tronics and Gresham prior to the Transactions. This increased expense will be recorded by Giga-tronics over the useful lives of the underlying assets. In addition, to the extent the value of goodwill or intangible assets were to become impaired after the Transactions, we may be required to incur charges relating to the impairment of those assets.

The combined company’s goodwill or other intangible assets may become impaired, which could result in material non-cash charges to its results of operations.

The combined company will have goodwill and other intangible assets resulting from the Transactions. At least annually, or whenever events or changes in circumstances indicate a potential impairment in the carrying value as defined by GAAP, the combined company will evaluate this goodwill and other intangible assets for impairment based on the fair value of each reporting unit. Estimated fair values could change if there are changes in the combined company’s capital structure, cost of debt, interest rates, capital expenditure levels, operating cash flows, or market capitalization. Impairments of goodwill or other intangible assets could require material non-cash charges to the combined company’s results of operations.

We will recognize approximately $3.1 million of goodwill on our balance sheet with the closing of the Share Exchange. On March 31, 2022, Gresham carried a significant amount of goodwill on its balance sheet in connection with several acquisitions, including the acquisition of Microphase in 2017, the acquisition of Enertec in 2018 and the acquisition of Relec in November 2020. To the extent any of Gresham’s acquisitions do not perform as anticipated and its underlying assumptions and estimates related to the fair value determination are not met, the value of such assets may be negatively affected and Gresham could be required to record impairment charges.

We will assess goodwill for impairment at least annually during the fourth fiscal quarter and whenever facts or circumstances indicate that the carrying value of goodwill may be impaired. Impairment analysis involves comparing the estimated fair value of a reporting unit to its carrying value. If the carrying value of a reporting unit exceeds its estimated fair value, we will record an impairment charge. Determination of fair value requires considerable judgment and is sensitive to changes in underlying assumptions, estimates and market factors. If we are required to recognize noncash charges related to impairment of goodwill, our results of operations would be materially and adversely affected.

Our utilization of our net operating loss carryforwards may be limited.

As of March 26, 2022, we had pre-tax federal net operating loss carryforwards of $10,720,000 and state net operating loss carryforwards of $6,780,000 available to reduce future taxable income. These amounts are net of a Section 382 limitation of $38,345,000 on the federal net operating loss and $19,612,000 on the state net operating loss. The Section 382 limitation was triggered due to an ownership change in 2020 year. The federal and state net operating loss carryforwards begin to expire from fiscal 2022 through 2038 and from 2029 through 2040, respectively. The federal net operating loss amount of $7,435,000 from fiscal year ended 2020 through 2022 will have an indefinite life. Utilization of net operating loss carryforwards may be subject to annual limitations due to certain ownership change limitations as required by Internal Revenue Code Section 382. The federal income tax credits begin to expire from 2032 through 2040 and state income tax credit carryforwards are carried forward indefinitely. The ownership change in 2020 triggered a Section 383 limitation on the federal income tax credits. The Section 383 limitation reduced the federal carryforward by $394,500 but did not reduce the state credit carryforward due to the indefinite carryforward. We recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may 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. Our management considers both positive and negative evidence and tax planning strategies in making this assessment.

 

25

As a result of the Share Exchange, we will generally continue to carry such NOLs, but we may be unable to fully use such NOLs, if at all. Under Section 382 of the Code, if a corporation undergoes an “ownership change” (very generally defined as a greater than 50% change, by value, in the corporation’s equity ownership by certain shareholders or groups of shareholders over a rolling three-year period), the corporation’s ability to use its pre-ownership change NOLs to offset its post-ownership change income may be limited. We have experienced ownership changes in the past, and we will experience an ownership change as a result of the Share Exchange. In addition, the combined company may experience an ownership change in the future as a result of subsequent shifts in its stock ownership. Future regulatory changes could also limit our ability to utilize its NOLs. To the extent our NOLs are not utilized to offset future taxable income, our net income and cash flows may be adversely affected. The Tax Cuts and Jobs Act (the “Tax Act”), as modified by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), among other things, includes changes to U.S. federal tax rates and the rules governing NOL carryforwards. For U.S. federal NOLs arising in tax years beginning after December 31, 2017, with certain exceptions, the Tax Act as modified by the CARES Act limits a taxpayer’s ability to utilize NOL carryforwards in taxable years beginning after December 31, 2020 to 80% of taxable income. In addition, U.S. federal NOLs arising in tax years beginning after December 31, 2017, can be carried forward indefinitely. Deferred tax assets for NOLs will need to be measured at the applicable tax rate in effect when the NOLs are expected to be utilized. The new limitation on use of NOLs may significantly impact our ability to utilize our NOLs to offset taxable income in the future. In addition, for state income tax purposes, there may be periods during which the use of net operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

Our independent auditors have expressed doubt about our ability to continue as a going concern and could express a similar qualified opinion about the combined company following the Share Exchange.

In its report on audited financial statements for our fiscal year ended March 26, 2022, our independent auditors expressed doubt about our ability to continue as a going concern. We do not know whether the combined company’s auditors will express doubt about the ability of the combined company to continue as a going concern in connection with the next audit of its financial statements. Our auditors may express doubt about or ability to continue as a going concern as a result of ongoing operating losses and a lack of financing commitments then in place to meet our expected cash requirements. Our ability to continue as a going concern upon consummation of the Transactions would be subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including the $25 million Proposed Public Offering. If our independent auditors express doubt about our ability to continue as a going concern, it could have a negative impact on the combined company, including our ability to obtain needed financing, and could adversely affect the trading price of our common stock.

We and Gresham have historically incurred net losses and negative cash flow, so the combined company may not be able to achieve or sustain profitability.

Gresham has historically experienced net losses and anticipates continuing to experience such losses in the future. Following the Share Exchange, our operating results will be largely determined by the results of operations of Gresham because it is much larger. For the year ended December 31, 2021 and 2020, Gresham reported revenue of $25,580,000 and $18,213,000 and net losses of $2,863,000 and $1,851,000, respectively. For the three months ended March 31, 2022 Gresham reported revenue of $7,244,000 and net loss of $510,000. We expect to continue to incur substantial expenditures to develop and market our products and services following the Share Exchange and we could continue to incur losses and negative operating cash flow for the foreseeable future.

Even if we are successful in integrating two different business, managements and cultures, we may not become profitable. We anticipate that our operating expenses will continue to increase. Expanding our operations may also make significant demands on our management, finances and other resources. Our ability to manage the anticipated future growth, should it occur, will depend upon a significant expansion of our accounting and other internal management systems and the implementation and subsequent improvement of a variety of systems, procedures and controls. We cannot assure you that significant problems in these areas will not occur. Our failure

 

26

to expand these areas and implement and improve such systems, procedures and controls in an efficient manner at a pace consistent with our business could have a material adverse effect on our business, financial condition and results of operations. Our attempts to expand our marketing, sales, manufacturing and customer support efforts may not succeed or generate additional sales or profits in any future period. Following the Share Exchange, with the anticipated increase in our operating expenses, along with the difficulty in forecasting revenue levels, we may experience significant fluctuations in our results of operations.

There is no assurance that we will be able to achieve a level of revenue adequate to generate sufficient cash flow from operations or obtain additional financings necessary to support our working capital requirements.

We need additional capital to fund our operations, and our inability to generate or obtain such capital on acceptable terms, or at all, could harm our business, operating results, financial condition and prospects.

We are relying upon the proposed $25 million Proposed Public Offering to meet our working capital needs and funding our future acquisition strategy. See the Risk Factor entitled “Our ability to complete the Proposed Public Offering is subject to a number of risks and uncertainties.” If we do not complete the Proposed Public Offering or begin to generate cash from operations, we will need to raise additional capital to support our working capital requirements and our planned growth. The terms of the Proposed Public Offering have not been set but they will include our common stock and may include warrants. Any other future financing may include shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, debt securities, units consisting of the foregoing securities, equity investments from strategic development partners or some combination of the foregoing. There is no assurance that additional financing will be available, or if available, will be on acceptable terms. If we are unable to raise additional capital, we may be required to curtail our operations and take additional measures to reduce costs, including reducing our workforce and eliminating outside consultants in order to conserve cash in amounts sufficient to sustain operations and meet our obligations. This could in its turn have a material adverse effect on our business, operating results and future prospects.

Additionally, any additional financings may be dilutive to our shareholders, and such dilution may be significant based upon the size of such financing.

Our ability to complete the $25 million Proposed Public Offering is subject to a number of risks and uncertainties.

The Share Exchange Agreement requires that we pursue a proposed $25 million underwritten public offering following the Share Exchange. BitNile has agreed to invest $10 million on the same terms and conditions as public investors (except for the discount or commissions payable to the underwriter). We expect that BitNile’s investment will consist of approximately $4,450,000 in cash and conversion of the $4,250,000 loan that BitNile has agreed to make to us upon the completion of the Share Exchange and the $1,300,000 BitNile has loaned us to date. Our ability to compete this public offering, which will provide us with working capital and may in part alleviate our dependency upon BitNile, is subject to a number of risks and uncertainties including:

 

•

The public offering will only occur if Giga-tronics common stock is listed on Nasdaq.

 

•

Listing on Nasdaq is subject to meeting certain quantitative and qualitative requirements. While we expect to meet these requirements following the Share Exchange and subject to the Proposed Public Offering, we cannot assure you that we will do so.

 

•

These qualitative requirements include the experience and integrity of our officers who are expected to be in place as of the time of the listing as well as the composition of our Board of Directors. In that regard, due to BitNile’s control, we will be deemed a “controlled company” under the Nasdaq rules which lessens certain independence requirements.

 

•

Completion of the public offering is subject to market conditions, for small issuers in particular, and the effect of the economy upon stock market in general.

 

27

•

The success of the Proposed Public Offering may be affected by the existence of relative peace in the Middle East because an important Gresham subsidiary is a defense contractor in Israel, which derives most of its revenue from the Israeli Defense Force.

The effects of Russia’s invasion of Ukraine on the capital markets and the economy is uncertain, and if we are able to complete the Proposed Public Offering, we may have to deal with a recessionary economy and economic uncertainty including possible adverse effects upon the capital markets.

While effects of Russia’s invasion of Ukraine on and resulting international sanctions are uncertain, they have already had an immediate effect on the global and United States economy by causing, among other things, increased inflation and substantial increases in the prices of oil, gas and other commodities. The conflict has created increased uncertainty in the capital markets with declines in leading market indexes. The duration of this conflict and its impacts are uncertain. We cannot predict the conflict will affect the capital markets but the impact may be adverse and may delay or prevent us from completing the Proposed Public Offering.

The combined company may be unable to execute its acquisition growth strategy.

Gresham has made a series of business acquisitions and plans to make additional acquisitions as part of its growth strategy. Following the Share Exchange, we will assume that goal and increasing revenue through acquisitions will be one of the key components of our growth strategy.

The combined company’s acquisition growth strategy will involve a number of risks and uncertainties. The combined company may be unable to successfully identify suitable acquisition targets and complete acquisitions. The combined company’s ability to execute its growth strategy depends in part on its ability to identify and acquire desirable acquisition candidates as well as its ability to successfully integrate Gresham’s operations into its business.

Additional factors may negatively impact the combined company’s growth strategy. The combined company’s strategy may require spending significant amounts of capital. If the combined company is unable to obtain additional needed financing on acceptable terms, we may need to reduce the scope of its acquisition growth strategy, which could have a material adverse effect on our growth prospects. If any of the aforementioned factors force management to alter the combined company’s growth strategy, the combined company’s growth prospects could be adversely affected.

We will have to pay cash, incur debt, or issue equity as consideration in any future acquisitions, each of which could adversely affect our financial condition or the market price of our common stock. The sale of equity or issuance of equity-linked debt to finance any future acquisitions could result in dilution to our shareholders. Incurring indebtedness may result in increased fixed obligations and could limit our flexibility in managing our business due to covenants or other restrictions contained in debt instruments. In addition, BitNile, as the holder of our Series F Preferred Stock, will have the right to approve or disapprove of any such indebtedness and certain acquisitions.

Further, we may not be able to realize the anticipated benefits of completed acquisitions. Some acquisition targets may not have a developed business or will be experiencing inefficiencies and incur losses. Additionally, small defense contractors which we consider suitable acquisition targets may be uniquely dependent on their prior owners and the loss of such owners’ services following the completion of acquisitions may adversely affect their business. Therefore, we may lose our investment in the event that the acquired businesses do not develop as planned or that we are unable to achieve the anticipated cost efficiencies or reduction of losses. Even if we are able to do so, we may not realize the full anticipated benefits of such acquisitions, and our business, financial conditions and results of operations may suffer.

Additionally, our acquisitions have previously required, and any similar future transactions may also require, significant management efforts and expenditures. Regardless of whether we are successful in making an

 

28

acquisition, the negotiations could disrupt our ongoing business, divert the attention of our management and key employees and increase our expenses.

If we fail to effectively manage our growth, our business and operating results could be harmed.

Gresham has experienced, and with the closing of the Share Exchange we will experience, growth in our operations. This growth will place, significant demands on our management, operational and financial infrastructure. If we do not manage our growth effectively, the quality of our products and services could suffer, which could negatively affect our operating results. To effectively manage our growth, we must continue to improve our operational, financial and management controls and reporting systems and procedures. These systems improvements may require significant capital expenditures and management resources. Failure to implement these improvements could hurt our ability to effectively manage our growth and would in its turn have a material adverse impact on our business and future operating results.

Our and Gresham’s businesses are subject to government procurement laws and regulations.

We and Gresham must comply with certain laws and regulations relating to the formation, administration and performance of government contracts. These laws and regulations affect how we and Gresham conduct business with its government contracts, including the business that it does as a subcontractor. In complying with these laws and regulations, we may incur additional costs. These costs may increase in the future, thereby reducing our margins, which could have an adverse effect on our business, financial condition, results of operations and cash flows. Failure to comply with these regulations and requirements could lead to fines, penalties, repayments, or compensatory or treble damages, or suspension or debarment from government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various laws, including those related to procurement integrity, export control, government security regulations, employment practices, protection of the environment, accuracy of records, proper recording of costs and foreign corruption. The termination of a government contract or relationship as a result of any of these acts would have an adverse impact on our operations and could have an adverse effect on our standing and eligibility for future government contracts.

If we fail to comply with anti-bribery, anti-corruption, anti-money laundering laws, and similar laws, or allegations of such failure, it could have a material adverse effect on our business, financial condition and operating results.

We are subject to various anti-bribery, anti-corruption, anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. Travel Act, and the USA PATRIOT Act. In addition, following the Share Exchange we will be subject to these laws and the United Kingdom Bribery Act 2010, the Proceeds of Crime Act 2002, Chapter 9 (sub-chapter 5) of the Israeli Penal Law, 1977, the Israeli Prohibition on Money Laundering Law–2000, and possibly other similar laws in countries outside of the United States in which Gresham conducts its business or seeks to sell its products will apply to us. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees, agents, representatives, business partners, and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector.

We, our employees, agents, representatives, business partners and third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these employees, agents, representatives, business partners or third-party intermediaries even if we do not explicitly authorize such activities.

These laws also require that we keep accurate records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and procedures to address compliance

 

29

with such laws, we cannot assure you that none of our employees, agents, representatives, business partners or third-party intermediaries will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. In addition, we may be held liable for violations committed of the FCPA or similar foreign laws by companies that we acquire.

Any alleged or actual violation of the FCPA or other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, investigations, enforcement actions, fines and other criminal or civil sanctions, adverse media coverage, loss of export privileges, or suspension or termination of government contracts. Responding to any investigation or enforcement action would require significant attention of our management and resources, including significant defense costs and other professional fees. Failure to comply with anti-bribery, anti-corruption, anti-money laundering laws, and similar laws, or allegations of such failure, could therefore have a material adverse effect on our business, results of operations, financial condition and future prospects.

Our sales and profitability may be affected by changes in economic, business and industry conditions.

If the economic climate in the United States or abroad deteriorates, customers or potential customers could reduce or delay their orders. In this environment, our customers may experience financial difficulty, cease operations and fail to budget or reduce budgets for the purchase of our products. This may lead to longer sales cycles, delays in purchase decisions, payment and collection, and can also result in downward price pressures, causing our sales and profitability to decline. In addition, general economic uncertainty and general declines in capital spending in the information technology sector make it difficult to predict changes in the purchasing requirements of our customers and the markets we serve. There are many other factors which could affect our business, including:

 

•

The introduction and market acceptance of new technologies, products and services;

 

•

New competitors and new forms of competition;

 

•

The size and timing of customer orders (for retail distributed physical product);

 

•

The size and timing of capital expenditures by our customers;

 

•

Adverse changes in the credit quality of our customers and suppliers;

 

•

Changes in the pricing policies of, or the introduction of, new products and services by us or our competitors;

 

•

Changes in the terms of our contracts with our customers or suppliers;

 

•

The availability of products from our suppliers; and

 

•

Variations in product costs and the mix of products sold.

These trends and factors could adversely affect our business, profitability and financial condition and diminish our ability to achieve our strategic objectives.

The loss of key personnel could have a material adverse effect on the combined company’s financial condition, results of operations, and growth prospects.

The success of the combined company will depend on the continued contributions of key employees and officers. The loss of the services of key employees and officers, whether such loss is through resignation or other causes, or the inability to attract additional qualified personnel, could have a material adverse effect on the combined company’s financial condition, results of operations, and growth prospects. Our Chief Executive Officer is resigning as on officer but will remain employed through December 27, 2022 on a part-time basis. He will continue to serve as member of our Board. Although we expect most Giga-tronics employees will remain as employees following the Share Exchange, it is possible some employees may quit. Depending upon who they are and how many employees quit, we may be adversely affected.

 

30

The sale of our products is dependent upon our ability to satisfy the proprietary requirements of our customers.

We depend upon a relatively narrow range of products for the majority of our revenue. Our success in marketing our products is dependent upon their continued acceptance by our customers. In some cases, our customers require that our products meet their own proprietary requirements. If we are unable to satisfy such requirements, or forecast and adapt to changes in such requirements, our business could be materially harmed.

Our limited ability to protect our proprietary information and technology may adversely affect our ability to compete, and our products could infringe upon the intellectual property rights of others, resulting in claims against us, the results of which could be costly.

Many of our products consist entirely or partly of proprietary technology owned by us. Although we seek to protect our technology through a combination of copyrights, trade secret laws and contractual obligations, these protections may not be sufficient to prevent the wrongful appropriation of our intellectual property, nor will they prevent our competitors from independently developing technologies that are substantially equivalent or superior to our proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. In order to defend our proprietary rights in the technology utilized in our products from third party infringement, we may be required to institute legal proceedings, which would be costly and would divert our resources from the development of our business. If we are unable to successfully assert and defend our proprietary rights in the technology utilized in our products, our future results could be adversely affected.

Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we may become subject to legal proceedings and claims for alleged infringement from time to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, require us to reengineer or cease sales of our products or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making claims may be able to obtain an injunction, which could prevent us from selling our products in the United States or abroad.

We may in the future be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe on our patents, trade secrets or the patents of our licensors. To counter such infringement or unauthorized use, we may be required to file infringement claims, or we may be required to defend the validity or enforceability of such patents, which can be expensive and time-consuming. In an infringement proceeding, a court may decide that either one or more of our patents or our licensors’ patents is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue because our patents do not cover that technology. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions regarding our patents or patent applications or those of our partners or licensors. An unfavorable outcome could require us to cease using the related technology or to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may cause us to incur substantial costs and distract the attention of our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

 

31

Because of the substantial amount of discovery required in intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

Our business could be negatively impacted by cybersecurity threats and other security threats and disruptions.

As U.S. Government defense contractors, we and Gresham face certain security threats, including threats to our information technology infrastructure, attempts to gain access to our proprietary or classified information, threats to physical security, and domestic terrorism events. Our information technology networks and related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. We and Gresham are also involved with information technology systems for certain customers and other third parties, which generally face similar security threats. Cybersecurity threats in particular, are persistent, evolve quickly and include, but are not limited to, computer viruses, attempts to access information, denial of service and other electronic security breaches. We and Gresham believe that it has implemented appropriate measures and controls and has invested in skilled information technology resources to appropriately identify threats and mitigate potential risks, but there can be no assurance that such actions will be sufficient to prevent disruptions to mission critical systems, the unauthorized release of confidential information or corruption of data. A security breach or other significant disruption involving these types of information and information technology networks and related systems could:

 

•

disrupt the proper functioning of these networks and systems and therefore its operations and/or those of certain of its customers;

 

•

result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of Microphase or its customers, including trade secrets, which others could use to compete against Microphase or for disruptive, destructive or otherwise harmful purposes and outcomes;

 

•

compromise national security and other sensitive government functions;

 

•

require significant management attention and resources to remedy the damages that result;

 

•

subject Gresham to claims for breach of contract, damages, credits, penalties or termination; and

 

•

damage Gresham’s reputation with its customers (particularly agencies of the U.S. Government) and the public generally.

Any or all of the foregoing could have a negative impact on its business, financial condition, results of operations and cash flows.

Failure of our information technology infrastructure to operate effectively could adversely affect our business.

We depend heavily on information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.

 

32

If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to accounting controls and procedures, or if we discover material weaknesses and deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.

If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting. If material weaknesses or significant deficiencies are discovered or if we otherwise fail to achieve and maintain the adequacy of our internal control, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. Our research coverage by industry and financial analysts is currently limited. Even if our analyst coverage increases, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Because of the COVID-19 pandemic, Gresham had disruptions to its business which may have, a material effect on its business and results of operations. The future impacts on the combined company, if any, are uncertain.

Gresham’s business was materially affected by the COVID-19 pandemic. The disruptions caused by the pandemic included temporary closures of its facilities, including a shutdown of its Microphase facility in Connecticut for three weeks in December 2020 and suspension of production operations for its Gresham Power located in Salisbury, United Kingdom from March 19, 2020 until June 2020 and from November 2020 until the Spring of 2021. This resulted in a significant decrease of revenue in December 2020 and a decrease in January to February 2021. In addition, Gresham Power experienced substantial revenue decreases while shut down. In January 2022, Israel experienced a fifth wave of COVID-19 with the Omicron variant. Many of Enertec’s workers became ill and/or worked from home. Despite this disruption, it did not materially impact Enertec’s operations.

Gresham and Giga-tronics also incurred expenses related to implementing the workplace safety protocols and adjusting for remote working arrangements. Most of its non-production employees currently work remotely. However, not all employees are as efficient working remotely and its business may be adversely affected as the result. Additionally, certain employees at Gresham’s production facilities must continue to work on site to continue manufacture for essential government programs.

Further, Gresham and Giga-tronics experienced an increase in the average length of sales cycles to onboard new customers and delays in new projects, which could materially adversely impact its business, results of operations, and financial condition in future periods.

As a result of the COVID-19 pandemic, the American, Israeli and United Kingdom economies have sustained material slowdowns during part of the pandemic.

 

33

Some of the prominent COVID-19-related risks that materially and adversely affected Gresham’s business are as follows:

 

•

The pandemic, government responses thereto and general public concern arising therefrom resulted in the reduction, cancellation or deferral of customer orders. Decision-making at the UK Ministry of Defence has slowed as government has shifted resources to the pandemic response.

 

•

Whether directly arising from COVID-19 or otherwise, supply chain delays appear to have adversely affected Gresham particularly with Microphase and Enertec, which issues are continuing;

 

•

As stated above, many employees may be less efficient in working from home, which can have an adverse effect on Gresham’s results of operations and financial condition.

 

•

Travel bans and the reluctance of people to travel may adversely affect Gresham’s sales efforts and further limit its ability to manage operations efficiently.

Because of the uncertainty surrounding COVID-19, we cannot be certain whether COVID-19 will adversely affect the combined company in the future.

Supply chain disruptions have materially and adversely affected our results of operations and those of Gresham, and could materially and adversely affect our results of operations in the future.

Supply chain disruptions have affected us and have also affected us and Gresham. During our fiscal year ended March 26, 2022, we experienced delays in our receipt of certain components, which temporarily delayed shipments.

Each of Gresham’s subsidiaries, Microphase, Enertec and Relec, have also experienced supply change disruptions, albeit in different ways. Microphase also experienced a 45 week delay in securing certain video component parts for a customer, which adversely impacted Microphase’s revenues and cash flows. To improve Microphase’s cash flow, on July 1, 2022, Gresham acquired an additional 444,444 shares of Microphase’s common stock in exchange for a purchase price of $1,000,000. While Relec experienced a spike in bookings, it encountered longer delivery lead times for products it distributes. That in turn also delays fulfillment of orders and reduces revenue. Enertec has also experienced problems with component delivery times in 2021. Enertec began purchasing component parts at least six months in advance in 2021. The current situation has put a lot of pressure on Enertec’s cash flow. We cannot assure you that these supply chain issues will continue in the future nor that Gresham’s other subsidiaries will not face similar problems.

For the year ended December 31, 2021, Enertec’s local Israeli auditors identified a critical audit matter in its audit opinion relating to certain estimates of contract costs incurred for long-term contract revenue. If Enertec underestimated its actual costs, we will see an adverse effect on future results of operations after 2021 which will result in additional cost of revenue. The amount may be material.

Gresham’s limited operating history makes it difficult to evaluate its future business prospects and to make decisions based on its historical performance.

Although Gresham’s operating subsidiaries have separately been involved in the defense technology solutions business for several decades, Gresham has a limited operating history as a combined company and has no operating history other than as part of BitNile’s business. This makes it difficult to evaluate its business on the basis of historical operations. Consequently, it is difficult, if not impossible, to forecast Gresham’s future results based upon its historical data. Reliance on its historical results may not be representative of the results Gresham will achieve, and for certain areas in which Gresham operates may not be indicative at all. Because of these uncertainties, Gresham may be hindered in its ability to anticipate and timely adapt to increases or decreases in sales, product costs or expenses.

 

34

Risk Related to our Ownership Structure After the Transactions

BitNile, as our largest shareholder and creditor, will have the ability to exert substantial influence over us.

After the closing of the Transactions, BitNile will beneficially own approximately 71.2% of the voting power in the combined company. If we complete the Delaware Reincorporation, our shareholders will not be able to cumulate votes in the election of directors. As a result, BitNile will have the ability to exert substantial influence over actions to be taken or approved by our shareholders, including the election of directors and any transactions involving a change of control.

In addition, BitNile will have the ability to exert substantial influence over us as the sole holder of our Series F Convertible Preferred Stock. The holders of Series F Convertible Preferred Stock will be entitled to elect four of our directors and, for so long as BitNile consolidates Giga-tronics as a subsidiary for financial reporting purposes, the prior approval of the holder of the Series F Convertible Preferred Stock will be required for us to incur indebtedness in excess of $1.0 million per individual transaction or $2.5 million in the aggregate or to complete a merger, acquisition or purchase of assets where the aggregate consideration is valued at more than $1.0 million. If our management wants to make acquisitions or incur indebtedness, we may not receive the consent of BitNile, even if our Board supports these actions.

Further we initially will owe BitNile at least $5,550,000 and if we are unable to repay this indebtedness, BitNile will have the ability to acquire all of our assets which would leave our shareholders as owners of an empty shell.

BitNile’s interests in or actions with respect to Giga-tronics could be different from or adverse to those of other holders of Giga-tronics common stock and could materially and adversely affect your investment in our common stock.

The Series F Certificate of Determination requires that we obtain BitNile’s consent for certain acquisitions and debt financings, so we will not be able to pursue these transactions if BitNile does not consent.

We will issue BitNile Series F Convertible Preferred Stock and common stock upon the closing of the Share Exchange. The term of the Series F Convertible Preferred Stock require that for so long as we are a consolidated subsidiary of BitNile, we must obtain BitNile’s consent before, among other things, incurring indebtedness of $1,000,000 in any individual transaction or $2,500,000 in the aggregate, or acquiring any business in which the aggregate consideration payable by us is $1.0 million or more.

In addition, if we issue further equity, subject to exceptions for certain excluded securities, such limited issuances pursuant to equity incentive plans, BitNile will have the right purchase additional equity to maintain its ownership interest    

These provisions could limit our ability to make future acquisitions, particularly larger acquisitions, because if BitNile does not want us to issue additional equity either as consideration to the sellers or to raise cash to pay the purchase price to sellers of a business we proposed to acquire, BitNile may not consent for any reason, even if our Board believes the proposed acquisition would be in the best interests of Giga-tronics.

We will be exempt from certain of Nasdaq’s corporate governance independence requirements, even if even if Giga-tronics common stock is listed on Nasdaq.

Giga-tronics common stock is not listed on Nasdaq and, therefore, we are not subject to Nasdaq rules. We may however be exempt from certain of Nasdaq’s corporate governance requirements even if we complete the Proposed Public Offering and Giga-tronics common stock is listed on Nasdaq following the Share Exchange. Based on BitNile’s anticipated percentage ownership following the Share Exchange and the Proposed Public Offering, we anticipate that upon listing on Nasdaq, we would be a “controlled company” under Nasdaq rules. A

 

35

controlled company is defined as an entity of which more than 50% of the voting power for the election of directors is held by an individual, a group or another entity. Under Nasdaq rules, controlled companies are afforded exemptions with respect to certain of the corporate governance rules which otherwise apply to Nasdaq-listed companies, including having a board consisting of majority of independent directors, having an independent Audit Committee, having an independent Compensation Committee, having an independent Nominating Committee, and the selection or recommendation of director nominees by independent directors. We may choose to rely upon the controlled company exemption if certain of our directors are not independent. To the extent that we rely upon these exemptions, we will comply with the disclosure requirements set forth in Instruction 1 to Item 407(a) of Regulation S-K. No determination has been made as to what we would do when, if the ever, if the Nasdaq’s controlled company exemption ceased to apply to us, but we could change certain of our director of increase the size of the Board to new independent directors.

Risks Related to Gresham’s Business

The following risk factors describe certain of the risks that apply to Gresham’s current business. We expect these risks will continue to apply to Gresham once the Share Exchange is completed and, therefore, represent additional risks that the combined company will face after the Share Exchange is completed.

If Gresham is unable to successfully expand its production capacity, it could result in material delays, quality issues, increased costs and loss of business opportunities, which may negatively impact its product margins and operating results.

Part of Gresham’s future growth strategy is to increase its production capacity to meet increasing demand for its products. Assuming we obtain sufficient funding to increase Gresham’s production capacity, any projects to increase such capacity may not be implemented on the anticipated timetable or within budget. Gresham may also experience quality control issues as we implement any production upgrades. Any material delay in completing these projects, or any substantial cost increases or quality issues in connection with these projects could materially delay our ability to bring our products to market and adversely affect our business, reduce our revenue, income and available cash, all of which could harm our financial condition.

Gresham’s strategic focus on its custom power supply solution competencies and concurrent cost reduction plans may be ineffective or may limit its ability to compete.

Gresham devotes significant resources to developing and manufacturing custom power supply solutions for its customers. Each product typically represents a uniquely tailored solution for a specific customer’s requirements. Failure to meet these customer product requirements or a failure to meet production schedules and/or product quality standards may put Gresham at risk with one or more of these customers. Moreover, changes in market conditions and changes in the needs and requirements of Gresham’s customers may affect their purchasing decisions. The loss of one or more of Gresham’s significant custom power supply solution customers could have a material adverse impact on its revenue, business or financial condition.

Gresham has implemented a series of initiatives designed to increase efficiency and reduce costs. While Gresham believes that these actions will reduce costs, they may not be sufficient to achieve the required operational efficiencies that will enable it to respond more quickly to changes in the market or result in the improvements in our business that it anticipates. In such event, Gresham may be forced to take additional cost-reducing initiatives, including those involving its personnel, which may negatively impact quarterly earnings and profitability as it accounts for severance and other related costs. In addition, there is the risk that such measures could have long-term adverse effects on Gresham’s business by reducing its pool of talent, decreasing or slowing improvements in its products or services, making it more difficult for it to respond to customers, limiting its ability to increase production quickly if and when the demand for its solutions increases and limiting Gresham’s ability to hire and retain key personnel. These circumstances could cause Gresham’s earnings to be lower than they otherwise might be.

 

36

Gresham’s reliance on subcontract manufacturers to manufacture the components of its products involves risks, including delays in product shipments and reduced control over product quality.

Gresham manufactures some components for its products, but it relies on a limited number of subcontract manufacturers to supply its components for products. Gresham’s reliance upon such subcontract manufacturers involves several risks, including reduced control over manufacturing costs, delivery times, reliability and quality of components, unfavorable currency exchange fluctuations, and continued inflationary pressures on many of the raw materials used in the manufacturing of its products. If Gresham were to encounter a shortage of key manufacturing components from limited sources of supply, or experience manufacturing delays caused by reduced manufacturing capacity, the inability of its subcontract manufacturers to procure raw materials, the loss of key assembly subcontractors, difficulties associated with the transition to its new subcontract manufacturers or other factors, it could experience lost revenue, increased costs, and delays in, or cancellations or rescheduling of, orders or shipments, any of which would materially harm its business.

Gresham may not be able to procure necessary key components for its products, or it may purchase too much inventory.

The defense industry, and the electronics industry as a whole, can be subject to business cycles. During periods of growth and high demand for Gresham’s products, it may not have adequate supplies of inventory on hand to satisfy its customers’ needs. Furthermore, during these periods of growth, Gresham’s suppliers may also experience high demand and, therefore, may not have adequate levels of the components and other materials that Gresham requires to build products so that it can meet its customers’ needs. Gresham’s inability to secure sufficient components to build products for its customers could negatively impact its sales and operating results. Gresham may choose to mitigate this risk by increasing the levels of inventory for certain key components assuming it has available cash resources. Increased inventory levels can increase the potential risk for excess and obsolescence should our forecasts fail to materialize or if there are negative factors impacting Gresham’s customers’ end markets. If Gresham purchases too much inventory, it may have to record additional inventory reserves or write-off the inventory, which could have a material adverse effect on its gross margins and on its results of operations.

Gresham faces intense industry competition and product obsolescence, which, in turn, could reduce its profitability.

Gresham operates in an industry that is generally characterized by intense competition. Gresham believes that the principal bases of competition in its markets are breadth of product line, quality of products, stability, reliability and reputation of the provider, along with cost. Quantity discounts, price erosion, and rapid product obsolescence due to technological improvements are therefore common in Gresham’s industry as competitors strive to retain or expand market share. Product obsolescence can lead to increases in unsaleable inventory that may need to be written off and, therefore, could reduce Gresham’s profitability.

Gresham depends on a limited number of major customers for a significant portion of its revenue. The loss of any of these customers, or the substantial reduction in the quantity of products that they purchase from Gresham, would materially adversely affect its business and results of operations.

Gresham depends upon a limited number of major customers for a significant portion of its revenue. As of December 31, 2021, Gresham’s top six customers accounted in the aggregate for approximately 64.7% of Gresham’s consolidated revenue. If one or more of Gresham’s major customers reduce or cancel their orders scaling back some of their activities, its revenue would be significantly reduced. Furthermore, reduction or diversions in defense spending may lead to reduced demand for Gresham’s products, which could, in turn, have a material adverse effect on its business and results of operations. To date, Gresham has sustained issues with its Gresham Power subsidiary which is heavily dependent upon the United Kingdom’s Royal Navy. Due to the pandemic, Gresham Power experienced delays in the receipt of orders during 2020-21. Because of Gresham

 

37

Power’s relatively small size, it has not had a material adverse effect upon Gresham’s consolidated results of operations. If the financial condition of one or more of Gresham’s major customers were to deteriorate, or if such customers have difficulty acquiring investment capital due to any of these or other factors, a substantial decrease in Gresham’s revenue would likely result.

Gresham outsources, and is dependent upon developer partners for, the development of some of its custom design products.

Gresham made an operational decision to outsource some of its custom design products to numerous developer partners. This business structure will remain in place until the custom design volume justifies expanding its in-house capabilities. Incomplete product designs that do not fully comply with the customer specifications and requirements might affect Gresham’s ability to transition to a volume production stage of the custom designed product where the revenue goals are dependent on the high volume of custom product production. Furthermore, Gresham relies on the design partners’ ability to provide high quality prototypes of the designed product for its customer approval as a critical stage to approve production.

Although Gresham depends on sales of its legacy products for a meaningful portion of its revenue, as these products mature we risk component parts becoming obsolete.

A significant portion of Gresham’s sales have historically been attributable to its legacy products. Gresham expects that these products may continue to account for a meaningful percentage of its revenue for the foreseeable future. As products mature, however, component parts may become obsolete and to the extent Gresham requires component parts it may incur significant expenses to retool and/or re-design such component part. If it fails to do so, Gresham will be unable to sell such mature products.

Gresham is subject to certain governmental regulatory restrictions and regulations relating to its international sales.

Some of Gresham’s products are subject to International Traffic in Arms Regulation (“ITAR”), which are interpreted, enforced and administered by the U.S. Department of State. ITAR regulation controls not only the export, import and trade of certain products specifically designed, modified, configured or adapted for military systems, but also the export of related technical data and defense services as well as foreign production. Any delays in obtaining the required export, import or trade licenses for products subject to ITAR regulation and rules could have a material adverse effect on Gresham’s business, financial condition, and/or operating results. In addition, changes in United States export and import laws that require Gresham to obtain additional export and import licenses or delays in obtaining export or import licenses currently being sought could cause significant shipment delays and, if such delays are too great, could result in the cancellation of orders. Any future restrictions or charges imposed by the United States or any other country on our international sales or foreign subsidiary could have a materially adverse effect on Gresham’s business, financial condition, and/or operating results. In addition, from time to time, Gresham has entered into contracts with the Israeli Ministry of Defence which were governed by the U.S. Foreign Military Financing program (“FMF”). Any such future sales would be subject to these regulations. Failure to comply with FMF rules could subject Gresham to investigations that could lead to civil, administrative and possible criminal prosecution, which have a material adverse effect on its financial condition, operating results and/or prospects for obtaining future government business. Failure to comply with ITAR or FMF rules could also have a material adverse effect on Gresham’s financial condition, and/or operating results.

Gresham is also required to obtain export licenses before filling foreign orders for many of its products that have military or other governmental applications. United States Export Administration regulations control technology exports like its products for reasons of national security and compliance with foreign policy, to guarantee domestic reserves of products in short supply and, under certain circumstances, for the security of a destination country. Thus, any foreign sales of its products requiring export licenses must comply with these

 

38

general policies. Compliance with these regulations is costly, and these regulations are subject to change, and any such change may require Gresham to improve its technologies, incur expenses or both in order to comply with such regulations.

A significant portion of Gresham’s contracts are fixed-price contracts that could subject it to losses in the event of cost overruns or a significant increase in inflation.

Gresham negotiates most of its contracts on a fixed-price basis which allows Gresham to benefit from cost savings but also subject it to the risk of potential cost overruns, particularly for firm fixed-price contracts, because it assumes the entire cost burden. If Gresham’s initial estimates are incorrect, it can lose money on these contracts. Government contracts can expose Gresham to potentially large losses because the government can hold it responsible for completing a project or, in certain circumstances, paying the entire cost of its replacement by another provider regardless of the size or foreseeability of any cost overruns that occur over the life of the contract. Because many of these contracts involve new technologies and applications, unforeseen events such as technological difficulties, fluctuations in the price of raw materials, problems with its suppliers and cost overruns, can result in the contractual price becoming less favorable or even unprofitable to Gresham. The United States, the United Kingdom and Israel are experiencing a significant increase in inflation, which could have a significant adverse impact on the profitability of these contracts. Furthermore, if Gresham fails to meet contract deadlines or specifications, it may need to renegotiate contracts on less favorable terms, be forced to pay penalties or liquidated damages or suffer major losses if the customer exercises its right to terminate. In addition, some of Gresham’s contracts have provisions relating to cost controls and audit rights, and if Gresham fails to meet the terms specified in those contracts it may not realize their full benefits. Cost overruns could have an adverse impact on Gresham’s operating results.

Gresham’s operating companies purchases a significant amount of its components and products outside of the countries in which they operate.

With the exception of Microphase which sources all of its components in the United States, Gresham purchases a majority of its components from foreign manufacturers and has a substantial majority of its commercial products assembled, packaged, and tested by subcontractors located outside the United States. These activities are subject to the uncertainties associated with international business operations, including trade barriers and other restrictions, changes in trade policies, governmental regulations, currency exchange fluctuations, reduced protection for intellectual property, war and other military activities, terrorism, changes in social, political, pandemic, or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect on Gresham’s business and operating results.

Gresham depends on international sales for a material portion of its revenue.

Sales to customers outside of North America accounted for 73.4% and 63.1% of Gresham’s net revenue for the years ended December 31, 2021 and 2020, respectively. Gresham expects that international sales will continue to represent a material portion of its total revenue. International sales are subject to the risks of international business operations as described above, as well as generally longer payment cycles, greater difficulty collecting accounts receivable, and currency restrictions. These risks include the following:

 

•

unexpected changes in practices, tariffs, export quotas, custom duties, trade disputes, tax laws and treaties, particularly due to economic

 

•

tensions and trade negotiations or other trade restrictions;

 

•

different labor laws and regulations;

 

•

exposure to many stringent and potentially inconsistent laws and regulations relating to privacy, data protection, and information security, particularly in the European Union;

 

•

changes in a specific country’s or region’s political or economic conditions;

 

39

•

risks resulting from the recent outbreak of the novel coronavirus, including uncertainty regarding how the U.S. or foreign governments will act with respect to the ongoing pandemic;

 

•

risks resulting from fluctuations of currency exchange rates;

 

•

risks relating to the trade protection regulations and measures in the United States or in other jurisdictions;

 

•

limitations on Gresham’s ability to reinvest earnings from operations derived from one country to fund the capital needs of its operations in other countries;

 

•

potential changes in laws, regulations, and costs affecting Gresham’s United Kingdom operations and personnel due to Brexit;

 

•

limited or potentially unfavorable intellectual property protection; and

 

•

exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, and similar applicable laws and regulations in other jurisdictions.

International sales are also subject to the export laws and regulations of the United States and other countries. Further, Gresham’s subsidiaries in the United Kingdom and Israel are subject to local regulation which may increase its costs.

Any one or more of these factors could increase Gresham’s costs and adversely affect its results of operations.

A material portion of Gresham’s revenue and expenses is denominated in foreign currencies, so fluctuations in exchange rates could have a material adverse effect on its operating results.

Gresham faces foreign exchange risks because a significant portion of its revenue and expenses is denominated in foreign currencies. Further, some suppliers to Enertec and Relec require payment in U.S. dollars, which also exposes Gresham to risk. Generally, U.S. dollar strength adversely impacts the translation of the portion of Gresham’s revenue that is generated in foreign currencies into the U.S. dollar. For the years ended December 31, 2021 and 2020, a substantial portion of Gresham’s revenue was denominated in currencies other than U.S. dollars. However, 2020 only included one month of Relec’s operations. Gresham’s results of operations could also be negatively impacted by a strengthening of the U.S. dollar as a large portion of Gresham’s costs are U.S. dollar-denominated. Gresham also has foreign exchange risk exposure with respect to certain of its assets that are denominated in currencies other than the functional currency of its subsidiaries, and its financial results are affected by the re-measurement and translation of these non-U.S. currencies into U.S. dollars, which is reflected in the effect of exchange rate changes on cash, cash equivalents, and restricted cash on the consolidated statements of cash flows. Strengthening of the U.S. dollar could materially and adversely affect Gresham’s results of operations and financial condition.

If Gresham is unable to satisfy its customers’ specific product quality, certification or network requirements, its business could be disrupted and its financial condition could be harmed.

Gresham’s customers demand that its products meet stringent quality, performance and reliability standards. Gresham has, from time to time, experienced problems in satisfying such standards. Defects or failures have occurred in the past, and may occur in the future, relating to Gresham’s product quality, performance and reliability. From time to time, Gresham’s customers also require it to implement specific changes to its products to allow these products to operate within their specific network configurations. If Gresham is unable to remedy these failures or defects or if it cannot complete such required product modifications, Gresham could experience lost revenue, increased costs, including inventory write-offs, warranty expense and costs associated with customer support, delays in, or cancellations or rescheduling of, orders or shipments and product returns or discounts, any of which would harm Gresham’s business.

 

40

Many of Gresham’s competitors are larger and have greater financial and other resources than it does.

Gresham’s products compete and will compete with similar, if not identical, products produced by its competitors. These competitive products could be marketed by well-established, successful companies that possess greater financial, marketing, distribution personnel, and other resources than Gresham does. These companies can implement extensive advertising and promotional campaigns. They can introduce new products to new markets more rapidly. In certain instances, competitors with greater financial resources may be able to enter a market in direct competition with Gresham, offering attractive marketing tools to encourage the sale of products that compete with Gresham’s products or present cost features that customers may find attractive.

The markets for some of Gresham’s products are also subject to specific competitive risks because these markets are highly price sensitive. Gresham’s competitors have competed in the past by lowering prices on certain products. If they do so again, Gresham may be forced to respond by lowering its prices. This would reduce revenue and increase losses. Failure to anticipate and respond to price competition may also further reduce revenue and increase losses.

Gresham’s subsidiary, Microphase, has a history of losses and its future profitability on a quarterly or annual basis is uncertain, which could have a harmful effect on Gresham’s business.

While Microphase was marginally profitable during fiscal 2020 and fiscal 2021, Microphase has incurred losses from operations. Since the financial crisis of 2008, Microphase has been significantly short of capital needed to acquire parts for production of its products to complete orders for such products. At times, Microphase has not had the cash available to make advance payments for the purchase of parts, and then, as a consequence, Microphase would not receive the parts from its vendors required to finish a customer order. This would then delay the delivery of products to customers, and would also delay recognition of the resulting revenue and the receipt of cash from the customer. Sometimes after experiencing a delay in delivery of an order from Microphase, the customer would not place its next order with Microphase, resulting in a loss of business. There can be no assurance that Microphase will not operate at a loss during the current or future fiscal years.

Microphase’s future profitability depends upon many factors, including several that are beyond its control. These factors include, without limitation:

 

•

changes in the demand for its products and services;

 

•

the availability of working capital;

 

•

loss of key customers or contracts;

 

•

its ability to hire engineers and other technical personnel;

 

•

the introduction of competitive products;

 

•

the failure to gain market acceptance of its new and existing products; and

 

•

economic dislocation, or supply chain disruption.

A large percentage of Microphase’s current revenue is derived from prime defense contractors to the U.S. government and its allies, and the loss of these relationships, a reduction in U.S. government funding or a change in U.S. government spending priorities or bidding processes could have an adverse impact on Gresham’s business, financial condition, results of operations and cash flows.

Microphase is highly dependent on sales to major defense contractors of the U.S. military and its allies, including Lockheed Martin, Raytheon, BAE Systems and SAAB. The percentages of its revenue that were derived from sales to these named major defense contractors and directly to the U.S. Government were 71% and 48% in the years ended December 31, 2021 and 2020, respectively. Therefore, any significant disruption or deterioration of Microphase’s relationship with any such major defense contractors or the U.S. Government

 

41

could materially reduce its revenue. During the year ended December 31, 2021 there were two customers that accounted for more than 10% of Microphase’s sales: BAE Systems, and Lockheed Martin. During the years ended December 31, 2020 and December 31, 2021, there were two customers that accounted for more than 10% of Microphase’s sales: BAE Systems and Lockheed Martin. Microphase’s competitors continuously engage in efforts to expand their business relationships with the same major defense contractors and the U.S. Government and will continue these efforts in the future, and the U.S. Government may choose to use other contractors.

Microphase expects that a majority of the business that it seeks will be awarded through competitive bidding. Microphase operates in highly competitive markets and its competitors have more extensive or more specialized engineering, manufacturing and marketing capabilities than Microphase does in many areas, and Microphase may not be able to continue to win competitively awarded contracts or to obtain task orders under multi-award contracts. Further, the competitive bidding process involves significant cost and managerial time to prepare bids and proposals for contracts that may not be awarded to Microphase, as well as the risk that Microphase may fail to accurately estimate the resources and costs required to fulfill any contract awarded to us. Following any contract award, Microphase may experience significant expense or delay, contract modification or contract rescission as a result of its competitors protesting or challenging contracts awarded to it in competitive bidding. Major defense contractors to whom Microphase supplies components for systems must compete with other major defense contractors (to which Microphase may not supply components) for military orders from the U.S. Government.

In addition, Microphase competes with other policy needs, which may be viewed as more necessary, for limited resources and an ever-changing amount of available funding in the budget and appropriation process. Budget and appropriations decisions made by the U.S. Government are outside of Microphase’s control and have long-term consequences for its business. U.S. Government spending priorities and levels remain uncertain and difficult to predict and are affected by numerous factors, including until recently sequestration (automatic, across-the-board U.S. Government budgetary spending cuts), and the purchase of Microphase’s products could be superseded by alternate arrangements. While the U.S. defense budget was recently increased, there can be no assurance that this increase will be maintained for the foreseeable future, particularly in light of the recent federal expenditures the federal government has made with a view to ameliorating the economic damage suffered as a result of COVID-19. A change in U.S. Government spending priorities or an increase in non-procurement spending at the expense of Microphase’s programs, or a reduction in total U.S. Government spending, could have material adverse consequences on Microphase’s future business.

Microphase’s U.S. government contracts may be terminated by the federal government at any time prior to their completion, which could lead to unexpected loss of sales and reduction in Microphase’s backlog.

Under the terms of Microphase’s contracts with prime defense contractors, the U.S. government may unilaterally:

 

•

terminate or modify existing contracts;

 

•

reduce the value of existing contracts through partial termination; and

 

•

delay the payment of Microphase’s invoices by government payment offices; and/or contractors directly serving the government.

The federal government can terminate or modify any of its contracts with Microphase or its prime contractors either for the federal government’s convenience, or if Microphase or its prime contractors default, by failing to perform under the terms of the applicable contract. A termination arising out of Microphase’s default could expose it to liability and have a material adverse effect on its ability to compete for future federal government contracts and subcontracts. If the federal government or its prime contractors terminate and/or materially modify any of Microphase’s contracts or if any applicable options are not exercised, Microphase’s failure to replace sales generated from such contracts would result in lower sales and would adversely affect its

 

42

earnings, which could have a material adverse effect on Microphase’s business, results of operations and financial condition. Microphase’s backlog as of December 31, 2021 was approximately $9.6 million. Microphase’s backlog could be adversely affected if contracts are modified or terminated.

Because Gresham is heavily dependent on its senior management, the loss of one or more members of its senior management team could have a material adverse effect on its business and operating results.

Gresham has depended upon the services of its Chief Executive Officer, Jonathan Read and Timothy Long, its Chief Operating Officer. Gresham also depends on the continued services of Zvika Avni, who manages its Israeli operations, Peter Lappin, the Managing Director of Relec, and Robin Shaffer, its Chief Innovation and Technology Officer and Sean Lyle, its Chief Development Officer. If Gresham loses the services of these key members of its management team and/or certain other key employees, it may not be able to find appropriate replacements on a timely basis, and its business could be adversely affected. Gresham’s existing operations and continued future development depend to a significant extent upon the performance and active participation of these individuals and certain other key employees. Although Gresham has entered into Employment Agreements with each of these officers, Gresham cannot guarantee that it will be successful in retaining the services of these individuals. If Gresham were to lose any of these individuals, it may not be able to find appropriate replacements on a timely basis and Gresham’s financial condition and results of operations could be materially adversely affected. Gresham cannot enforce the Employment Agreements to require any employee to remain employed.

If Gresham is unable to identify, attract, train and retain qualified personnel, especially its design and technical personnel, its business and results of operations would be materially and adversely affected and Gresham may not be able to effectively execute its business strategy.

Gresham’s performance and future success largely depends on its continuing ability to identify, attract, train, retain and motivate qualified personnel, including its management, sales and marketing, finance and in particular its engineering, design and technical personnel. For example, Gresham currently has a limited number of qualified personnel for the assembling and testing processes. Members of Microphase’s technical staff are nearing retirement and it may be difficult to replace them, given their experience and expertise. In addition, Gresham will need additional staff to drive Microphase’s forecasted growth and to allow Enertec to handle any large orders. Gresham does not know whether it will expand its workforce as it continues to pursue its business strategy. Gresham’s engineering, design and technical personnel represent a significant asset. The competition for qualified personnel in the defense industry in the United States, United Kingdom and Israel is intense and constrains Gresham’s ability to attract qualified personnel. The loss of the services of one or more of Gresham’s key employees, especially Gresham’s key engineering, design and technical personnel, or its inability to attract, retain and motivate qualified personnel could have a material adverse effect on Gresham’s business, financial condition and operating results.

If the inflationary pressures in the United States and elsewhere continue, we could experience reduced margins and lose future business.

The current inflationary pressures are affecting Gresham’s margins particularly since it has lacked the capital to accumulate material inventory. Most of Gresham’s contracts (except with Relec) are fixed-price, which reduces Gresham’s margins when inflation occurs. Further, because Gresham has a limited number of large customers, it is facing pricing pressure from customers. Reducing its selling prices results in further reduction of Gresham’s margins. This customer pricing pressure may also result in the loss of contracts and/or future business. Finally, Gresham is experiencing rising labor costs which may further tighten margins.

 

43

Gresham’s operating results may vary from quarter-to-quarter, potentially significantly.

Gresham’s operating results have in the past been subject to quarter-to-quarter fluctuations, and Gresham expects that these fluctuations will continue, and may increase in magnitude, in future periods. Demand for Gresham’s products is driven by many factors, including the availability of funding for its products in its customers’ budgets. There is a trend for some of its customers to place large orders near the end of a quarter or fiscal year, in part to spend remaining available budget funds. Seasonal fluctuations in customer demand for its products driven by budgetary and other concerns can create corresponding fluctuations in period-to-period revenue, and Gresham therefore cannot assure you that its results in one period are necessarily indicative of its revenue in any future period. In addition, the number and timing of large individual sales and the ability to obtain acceptances of those sales, where applicable, have been difficult for Gresham to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those Gresham anticipated, or have not occurred at all. The loss or deferral of one or more significant sales in a quarter could harm Gresham’s operating results for such quarter. It is possible that, in some quarters, Gresham’s operating results will be below the expectations of public market analysts or investors.

If Gresham fails to anticipate and adequately respond to rapid technological changes in its industry, including evolving industry-wide standards, in a timely and cost-effective manner, its business, financial condition and results of operations would be materially and adversely affected.

Rapid technology changes in Gresham’s industry require it to anticipate, sometimes years in advance, which technologies and/or distribution platforms its products must take advantage of in order to make them competitive in the market at the time they are released. Therefore, Gresham usually starts its product development with a range of technical development goals that it hopes to be able to achieve. Gresham may not be able to achieve these goals, or its competition may be able to achieve them more quickly than Gresham can. In either case, Gresham’s products may be technologically inferior to competitive products, or less appealing to consumers, or both. If Gresham cannot achieve its technology goals within the original development schedule of its products, then Gresham may delay products until these technology goals can be achieved, which may delay or reduce revenue and increase its development expenses. Alternatively, Gresham can increase the resources employed in research and development in an attempt to accelerate its development of new technologies, either to preserve its product launch schedule or to keep up with its competition, which would increase Gresham’s development expenses and adversely affect its results of operations.

Risks Related to Gresham’s Foreign Operations

Gresham’s financial condition and operating results may be adversely affected by potential political, economic and military instability in Israel.

A material portion of Gresham’s business is conducted through Enertec, its Israeli subsidiary. Political, economic and military conditions in Israel directly affect Enertec’s operations. A state of hostility, varying in degree and intensity in Israel, has led to security and economic problems for Israel. Such ongoing hostilities may hinder Israel’s international trade relations and may limit the geographic markets where Enertec can sell its products and solutions. Hostilities involving or threatening Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could materially and adversely affect Gresham’s operations.

In addition, Israel-based companies and companies doing business with Israel have been the subject of an economic boycott by members of the Arab League and certain other predominantly Muslim countries, including Iran, since Israel’s establishment. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved. Wars and acts of terrorism have resulted in significant damage to the Israeli economy, including reducing the level of foreign and local investment. Damages to Enertec’s operation or

 

44

inquiries to employees from rockets launched from Gaza or Iran, — or outright war against Israel — may have a material and adverse effect upon Gresham.

Gresham’s commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, Gresham cannot assure you that this government coverage will be maintained or that it will sufficiently cover its potential damages. Any losses or damages incurred by us could have a material adverse effect on Gresham’s business.

Many of Enertec’s employees are obligated to perform military reserve duty in Israel, which could have a disruptive impact on Gresham’s business.

Certain of Enertec’s officers and employees may be obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called up for active military duty at any time. All Israeli male citizens who have served in the army are subject to an obligation to perform reserve duty until they are between 40 and 49 years old, depending upon the nature of their military service. These military service obligations could have a disruptive impact on Gresham’s business, if hostilities develop in the future.

Enertec may become subject to claims for remuneration or royalties for assigned service invention rights by its employees, which could result in litigation and harm Gresham’s business.

A significant portion of the intellectual property covered by Enertec’s products has been developed by Enertec’s employees in the course of their employment for Enertec. Under the Israeli Patent Law, 5727-1967, or the Patent Law, and recent decisions by the Israeli Supreme Court and the Israeli Compensation and Royalties Committee, a body constituted under the Patent Law, Israeli employees may be entitled to remuneration for intellectual property that they develop for us unless they explicitly waive any such rights. To the extent that Enertec is unable to enter into agreements with its future employees pursuant to which they agree that any inventions created in the scope of their employment or engagement are owned exclusively by Enertec (as it has done in the past), Enertec may face claims demanding remuneration. As a consequence of such claims, Enertec could be required to pay additional remuneration or royalties to its current and former employees, or be forced to litigate such claims, which could negatively affect its business.

If we are unable to replace Relec’s senior management, it may encounter losses of business and operating losses.

Gresham acquired Relec on November 30, 2020 from its three owners who stayed following the closing. One former Relec owner has resigned and Gresham expects that the remaining two owners may resign after the three year earn-out period expires in November 2023 or perhaps earlier. Relec relies upon its former owners’ personal relationships and skills to grow and maintain relationships with customers and suppliers. Once they resign, Relec may encounter losses of business and opening losses.

Because Relec engages as a distributor of Relec’s electronic products, its distribution business has no long-term contracts, no intellectual property rights, and is subject to intense competition with limited barriers to entry.

Relec’s business has grown based upon personal relationships with customers and suppliers and is not protected by intellectual property or long-term contracts. In addition to the above risk with the loss of Relec’s management, personnel of both Relec and its customers and suppliers could leave and/ or start a competitive business. Future competitors would face limited barriers to entry, aside from personal relationships and capital.

 

45

Risks Associated with the Reverse Stock Split

We cannot predict whether the Reverse Stock Split will increase the market price for our common stock.

Although the Board believes that a higher stock price may help Giga-tronics common stock qualify for listing on Nasdaq and generate the interest of new investors, the Reverse Stock Split may not result in a per-share price that will satisfy Nasdaq’s listing requirements or successfully attract certain types of investors and such resulting share price may not satisfy the investing guidelines of institutional investors or investment funds. Further, other factors, such as our financial results, market conditions and the market perception of our business, may adversely affect the interest of new investors in the shares of our common stock. As a result, the trading liquidity of the shares of our common stock may not improve as a result of the Reverse Stock Split and there can be no assurance that the Reverse Stock Split, if completed, will result in the intended benefits described above.

Additionally, the market price of our common stock will also be based on our performance and other factors, some of which are unrelated to the number of shares outstanding. There can be no assurance that the market price of our common stock will not decrease in the future.

Our announcement or implementation of the Reverse Stock Split may adversely affect the trading price of our common stock.

The Reverse Stock Split could be viewed negatively by the market and other factors, such as those described above, may adversely affect the market price of the shares of our common stock. Consequently, the market price of the post-Reverse Stock Split shares may not increase in proportion to the reduction of the number of shares of our common stock outstanding before the implementation of the Reverse Stock Split. Accordingly, the total market capitalization of our shares of common stock after the Reverse Stock Split may be lower than the total market capitalization before the Reverse Stock Split.

Any reduction in our total market capitalization as the result of the Reverse Stock Split may make it more difficult for us to meet the Nasdaq Listing Rule regarding minimum value of listed securities, which could delay or prevent shares of our common stock from being listed on Nasdaq.

The Reverse Stock Split could make it more difficult or expensive for you to sell shares of our common stock.

The Reverse Stock Split may result in some shareholders owning “odd lots” of fewer than 100 shares of common stock on a post-split basis. These odd lots may be more difficult to sell, or require greater transaction costs per share to sell, than shares in “round lots” of even multiples of 100 shares. In addition, the Nasdaq listing rules require that we leave a minimum number of round lot shareholders. We expect to rely upon the underwriters in the Proposed Public Offering to sell to enough retail accounts to allow us to meet the Nasdaq listing rules but we cannot assure you it will achieve that important objective.

Risks Related to the Reincorporation Proposal

Provisions in our proposed Delaware Certificate of Incorporation and Delaware law may inhibit a takeover of Giga-tronics after the Delaware Reincorporation is completed, which could limit the price investors might be willing to pay in the future for its common stock and could entrench management.

Our proposed Delaware Certificate of Incorporation contains provisions that may discourage unsolicited takeover proposals that shareholders may consider to be in their best interests. These provisions include the elimination of cumulative voting in the election of directors, the ability of the Board to designate the terms of and to issue new series of preferred shares, advance notice requirements for shareholder proposals and director nominations, any of which may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

 

46

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of Giga-tronics. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take corporate actions you may desire.

Our proposed Delaware Certificate of Incorporation contains provisions that may result in difficulty in bringing shareholder actions against us or on behalf of our affiliates.

Our proposed Delaware Certificate of Incorporation provides that the internal affairs of Giga-tronics, including stockholder derivative actions, but excluding claims under the Exchange Act, shall be brought exclusively in state courts located in Delaware. Our proposed Delaware Certificate of Incorporation further provides that unless we consent in writing to an alternative forum, the federal district courts of the United States shall have exclusive jurisdiction over claims brought under the Securities Act of 1933, as amended (the “Securities Act”), and that the United States District Court for the State of Delaware shall be the exclusive venue with respect to any cause of action brought under the Securities Act or the Exchange Act. These provisions may have the effect of precluding shareholders from bringing suit in their forum or venue of choice. Further, these provisions may give rise to a potential ambiguity as to which courts — state or federal — should preside over certain cases such as cases with overlapping claims under both state corporate law and the Securities Act and the rules and regulations thereunder. Therefore, an investor seeking to bring a claim against or on behalf of Giga-tronics or its affiliates under Delaware law or the federal securities laws may be forced to litigate their case in a court which poses geographic or other hardships, and could face uncertainty as to which jurisdiction and venue the case will ultimately be heard in, which may delay, prevent or impose additional obstacles on the investor in such litigation. Investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder, and there is uncertainty as to whether a state or federal court would enforce this charter provision.

Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, the Delaware Certificate of Incorporation provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a shareholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of the Delaware Certificate of Incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provision will be enforced by a court in those other jurisdictions.

These exclusive forum provisions may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against it and its directors, officers and other employees. If a court were to find either exclusive-forum provision in the Delaware Certificate of Incorporation to be inapplicable or unenforceable in an action, we could incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement, as well as information included in oral statements or other written statements made or to be made by us, contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are neither

 

47

historical facts nor assurances of future performance. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended March 26, 2022, which was filed with the SEC on June 24, 2022, and incorporated by reference into this proxy statement, and in particular, the risks discussed under the caption “Risk Factors” included in this proxy statement. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

48

PROPOSAL 1: THE SHARE EXCHANGE PROPOSAL

The following discussion contains important information relating to the Transactions. The Share Exchange Agreement is included as Annex A to this proxy statement. We encourage you to carefully read the Share Exchange Agreement in its entirety because it is the principal legal agreement that governs the Share Exchange and the Transactions. Capitalized terms used but not defined herein have the meanings ascribed to such terms in the Share Exchange Agreement attached hereto as Annex A.

The Companies

Giga-tronics Incorporated

Giga-tronics Incorporated manufactures specialized electronics equipment for use in both military test and airborne operational applications. Our operations consist of two business segments, those of our wholly-owned subsidiary, Microsource, Inc., and those of our Giga-tronics Division.

Microsource designs and manufactures custom microwave products for military airborne, sea, and ground applications while the Giga-tronics Division designs and manufactures high fidelity signal simulation and recording solutions for RADAR and EW test applications.

Microsource’s two largest customers are prime contractors for which we develop and manufacture sophisticated RADAR filters used in fighter aircraft. Revenues from Microsource comprised a majority of Giga-tronics’ revenues for the fiscal years ended March 27, 2021 and March 26, 2022.

The Giga-tronics Division designs, manufactures, and markets a family of functional test products and integrates those test products along with third-party hardware and software to create full test solutions for the RADAR/EW segment of the defense electronics market. Giga-tronics RADAR/EW test solutions are used to evaluate and improve the performance of RADAR/EW systems. Giga-tronics Division customers include major United States defense prime contractors, the U.S. armed services and research institutes.

We were incorporated in California on March 5, 1980. We acquired Microsource on May 18, 1998.

Our principal executive offices are located at 5990 Gleason Drive, Dublin, California 94568, and its telephone number at that location is (925) 328-4650. Our website address is https://www.gigatronics.com.

Gresham Worldwide, Inc.

Gresham, through its subsidiaries, designs, manufactures, and distributes specialized electronic solutions, automated test solutions, power electronics, supply and distribution solutions, and radio, microwave and millimeter wave communication systems and components for a variety of applications, with a focus on the global defense industry. Gresham also offers bespoke technology solutions for mission critical applications in the medical, industrial, transportation and telecommunications markets.

Gresham was incorporated in Delaware on November 21, 2018. Gresham’s defense technology solutions business has in part operated as part of BitNile’s business since 1998.

Gresham’s principal executive offices are located at 7272 E. Indian School Road, Suite 540, Scottsdale, AZ 85251 and its phone number at that location is (833) 457-6667. Its website address is https://greshamworldwide.com/.

For additional information about Gresham’s business, see the section titled “Gresham’s Business,” below.

 

49

BitNile Holdings, Inc.

BitNile, a Delaware corporation, formerly known as Ault Global Holdings, Inc., was incorporated in September 2017. BitNile is a diversified holding company owning subsidiaries engaged in, among others, commercial and defense solutions, commercial lending, data center operations, cryptocurrency mining, commercial real estate and advanced textile technology. BitNile currently is the holder of 100% of the issued and outstanding equity of Gresham.

BitNile’s principal executive offices are located at 11411 Southern Highlands Parkway, Suite 240, Las Vegas, NV 89141 and its phone number is (949) 444-5464. Its website address is https://bitnile.com.

The Transactions

Under the terms of the Share Exchange Agreement, we will acquire all of the outstanding shares of Gresham, which is a subsidiary of BitNile, in exchange for issuing to BitNile 2,920,085 shares of Giga-tronics common stock and 514.8 shares of a new series of Series F Convertible Preferred Stock that are convertible into an aggregate of 3,960,043 shares of Giga-tronics common stock, subject to potential adjustments (See “— The Series F Convertible Preferred Stock”). We have also agreed to assume Gresham’s outstanding equity awards representing the right to receive up to 749,626 shares of Giga-tronics common stock on an as-converted basis.

In addition, the Share Exchange Agreement further provides that, BitNile will loan us $4.25 million upon the closing of the Share Exchange pursuant to a convertible promissory note and that following the closing of the Share Exchange, we will repurchase or redeem our Outstanding Preferred Shares.

Upon the consummation of the Share Exchange, outstanding shares of Giga-tronics common stock will continue to be outstanding and will continue to be traded on the OTCQB. Immediately following the completion of the Transactions, assuming the repurchase of the Outstanding Preferred Shares, and based on 2,777,230 currently outstanding shares of Giga-tronics common stock, following the issuance to BitNile of the shares of Giga-tronics common stock and the Series F Convertible Preferred Stock, BitNile will own common stock and Series F Convertible Preferred Stock representing approximately 71.2% of the voting power of Giga-tronics and holders of our common stock immediately prior to the Transactions will hold the remaining approximately 28.8%. Such percentages do not include shares of common stock that BitNile will have the right to acquire upon conversion of the $4.25 million Convertible Note or in the Proposed Public Offering.

Consideration

Giga-tronics Shareholders

No consideration is being paid to holders of Giga-tronics common stock in the Transactions. Holders of Giga-tronics common stock will continue to own their existing shares of Giga-tronics common stock after the Transactions.

The Share Exchange Agreement contemplates that after the Share Exchange, we will repurchase or redeem all of our the currently outstanding shares of its Series B, Series C, Series D and Series E preferred stock at the full liquidation preference amount, which is approximately $3.65 million.

BitNile

Under the terms of the Share Exchange Agreement, we will acquire all of the outstanding shares of Gresham in exchange for issuing to BitNile 2,920,085 shares of Giga-tronics common stock and 514.8 shares of a new series of Series F Convertible Preferred Stock that are convertible into an aggregate of 3,960,043 shares of Giga-tronics common stock, subject to potential adjustments (See “— The Series F Convertible Preferred Stock”).

 

50

Assumption of Gresham’s Equity Awards

Under the terms of the Share Exchange Agreement, we agreed to assume Gresham’s outstanding equity awards representing the right to receive up to 749,626 shares of Giga-tronics common stock on an as-converted basis. These equity awards consist of, on an as-converted basis, 249,875 RSUs and 499,751 stock options exercisable at $2.93 per share held by Gresham’s Chief Executive Officer and Chief Operating Officer. The RSUs were 50% vested as of the grant date in May 2021 and vest semiannually through May 2024, subject to the executive officer’s continued employment as of each applicable vesting date. The underlying common stock will be delivered in May 2024 or earlier if an executive officer is no longer employed at which time the vested shares will be delivered. The stock options were 50% vested as of the May 2021 grant date and vest monthly through the final May 2024 vesting date, subject to the executive officer’s continued employment as of each applicable vesting date.

The Series F Convertible Preferred Stock

The Share Exchange Agreement provides that we will issue to BitNile, as partial consideration for the acquisition of Gresham, 514.8 shares of Series F Convertible Preferred Stock, which we refer to as the Series F Convertible Preferred Stock.

The Series F Convertible Preferred Stock will be a newly designated series of preferred stock. The terms, preferences and rights of holders of the Series F Convertible Preferred Stock are set forth in a Certificate of Determination to be filed with the California Secretary of State, the form of which is attached as Exhibit B to the Share Exchange Agreement attached as Annex A to this proxy statement. We urge you to read the form of Certificate of Determination for the Series F Convertible Preferred Stock in its entirety.

The Series F Convertible Preferred Stock Certificate of Determination contains an Exchange Cap which requires our shareholders to approve the issuance of more than 19.99% of our outstanding common stock that would apply as of the time of any future conversion. By approving the Share Exchange, our shareholders are approving the future issuance of common stock upon conversion of the Series F Convertible Preferred Stock in excess of the Exchange Cap.

Assuming BitNile were to convert all of the Series F Convertible Preferred Stock immediately upon closing of the Share Exchange, the common stock issuable would be approximately 71.2% of outstanding shares. However, because shares issuable in the Proposed Public Offering or for any other purpose, conversion of all of the Series F Convertible Preferred Stock may be less than the Exchange Cap.

Presently our common stock trades on the OTCQB which does require shareholder approval for issuances above the Exchange Cap. However, our plan is to list our common stock on Nasdaq which requires shareholder approval for issuance above the Exchange Cap.

By approving the Share Exchange Proposal, our shareholders are approving the full conversion of the Series F Convertible Preferred Stock regardless if our common stock is listed on Nasdaq or other national securities exchange which requires such approval notwithstanding the Exchange Cap.

Seniority and Liquidation Preference

The Series F Convertible Preferred Stock will rank senior to the shares of Giga-tronics common stock with respect to dividend rights and rights on the distribution of assets on any liquidation, dissolution or winding up of the affairs of Giga-tronics. The Series F Convertible Preferred Stock will have a liquidation preference of $25,000 per share. The 514.8 shares of Series F Convertible Preferred Stock that will issued to BitNile in the Share Exchange will have an aggregate liquidation preference of $12,870,140. The Series F Convertible Preferred Stock will rank junior to our Outstanding Preferred Shares with respect to dividend rights and distributions on liquidation, however it is expected that all shares of Outstanding Preferred Shares will be repurchased and will cease to be outstanding following the Share Exchange.

 

51

Conversion Right

Shares of Series F Convertible Preferred Stock will be convertible into Giga-tronics common stock at the holder’s option at a conversion price of $3.25 per share, subject to customary adjustments for stock splits (including the Proposed Reverse Split), combinations and distributions on the Giga-tronics common stock in which the Series F Convertible Preferred Stock does not participate. The Exchange Cap limits the number of shares of common stock issuable upon conversion of the Series F Convertible Preferred Stock to 19.99% of the shares of Giga-tronics common stock outstanding on the date the shares of Series F Convertible Preferred Stock are first issued unless shareholders approve the issuance of common stock in excess of such limit is without violating the rules of the principal Market or exchange on which the common stock is listed or quoted. The 514.8 shares of Series F Convertible Preferred Stock that we will issue to BitNile in the Share Exchange will be initially convertible into an aggregate of 3,960,043 shares of Giga-tronics common stock. If converted in a public offering of Giga-tronics common stock, such as the Proposed Public Offering, the conversion price will be at the public offering price less underwriting discounts and commissions.

Dividend Rights

Holders of Series F Convertible Preferred Stock are entitled to participate with the Giga-tronics common stock and receive such dividends and distributions as they would receive if their shares of Series F Convertible Preferred Stock had converted to common stock.

Holders of Series F Convertible Preferred Stock are also entitled to such dividends as the Board may declare on shares from time to time, if any.

Voting Rights; Board Representation

Holders of Series F Convertible Preferred Stock shall have the right to vote on matters submitted to a vote of the holders of common stock on an as-converted basis unless required by applicable law.

In addition, holders of Series F Convertible Preferred Stock will be entitled to elect four of our seven directors.

Approval Rights for Certain Matters

For so long as BitNile consolidates Giga-tronics as a subsidiary of BitNile for financial reporting purposes, we will require prior approval of the holders of the Series F Convertible Preferred to incur indebtedness in excess of $1.0 million per individual transaction or $2.5 million in the aggregate or to complete a merger, acquisition or purchase of assets where the aggregate consideration is valued at more than $1.0 million.

Holders of the Series F Convertible Preferred Stock will have separate class approval rights over certain specified actions that would affect the rights of holders of the Series F Convertible Preferred Stock.

Preemptive/Participation Rights

If we sell any voting stock, or securities representing the right to acquire Giga-tronics’ voting stock, holders of Series F Convertible Preferred Stock will have the right to purchase, at the same price as other participants in the offering, a pro rata portion of such securities based on their aggregate voting power held such that they may maintain the percentage of voting power held. This participation right does not apply to certain exercises and conversions of outstanding securities, certain issuances pursuant to equity incentive plans and certain public offerings of Giga-tronics common stock of $25 million or more. This participation right terminates upon the early of the date that holders of Series F Convertible Preferred Stock cease to beneficially own at least 50% of Giga-tronics common stock or the fifth anniversary of the date that shares of Series F Convertible Preferred Stock are first issued.

 

52

BitNile’s Loan to Giga-tronics at Closing

The Share Exchange Agreement provides that BitNile will loan us $4,250,000 upon the closing of the Share Exchange. The loan will be evidenced by a Senior Secured Convertible Promissory Note (the “Convertible Note”), that we will issue and sell to BitNile pursuant to a Securities Purchase Agreement. We refer to this loan as the “Closing Date Loan.”

The Convertible Note will carry an interest rate of 10% per annum and matures on February 14, 2023.

The holder may at any time elect to convert in whole or in part, the outstanding principal and interest under the Convertible Note into shares of Giga-tronics common stock at a conversion price of $3.20 per share (the “Conversion Shares”). In addition, all principal and outstanding interest under the Convertible Note will automatically convert to Giga-tronics common stock upon the closing of an underwritten public offering of common stock with net proceeds (net of underwriters’ discounts and selling commissions) of at least $25 million. The Convertible Note may not be converted to the extent the holder would, as a result of such conversion, beneficially own in excess of 4.99% of our common stock. The holder may increase this limit to 9.99% on 61 days’ notice to us.

The Convertible Note will be secured by all of our assets and the assets of our subsidiaries. The Convertible Note contains customary events of default (each an “Event of Default”). If an Event of Default occurs, interest under the Convertible Note will accrue at a rate of 18% per annum and the outstanding principal amount of the Convertible Note, plus accrued but unpaid interest, liquidated damages and other amounts owing with respect to the Convertible Note will become, at the Convertible Note holder’s election, immediately due and payable in cash.

We may prepay all or a portion of the outstanding principal amount of the Convertible Note at a premium that increases over the term, ranging from 5% to 25%. If we complete a public or private offering of $5.0 million or more of our common stock (net of underwriting discounts and commission) prior to the maturity date, we must prepay all or part of the principal amount of the Convertible Note outstanding at a premium that increases over the term, ranging from 5% to 25% using up to 50% of the proceeds from the offering.

In addition, we will agree to indemnify BitNile against losses from our breach of its covenants, representations and warranties under the Securities Purchase Agreement pursuant to which we issue the Convertible Note.    

The Securities Purchase Agreement contemplates that we will enter into a Registration Rights Agreement with BitNile (the “Registration Rights Agreement”) simultaneous with the issuance of the Convertible Note. The Registration Rights Agreement will require that we file a registration statement with the SEC registering the shares issuable upon conversion of the Convertible Note within 15 days following the first issuance of such shares and that we use all commercially reasonable efforts to have the registration statement declared effective by the SEC within 60 days thereafter or at the earliest possible date.

The $4,250,000 Closing Date Loan is separate from and in addition the outstanding Bridge Loan of $1,300,000 made by a subsidiary of BitNile to us. See “Affiliated Party Transactions — Outstanding Loan to Giga-tronics.”

The form of the Securities Purchase Agreement to be entered into by Giga-tronics and BitNile at the closing is attached as Exhibit A to the Share Exchange Agreement, which is attached as Annex A to this proxy statement. The forms of the Convertible Note and Registration Rights Agreement are attached as Exhibits A and B, respectively, to the Share Exchange Agreement. We urge you to read the form of Securities Purchase Agreement, including the forms of Convertible Note and Registration Rights Agreement thereto, in their entirety.

 

53

Repurchase of Outstanding Preferred Shares

The Share Exchange Agreement contemplates that after the Share Exchange, we will use the proceeds from the Convertible Note to repurchase or redeem all of its the currently outstanding shares of our Series B, Series C, Series D and Series E preferred stock at the full liquidation preference amount, which is approximately $3.652 million.

Proposed Public Offering of Giga-tronics Common Stock

The Share Exchange Agreement provides that we will pursue a $25 million underwritten public offering of Giga-tronics common stock, which we refer to as the “Proposed Public Offering”. BitNile has agreed to acquire $10 million of common stock on the same terms and conditions as public investors (except for the discount or commissions payable to the underwriter). This will consist of approximately $4,450,000 in cash, conversion of the Convertible Note in the principal amount of $4,250,000, and the $1,300,000 Bridge Loan. The parties have also agreed that Roth shall be the lead bookrunner and underwriter for the Proposed Public Offering.

Warrant

On April 5, 2022, we borrowed an additional $500,000 under the Bridge Loan and granted to Gresham a warrant representing the right to purchase 433,333 shares of Giga-tronics common stock at the price of $3.00 per share, subject to potential adjustment. The Warrant will become exercisable if the closing of the Share Exchange does not occur, unless the failure to close results (1) solely from BitNile’s or Gresham’s breach of the Share Exchange Agreement or (2) BitNile’s election to terminate the Share Exchange Agreement on or after the End Date absent our breach or failure to satisfy a condition to the closing of the Share Exchange Transaction. The Warrant may be exercised in whole or part for a period of three years following the date it first becomes exercisable or, if earlier, until December 31, 2025.

Gresham may not exercise the Warrant with respect to any underlying shares that would cause it to beneficially own in excess of 4.99% of Giga-tronics common stock, though it may elect to increase this limit to 9.9% of Giga-tronics common stock on at least 61 days written notice. The Warrant may be exercised for cash or, if there is no effective registration statement covering the resale of the underlying shares, the Warrant may be exercised on a cashless basis beginning six months after the date it first becomes exercisable. The number of shares issuable upon exercise of the Warrant is subject to adjustment for splits, subdivisions or consolidations of shares and other standard dilutive events, or in the event we effect a reorganization, reclassification, merger, consolidation, disposition of assets. If Giga-tronics completes a “fundamental transaction,” such as merger into or sale to another entity, then upon exercise of the Warrant, the Gresham would have the right to receive, at its option, the number of shares of the successor or acquiring corporation and any additional consideration receivable as a result of such transaction by a holder of the number of shares of Giga-tronics common stock for which the Warrant was exercisable immediately prior to such transaction. In addition, subject to certain exempt issuances, if at any time while the Warrant is outstanding, we sell, issue or grant any shares of Giga-tronics common stock or other securities entitling the holder to acquire shares of Giga-tronics common stock at a price per share less than the then exercise price, the exercise price shall be reduced to equal the lesser of either such lesser price or the volume-weighted average price on the next trading date following the first public disclosure of the issuance. The Warrant includes a most favored nation clause providing that if we issue or sells any shares of common stock or any securities of that would entitle the holder of such securities to acquire common stock on terms the holder reasonably believes are more favorable than those in the Warrant, at the request of Gresham, we must amend the Warrant to include such terms.

Background of the Transactions

As part of our continuous efforts to strengthen its business and increase value for shareholders, the Board, in consultation with our senior management and, from time to time, with outside advisors, regularly reviews and

 

54

considers Giga-tronics’ business plans and its strategic options, including organic growth and potential strategic transactions, such as mergers and acquisitions. These strategic discussions have been set against a backdrop of, among other things, our business performance, prospects and developments. Over the past decade, after selling our legacy general-purpose test and measurement products business lines, our product development efforts have focused almost exclusively on our RADAR/EW testing platform. Development delays and longer than anticipated sales cycles contributed to our losses and a need to repeatedly raise additional capital.

To address these issues, we have from time to time explored strategic transactions, such as a potential of sale of the company or a merger. We, however, found it difficult to identify acquirors that were interested in acquiring both our Microsource Division, which has been responsible for the majority of our revenues each year, and our Giga-tronics Division, which produces products with greater margins but relatively sporadic sales and lengthy sales cycles.

On September 23, 2020, Todd Ault, the Executive Chairman of BitNile, contacted our Chief Executive Officer, John Regazzi, to discuss a potential business transaction. Mr. Ault discussed the possibility of taking a majority stake in Giga-tronics or spinning out BitNile’s defense businesses and combining it with Giga-tronics as two possible forms a combination might take. No terms of either possibilities were discussed. On September 26, 2020, Jonathan Read, Chief Executive Officer of Gresham, contacted Lutz Henckels, our Chief Financial Officer and Chief Operating Officer, to execute a non-disclosure agreement to facilitate further and more detailed discussions between the companies. Mr. Read advised Mr. Henckels that combining Gresham with Giga-tronics was the preferred transaction. No terms of a potential business combination were proposed.

The Board held a special meeting on October 8, 2020, at which there was a report on Gresham’s outreach. At that time, Giga-tronics was pursuing the acquisition of an unrelated business, which we refer to as Party A, that did not ultimately progress. The Board did not elect pursue discussions with Gresham at that time, instead choosing to focus on the potential acquisition of Party A, but would be open to exploring a transaction with Gresham if and when its pending potential business acquisition efforts were complete. Mr. Henckels relayed the Board’s position to Mr. Read.

The Board held a special meeting on January 11, 2021 to discuss its continued efforts acquire Party A. At the meeting the Board discussed informal inquiries from Gresham and a second company that we refer to as Party B. Party B was a privately held developer of avionics and defense systems, which several years prior had expressed an interest in exploring a potential business combination in which Giga-tronics would acquire Party B resulting in a larger, publicly traded company. Party B had recently informally reapproached William Thompson, Giga-tronics’ chairman, regarding a potential business combination.

The Board held a regular meeting on January 27, 2021 at which the Board further considered, among other things, whether to continue to pursue its potential acquisition of Party A, and its strategic alternatives should it not pursue the acquisition, including raising additional capital or pursuing a sale of Giga-tronics. Among the alternatives discussed were potential business combinations with Gresham or Party B.

The Board held special meetings on February 16 and 17, 2021. The Board determined to no longer pursue its potential acquisition of Party A. The Board directed management to evaluate prospects for Giga-tronics’ sale of or other exit and to report its initial findings at the following board meeting in connection with its annual budget and planning process.

On May 7, 2021, Gresham, through Mr. Read, delivered a draft term sheet to Giga-tronics’s Chief Financial Officer, Mr. Henckels. The Board held a regular meeting on March 8, 2021 at which it considered its annual budget and planning, the state of the company and potential strategic alternatives, including a potential transaction with Gresham. It was noted that Giga-tronics’ largest shareholder, who was also the holder of a significant majority of Giga-tronics’ preferred stock, believed Giga-tronics should consider a sale or other exit. Management discussed Giga-tronics’ prospects of continuing on a standalone basis and alternatives for pursuing

 

55

a sale. The Board discussed the term sheet that Gresham presented the previous day. Mr. Henckels reported that Gresham, through Mr. Read, had continued to make inquiries to Mr. Henckels concerning a combination of the companies. Gresham’s draft term sheet proposed a business combination in which Giga-tronics would acquire Gresham from BitNile in exchange for an amount of Giga-tronics common stock such that the resulting ownership percentages between current BitNile and current holders of Giga-tronics common stock would be based on the relative historic sales of Gresham and Giga-tronics without specifying a ratio; that BitNile would invest $15 million in the combined company; that Giga-tronics would repurchase its Outstanding Preferred Shares; and that three current Giga-tronics directors would continue as directors of the combined company. The term sheet further provided that Mr. Read would be the Chief Executive Officer of the combined company, Mr. Regazzi would be its director of new projects and Mr. Henckels would be its President. The Board, after conferring with management, determined to pursue preliminary discussions with Gresham about a potential transaction on a nonexclusive basis. The Board also discussed the retention of an investment banking firm.

During March and April, 2021, John Regazzi, Giga-tronics’ President and Chief Executive Officer, and Mr. Henckels informally discussed with Mr. Read a potential combination between Giga-tronics and Gresham, shared information and conducted preliminary due diligence. On March 29, 2021, Giga-tronics and Gresham signed a non-disclosure agreement.

During April and May, 2021, Mr. Read and Mr. Henckels had numerous discussions about a potential transaction.

On May 3, 2021, Party B delivered a letter to Giga-tronics proposing that Party B and Giga-tronics pursue a business. No transaction terms were specified. Party B also suggest that Giga-tronics appoint Party B’s chief executive offer to the Board and make certain changes to its business strategy.

On May 7, 2021, Mr. Read delivered a revised proposed term sheet to Mr. Henckels outlining a business combination in which Giga-tronics would acquire Gresham from BitNile for Giga-tronics stock, with Giga-tronics continuing as a publicly traded company. The term sheet did not specify the pro forma ownership following the transaction but instead proposed that the pro forma ownership of BitNile and existing holders of Giga-tronics common stock be determined based Gresham’s and Giga-tronics’ historic sales revenues. The term sheet further provided that Giga-tronics would repurchase its Outstanding Preferred Shares at its full liquidation preference amount and the combined company would pursue a public offering and listing on the NYSE American market.

The Board discussed Gresham’s proposal at a special meeting on held on May 13, 2021. At the meeting, the Board also discussed recent inquiries form Party B, the possibility that one of Giga-tronics’ suppliers, which we refer to as Party C, could be interested in pursuing a business combination, and the retention of an investment banking firm to serve as a financial advisor and the state of the Company’s business more generally. Following the meeting, Gresham and Giga-tronics exchanged financial information regarding their respective companies.

The Giga-tronics Board held a special meeting on May 19, 2021 at which it further discussed and considered Gresham’s proposal outlined in its May 7, 2021 term sheet, Gresham’s financial condition and history, Giga-tronics’ on-going discussions with Party B and alternatives for engaging an investment banking firm. Giga-tronics fiscal year ended on March 27, 2021. The Board, after conferring with management, determined to continue discussions with Gresham about a potential transaction on a non-exclusive basis, though management resources were limited, and management’s primary focus over the following several weeks should be the completion of Giga-tronics’ financial statements and annual report on Form 10-K. The Board also determined that its chairman, Mr. Thompson, would contact Party B, which continued to contact Giga-tronics regarding a potential transaction and board representation from time to time.

On June 17, 2021, Mr. Read and Tim Long, Gresham’s Chief Operating Officer met with Mr. Regazzi, Mr. Henckels and other member of Giga-tronics’ senior management at Giga-tronics’ headquarters in Dublin,

 

56

California to discuss Gresham’s and Giga-tronics’ businesses and a potential business combination. On June 23 and 24, 2021, a representative of Giga-tronics’ legal counsel, Sheppard, Mullin, Richter and Hampton LLP, which we refer to as Sheppard Mullin, and representative of Gresham’s legal counsel, Nason, Yeager, Gerson, Harris & Fumero, P.A., which we refer to as Nason Yeager, had preliminary discussions about the proposed structure of the transaction.

The Board held a special meeting on July 1, 2021 at which a representative of Sheppard Mullin, was present. Mr. Regazzi and Mr. Henckels reported on their meeting with Gresham’s executives and the Board discussed its proposed term sheet. Mr. Henckels presented a financial analysis of Giga-tronics on a standalone basis and based on a hypothetical combination with Gresham, in each case based on difference assumptions and scenarios. The Board determined that management should continue discussions with Gresham and Party B. In addition, the Board determined to select and engage an investment banking firm to serve as its financial advisor and to consider whether and to what extent the Board should contact other parties regarding a potential strategic transaction.

At the request of Party B, the Board held a special meeting on July 6, 2021 at which Party B’s chief executive officer was present. Party B’s chief executive officer proposed certain changes to Giga-tronics’ business strategy and requested that he be appointed to the Board. He also indicated that Party B was not interested in actively pursuing a business combination with Giga-tronics at that time. Also on July 6, 2021, Mr. Read, Mr. Long and a representative of Nason Yeager met via with Roth at the request of the Board to discuss a proposed transaction with Giga-tronics.

On July 8, 2021, Giga-tronics formally retained Roth as its financial advisor. Following its engagement, at the direction of Giga-tronics, Roth contacted Gresham and BitNile to discuss their proposal.

On July 20, 2021, Gresham provided financial information to Roth and on July 21, 2021, Gresham and Roth discussed a potential transaction between Gresham and Giga-tronics and a proposed financing.

The Board held a special meeting on July 29, 2021 at which representatives of Roth and Sheppard Mullin were present. Prior to the meeting, Gresham proposed that BitNile’s post-transaction ownership be of 60% the combined company, prior to any investment by BitNile and giving effect to Giga-tronics’ repurchase of its preferred stock, with existing holders of Giga-tronics common stock holding the remaining 40%, each on a fully diluted basis. A representative of Sheppard Mullin provided the Board advice about process and its fiduciary duties in connection with its evaluation of strategic options. Roth presented an analysis of Gresham’s current proposal. Roth noted that Gresham was frustrated with what it perceived to be delays and a lack of progress. The Board and Roth also discussed other parties that could have an interest in engaging in a strategic transaction with Giga-tronics, after which the Board directed Roth to engage in preliminary, confidential discussions with Party B to determine whether Party B was interested in submitting a proposal regarding a business combination. The Board also directed Mr. Henckels to contact Party C to determine whether it would be interested in pursuing a business combination. In addition, the Board directed Roth to propose to BitNile that the post-transaction ownership be of 57.5% the combined company, prior to any investment by BitNile and giving effect to Giga-tronics’ repurchase of its preferred stock, with existing holders of Giga-tronics common stock holding the remaining 42.5% on a fully diluted basis. At this meeting, aware that directors Lutz Henckels and Thomas Vickers held a minority of the shares of Giga-tronics preferred stock, the Board established an independent committee comprised of the remaining directors, none of whom held shares of Giga-tronics preferred stock, for the purpose of negotiating the terms of the treatment of the preferred stock, should it be necessary to do so.

On July 31, 2021, Giga-tronics, through Roth, submitted a revised term sheet to Gresham and made the case for a higher pro forma ownership percentage for Giga-tronics shareholders.

On August 3, 2021, Party B submitted a term sheet proposing a business combination in which Giga-tronics would acquire Party B for Giga-tronics common stock such that Party B’s shareholders would own 55% of the

 

57

combined company with Giga-tronics shareholders holding the reaming 45%, on a fully-diluted basis. Giga-tronics would repurchase the Outstanding Preferred Shares at its full liquidation preference using borrowed funds. The Board would be recomposed such that Party B’s representatives would comprise a majority of the directors, and existing Giga-tronics directors would make up a minority.

Roth provided a further valuation analysis to Gresham and BitNile on August 10, 2022. On August 17, 2021, Mr. Read advised Mr. Regazzi and Mr. Henckels via email that BitNile strongly disagreed with Giga-tronics’ suggested valuation and proposed pro forma ownership.

On August 24, 2021, Mr. Read submitted to Mr. Henckels revised term sheet proposing that Giga-tronics acquire Gresham from BitNile in exchange for issuing a combination of Giga-tronics common stock and convertible preferred stock to BitNile, such that immediately following the transaction, BitNile would beneficially own approximately 65% of Giga-tronics common stock, existing holdings of Giga-tronics common stock would, as a group, own the remaining 35% on a fully diluted basis, and Giga-tonics would redeem or repurchase all shares of its Outstanding Preferred Shares at the stated liquidation amounts. The term sheet proposed that the preferred stock issuable to BitNile have a liquidation preference of $10 million and carry a mandatory 7% dividend per year. The proposal also provided that three of Giga-tronics’ existing directors would continue as directors following the transaction, with four additional directors to be appointed by BitNile.

At a special meeting of the Board held on August 24, 2021, at which representatives of Roth and Sheppard Mullin were present, the Board discussed the results of its outreach to Gresham, Party B and Party C. Both Gresham and Party B presented proposed terms of a business combination. Party C did not respond to inquiries from Roth or Giga-tronics. At the meeting, representatives of Roth provided analyses of the financial terms of Gresham’s proposal and Party B’s proposal and an analysis of Giga-tronics on a standalone basis. After discussion and consideration, the Board determined that it was in the best interests of Giga-tronics’ shareholders to pursue a transaction with Gresham rather than Party B because, among other things, Gresham’s businesses and products were more closely aligned with those of Giga-tronics, offering somewhat greater potential for synergies and Gresham’s proposal included a proposed public offering that included a commitment from BitNile and a simultaneous stock exchange listing, which was expected to provide needed capital for Giga-tronics and increased liquidity for existing holders of Giga-tronics common stock and was forecasted to result in higher long-term revenues than a combination with Party B. The Board and representatives from Roth and Sheppard Mullin also discussed Gresham’s proposed transaction structure and the possible timing with respect to the consummation of a transaction. The Board directed Roth to advise Party B the Board had determined not to proceed with further discussions with Party B but would instead pursue a different transaction.

Following the Board meeting, on August 25, 2021, Giga-tronics sent a revised term sheet to Gresham proposing pro forma ownership of 35% for existing holders of common stock and 65% for BitNile, all on a fully-diluted basis. Mr. Read and Mr. Henckels further discussed the proposed terms of the Giga-tronics preferred stock that would be issued to BitNile.

Representatives of Gresham, Roth and Giga-tronics continued discussions regarding the pro forma ownership amounts over the following days. On August 26, 2021, Mr. Read and Mr. Henckels discussed the proposed terms of the preferred stock that would be issuable to BitNile. On August 27, 2021, representatives of Roth and Nason Yeager had further discussions about the terms of BitNile’s proposed $10 million financing. On August 27, 2021, Gresham sent Giga-tronics a further updated version of the term sheet.

At special board meetings held on August 27 2021, the Board continued its review and discussion of the term sheet from Gresham with representatives of Roth and its outside legal counsel. Gresham sent a further revised term sheet to Giga-tronics on August 29, 2021. On August 30, 2021, Roth, Mr. Henckels, Mr. Read had further discussions concerning the terms of the preferred stock that Giga-tronics would issue to BitNile in the Share Exchange and the terms of BitNile’s proposed $10 million financing.

 

58

On September 1, 2021, Giga-tronics proposed that BitNile agree to eliminate the mandatory 7% dividend on the Series F Convertible Preferred Stock and, in exchange, that Giga-tronics increase the number of Series F Preferred Shares that will be issued to BitNile upon the closing of the Share Exchange. As a result, the parties agreed that Giga-tronics would issue additional shares of Series F Preferred Stock, such that immediately following the Share Exchange, on a fully diluted basis, BitNile would beneficially own approximately 68% of Giga-tronics common stock, existing holdings of Giga-tronics common stock would, as a group, own the remaining 32% on a fully diluted basis, and the mandatory 7% dividend on the Series F Convertible Preferred Stock would be eliminated. The term sheet also provided that the Series F Convertible Preferred Stock would be convertible to common stock at the price of $3.25 per share.

On September 3, 2021, Gresham submitted a revised non-binding term sheet proposing a transaction on substantially the same terms as its previous proposal, but which reflected the elimination of the mandatory 7% dividend on the Series F Convertible Preferred Stock and the revised pro forma ownership percentages. On September 4, 2021, Nason Yeager delivered to Sheppard Mullin a revised draft of the term sheet with several immaterial changes and an initial draft of the Share Exchange Agreement based on the current draft of the term sheet. On September 5, 2021, Roth, Mr. Henckels and Mr. Read had further negotiations about the pro forma ownership amounts.

At a special meeting of the Board on September 7, 2021, representatives of Roth presented an update on discussions with Gresham and provided a financial analysis of Gresham’s current proposal, including financial analyses previously requested by the Board. Representatives of Roth also outlined certain potential benefits and potential risks of pursuing the transaction versus remaining a standalone company. A representative of Sheppard Mullin discussed the Board’s fiduciary duties in considering the proposed transaction, referencing its earlier discussion in July. The Board considered the revised proposal, which included an exclusivity provision expiring on October 31, 2021, and unanimously voted to approve it. Later that day, Giga-tronics, BitNile and Gresham executed the non-binding term sheet.

Over the following weeks, representatives of Giga-tronics, Gresham and their respective legal counsels had numerous discussions regarding due diligence planning and the initial draft of the Share Exchange Agreement.

At a special meeting of the Board on September 29, 2021, a representative of Sheppard Mullin reviewed Gresham’s initial draft of the Share Exchange Agreement with the Board and provided a proposed revised draft. At a special meeting of the Board on October 1, 2021 a representative of Sheppard Mullin reviewed the further revised draft of the Share Exchange Agreement with the Board, which Sheppard Mullin forwarded to Nason Yeager the same day. Thereafter, until the execution of the Share Exchange Agreement on December 27, 2021, the parties and their respective legal advisors exchanged drafts of, and engaged in discussion and negotiations concerning the terms of, the Share Exchange Agreement. Extensive documentary and other due diligence, including Giga-tronics’ due diligence evaluation of Gresham, continued in parallel with the negotiation of the transaction documentation during this time. On September 29, 2021, Giga-tronics counsel provided to Gresham a legal due diligence list. On October 4, representatives of Nason Yeager and Sheppard Mullin discussed the draft Share Exchange Agreement. On October 15, 2021, counsel for Gresham delivered revised draft of the Share Exchange Agreement to Giga-tronics’ counsel. Counsel for Gresham and Giga-tronics continued to revise and negotiate the Share Exchange Agreement through December 24, 2021.

On September 15 and 16, 2021, members of the senior management teams of Giga-tronics, BitNile and Gresham, as well as their legal representatives met to facilitate Gresham’s and Giga-tronics’ further due diligence of the other and exchanged due diligence lists. Thereafter, through December 23, 2021, Giga-tronics and Gresham engaged in extensive reciprocal due diligence.

At regular and special meetings in September, October and November 2021, the Board held regular or special meetings at which management reported on due diligence findings, financial analyses and management and a representative of Sheppard Mullin discussed the advantages and disadvantages of the proposed transaction

 

59

and the status of transaction documents. On November 1, 2021, Giga-tronics counsel provided an initial draft of the Certificate of Determination for the Series F Convertible Preferred Stock.

In early November, 2021, Mr. Henckels and Mr. Read had several discusses regarding a proposed loan by BitNile to Giga-tronics, the proceeds of which Giga-tronics would use for ordinary corporate purposes.

On November 12, 2021, at the request of Giga-tronics, BitNile loaned Giga-tronics $500,000, to be used for general corporate purposes.

On November 19, 2021, Nason Yeager provided initial drafts of the transaction documents for the Closing Date Loan and a revised draft of the Certificate of Determination for the Series F Convertible Preferred Stock to Sheppard Mullin. On December 6 and 8, 2021, Sheppard Mullin forwarded to Gresham’s counsel revised transaction documents for the Closing Date Loan and the Certificate of Determination the Series F Convertible Preferred Stock. At a special meeting of the Board on December 17, 2022, a representative of Sheppard Mullin reviewed the transaction documents with the Board and provided proposed revised drafts. Thereafter, until the execution of the Share Exchange Agreement on December 27, 2021, the parties and their respective legal advisors exchanged drafts of, and engaged in discussion and negotiations concerning the terms of, the Share Exchange Agreement, the Closing Date Loan and the Certificate of Determination for the Series F Convertible Preferred Stock.

On December 20, 2021, the Board held a special meeting at which management and representatives from Sheppard Mullin further reported on due diligence findings, anticipated advantages and disadvantages of the proposed transactions and the status of transaction documents.

On December 23, 2021, Gresham’s board of directors approved the proposed Securities Exchange Agreement.

On December 24, 2021, the Board held a special meeting to review the Share Exchange Agreement and the proposed transactions contemplated thereby. Representatives of Giga-tronics’ senior management, Roth and Sheppard Mullin also attended. Mr. Henckels, Mr. Regazzi and a representative of Sheppard Mullin updated the Board regarding the status of discussions with Gresham and BitNile and the status of definitive documentation which was substantially complete in all material respects. Mr. Regazzi and Mr. Henckels provided a final update on Giga-tronics’ due diligence findings on Gresham in connection with the proposed transaction. A representative of Sheppard Mullin discussed the fiduciary duties of the Board in connection with its evaluation of the proposed transaction and reviewed the Share Exchange Agreement and other transaction documents with the Board in detail. Representatives of Roth reviewed the updated financial analyses performed by Roth in connection with its evaluation of the Share Exchange, including discussing the various financial methodologies used in its analysis. Representatives of Roth then rendered to the Board its opinion to the effect that, as of the date of such written opinion and based on and subject to the various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken as described in such written opinion, the consideration to be issued by Giga-tronics in the Share Exchange pursuant to the Share Exchange Agreement was fair, from a financial point of view, to holders of Giga-tronics stock. After extensive discussion, the Board, by unanimous vote adopting resolutions to such effect, determined that the Share Exchange and the Share Exchange Agreement and the transactions contemplated thereby were in the best interests of Giga-tronics and its shareholders and approved the Share Exchange, the Share Exchange Agreement and the transaction contemplated thereby.

On December 26 and 27, 2021, the parties and their respective legal counsel worked to finalize the transaction documents for signature. On December 27, 2021, the Share Exchange Agreement was executed and delivered by Giga-tronics, BitNile and Gresham. The parties announced the transaction the morning of December 28, 2021, before the opening of the financial markets in New York.

 

60

On April 5, 2022, in view of delays principally related to the preparation of this proxy statement and the related financial statements, Giga-tronics, BitNile and Gresham amended the Share Exchange Agreement to extend the earliest date on which any party may elect to terminate the agreement from June 30, 2022 to August 31, 2022, to increase the amount of the Bridge Loan to $1,300,000 and to provide for Giga-tonics’ issuance of the Warrant to Gresham.

The Giga-tronics Board of Directors’ Reasons for the Transactions

Our Board has unanimously approved the Share Exchange Agreement and the transactions contemplated therein, including the Share Exchange. In reaching its decision to approve the Share Exchange Agreement and unanimously recommend that shareholders approve the Share Exchange Proposal, the Board consulted with our management and financial and legal advisors and considered a number of factors, including the following material factors, which the Board viewed as supporting its determination:

 

•

The expected pro forma financial impact of the Share Exchange, in particular, the advantages of being part of a larger organization, including the potential for operating efficiencies, the ability to spread overhead costs across an organization with greater scale and greater revenues and the expectation that some potential vendors and customers may be more willing to do business with the larger, combined company than Giga-tronics on standalone basis.

 

•

The expectation that the combined company’s more diverse product mix will lead to a more consistent revenue stream compared to our current revenue stream, which is marked by a limited number of significant sales and shipments, causing revenues to fluctuate from quarter to quarter, sometimes significantly.

 

•

The expectation that Gresham’s international sales and operations may allow us to more readily seek potential sales of our electronic warfare test/simulation products and Microsource RF filter in markets outside of North America.

 

•

While we have previously had difficulty finding a merger partner or acquiror that is interested in acquiring and supporting both its electronic warfare test/simulation division and its Microsource RF filter division, Gresham has existing electronic warfare and RF filter business lines and Gresham’s management is willing to support both of Giga-tronics’ business lines.

 

•

Anticipated synergies between the companies, which both design and manufacture RADAR-related products for the defense industry, particularly anticipated synergies between Gresham’s Microphase business and our Microsource businesses and between Gresham’s Enertec business and our electronic warfare test/simulation business, which may, given their similarities, permit greater efficiencies in managing inventory, better buying power and more flexibility in managing workload by sharing skilled labor.

 

•

the fact that the Giga-tronics shareholders will initially continue to hold approximately 28.8% of the voting power of a significantly larger combined company following the Transactions and will therefore participate meaningfully in the significant opportunities for long-term growth of the combined company.

 

•

the opinion of Roth dated as of December 24, 2021, to the Giga- Board as to the fairness, from a financial point of view, of the consideration to be paid by the Company in the Share Exchange (see “— Opinion of Roth as Giga-tronics’ financial advisor”).

 

•

information concerning Gresham’s businesses, prospects, financial condition and results of operations, management and competitive position, including the results of business, legal, and financial due diligence of Gresham conducted by the Company and its advisors.

 

•

the proposed governance and management of the combined company, including that the directors and executive officers of the combined company will include directors and officers of both Giga-tronics and Gresham, providing management continuity following the Share Exchange.

 

61

•

the proposed governance and management of the combined company, including that the expected composition of the executive officers and the Board would allow for continuity after the Share Exchange.

 

•

the expectation that the combined company will have greater management resources and capabilities.

 

•

the belief that the Proposed Public Offering, if completed, and successfully listing shares of Giga-tronics common stock for trading on Nasdaq, would provide additional liquidity for existing holders of Giga-tronics common stock.

 

•

the results that the Company could expect to achieve by remaining independent in light of the aforementioned risks and prospects, and the expected resulting value to our shareholders, as compared to the value of the Giga-tronics common stock following the Transactions.

 

•

the financial terms of the Transactions.

 

•

the potential opportunity for greater liquidity for existing holders of Giga-tronics common stock if Giga-tronics successfully completes the Proposed Public Offering and related Nasdaq listing.

 

•

the terms of the Share Exchange Agreement, including the representations, covenants, deal protection and termination provisions and the size of the termination fee payable by Giga-tronics in certain circumstances in relation to the overall transaction size.

 

•

the fact that the Share Exchange Agreement does not include any unrealistic closing conditions or pricing adjustments based on the financial performance of Giga-tronics between signing and closing of the Share Exchange.

 

•

the fact that the Share Exchange Agreement does not preclude a third party from making an unsolicited acquisition proposal to the Company and that, under certain circumstances, we may furnish non-public information to, and enter into discussions with, such a third party regarding a qualifying acquisition proposal.

 

•

the ability of the Board to change its recommendation that Giga-tronics shareholders vote to approve the Share Exchange Agreement, subject to the terms and conditions set forth in the Share Exchange Agreement (including the right of BitNile to match any competing bid and our potential payment of a termination fee).

 

•

Our management’s view that the Share Exchange will allow for greater opportunities for our clients, customers and other constituencies, and that the combination will enhance product offerings and market opportunity beyond the level that we believed to be reasonably achievable by us on an independent basis.

 

•

the expectation that the Share Exchange will be tax-free to existing holders of Giga-tronics common stock for U.S. federal income tax purposes.

 

•

the financial presentation, dated December 24, 2021, of Roth to the Board and the written opinion, dated December 24, 2021, of Roth to the Board, as to the fairness, from a financial point of view and as of the date of the opinion, of the Share Exchange to Giga-tronics shareholders, as more fully described below under “Opinion of Giga-tronics’ Financial Advisor”.

 

•

the Board’s review and discussions with our management and advisors concerning our due diligence examination of the operations, financial condition and regulatory compliance programs and prospects of Gresham.

The Board also considered the potential adverse consequences of the proposed Share Exchange and other Transactions, including:    

 

•

the fact that the number of shares of common stock and Series F Convertible Preferred Stock issuable to BitNile is fixed and the resulting risk that the number of shares will not adjust based on Gresham’s financial performance prior to the closing of the Share Exchange.

 

62

•

the potential for diversion of management and employee attention, and for employee attrition, during the period following the announcement of the Share Exchange and prior to the completion of the Share Exchange, and the potential effect on our business and relations with customers, service providers and other stakeholders, whether or not the Share Exchange is completed.

 

•

the fact that BitNile will, by virtue of its ownership of a substantial majority of Giga-tronics’ voting securities, its lending relationship with us and its rights as the sole holder of Giga-tronics’ Series F Convertible Preferred Stock, be able to exert significant influence over the combined company, and that BitNile’s interests in and actions with respect to the Company could be different from or adverse to those of other holders of Giga-tronics common stock.

 

•

the risk that we could experience a material adverse effect (as defined in the Share Exchange Agreement), in which case BitNile might not be obligated to complete the Share Exchange.

 

•

the potential that certain provisions of the Share Exchange agreement prohibiting us from soliciting, and limiting our ability to respond to, proposals for alternative transactions, and requiring the payment of a termination fee could have the effect of discouraging an alternative proposal.

 

•

the interests of Giga-tronics’ officers and directors with respect to the Share Exchange apart from their interests as holders of Giga-tronics common stock, and the risk that these interests might influence their decision with respect to the Transactions.

 

•

the requirement that we conduct our business in the ordinary course and the other restrictions on the conduct of our business prior to completion of the Share Exchange, which could delay or prevent us from undertaking business opportunities that may arise pending completion of the Share Exchange.

 

•

the transaction costs and expenses that will be incurred in connection with the Share Exchange, including the costs of integrating Gresham’s business with our own.

 

•

the possible effects on the Company should the parties fail to complete the Share Exchange, including the increased difficulty of resuming operations with a standalone strategy, the need to find sources of capital to support our business and repay the Bridge Loan, the possible effects on the price of Giga-tronics common stock, and the business and opportunity costs.

 

•

the risk of litigation arising from shareholders in respect of the Share Exchange Agreement or the Transactions.

 

•

the other risks described under “Risk Factors” beginning on page 19.

In determining whether to approve and recommend the Share Exchange Agreement, the Board did not assign any relative or specific weights to any of the foregoing factors, and individual directors may have weighed factors differently. After deliberating with respect to the Share Exchange and the Share Exchange Agreement, considering, among other things, the reasons discussed above, the Board approved the Share Exchange agreement and the Share Exchange as being in the best interests of Giga-tronics and its shareholders, based on the total mix of information available to the Board.

This explanation of the Board’s reasons for the Share Exchange and other information presented in this section is forward-looking in nature and should be read in light of the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”

In addition to the factors described above, the Board identified and considered a variety of risks and potentially negative factors concerning the Transactions, including the following:

 

•

the possibility that the Transactions may not be completed as a result of the failure to satisfy one or more conditions to the Transactions described under “The Share Exchange Agreement — Conditions to Closing.”

 

63

•

the effect of the public announcement of the Transactions on our revenues, operating results, stock price, customers, suppliers, management, employees, and other constituencies.

 

•

the risk that the operations of the two companies might not be successfully integrated or integrated in a timely manner, and the possibility of not achieving the anticipated synergies and other benefits sought to be obtained in the Transactions.

 

•

the substantial costs to be incurred in connection with the Transactions, including costs of integrating the businesses and expenses arising from the Transactions, which may exceed management’s estimates.

 

•

the risk that Gresham has material liabilities which were not identified during our due diligence review.

 

•

the risk that the combined company will have limited recourse to recover losses related to a breach of Gresham’s representations and warranties and covenants in the Share Exchange Agreement following the completion of the Share Exchange.

 

•

the interests that certain of our executive officers and directors may have with respect to the Transactions in addition to their interests as Giga-tronics shareholders.

 

•

various other risks associated with the Transactions and the combined company set forth under the “Risk Factors” section.

In light of the number and wide variety of factors considered in connection with its evaluation of the Transactions, the Board did not consider it practicable to, and did not attempt to, quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its determination. Rather, the Board made its recommendation based on the totality of information presented to, and the investigations conducted by or at its direction. In addition, individual directors may have given different weight to different factors. This explanation of the Board’s reasons for approving the Transactions and other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under “Risk Factors.”

Opinion of Roth as Giga-tronics’ Financial Advisor

The Board retained Roth on July 8, 2021 as its exclusive financial advisor in connection with its transaction with Gresham. On December 21, 2021, the Board requested that Roth render an opinion as to the fairness to Giga-tronics’ shareholders of the Share Exchange. On December 24, 2021, Roth delivered its opinion to the Board that, as of that date, and based upon and subject to the factors and assumptions set forth in its opinion, the Share Exchange was fair and equitable to Giga-tronics and its shareholders.

Roth’s opinion was prepared solely for the information of the Board and only addressed the fairness, from a financial point of view, to the shareholders of Giga-tronics of the consideration to be paid by Giga-tronics in the Share Exchange. Roth was not requested to opine as to, and Roth’s opinion does not address, the relative merits of the Share Exchange or any alternatives to the Share Exchange, the Company’s decision to proceed with or effect the Share Exchange, or any other aspect of the Share Exchange and does not opine as to overall conclusions, analysis or economic or corporate financial decisions of the Board. Roth’s opinion does not address the fairness of the Share Exchange to the holders of any class of securities, creditors or other constituencies of Giga-tronics and is not a valuation of Giga-tronics or Gresham, or their respective assets or any class of their securities. Roth did not express an opinion about the fairness of the amount or nature of any compensation payable or to be paid to any of the officers, directors or employees, of Gresham, whether or not relative to the Share Exchange.

The summary of Roth’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex B to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Roth in preparing its opinion. Roth’s opinion was prepared solely for the information of the Board for its use in connection with its consideration of the Share Exchange. Neither

 

64

Roth’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and they do not constitute, advice or a recommendation to any shareholder as to how such shareholder should act or vote with respect to any matter relating to the Share Exchange or any other matter.

The full text of Roth’s opinion, which sets forth the assumptions made, general procedures followed, factors considered and limitations on the review undertaken by Roth in rendering its opinion is attached as Annex B to this proxy statement and is incorporated herein by reference. Giga-tronics urges you to read the opinion in its entirety. The summary of the opinion of Roth set forth below is qualified in its entirety by reference to the full text of the opinion. Roth’s opinion, based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken and the other factors Roth deemed relevant, is that the Share Exchange is fair and equitable to the Giga-tronics shareholders, from a financial point of view.

The terms of the Share Exchange, the consideration to be paid in the Share Exchange, and the related transactions were determined through arm’s length negotiations between Giga-tronics, Gresham, and BitNile, and were approved unanimously by the Board. Roth did not determine the consideration to be paid by Giga-tronics in connection with the Share Exchange.

In connection with rendering the opinion described above and performing its related financial analyses, among other things, Roth has:

 

•

reviewed a draft of the Share Exchange Agreement, dated December 22, 2021, as provided to Roth by management of Giga-tronics;

 

•

reviewed certain information relating to the business, earnings, cash flow, assets, liabilities and prospects of Gresham and Giga-tronics that were furnished to Roth by management of Giga-tronics;

 

•

reviewed certain financial projections that Gresham and Giga-tronics prepared and furnished to Roth, by the management of Giga-tronics (the “Financial Projections”), and conducted discussions with members of senior management of Giga-tronics concerning the Financial Projections;

 

•

discussed the past and current operations, financial condition and prospects of Gresham and Giga-tronics with the management team of Giga-tronics;

 

•

reviewed the reported prices and trading activity for Giga-tronics;

 

•

reviewed the financial terms, to the extent publicly available, of certain acquisition transactions comparable to the Transactions;

 

•

compared the financial performance of Gresham with that of certain publicly-traded companies Roth deemed comparable with Gresham; and

 

•

performed such other analyses, made such other inquiries and considered such other factors as Roth has deemed appropriate for the purpose of reviewing the Transactions and arriving at its opinion.

The following is a summary of the material financial analyses performed by Roth in connection with the preparation of its fairness opinion, which opinion was rendered orally to the Board and subsequently confirmed in writing by delivery of Roth’s written opinion to the Board on December 24, 2021. The preparation of analyses and a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description and this summary does not purport to be a complete description of the analyses performed by Roth or the delivery of Roth’s opinion to the Board.

This summary includes information presented in tabular format. In order to fully understand the financial analyses presented by Roth, the tables must be read together with the text of each analysis summary and

 

65

considered as a whole. The tables alone do not constitute a complete summary of the financial analyses. Considering any portion of such analyses and of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Roth’s opinion.

In arriving at its opinion, Roth relied upon and assumed, without independent verification, the accuracy and completeness of all information that was publicly available or was furnished, or otherwise made available to Roth or discussed with or reviewed by or for Roth, and further assumed that the financial information provided to Roth had been prepared on a reasonable basis in accordance with industry practice, and that management of Giga-tronics was not aware of any information or facts that would make any information provided to Roth incomplete or misleading.

With respect to the financial forecasts, estimates and other forward-looking information reviewed by Roth, Roth assumed that such information had been reasonably prepared based on assumptions reflecting the best currently available estimates and judgments of Giga-tronics’ management as to the expected future combined results and financial condition of Giga-tronics and Gresham after giving effect to the Share Exchange. Roth was not engaged to assess the achievability of any such financial forecasts, estimates or forward-looking information or the assumptions on which they were based, and Roth expressed no opinion as to such information or assumptions. In addition, Roth did not assume any responsibility for, and did not perform, any appraisals or valuation of any specific assets or liabilities (fixed, contingent or other) of Giga-tronics or Gresham, nor was Roth furnished or provided with any such appraisals or valuations. Without limiting the generality of the foregoing, Roth was not engaged to, and did not undertake, any independent analysis of any pending or threatened litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which Giga-tronics, Gresham or any of their respective affiliates is a party or may be subject, and at the direction of Giga-tronics and with its consent, Roth’s opinion made no assumption concerning, and did not consider, the possible assertion of claims, outcomes or damages arising out of any such matters.

Roth relied upon and assumed that the representations and warranties of all parties set forth in the exchange agreements and all related documents and instruments that are referred to therein are true and correct, that each party will fully and timely perform all of the covenants and agreements required to be performed by such party, that the Share Exchange will be consummated pursuant to the terms of the exchange agreements, without amendment, and that all conditions to the consummation of the exchange agreements will be satisfied without waiver thereof. Roth further assumed that the Share Exchange agreements were in all material respects identical to the draft of the exchange agreements provided to Roth. Finally, Roth also assumed that all necessary regulatory approvals and consents required for the Share Exchange, including the approval of the shareholders of Giga-tronics, will be obtained in a manner that will not adversely affect Giga-tronics, Gresham or the contemplated benefits of the Share Exchange.

In connection with its opinion, Roth assumed and relied upon, without independent verification, the accuracy and completeness of all financial, legal, regulatory, tax, accounting and other information provided to, discussed with or reviewed by Roth. Roth’s opinion does not address any legal, regulatory, tax or accounting issues.

Roth’s opinion is necessarily based upon the information available to Roth and facts and circumstances as they existed and were subject to evaluation as of December 24, 2021, which is the date of the Roth opinion. Although events occurring after the date of the Roth opinion could materially affect the assumptions used in preparing the opinion, Roth does not have any obligation to update, revise or reaffirm its opinion and Roth expressly disclaims any responsibility to do so. Roth did not express any opinion as to the price at which shares of Giga-tronics common stock may trade following announcement of the Share Exchange or at any future time.

The consideration to be paid by Giga-tronics in the Share Exchange was determined through arm’s length negotiations between Giga-tronics, Gresham, and BitNile, and was approved by the Giga-tronics and Gresham boards of directors. Roth’s opinion and its presentation to the Board was one of many factors taken into

 

66

consideration by the Board in deciding to approve, adopt and authorize the exchange agreements. Consequently, the analyses as described herein should not be viewed as determinative of the opinion of the Board with respect to the consideration to be paid by Giga-tronics in the Share Exchange or of whether the Board would have been willing to agree to different consideration. The following is a brief summary of each of the material analyses performed by Roth in connection with its opinion letter dated December 24, 2021.

In furnishing its opinion, Roth did not attempt to combine the analyses described herein into one composite valuation range, nor did Roth assign any quantitative weight to any of the analyses or the other factors considered. Furthermore, in arriving at its opinion, Roth did not attribute any particular weight to any analysis or factor considered by Roth, but rather made qualitative judgments as to the significance and relevance of each analysis and factor in light of one another. Accordingly, Roth has stated that it believes that its analyses must be considered as a whole and that considering any portion of its analyses, without considering all of the analyses, could create a misleading or incomplete view of the process underlying its opinion or the conclusions to be drawn therefrom.

The following is a summary of the various components relating to the material analyses performed by Roth in connection with the rendering of its fairness opinion. There were no limitations imposed by Giga-tronics on the scope of the investigation.

Selected Comparable Public Companies Analysis

Roth examined comparative company data from two sectors (1) the mission critical equipment and services sector; and (2) the electronic equipment and services sector:

Mission Critical Equipment & Services

 

COMPANY NAME		SYMBOL
Frequency Electronics, Inc.		Nasdaq:FEIM
HEICO Corporation		NYSE:HEI
Kratos Defense & Security Solutions, Inc.		Nasdaq:KTOS
Mercury Systems, Inc.		Nasdaq:MRCY
Teledyne Technologies Inc.		NYSE:TDY
Textron Inc.		NYSE:TXT

Electronic Equipment & Services

 

COMPANY NAME		SYMBOL
Fortive Corporation		NYSE:FTV
Keysight Technologies, Inc.		NYSE:KEYS
National Instruments Corporation		Nasdaq:NATI
Viavi Solutions Inc.		Nasdaq:VIAV

Selected Precedent Transactions Analysis

 

TARGET		ACQUIROR(S)
Tools & Test business of Textron Inc.		Emerson Electric Co.
Raytheon Company		United Technologies Corporation
Physical Optics Corporation, Inc.		Mercury Systems, Inc.
Arcturus AUV, Inc.		AeroVironment, Inc.
Cubic Corporation		Evergreen Coast Capital Corp. Veritas Capital Fund Management, LLC
FLIR Systems, Inc.		Teledyne Technologies Incorporated
Alion Science and Technology Corp.		Huntington Ingalls Industries, Inc.

 

67

Shares Traded Analysis

Roth also conducted an analysis of Giga-tronics’ volume weighted publicly traded common stock price at various points in time over the last twelve months.

General

Roth was entitled to receive a fee of $150,000 for its services upon delivering its opinion letter and a fee of 2% of the value of the common stock and Series F Preferred Stock issued to BitNile upon the closing of the Transactions. Roth will not receive any other payment or compensation contingent upon the consummation of the Transactions. Roth may perform financial services for Giga-tronics, Gresham, or BitNile and each of their respective affiliates in the future and, in such case, expect to receive customary fees for such services. Giga-tronics has agreed to indemnify Roth for certain liabilities and reimburse it for certain expenses in connection with its engagement.

Roth, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Accordingly, Roth may have a conflict of interest with Giga-tronics, Gresham or BitNile by virtue thereof. For example, Roth and its affiliates may in the future provide investment banking and other financial services to Giga-tronics, Gresham or BitNile for which Roth and its affiliates would expect to receive compensation. Roth is a full service securities firm engaged in securities trading and brokerage activities, as well as providing investment banking and other financial services. In the ordinary course of business, Roth and its affiliates may acquire, hold or sell, for our and its affiliates’ accounts and for the accounts of customers, equity, debt and other securities or other interests or securities and financial instruments of Giga-tronics, Gresham or BitNile, and, accordingly, may at any time hold a long or a short position in such securities.

Roth acted as placement agent for a private placement consummated by Giga-tronics in April 2021. Roth also holds warrants to purchase 44,055 shares of Giga-tronics stock. Roth has not otherwise had a material relationship with, nor otherwise received fees from, Giga-tronics, Gresham or BitNile or any other party to the Reincorporation during the two years preceding the date hereof. The Share Exchange Agreement provides that Roth will serve as the underwriter for the offering of Giga-tronics common stock in the Proposed Public Offering, but Roth and Giga-tronics have not entered into an engagement letter or other agreement with respect to the Proposed Public Offering.

Interests of Giga-tronics Executive Officers and Directors in the Transactions

In considering the recommendation of the Board with respect to the Share Exchange Proposal, shareholders should be aware that our executive officers and members of the Board may have interests in the Transactions that may be different from, or in addition to, the interests of Giga-tronics shareholders generally. The Board was aware of these interests and considered them, among other matters, in approving the Share Exchange Agreement and in making its recommendations that shareholders approve the Share Exchange Proposal.

Preferred Shares

The Share Exchange Agreement provides that following the closing of the Share Exchange, we will repurchase or redeem the Outstanding Preferred Shares at the stated liquidation preference amount of such shares. Two of our directors, Lutz Henckels and Tom Vickers, hold some of the Outstanding Preferred Shares that we will purchase on the same terms and price as shares of the Outstanding Preferred Shares held by other shareholders. Mr. Henckels holds 697.4 shares of Series B Preferred Stock, 236 shares of Series C Preferred Stock, and 353 shares of Series D Preferred Stock, which will be purchased for an aggregate purchase price of $246,034. Mr. Vickers holds 317.1 shares of Series B Preferred Stock, 118.05 shares of Series C Preferred Stock, and of 176.1 shares of Series D Preferred Stock, which will be purchased for an aggregate purchase price of $115,667

 

68

Severance Agreements

We have entered into severance agreements with each of John Regazzi, our President and Chief Executive Officer; Lutz Henckels, our Executive Vice President, Chief Financial Officer and Chief Operating Officer; Armand Pantalone, our Chief Technology Officer; and Daniel Kirby, our Chief Customer Officer. The severance agreements are, among other things, designed to avoid the loss of these employees in the event of a potential or following a change of control of Giga-tronics.

Under the terms of each of Mr. Regazzi’s and Mr. Henckels’ severance agreements, if their employment is terminated by us other than for cause or if they quit for “good reason” during the 12 months following a change of control, then we will continue to pay their base annual salary in effect immediately preceding their termination for a period of 15 months, unless they are eligible for Medicare, we will reimburse them for the cost of COBRA insurance premiums, if any, during such period and their unvested options, restricted stock awards and restricted stock units, if any, will vest in full upon the termination of their employment. Under the terms of each of Mr. Kirby’s and Mr. Pantalone’s severance agreements, if their employment is terminated by us other than for cause or if they quit for “good reason” during the two months preceding the first public announcement of change in control or during the 12 months following a change of control, then we will continue to pay their base annual salary in effect immediately preceding their termination for a period of six months.

Under the terms of the severance agreements, “good reason” is generally defined to include a reduction in base salary, a change into whom the executive reports (or in the case of Mr. Kirby and Mr. Pantalone, a material diminution in his authorities, duties or responsibilities or those of the executive to whom he reports), or a change in the location of where the executive must perform his services of more than 50 miles. However, in connection with our entry into the Share Exchange Agreement, each executive officer agreed to waive his right to claim that he is entitled to terminate his employment for “good reason” as a result of a change in his title or a diminution in his authorities, duties or responsibilities. In exchange for Mr. Regazzi’s waiver, we agreed that Mr. Regazzi would receive a retirement benefit equal to the amount that he would be entitled to receive if he terminated his employment for good reason in connection with the Share Exchange. In exchange for Mr. Pantalone’s and Mr. Kirby’s waivers, we granted both of them 10,000 shares of restricted stock that will vest in full in December 2022, subject to his continued service to Giga-tronics. In exchange for Mr. Regazzi’s and Mr. Henckels’s waivers, we granted both of them 10 shares of restricted stock that will vest in full in December 2022, subject to continued service to Giga-tronics.

We anticipate that Mr. Regazzi will be entitled to retirement payments in the aggregate amount of $325,000 pursuant to his Severance Agreement and waiver as a result of the Share Exchange. We do not anticipate that we will terminate Mr. Henckels, Mr. Pantalone or Mr. Kirby during the 12 months following the Share Exchange or take other action entitling any of them to terminate their employment for good reason. However, pursuant to their respective severance agreements, if July 1, 2022 were used as the applicable change of control date and the executives were terminated or quit their employment for good reason on such date; Mr. Henckels would be entitled to payments in the aggregate amount of $350,000; Mr. Pantalone would be entitled to payments in the aggregate amount of $137,500 and Mr. Kirby would be entitled to payments in the aggregate amount of $100,000.

Additionally, under the terms of these employment agreements, if the payments to any executive officer, together with any other payments which such executive officer has the right to receive from us would constitute a “parachute payment” under Internal Revenue Code Section 280G, which we refer to as 280G, the payments pursuant to the employment agreement will be reduced so that the maximum amount of such payments (after reduction) will be one dollar less than the amount that would cause the aggregate of such payments to be subject to the excise tax imposed by Internal Revenue Code Section 4999 (or nondeductible by us under 280G) or any interest or penalties with respect to such excise tax. However, the aggregate of the payments will only be reduced to the extent that the after-tax value of amounts received by the applicable executive officer after application of the above reduction would exceed the after-tax value of the aggregate of these payments without application of such reduction.

 

69

Incentive Bonus Arrangement

We have adopted a Management Change in Control Cash Incentive Opportunity pursuant to which each of our executive officers, John Regazzi, President and Chief Executive Officer; Lutz Henckels, Executive Vice President, Chief Financial Officer and Chief Operating Officer; Armand Pantalone, Chief Technology Officer and Daniel Kirby, Chief Customer Officer, would be entitled to receive an incentive/retention bonus equal to $100,000 or more if the fair market value of Giga-tronics common stock upon the completion of a change in control transaction, such as the Share Exchange, is $4.00 or greater (as may be adjusted for any reverse stock split). Under this arrangement, the amount of each executive officer’s bonus will increase by $200 for each $0.01 that the fair market value of Giga-tronics common stock exceeds $4.00 per share. For example, if the fair market value of Giga-tronics common stock upon completion of the Share Exchange were $5.00, each of the executive officers would be entitled to a bonus equal to $120,000. Payments under this arrangement are subject to reduction to the extent that such payments, when combined with other payments to which the executive is entitled to receive upon a change of control, would exceed the limits in Section 280G of the Code.

If the fair market value of Giga-tronics common stock were $1.10 upon completion of the Share Exchange, which was the last reported trading price of our common stock on the OTCQB as of July 1, 2022, none of the executive officers would be entitled to a bonus under this arrangement.

Summary of Potential Payments to Certain Executive Officers

The following table sets forth the estimated value of the payments to which our executive officers would be entitled pursuant to a “change in control,” subject to execution of a release, based on compensation levels as of the date of this proxy statement, if July 1, 2022 were used as the applicable change of control date and a termination of employment immediately following closing of the Share Exchange such date. The amounts under the heading “Dollar Value of Change in Control Payment” include amounts potentially payable under both the named executive’s severance agreement with Giga-tronics and the Incentive Bonus. Amounts for Mr. Henckels exclude payment he will be entitled to receive upon our repurchase of his Outstanding Preferred Shares. The actual amounts, if any, to be received by the executive officers may differ from the amounts set forth below.

 

Named Executive		Dollar Value of Potential Severance Payments(1)				Dollar Value of Incentive Bonus(2)				Dollar Value of Unvested Equity Awards(3)				Total
Officer
John Regazzi		$	325,000				—				—			$	325,000
Lutz Henckels		$	350,000				—				—			$	350,000
Armand Pantalone		$	137,500				—				—			$	137,500
Daniel Kirby		$	100,000				—				—			$	100,000

 

(1)

Represents the aggregate cash payments the executive would be entitled to receive under severance agreement if the Share Exchange were completed on July 1, 2022 and the executive was terminated or quit his employment for good reason on such date. We anticipate that we do not terminate Mr. Henckels, Mr. Pantalone or Mr. Kirby during the 12 months following the Share Exchange or take other action entitling any of them to terminate his employment for good reason and, therefore, does not anticipate that these executives will become entitled to receive these amounts. While we anticipates that Mr. Regazzi’s employment will be terminated when the Share Exchange is completed, he has agreed to receive the indicated amounts in the form of post-employment retirement benefits rather than as a severance benefit.

(2)	Represents the amount of the retention bonus the executive would be entitled to if the Share Exchange were completed on July 19, 2022. Based on the closing share price of Giga-tronics common stock as of that date, which was $1.10,) the executives would not be entitled a retention bonus.

(3)

Represents the value of in-the-money stock options and unvested restricted stock awards held by the executive on July 1, 2022 that would vest pursuant to the terms of his severance agreement if the Share Exchange were completed and the executive were terminated on such date. As of such date the closing price of Giga-tronics common stock was $1.10 per share, which is less than the exercise price of such options.

 

70

Directors

The Share Exchange Agreement provides that upon the completion of the Share Exchange, the Board will be comprised of seven directors, four of whom shall be designated by BitNile and three of whom shall be current directors of Giga-tronics designated by Giga-tronics. Under the terms of the Share Exchange Agreement, the three current directors designated by Giga-tronics as continuing directors will be nominated for reelection at the first annual meeting of shareholders following the Share Exchange and will be entitled to receive the same compensation for their service as other directors of Giga-tronics. We expect that the three continuing Giga-tronics directors will be John Regazzi, William J. Thompson and Thomas E. Vickers.

Indemnification

Our current directors and officers have rights to indemnification under our Bylaws and indemnification agreements that we have entered into with them. These rights to indemnification will survive completion of the Transactions.

Anticipated Accounting Treatment

We will account for the Share Exchange using the acquisition method of accounting in accordance with GAAP. We will treat Gresham as the acquirer for accounting purposes. In determining the acquirer for accounting purposes, we considered that we expect that, upon completion of the Transactions, BitNile will receive approximately 71.2% of our outstanding common stock and preferred stock and voting power of the combined company, while Giga-tronics shareholders will retain 28.8% of the outstanding common stock and voting power of the combined company. In addition to considering these relative voting powers, we also considered the proposed composition of the combined company’s board of directors and the proposed members of the executive management team of the combined company. Based on these factors, we concluded that Gresham is the accounting acquirer.

Under the acquisition method of accounting, the assets, including identifiable intangible assets, and liabilities of Giga-tronics as of the effective time of the Share Exchange will be recorded at their respective fair values and added to those of Gresham. Any excess of the purchase price for the Share Exchange over the net fair value of Giga-tronics’ assets and liabilities will be recorded as goodwill. The results of operations of Gresham will be combined with the results of operations of Giga-tronics beginning at the closing of the Share Exchange. The consolidated financial statements of Giga-tronics after closing will not be restated retroactively to reflect the historical financial position or results of operations of Gresham. Following the Share Exchange, and subject to the finalization of the purchase price allocation, the earnings of Giga-tronics will reflect the effect of any purchase accounting adjustments, including any increased depreciation and amortization associated with fair value adjustments to the assets acquired and liabilities assumed.

The allocation of the purchase price used in the unaudited pro forma financial statements included in this proxy statement is based upon the fair values of the assets and liabilities determined by a third-party valuation firm. Our preliminary estimates and assumptions are subject to materially change upon the finalization of internal studies and third-party valuations of assets, including investments, property and equipment, intangible assets including goodwill, and certain liabilities.

Ownership of Giga-tronics after the Transactions

As of July 6 2022, there were 2,777,230 shares of Giga-tronics common stock outstanding, 23,482 Outstanding Preferred Shares convertible into an aggregate of 156,547 shares of Giga-tronics common stock and 461,568 prefunded warrants exercisable for an aggregate of 461,568 shares common stock at a nominal price.

Under the terms of the Share Exchange Agreement, on the closing date of the Transactions, we will issue to BitNile 2,920,085 shares of Giga-tronics common stock and 514.8 shares of a new series of preferred stock that

 

71

are convertible into an aggregate of 3,960,043 shares of Giga-tronics common stock, without giving effect to delivery of our common stock issuable to Gresham’s Chief Executive Officer and Chief Operating Officer following the full vesting of the RSUs they hold in May 2024 or upon the exercise of their stock options. In addition, following the closing, we will repurchase all of our Outstanding Preferred Shares.

Based on the foregoing, immediately after the completion of the Transactions, 6,408,728 shares of Giga-tronics common stock will be issued and outstanding and the shares issued to BitNile in the Transactions will represent approximately 71.2% of the outstanding common stock including the Series F Convertible Preferred Stock, 28.8% of the voting power of Giga-tronics. On a fully diluted basis (that is, assuming the exercise or conversion of all preferred shares, option and warrants convertible into or representing the right to acquire shares of Giga-tronics common stock), current holders of Giga-tronics common stock will hold approximately 32.4% of Giga-tronics following the Transactions and BitNile will hold approximately 67.6%. The foregoing amounts do not include an additional 1,307,092 shares of Giga-tronics common stock that BitNile would have the right to acquire upon the optional conversion of the Convertible Note at the conversion price of $3.25 per share or shares of common stock that BitNile has agreed to acquire in the Proposed Public Offering. The foregoing are estimated percentages of post-Transactions shares of Giga-tronics common stock and do not give effect to delivery of our common stock issuable to Gresham’s Chief Executive Officer and Chief Operating Officer following the full vesting of the RSUs they hold in May 2024 or upon the exercise of their stock options.

Security Ownership of Certain Beneficial Owners and Management before the Transactions

The following table sets forth certain information as of July 6, 2022 with respect to the beneficial ownership of our common stock by (i) each shareholder known by us to be the beneficial owner of more than five percent (5%) of our common stock, (ii) by each of our current directors and executive officers as identified herein, and (iii) all of our directors and executive officers as a group. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock, stock options, and common stock purchase warrants that are currently exercisable or convertible into shares of our common stock within sixty (60) days of the date of this document, are deemed to be outstanding and to be beneficially owned by the person holding the options, or warrants for the purpose of computing the percentage ownership of the person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

Unless otherwise noted, the address for all officers and directors listed below is the Company’s headquarters located at 5990 Gleason Drive, Dublin, California 94568. The address for Messrs. Read and Long is Gresham’s headquarters located at 7272 Indian School Road, Suite 540, Scottsdale, Arizona 85251. The address for Messrs. Bentz, Horne and Smith is BitNile’s headquarters located at 1411 Southern Highlands Parkway, Suite 240, Las Vegas, Nevada 89141.

 

Stock Ownership of Certain Beneficial Owners
Name of Beneficial Owner and Position(s) with the Company		Amount of Beneficial Ownership				See notes below				Percentage of Total Outstanding Common Stock
Lutz Henckels, EVP, CFO, COO and Director			128,613				1				4.63	%
John R. Regazzi, Chief Executive Officer and Director			100,834				2				3.63	%
William J. Thompson, Director, Chairman of the Board			28,202				3				1.02	%
Thomas E. Vickers, Director			33,059				4				1.19	%
Armand Pantalone, Chief Technology Officer			39,444				5				1.42	%
Daniel Kirby, Vice President Business Development			53,052				6				1.91	%

 

72

Stock Ownership of Certain Beneficial Owners
Name of Beneficial Owner		Amount of Beneficial Ownership				See notes below				Percentage of Total Outstanding Common Stock
All executive officers and directors as a group			383,204								13.80	%
(6 persons, including those above)
5% Shareholders
Cornelis F. Wit Revocable Living Trust			373,461				7				13.45	%
2700 N. Military Trail Suite 210
Boca Raton, FL 33431
Laurence W. Lytton			274,700				8				8.92	%
467 Central Park West
New York, NY 10025
AWM Investment Company, Inc.			237,383				9				8.55	%
c/o Special Situations Funds 527 Madison Avenue, Suite 2600
New York, NY 10022

 

1

Includes 72,950 shares of common stock issuable under options exercisable within 60 days of August 1, 2022, 4,650 shares of common stock issuable upon conversion of 697.4 shares of Series B preferred Stock, 1,573 shares of common stock issuable upon conversion of 236 shares of Series C preferred Stock, and 2,353 shares of common stock issuable upon conversion of 353 shares of Series D preferred Stock.

2	Includes 51,087 shares of common stock issuable under options exercisable within 60 days of August 1, 2022.

3	Includes 7,028 shares of common stock issuable under options exercisable within 60 days of August 1, 2022.

4

Includes 1,415 shares of common stock issuable under options exercisable within 60 days of August 1, 2022, 2,114 shares of common stock issuable upon conversion of 317.1 shares of Series B preferred Stock, 787 shares of common stock issuable upon conversion of 118.05 shares of Series C preferred Stock, and 1,174 shares of common stock issuable upon conversion of 176.1 shares of Series D preferred Stock.

5	Includes 20,245 shares of common stock issuable under options exercisable within 60 days of August 1, 2022.

6	Includes 21,952 shares of common stock issuable under options exercisable within 60 days of August 1, 2022.

7

Information is based on a Schedule 13G/A filed by Cornelis Wit on February 16, 2022. Includes 56,227 shares of common stock, 54,878 shares of common stock issuable upon conversion of 8,231 shares of Series B Preferred Stock, 20,473 shares of common stock issuable upon conversion of 3,071 shares of Series C Preferred Stock and 30,553 shares of common stock issuable upon conversion of 4,583 shares of Series D Preferred Stock.

8	Information is based on a Schedule 13G/A filed by Laurence W. Lytton on February 15, 2022. Does not include 461,538 shares of common stock potentially issuable upon exercise of warrants to purchase common stock at a nominal exercise price.

9

Information is based on a Schedule 13G/A filed by AWM Investment Company, Inc. (“AWM”) on February 11, 2022 reporting that AWM Investment Company, is the investment adviser to Special Situations Technology Fund, L.P.(“TECH”) and Special Situations Technology Fund II, L.P. (“TECH II”), (TECH and TECH II together referred to as the “Funds”). As the investment adviser to the Funds, AWM holds sole voting and investment power over 36,781 shares of common stock and 200,602 shares of common stock held by TECH II.

 

73

Security Ownership of Giga-tronics after the Transactions

The following table sets forth information with respect to the beneficial ownership of Giga-tronics common stock after consummating the Share Exchange by each person expected to serve as an executive officer or director of the combined company, all such executive officers and directors as a group, and each person expected to own more than 5% of our common stock. For this table, we assume 2,920,085 shares of common stock and 514.8 shares of Series F Convertible Preferred Stock will be issued, and all shares of our Outstanding Preferred Shares be repurchased in connection with the Share Exchange. We assume that 6,408,728 shares of our common stock will be outstanding. We further assume that the 4,250,000 Convertible Note we will issue BitNile will not be converted due to a 4.99% beneficial ownership limitation. While Gresham’s counsel and BitNile’s counsel have discussed potentially eliminating the 4.99% beneficial ownership limitation, in the interest of time they decided to defer discussions about the matter.

 

Name of Beneficial Owner		Amount of Beneficial Owner+				See Notes Below				Percentage of Total Outstanding Common Stock
Directors and Executive Officers:
Jonathan Read			212,401				1				2.05	%
Timothy Long			141,605				2				1.37	%
Lutz Henckels			128,613				3				1.24	%
Jeffrey Bentz			0				4				0	%
William B. Horne			6,880,128				5				66.35	%
Robert Smith			0				6				0	%
John R. Regazzi			100,834								*
William J. Thompson			28,202								*
Thomas E. Vickers			33,059								*
All directors and executive officers as a group (7 persons)			7,524,842								72.45	%
5% Shareholders:
BitNile Holdings, Inc.			6,880,128				7				66.35	%
Cornelis F. Wit Revocable Living Trust			373,461				8				3.60	%
Laurence W. Lytton			736,328				9				7.10	%

 

*	Less than 1%.

+

Applicable percentages are based on 6,408,728 shares of common stock outstanding, after giving effect to the issuance of 2,920,085 shares of common stock to be issued pursuant to the Share Exchange. Shares of common stock subject to options, warrants, and convertible securities exercisable, convertible, or exchangeable within 60 days are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Unless otherwise indicated in the footnotes to this table, We believe that each of the shareholders named in the table has sole voting and investment power with respect to the shares indicated as beneficially owned by them.

(1)	Mr. Read will be appointed as the Chief Executive Officer and a director of Giga-tronics upon completion of the Share Exchange. Represents vested stock options. Does not include 149,925 RSUs because the underlying common stock will not be deliverable until May 2024.

(2)	Mr. Long will be appointed as the Chief Operating Officer of Giga-tronics upon completion of the Share Exchange. Represents 133,267 vested stock options. Does not include 99,950 RSUs because the underlying common stock will not be delivered until May 2024.

(3)	Mr. Henckels will continue to serve as the Chief Financial Officer of Giga-tronics upon completion of the Share Exchange.

(4)	Mr. Bentz will be appointed as a director of Giga-tronics upon completion of the Share Exchange.

 

74

(5)

Mr. Horne will be appointed as a director of Giga-tronics upon completion of the Share Exchange. Mr. Horne is the Chief Executive Officer of BitNile and may be deemed to beneficially own shares beneficially owned by BitNile. Represents 2,920,085 shares of common stock issuable to BitNile pursuant to the Share Exchange, and 3,960,043 shares of common stock underlying 514.8 shares of Series F Convertible Preferred Stock issuable to BitNile pursuant to the Share Exchange.

(6)	Mr. Smith will be appointed as a director of Giga-tronics upon completion of the Share Exchange.

(7)	Represents 2,920,085 shares of common stock issuable to BitNile pursuant to Share Exchange and 3,960,043 shares of common stock underlying 514.8 shares of Series F Convertible Preferred Stock issuable pursuant to the Share Exchange.

(8)	Information based on a Schedule 13G/A filed by Cornelis F. Wit on February 16, 2022. Address is 2700 N. Military Trail Suite 210, Boca Raton, FL 33431.

(9)	Information is based on a Schedule 13G/A filed by Laurence W. Lytton on February 15, 2022. In addition, includes warrants to purchase 461,538 shares of Giga-tronics common stock at a nominal price. Mr. Lytton’s address is 467 Central Park West, New York, NY 10025.

Executive Officers and Board of Directors of Giga-tronics After the Transactions

The following table sets forth information on our executive officers and directors after the Transactions.

 

Name		Age		Position with Giga-tronics After the Transactions		Current Position With Gresham
Jonathan Read		66		Chief Executive Officer		Chief Executive Officer
Timothy Long		65		Chief Operating Officer		President of Gresham
Lutz Henckels		81		Chief Financial Officer		None
Robin Shaffer		59		Chief Innovation Officer		Chief Innovation and Technology Officer
Sean Lyle		55		Chief Development Officer		Chief Development Officer

Jonathan Read’s background in the following table.

Timothy Long has served as the Chief Operating Officer of Gresham Worldwide Inc. since December 2019. He served as Executive Vice President for Strategic Development at DPW Technologies Inc., the predecessor company to Gresham Worldwide, from April 2019 until December 2019. He also has served as the Chief Executive Officer and Chairman of the Board of Directors of Microphase Corporation, a subsidiary of Gresham Worldwide, Inc., since December 2019 to the present. Mr. Long serves on the Board of Directors of Gresham Worldwide, Inc., since December of 2019 as well as a director of Gresham Power Electronics Ltd. since August 2019 and, RELEC Electronics Ltd since December of 2020 in the United Kingdom. He also is a member of the Board of Directors of PowerGrow, Inc., since 2019. Before joining Gresham Worldwide, Mr. Long worked as a consultant to businesses, municipalities, and institutions of higher learning on government contracting and government affairs for 15 years. Prior to that, Mr. Long work for in a variety of executive level positions at the intersection of law, public policy, business development and operations management to build businesses with small, mid-sized and Fortune 500 companies. He started his professional career as an attorney in private practice, representing and advising clients on litigation, administrative proceedings, and government contracts matters. Mr. Long earned a Bachelor of Arts degree in Political Science and Economics from Old Dominion University and Juris Doctor degree from the University of Virginia School of Law.

Lutz Henckels has served as a member of our Board since 2011. He was appointed as our Executive Vice President and Chief Financial Officer in March 2019, having served as our Interim Chief Financial Officer since February 2018. He was appointed to the additional position of Chief Operating Officer in July 2020. Dr. Henckels has more than 40 years’ experience in corporate leadership roles, and previously served as Chief Executive Officer of public and private technology companies, including HiQ Solar, SyntheSys Research (acquired by Tektronix/Danaher), LeCroy Corporation and HHB Systems. He was the founder of HBB Systems,

 

75

an electronic design automation company, and took that company public with its listing on Nasdaq. As Chief Executive Officer of LeCroy, he focused the company on its oscilloscope business, drove a successful turnaround and guided that company though its public listing on Nasdaq. Dr. Henckels holds a Bachelor of Science and Master of Science in Electrical Engineering and PhD in Computer Science from the Massachusetts Institute of Technology and he is also a graduate of the OMP program of Harvard Business School. During his career he has served as a director for several publicly traded companies, including Ikos, Inframetrics and LeCroy.

Robin D. Shaffer currently serves as Chief Innovation Officer effective July 2022. Previously Mr. Shaffer served as interim Chief Technology Officer & Chief Innovation Officer, having joined the company in January 2021. Immediately prior to Gresham Worldwide he served as Managing Partner — Technology for Align Infrastructure and as Director of Sales & Marketing for AirTest Technologies, Inc. (OTC:AATGF). Mr. Shaffer served as a lead Technology Partner for Sustainability Partners from 2015 to 2020 and, prior to 2015, held senior management positions across a breadth of technology companies serving as Senior Vice President of Sunlink; General Manager — Solar for Cooper Industries; Sr. Dir. Of Sales & Marketing for Sunverge, Vice President Sales Operations for Clearedge Power and Vice President of Sales & Marketing for NK Technologies.

Sean P. Lyle currently serves as the Chief Development Officer for Gresham Worldwide, effective June 15th, 2022. Previously Mr. Lyle served as interim Chief Development officer of Gresham Worldwide on a contract basis from July 2021 to June 2022. Mr. Lyle has over 20 years of management experience in technical industries including Software, Energy and Agribusiness. Mr. Lyle most recently served as the Founder and CEO of PowerGrow Inc., from January 2017 through June 2022; where he led the strategic direction of PowerGrow Inc, to create clean energy powered, high-tech glass greenhouse facilities for sustainable agriculture. In addition, Mr. Lyle was President at an energy services company called Energy Surety Partners. Mr. Lyle worked for over 5 years at Siemens Industry (OTCMKTS: SIEGY), in their Energy & Environmental Solutions group. Mr. Lyle is a Board Member at WOW Life Sciences, a life sciences company focused on the development of nutraceutical products that promote natural immunity. Mr. Lyle is experienced in helping organizations scale their operations through organic growth, as well as mergers and acquisition activities. Mr. Lyle is a subject matter expert for renewable energy program development, information technology development and business development for the Federal, State and Local Government sectors. Mr. Lyle is a LEED Accredited Professional (AP) and a member of BENS (Business Executives for National Security).

The Share Exchange Agreement provides that upon the completion of the Share Exchange the Board will be comprised of seven directors, four of whom shall be designated by BitNile and three of whom shall be current directors of Giga-tronics designated by Giga-tronics. Under the terms of the Share Exchange Agreement, the three current directors of Giga-tronics designated by Giga-tronics as continuing directors will be nominated for reelection at the first annual meeting of shareholders following the Share Exchange and will be entitled to receive the same compensation for their service as other directors of Giga-tronics. Our Board has not determined which of its directors will be among the three directors that will continue as directors of Giga-tronics following the Share Exchange.

BitNile expects that following four persons will be BitNile’s designees to the Giga-tronics board of directors upon completion of the Share Exchange:

 

Name of Director		Age		Background
Jeffrey Bentz		60		Mr. Bentz has served as a director of BitNile since 2018. He has been a director of Gresham since 2019. Mr. Bentz is an experienced businessman who has served since 1994 as President of North Star Terminal & Stevedore Company, a full-service stevedoring company located in Alaska and whose major areas of business include terminal operations and management, stevedore services, and heavy equipment operations. He also has served as a director and advisor to several private companies and agencies.

 

76

Name of Director		Age		Background
William B. Horne		53		Mr. Horne has been the Chief Executive Officer of BitNile since January 2021 and a director since October 2016. He served as BitNile’s President from August 2020 until January 2021 and previously as its Chief Financial Officer since January 2018. He has been a director of Gresham since 2019. Mr. Horne served as the Chief Executive Officer and a director of Ault Disruptive Technologies Corporation (NYSE:ARDT) since January 2021. He served as the Chief Financial Officer of Targeted Medical Pharma, Inc. (OTCBB: TRGM) from August 2013 to May 2019. Mr. Horne is a director and Chief Financial Officer of Avalanche International, Corp., an Exchange Act registrant. Mr. Horne has served on the board of directors of Alzamend Neuro, Inc., a biotechnology firm dedicated to finding the treatment, prevention and cure for Alzheimer’s Disease, since 2016. Mr. Horne previously held the position of Chief Financial Officer in various public and private companies in the healthcare and high-tech field. Mr. Horne has a Bachelor of Arts Magna Cum Laude in Accounting from Seattle University.
Jonathan Read		66		Mr. Read has been Gresham’s Chief Executive Officer since May 2019. He has been a director of Red Cat Holdings, Inc. since August 18, 2017 and was the Chief Executive Officer, Secretary and Treasures and a director of Timefire VR. Inc from October 2017 until May 2019 and from November 1, 2015 to January 31, 2017. In May 2019 Red Cat acquired Timefire. From July 14, 2017 through July 20, 2018, Mr. Read served as a director of BTCS Inc, a digital asset-related company. From 2005 through 2012, Mr. Read was the Chief Executive Officer of ECOtality Inc. (“ECOtality”), a San Francisco based company that Mr. Read founded and was formed to create a network of charging stations for electric cars. In 2013, ECOtality, filed for Chapter 11 bankruptcy protection. In 2014, Mr. Read filed for bankruptcy.
Robert Smith		76		Mr. Smith has been a director of Gresham since 2020. He serves as the lead independent director of BitNile and has been a director since September 2016. Previously, he was a director of BitNile from November 2010 until May 2015. He is currently a C-level executive consultant working with Bay Area high-tech firms on various strategic initiatives in all aspects of their business. Mr. Smith has served on the board of directors of Ault Disruptive Technologies Corporation, an NYSE listed SPAC, since its IPO in December 2021.

 

77

Giga-tronics expects that following three current directors of Giga-tronics will continue as directors of Giga-tronics following the Share Exchange:

 

Name		Age		Background
John R. Regazzi		67		John R. Regazzi has served as a member of our Board since 2006. He has been our Chief Executive Officer since February 2018. Previously he was appointed Co-Chief Executive Officer in June 2017 and Chief Technology Officer in August 2016. From 2006 to August 2016, he was the President and Chief Executive Officer of the Company. Prior to that, Mr. Regazzi held the following positions within the Giga-tronics Instrument Division: President and General Manager, Vice President of Operations, and Vice President of Engineering. Prior to Giga-tronics, Mr. Regazzi was with Hewlett Packard for 22 years in various design and management positions associated with their microwave sweeper and synthesizer product lines. Mr. Regazzi holds a Bachelor of Science in Electrical Engineering from Rutgers University and a Master of Science in Electrical Engineering from Lehigh University.
William J. Thompson		57		William J. Thompson has served as Chairman of our Board since August 2016 and has been a member of our Board since 2011. Dr. Thompson served as our Acting Chief Executive Officer from August 2016 until June 2017. Dr. Thompson serves as Chief Technology Officer of Safetonet Limited, a privately held cyber-safety business focused on protecting children from online harms that makes Net Nanny™ parental control software, and he is a partner at QFT Analytics, a private company that offers financial modeling and back office solutions for small companies. Dr. Thompson was a Managing Member of Alara Capital AVI II and was Director of Research for Jacobi Capital Management. Dr. Thompson cofounded Circadiant Systems (acquired by JDS Uniphase Corporation), a venture capital backed test and measurement company that designed and manufactured instrumentation for optical communication. Dr. Thompson also served as a Member of Technical Staff at Lucent Technologies where he designed analog RF optoelectronic components for high speed optical communication, and as a researcher with the University of Maryland. Dr. Thompson graduated summa cum laude with a Bachelor of Science in Physics from University of North Carolina at Charlotte and holds a Ph.D. in Physics from Stony Brook University. He graduated as a Palmer Scholar with an MBA in Finance from the Wharton School of the University of Pennsylvania.
Thomas E. Vickers		58		Thomas E. Vickers has served as a member of our Board since September 2020. Mr. Vickers has more than 35 years of experience in corporate finance and operations management. Presently, he is the President of Stack Financial Inc., a finance and accounting advisory firm that provides family office, Chief Financial Officer on demand, finance and accounting services to various clients. He has been a director of Veritas Farms, Inc., an

 

78

Name		Age		Background
				Exchange Act registrant, since 2020. Previously, he served as Chief Financial Officer and Senior Vice President of Human Resources for OmniComm Systems Inc., a healthcare technology company, where he was a key member of the executive team that successfully completed that company’s acquisition by Anju Software. At OmniComm he had primary responsibility for planning, implementing, managing and controlling all financial activities and worked directly with the Chief Executive Officer to determine budget, disbursements and expenditures of money and capital assets. Prior to that, Mr. Vickers spent six years at Ocwen Financial Corporation, a financial services company providing mortgage servicing solutions, where he first served as Director and Controller and later as Director, Servicing Operations. Earlier in his career, Mr. Vickers was Vice President of Operations for S & J, and before that he worked at Precision Response Corporation where he served in financial and operational roles of increasing responsibility, culminating as Vice President, Financial Operations. He holds a BBA in Finance, a BBA in Accounting and an MTX in Taxation from Florida Atlantic University, as well as an MBA in Finance from the University of Miami. He is also a Chartered Financial Analyst® charter holder.

Federal Securities Laws Consequences; Stock Transfer Restriction Agreements

All shares of Giga-tronics common stock and Series F Convertible Preferred Stock that will be issued to BitNile in the Share Exchange will be issued pursuant to the exemption from the registration requirements under the Securities Act provided pursuant to Section 4(a)(2) thereof as a transaction not involving a public offering, and as such will be deemed restricted securities as that term is understood under the Securities Act.

GRESHAM’S BUSINESS

Overview

Gresham, through its subsidiaries, designs, manufactures, and distributes specialized electronic solutions, automated test solutions, power electronics, supply and distribution solutions, and radio, microwave and millimeter wave communication systems and components for a variety of applications with a focus on the global defense industry. Gresham also offers bespoke technology solutions for mission critical applications in the medical, industrial, transportation and telecommunications markets.

Gresham’s Strengths

Gresham has the following core strengths that it believes gives it a competitive advantage:

 

•

High quality, ultra-reliable bespoke technology offerings with elegant designs and precision “high touch” manufacture that stand the test of time, narrow the field of competition and command enhanced operating margins.

 

•

Enduring relationships with “blue chip” customers in defense with diversity in other growth markets such as health care, industrial, transportation and telecommunications provide stable revenue growth and reduce sales cost.

 

79

•

Substantial backlog of orders with definite delivery dates for solutions engineered into long life cycle platforms that provide revenue base for years to come. Global operations expand its market opportunities, extend its operational reach and diversify its business base.

Impact of COVID-19 on Gresham’s Operations

COVID-19 had a material adverse effect on Gresham’s operations but it appears to no longer be a material issue. No assurances can be given that the future variants will not have a material adverse effect. See “Risk Factor” at page 33.

Government Support Programs

On April 18, 2020, Microphase received a loan pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”) evidenced by a promissory note (the “PPP Note”) in the principal amount of $467,333 (“PPP Loan”) from People’s United Bank. The PPP Loan has a term of 2 years, bears an interest at 1% per annum and may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan were used by Microphase for payroll costs, rent and utilities during the eight-week period after origination. This helped offset some of the adverse effects of the COVID-19 pandemic and allowed Microphase to serve its customers at a reduced capacity but without experiencing any cancellation of its open orders. The Small Business Administration approved forgiveness of the Microphase PPP loan in June 2021, enabling Microphase to realize that loan amount as income in 2021.

The UK Government subsidized salaries of workers furloughed because of pandemic disruptions under the Coronavirus Job Retention Scheme, which extended through October 31, 2021. The subsidy program covered 80% of an employee’s usual compensation for hours not worked because of the pandemic related shutdowns and furloughs. Gresham Power took advantage of this program to defray costs of paying workers during slowdowns and shutdowns because of the pandemic. Gresham Power also received a government backed low interest “Bounce Back” loan with extended repayment terms for operating capital in 2021.

Gresham’s Corporate History and Structure

Gresham principally conducts its operations through its through its subsidiaries, Microphase, Enertec, Gresham Power and Relec.

In January 1998, BitNile’s predecessor company acquired Gresham Power, which manufactures and distributes ultra-reliable power systems for defense customers and distributes other high quality power electronics solutions to defense and commercial customers.

On June 2, 2017, BitNile purchased 57.89% of the outstanding capital stock of Microphase, a design-to-manufacture original equipment manufacturer (“OEM”) delivering world-class radio frequency (“RF”) and microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and detector logarithmic video amplifiers (“DLVA”) to the military, aerospace and telecommunications industries. In two subsequent transactions, BitNile acquired an additional 1.45% of the outstanding capital stock of Microphase for an aggregate 57.35% in total. BitNile subsequently transferred its ownership of Microphase to Gresham. Effective July 1, 2022, Gresham purchased 444,444 additional shares of Microphase common stock bringing its ownership to 63.07%

On May 23, 2018, BitNile acquired Enertec, Israel’s largest private contractor offering specialized electronic solutions for the military market, including missile launch, automated testing, combat systems, command and control solutions. BitNile subsequently transferred its ownership to Gresham.

 

80

On November 30, 2020, Gresham acquired Relec, a company based in Wareham, United Kingdom that markets and distributes power electronics and display solutions for mission critical rail, industrial, medical, telecoms and military applications. The acquisition was structured as a stock purchase under which Gresham paid approximately $3.6 million, net of cash which the sellers retained with additional contingent cash payments up to approximately $665,000 based on Relec’s future financial performance over a three-year period. Relec will pay the sellers an earn-out of approximately $210,000. The acquisition of Relec enhanced Gresham’s presence in industrial and transportation markets in the United Kingdom and Europe and considerably broadened its product portfolio, including high-quality power conversion and display product offerings. Relec specializes in AC-DC power supplies, DC-DC converters, displays and EMC filters.

Gresham’s current corporate structure is reflected at page 3:

Set forth below is information concerning Gresham’s subsidiaries.

 

Name		% Owned		Domicile		Date Business Started
Enertec		100%		Israel		1995
Relec		100%		United Kingdom		1978
Gresham Power		100%		United Kingdom		1932
Microphase		63.07%		Delaware		1955

A description of the businesses of Gresham’s subsidiaries follows.

Microphase Corporation

Microphase designs, manufactures and sells microwave electronics components for radar, EW, and communication systems. Such components include RF and microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and DLVAs. Microphase’s customers are comprised of the U.S. military, and contractors to the U.S. military and to militaries of other countries including prime contractors and sub-contractors. Microphase’s technology innovations are used in many significant U.S. Government defense programs, including the Patriot missile, the F-16, the F-35 and the B-1B Stealth Bomber. Other notable programs in which Microphase’s products are or were used include the Atlas Missile, Vanguard Missile, Polaris Missile System, SHRIKE Missile, ARM Missile, Patriot Missile System, THAAD (or Terminal High Altitude Area Defense), the Samos, Tiros, and Currier Space Probes, the FB-111, EA-6B, F-14, F-18 JAS Gripen fighter, MODI & MFEW IED countermeasures programs and more recently drone programs including the Predator, the Reaper and the Shadow.

Microphase’s advanced technology products enable the ultra-sensitive detection and high precision video amplification that are necessary to accurately recover the signals and facilitate use of the information received. These products include:

 

•

filters that sort and clarify microwave signals, including multiplexers that are a series of filters combined in a single package;

 

•

solid state amplifiers that amplify microwave signals;

 

•

detectors and limiters that are semiconductor devices for detection of radar signals and protection of receivers from damage from high power signals and jamming;

 

•

detector log video amplifiers that are fully integrated, ruggedized, “mil-spec” signal detection systems; and

 

•

integrated assemblies that combine multiple functions from a range of components and devices, including transmitters, receivers, filters, amplifiers, detectors, and other functionality into single, efficient, high performance, multifunction assemblies.

 

81

Microphase maintains and monitors a supply chain of high-quality, customer-approved component manufacturers and distributors to provide the essential elements for its products. However, Gresham recently has undertaken a comprehensive effort to upgrade its production infrastructure and to in-source more fabrication, sealing, wire bonding and finishing processes to increase control over the production processes to lower costs and reduce lead times. Microphase is continually improving its internal processes to ensure the highest quality and consistent manufacturing of its power solutions. Microphase tunes and tests all of its products under stress operating conditions per defined in tuning protocols and test procedures it developed as part of the production process. This approach ensures that its customers can use and incorporate Microphase products into systems and sub-systems with confidence in the operational performance and reliability.

Compliance with international safety agency standards is critical in every application, and power solutions play a major role in meeting these compliance requirements. Microphase safety engineers and quality assurance teams help ensure that its custom products are designed to meet all safety requirements and are appropriately documented to expedite safety approval processes.

Enertec Systems 2001 Ltd.

Based in Israel, Enertec designs, develops, manufactures and maintains advanced end-to-end high technology electronic solutions for military, medical, telecommunications and industrial markets. Those solutions include custom computer-based automated test equipment and turnkey systems to ensure combat readiness, provide command and control, and direct and deploy resources in military operations in harsh environments and battlefield conditions. Enertec also designs, develops, manufactures and maintains high precision calibration equipment for lifesaving medical operations for a global health care products company as well as advance power systems for electric vehicle, telecom and other industrial applications. Enertec delivers complete end-to-end project management with requirements definition, systems engineering, design/development, production, testing, integration, field support, maintenance and optimization. Its custom engineered solutions enable and support mission critical air, land and sea military platforms, e.g., missiles, UAVs, combat aircraft, boats, submarines, trailers and satellites.

Enertec’s primary customers include the Israeli Ministry of Defence and the three major defense contractors in Israel — Israel Air Industries (IAI), Rafael and Elbit Systems. In addition, Enertec has a strategic partnership with Cyient to build and deliver solutions for the Indian military. High tech capabilities to deliver advance electronics solutions create possible opportunities for other Gresham operating subsidiaries — Microphase and Gresham Power — to supply components for Enertec solutions. Enertec also provides geographic reach into the Middle East and India to broaden Gresham’s footprint in delivering the highest quality and most advance technology solutions across the globe.

Enertec is among Israel’s largest, most well-established manufacturers of test equipment and simulators. Enertec develops and manufacture test systems and simulators for all types of weapons systems at all levels of maintenance, development, and integration. Enertec is currently working on developing a new generation of electronics cards and assemblies to build a new generation of test systems.

Enertec complies with all information security requirements included in its customer contracts as well as all the confidentiality laws that Israel mandates for work related to defense of the country.

Gresham Power

Gresham Power is the smallest of Gresham’s operating subsidiaries. In January 1998, Gresham Power was acquired by BitNile’s predecessor company.

Gresham Power designs, manufactures, and distributes switching power supplies, uninterruptible power supplies and power conversion and distribution equipment frequency converters for the commercial and military

 

82

markets, under the name Gresham. Frequency converters manufactured by Gresham are used by naval warships to convert their generated 60-cycle electricity supply to 400 cycles. This 400-cycle supply is used to power their critical equipment such as gyro, compass, and weapons systems. Gresham Power also designs and manufactures transformer rectifiers for naval use. Typically, these provide battery supported back up for critical DC systems, such as machinery and communications. In addition, higher power rectifiers are used for the starting and servicing of helicopters on naval vessels, and Gresham Power now supplies these as part of overall helicopter start and servicing systems. Gresham Power believes that its products add diversity to Gresham’s product line, provide greater access to the United Kingdom and European markets, and strengthen Gresham’s engineering and technical resources. Gresham Power’s largest customer is the Royal Navy which accounted for approximately 70% of its revenues in 2021.

Relec Electronics Ltd.

Relec was established in 1978 with the aim of providing specialist power conversion and display products to support professionals in the electronics industry. Relec markets and distributes power electronics and display solutions for mission critical rail, industrial, medical, telecoms and military applications. Relec develops custom solutions for various applications ranging from light industrial to heavily ruggedized for the harshest of environments. Relec customizes product selection feature functionality to achieve optimum performance and service delivery for specific customer requirements. Relec currently operates in specific fields, specializing in AC-DC Power Supplies, DC-DC Converters, Displays and EMC Filters. Approximately 78% of Relec’s 2021 revenues came from sales to customers within the United Kingdom and the balance came throughout the world.

Additional Information about Gresham’s Products and Solutions

Gresham’s subsidiaries’ defense products and solutions include weapon test and simulation systems, command and control equipment for weapons systems, laser system drivers, military grade power supplies and converters, amplifiers, radio frequency, microwave, and millimeter-wave filters for electronic warfare, radar, and communications systems, display technologies, advanced integrated multifunction assemblies and sub-systems, and high-performance component solutions. Gresham’s subsidiaries design, develop, manufacture and distribute advanced electronic technology solutions which convert, regulate, purify, manage or distribute electrical power for electronic equipment. Its power solutions are intended for mission-critical defense, industrial, health care and transportation applications in, and generally convert AC current from the power grid to DC current, or modify the voltage being delivered (DC to DC). Gresham’s subsidiaries also offer standard off-the-shelf, modified-standard and custom-built products. Although Gresham’s subsidiaries sell standard products unmodified to its customers, those standard offerings are designed into specific customer product configurations in most instances. Modified-standard products are based on lightly modified versions of standard products. Custom products are designed specifically to the customer’s specification and are not generally sold to other customers.

 

•

Test and simulation systems for a wide array of weapon systems: Enertec is Israel’s largest, most well-established manufacturer of test equipment and simulators. Enertec develops and manufactures test systems and simulators for all types of weapons systems at all levels of maintenance, development, and integration.

 

•

Command and control equipment and workstations for weapons systems: Enertec’s ruggedized command and control systems are used for operating complex weapon systems and installed on mobile shelters or missile boats. These solutions include command and tracking systems, operation consoles for weapon systems, naval control and communications systems, and ground command system.

 

•

Power supplies, transformers and converters for combat aircraft, missiles, ships and mobile ground units: Gresham Power and Relec offer ruggedized sophisticated military systems for vehicles, ships, and submarines.

 

•

Drivers for laser systems: Enertec’s computerized systems assembled on combat aircraft and mobile weapons units drive high power laser diodes, up to 200 Watt, and enable full control and reporting to a remote computer, as well as control of flow and temperature for high precision.

 

83

•

Detector Log Video Amplifiers: Microphase provides a wide selection of best-in-class DLVA technology offerings. DLVAs have a wide range of military, aerospace, and other mission critical applications. Nine models cover 25 MHz to 40 GHz in octave and multi-octave ranges with exceptional performance in a compact size. All units are designed to operate over –67° to +185°F and military environments.

 

•

Successive Detection Log Video Amplifiers (“SDLVA”): SDLVAs provide high sensitivity and wide dynamic range performance. One of the key attributes of an SDLVA is its ability to demodulate and compress transmitted data in such a way as to produce an output voltage that increases in linear increments with respect to radio frequency output power. SDLVAs are high performance, multi-octave assemblies designed for use in a wide range of applications including electronic warfare systems, instrumentation, and telecommunications equipment.

 

•

Radio frequency, microwave, and millimeter-wave filters: Microphase’s filter products cover a frequency range of DC to 90 GHz and are used in electronic warfare, radar, and military communications systems, weather, satellite, and commercial communications systems, land mobile radio systems, and precision laboratory test equipment. Most of its filter products and solutions are custom designed and manufactured to meet a wide range of applications and specifications.

 

•

Millimeter wave products: Microphase’s standard products include amplifiers, control components, detectors, filters/channelizers, and transceivers for defense applications. Microphase offers custom designed components and subsystems.

 

•

High performance component solutions: Microphase offers a comprehensive range of standard and custom designed high performance component solutions including detectors, limiters, multipliers, switches, couplers covering frequency range of 0.1 – 40 GHz. It also offers integrated multifunction component solutions such as detector-coupler, limiter-detector, and filter-limiter-detector modules.

 

•

Display technologies: Relec offers standard and custom displays and modules and screen enhancements to improve the optical, mechanical and environmental performance. Relec develops custom solutions for various applications ranging from light industrial to heavily ruggedized for the harshest of environments.

 

•

Multifunction Assemblies and Integrated Subsystems: Microphase offers a base line of integrated multifunction assemblies for subsystems, which can be modified to meet customer-specific performance and application criteria. By integrating its own devices with other RF/microwave hardware, Microphase engineers complex solutions that deliver substantial space and cost savings, with better overall performance and reliability. Microphase has a 60-year history in design and manufacture of advanced integrated multifunction assemblies and sub-systems incorporating the latest component technologies.

The high degree of customization of most of Gresham’s offerings to unique customer requirements typically narrows the field of competition for its products and solutions. Even standard, “off-the-shelf” power electronics products may be “designed in” to applications of customers for Gresham’s UK subsidiaries, raising barriers to competing solutions.

Engineering and Technology

Gresham’s engineering and product development efforts vary with each operating subsidiary. Most of these efforts focus on designing and developing new products in connection with custom product design and modification of standard electronics offerings to provide solutions tailored to specific customer requirements. Gresham’s engineers work closely with customers and specialist partners to incorporate modifications or create custom designs for specific project requirements.

Enertec provides full-service design and development of turnkey electronic solutions. Microphase designs custom RF solutions to meet customer specifications. When required, other subsidiaries modify standard

 

84

products to meet specific customer requirements, including, but not limited to, redesigning commercial products to meet requirements for military applications based on commercial off-the-shelf products and for other customized product requirements, when applicable. Gresham continually seeks to improve its product offerings while anticipating changing market demands for increased functionality, customized firmware and improved EMI (electromagnetic interference) filtering. Whenever possible, Gresham attempts to differentiate all its products from commodity-type products by enhancing, modifying and customizing standard product offerings as well as refreshing and enhancing custom designs to meet a broader array of applications.

Additionally, Microphase and Enertec are engaged in advanced research and development programs for defense electronic solutions and wireless communications applications. Microphase and Enertec engineers work in close collaboration with engineering and program teams with strategic customer partners. Current programs focus on, among other things, advanced testing solutions, secure communications and jamming, electronic countermeasures, advanced radar waveform synthesis and detection, high efficiency, high linearity power amplifier technology, and high power filter miniaturization. Enertec currently is working on developing a new generation of electronics cards and assemblies to build a new generation of test systems.

Gresham Power specializes in engineering, designing and developing power conversion and distribution solutions for Naval applications, with equipment installed on virtually all of the UK Royal Navy’s submarine and surface fleet. Many of Gresham Power’s ultra-reliable offerings support shipboard distribution of electrical power in emergencies (such as loss of main ship’s power) to enable continued operation of weapons systems, tactical communications and lighting. Gresham Power specializes in a comprehensive range of activities from PCB and Mechanical Design through prototype development to board and system assembly and test. Its engineers ruggedize Marine power products to meet high levels of shock, vibration, harsh climate conditions and the most rigorous MIL STD requirements. Gresham Power also has deployed its equipment on vessels of the navies of 15 other countries, including Australia, Malaysia, Oman, Spain, Turkey and Japan. Since 2019, all of Gresham Power’s revenues have been generated from United Kingdom customers. It has entered into a contract to supply products in Singapore and is currently engaged in discussions concerning possible business form customers located in other countries.

Research and Development

Gresham generally conducts research and development in collaboration with and funded by its customers. In 2021, Microphase, Enertec and Gresham Power, incurred independent research and development cost in an aggregate amount of $1,537,000, or 6% of Gresham’s consolidated operating revenues for fiscal 2021 as compared with $1,512,000 in 2020, or 8.3% of its consolidated operating revenues for fiscal 2020. Gresham anticipates comparable research and development expenditures in 2022.

Industry and Competition

Market Overview

Gresham operations focus exclusively on the market for electronic solutions that support the defense industry and other mission critical applications. The essential nature of these applications provides a degree of insulation from volatility associated with other segments of the global economy while accounting for stability and steady growth of the addressable market opportunities available to Gresham in segments that it serves. Demand for solutions to meet these requirements continues unaffected, and in many instances increases, in times of global crisis. Total defense spending in the three countries in which Gresham currently operates will total more than an estimated $856 billion in 2022. (https://www.globalfirepower.com/defense-spending-budget.asp) Gresham sells to the militaries and defense contractors in 15 other countries as well. Overall global defense spending hit $2.0 trillion in 2021 notwithstanding the pandemic and. is expected to grow at CAGR of 3% through 2028 with U.S. spending continuing to lead the world in the same period (ASD Reports, Global Defense Budget Analysis — Forecast to 2028). The current conflict in the Ukraine has intensified interest and investment in defense platforms throughout the United Kingdom and Europe.

 

85

Gresham believes that the drive for increased situational awareness and close coordination of air, land, sea, space and cyber operations will fuel an increase in defense modernization, force protection and situational awareness will drive spending increased procurement of components and systems to enable electronic warfare, countermeasures and unattended solutions with a CAGR of 6.4% projected in coming years to drive spending in the global defense electronics market to $231.6 billion in 2030. (Defense Electronics Market Intelligence Report, May 26, 2022). The drive for greater connectivity and analytics will in turn increase demand for RF communications, power solutions and electronic control systems content in new major military platforms, which are the core offerings of Gresham’s operating units.

Thousands of companies compete in this market to deliver electronics solutions to meet defense and other mission critical applications. However, Gresham’s operating units have longstanding relationships with dominant defense contractors in the US (Lockheed, BAE Systems, L3Harris, Raytheon, Boeing), in the UK (BAE, Rolls Royce, Thales, Babcock) and in Israel (IAI, Rafael, Elbit Systems) who hold contracts for major defense platforms with very long life cycles. These relationships enable Gresham to narrow the field of competition considerably to grow based on repeat business with relatively low selling costs.

Beyond the defense arena, initiatives to complete $42 billion in upgrades to the current National Railway System in the UK over the next three years while spending $115 billion over the next 10 years to build high speed rail to link London with the Midlands cities of Birmingham, Leeds and Manchester will generate significant opportunities for growth in demand for power solutions to upgrade and replace current infrastructure, both in rolling stock and track side controls. Relec’s current relationships and track record for supplying power solutions to the UK rail industry position Gresham ideally to capitalize on these ongoing refurbishment and expansion efforts. A similarly robust market in the medical power supply markets with a compound annual growth rate of 6.9% to reach $1.8 billion in 2025 creates tremendous growth opportunities for Relec in the UK. The COVID-19 has put healthcare and the medical device industry front and center in the United States, Europe and Asia, fueling interest in the type of power electronics and display solutions that Relec distributes.

Competition

The defense electronic technology solutions industry is highly fragmented and characterized by intense competition. Gresham’s competition includes thousands of companies located throughout the world, some of which have advantages in terms of labor and component costs, and some of which may offer products superior or comparable in quality to Gresham. Each operating subsidiary confronts a different set of competitors depending on solutions offered, vertical markets targeted and geographic scope of operations.

Many competitors for Microphase, including K&L Microwave, Qorvo, Q Microwave, and Gowanda Electronics, have substantially greater fiscal and marketing resources and geographic presence than Gresham has. However, elegant designs, strong engineering and a long history of delivering high quality, ultra-reliable components and subsystems enable Microphase to compete very effectively and carve out a strong position against competitors with more resources.

Enertec faces direct competition from smaller firms than itself such as Nir Or, EPS, MER, Alexander Schneider, Symcotech and Chaban, which specialize in components of electronic solutions. Offering end-to-end, turnkey solutions gives Enertec a competitive advantage over other private contractors competing to provide the Israeli MOD and major OEMs with electronic systems and components. That competitive advantage renders roughly 80% of Enertec’s business de facto “sole source” work without other viable competition.

Gresham Power faces competition from Ultra Electronics and Rolls Royce. As in the case of Microphase, elegant designs, strong engineering and a long track record for delivering ultra-reliable high quality power electronics solutions enables Gresham Power to compete effectively. Customers continue to seek out Gresham Power to provide power systems for marine defense applications.

 

86

Relec competes against many other distributors of power electronics and display offerings, facing competition from Fidus Power Ltd, Mouser Electronics and Avnet Abacus as well as power supply and electronics manufacturers like XP and ABB who sell direct, many of which have significantly more fiscal and marketing resources than Relec. However, a high touch, customer-focused approach enables Relec to compete effectively against high volume distributors and direct selling manufacturers. Optimizing and designing solutions into customer product lines has proven tremendously effective in building relationships with customers and suppliers alike that endure over time, generating regular repeat business and builds a reputation for customer service that provides a strong competitive advantage when pursuing new customers.

Gresham also faces competition from current and prospective customers who may decide to design and manufacture power electronics, communications components and electronic solutions needed to satisfy their internal programmatic requirements.

Consolidation in the defense technology solutions market, including through mergers, acquisitions and/or strategic alliances among major primes to whom Gresham sells its products, has the potential to intensify the competitive pressures that it faces. Many of its existing and potential competitors may be better positioned than Gresham is to acquire other companies, technologies or products. Gresham believes it competes favorably on the basis of multiple factors, including product quality and reliability, technological capabilities, service, past performance, design flexibility and ability to develop and implement complex, integrated solutions customized to its customers’ needs, and cost-effectiveness. Focusing on bespoke technology offerings with relatively low volumes and high margins enables Gresham’s operating subsidiaries to compete favorably on price against larger companies with much high indirect cost structures (overhead and G&A) and cumbersome internal bureaucracies. Finally, the fragmentation of the defense technology market also creates opportunities the Gresham to grow through acquiring competitors and/or potential competitors.

Gresham’s Strategy

Gresham’s goal is to become the supplier of choice for the major players in the defense industry. Its short-term strategy is primarily focused on securing sufficient working capital to execute on a substantial backlog of orders with definite delivery dates, take on additional significant orders and further improve access to capital resources, including through the anticipated Proposed Public Offering following the Share Exchange.

Gresham’s long-term strategy includes the following key elements:

 

•

maintain, strengthen and expand relationships with current customers, including by increasing on-time delivery, diversifying solutions offered and maximizing quality of solutions;

 

•

attract new customers through building business development, marketing and sales infrastructure to raise market awareness, identify opportunities early in the process and design in optimally tailored offerings to provide customers competitive advantage;

 

•

take advantage of the cross-selling opportunities among Gresham’s operating subsidiaries to leverage current resources, reduce time to delivery, minimize selling costs and capitalize on strong customer relationships in other vertical market segments and geographies;

 

•

enhance Gresham’s geographic footprint by increasing marketing outreach, forming alliances with leading companies located in areas beyond its current reach and acquiring businesses that expand reach into other geographies;

 

•

transfer technology developed for mission critical defense applications to contiguous commercial markets with similar requirements for high quality, ultra-reliable solutions and invest in state-of-the-art technology to enhance its product offerings and production processes; and

 

•

acquire complementary assets and businesses. Gresham believes there are number small defense contractors whose principal owner is nearing retirement which could be attractive acquisition targets.

 

87

Manufacturing and Testing

Gresham fabricates components and performs product assembly, integration and testing of its products at its production facilities in Shelton, Connecticut (Microphase), Karmiel, Israel (Enertec) and in Salisbury, England (Gresham Power). Each of its operating subsidiaries has built a robust network of trusted supply chain partners to provide components, materials and parts for assembly into products or products for resale.

Gresham continually strives to improve its production and test processes, to ensure the highest quality and consistent manufacturing of its solutions. Each operating subsidiary maintains rigorous quality control to ensure that Gresham’s solutions conform to all customer specifications and will perform reliably in the customer’s application. Gresham tests all its products under stress operating conditions per defined test procedures it developed in conjunction with its customers. This approach ensures that its customers can use its solutions right out of the box on their production line or installed directly in the field. Gresham offers customer specific testing services with custom designed tests to simulate operation within its customer applications.

All of Gresham’s operating units comply with all applicable safety and EMC standards for electronics solutions. Compliance with international safety agency standards is critical in every application, and power solutions play a major role in meeting these compliance requirements. Gresham’s safety engineers and quality assurance teams help ensure that its custom products are designed to meet all safety requirements and are appropriately documented to expedite safety approval processes.

Gresham maintains ISO 9001:2008 (Enertec), ISO 9001:2015 (Microphase, Gresham Power and Relec) and AS9100D (Enertec, Microphase) certification in its manufacturing operations. ISO 9001 and AS9100 are universally recognized and accepted international standards for quality management. Relec also was one of the first companies in its industry ever to earn ISO 9002 certification.

Customer Service and Support

Gresham’s subsidiaries offer a “high touch” approach to optimizing and customizing solution offering to meet customer unique requirements. Working closely with customers, Gresham designs, engineers, develops and produces offerings to the highest standards of performance, durability and reliability to meet unique customer requirements. All operating units constantly track performance against cost, quality and on-time delivery metrics with an intense focus on customer satisfaction. Regular communications and direct collaboration at all levels with customers have become hallmarks of all Gresham operations.

Given the mission critical nature of the customer applications which Gresham product and solution offerings support, Gresham responds promptly and takes necessary corrective action to ensure its offerings conform to the specifications and works to that specific customer’s expectations. Gresham provides warranties on all products offered. The length and terms of the warranties vary with the product type and application in which the product gets used. In addition, even after warranties expire, its operating units will provide maintenance, repair and post-delivery support for the full expected life of the product. For instance, Gresham Power designs and builds the ruggedized power electronics that it provides to the Royal Navy to last for 25 years while Microphase designs and manufactures its RF filters and DLVA products in military applications typically to have a product life of 15 years or more.

Suppliers

Gresham’s operating subsidiaries purchase electronic components, materials, parts and assemblies, including power supplies, converters, transformers, rectifiers, inverters, housings, blocks, covers, machined parts, substrates, resistors, diodes, detectors, amplifiers, integrated circuits, printed circuit boards, cables, connectors, metal work, and capacitors, from outside suppliers. Gresham also purchases certain precious metals used in manufacturing of its products and services (plating, sealing, painting, finishing). Gresham carefully selects suppliers based on their

 

88

ability to provide quality parts and components which meet technical specifications and volume requirements. For defense work, Gresham operating units have built supply chain networks from sources in the U.S. (Microphase (which sources exclusively from the U.S.), Enertec, Relec), the UK (Gresham Power, Relec) and Israel (Enertec) with no sourcing from China. Relec does work with some suppliers in China for commercial applications.

Gresham has put considerable effort into ensuring that the required components and raw materials are available to it from a variety of sources, and it is not dependent on any one supplier. However, for a very few components it still relies on a limited number of suppliers and certain components remain sole source. For the most part, however, parts and materials used in its offerings will have at least two approved sources. The following table describes supplier concentration as of December 31, 2021 based on the percentage of materials purchased from each supplier during 2021:

 

Mornsun Guangzhou Science & Technology		$	1,056,345				8.1%
Bel Power Solutions GmbH		$	777,239				6.0%
Chinfa Electronics Ind Co Ltd		$	705,885				5.4%
TDK		$	550,531				4.2%
Metech Solutions, Inc.		$	400,265				3.1%
Top Five Suppliers Listed Above		$	3,490,265				26.8%
All other suppliers (approximately 400)		$	9,540,176				73.2%
Total		$	13,030,441				100.0%

Sales and Marketing

Gresham markets its products directly to its customers and sells primarily through internal sales forces within each of its operating subsidiaries. Gresham’s marketing and sales efforts target specific types of customers such as major defense contractors, manufacturers of industrial products, health care solutions and infrastructure components in transportation and telecommunications.

Gresham recently hired an experienced sales and business development executive as its Chief Development Officer to drive organic growth and identify prospects for further growth through merger and/or acquisition. Gresham has implemented HubSpot to track capture and track the opportunity stream within and among the operating subsidiaries.

Much of business development and sales effort at Enertec and Microphase takes place at the senior executive levels. The CEOs of those operating units currently hold and maintain the key customer relationships which generate most of the revenue in those operating levels. In addition to the top executive at Relec, that subsidiary has a high performing team of four sales professionals supported by a sales administrator and will add two more sales professionals to that team in 2022. Gresham Power has two inside sales professionals in place. Both Gresham Power and Microphase will add business development professionals in 2022 to increase awareness of Gresham in their respective defense markets, identify new leads and expand the current customer base.

Gresham Power makes limited use of strategic operating partners in the Middle East, India and Australia. These representatives promote its products and serve as the customer interface for Gresham Power in specific parts of the world as agreed. Typically, either Gresham or the manufacturing representatives are entitled to terminate the manufacturer representative agreement upon 30 days’ written notice.

Prior to the COVID-19 pandemic, Gresham also promoted its products and solutions by attending trade shows such as the Defense Manufacturing Conference, Doha International Maritime Defense Exhibition & Conference (DIMDEX) Electronica (Europe), Southern Manufacturing and Electronics, and Railtex. Gresham has resumed attending trade shows.

 

89

Each of Gresham’s operating subsidiaries maintains a comprehensive website emphasizing its respective capabilities and expertise. Gresham plans to upgrade all its websites by adding more features and functionalities to drive inquiries, generate leads from prospective customers and support recruiting efforts.

Relec and Gresham Power advertise in highly targeted industry-specific publications such as Electronics Weekly, New Electronics, Electronic Product Design & Test, Electronics Specifier, Components In Electronics, Design Products & Applications, Rail Technology Magazine, Rail Engineer, Rail Professional. In addition, Relec also posts regular podcasts on topics of interest to customers and prospect as well as running an active PR campaign to get placements of earned media and coverage in a wide range of media. Gresham looks to replicate similar campaigns in other operating subsidiaries to generate inquiries/leads, raise awareness of Gresham and support talent recruiting efforts.

Customers

Gresham’s customers are comprised primarily of the U.S. military and allied militaries, including Israel and the United Kingdom, and defense contractors in the United States, Europe, Middle East, and South Asia, including prime contractors and sub-contractors.

Gresham’s defense customers include the Israeli Ministry of Defense and Israel Air Industries (“IAI”), Rafael and Elbit Systems, the three major defense contractors in Israel, the United States Department of Defense (“U.S. DOD”) and major Defense contractors such as BAE Systems North America, L3Harris, Boeing, Lockheed Martin, Raytheon and Sierra Nevada Corporation in the U.S., , the UK Ministry of Defence, including the Royal Navy, and major defense contractors in the United Kingdom and Europe, including BAE Systems plc, a British multinational defense, security, and aerospace company, Rolls Royce, Babcock and Thales, SAAB (Sweden), Indra (Spain) and Aselsan (Turkey). In addition, Enertec has a strategic partnership through IAI with Cyient to build and deliver solutions for the Indian military.

Gresham’s commercial customers include Elma GmbH, BioSense Webster, a subsidiary of Johnson & Johnson, RS Components, Farnell, Parker Hannifin, Vanderbilt, Bombardier.

As of December 31, 2021, and 2020, Gresham’s top five customers accounted in the aggregate for 62% and 71% of its consolidated revenues. The following table describes Gresham’s customer concentration as of December 31, 2021 based on the percentage of operating revenue during 2021:

 

Israel Air Industries		$	9,575,022				37.4%
BAE North America		$	3,805,225				14.8%
RS Components Ltd		$	1,137,303				4.4%
BioSense Webster		$	793,828				3.1%
Lockheed Martin		$	676,200				2.6%
U.S. Department of Defense		$	593,020				2.7%
Top Six Customers		$	16,580,098				64.7%
All other customers (approximately 600)		$	9,051,185				35.3%
Total		$	25,631,283				100.0%
Columns may not total because of rounding.

Backlog

As of June 30, 2022, Gresham had approximately $30.31 million in backlog order for its products broken down by subsidiary as follows: Enertec $11.61 million; Microphase $10.35 million; Relec $5.68 million and

 

90

Gresham Power $2.67 million. Gresham’s backlog consist of purchase orders with specified delivery dates and extend over the next five years.

Government Regulation

Gresham must meet applicable regulatory, environmental, emissions, safety and other requirements where specified by the customer and accepted by it or as required by local regulatory or legal requirements. The products that Gresham markets and sells in Europe may be subject to the 2003 European Directive on Restriction of Hazardous Substances (“RoHS”), which restricts the use of six hazardous materials in the manufacture of certain electronic and electrical equipment, as well as the 2002 European Directive on Waste Electrical and Electronic Equipment (“WEEE”), which determines collection, recycling and recovery goals for electrical goods. In July 2006, Gresham’s industry began phasing in RoHS and WEEE requirements in most geographical markets with specific emphasis on consumer-based products. Gresham believes that RoHS and WEEE-compliant components may be subject to longer lead-times and higher prices as the industry transitions to these new requirements. REACH Registration, Evaluation, Authorization and Restriction of Chemicals Registration, is a European Union regulation dating from December 18, 2006. REACH addresses the production and use of chemical substances, and their potential impacts on both human health and the environment.

These regulatory mandates apply to all Gresham operating subsidiaries. Gresham has structured operations to comply with these requirements and has experienced little to no impact on lead times or prices. Given the applicability of these requirements to all competitors alike, Gresham believe that compliance has had no impact on the competitive position of any operating subsidiary.

Some of Gresham’s products are subject to the International Traffic in Arms Regulations (“ITAR”), which is administered by the U.S. Department of State. ITAR controls not only the export of certain products specifically designed, modified, configured or adapted for military systems, but also the export of related technical data and defense services and foreign production. Gresham obtains required export licenses for any exports subject to ITAR. Compliance with ITAR may require a prolonged period of time; if the process of obtaining required export licenses for products subject to ITAR is delayed, it could have a materially adverse effect on Gresham’s business, financial condition, and operating results. Any future restrictions or charges may be imposed by the United States or any other foreign country. In addition, from time-to-time, Gresham enters into defense contracts to supply technology and products to foreign countries for programs that are funded and governed by the U.S. Foreign Military Financing program.

Gresham is also subject to heightened government scrutiny of its operations pursuant to certain of its contracts.

Security Clearances

As a U.S. Government contractor, Gresham is required to maintain facility and personnel security clearances complying with the U.S. DOD and other Federal agency requirements. Microphase maintains strict protocols for handling classified information and Confidential Unclassified Information associated with its work for the U.S. DOD and has built within its Shelton production facility a “Restricted Area” certified for generating, storing and reviewing classified information Microphase also must obtain and maintain “authority to operate” equipment to perform classified work. The process to secure these authorities is long and laborious. Microphase must hire an information security manager to oversee applications to secure these authorities as well as ongoing monitoring to maintain the security of these systems.

Gresham Power works on many contracts classified as “Official Sensitive” that require individual security clearances and adherence to information security protocols for receiving, handling and storing confidential information as required in the UK Official Secrets Act and its implementing regulations. Relec does not work on classified, sensitive defense work.

 

91

Enertec complies with all information security requirements included in its customer contracts as well as all the confidentiality laws that the State of Israel mandates for work related to defense of the country.

Audits and Investigations

As a government contractor, Gresham is subject to audits and investigations by U.S. Government agencies including the Defense Contract Audit Agency (the “DCAA”), the Defense Contract Management Agency (the “DCMA”), the Inspector General of the U.S. DOD and other departments and agencies, the Government Accountability Office, the Department of Justice (the “DoJ”) and Congressional Committees. From time-to-time, these and other agencies investigate or conduct audits to determine whether a contractor’s operations are being conducted in accordance with applicable requirements. The DCAA and DCMA also review the adequacy of, and compliance with, a contractor’s internal control systems and policies, including the contractor’s accounting, purchasing, property, estimating, earned value management and material management accounting systems. Gresham’s final allowable incurred costs for each year are also subject to audit and have from time to time resulted in disputes between Gresham and the U.S. Government. Any costs found to be improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. If an audit or investigation uncovers improper or illegal activities, Gresham may be subject to civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. Government.

Enertec conducts operations under constant supervision of the Ministry of Defense of Israel. All of its contracts are subject to audits of performance, quality and price reasonableness.

Gresham Power contracts with UK Ministry of Defence, Royal Navy or major contractors serving those agencies include standard provisions which give the customer the right to audit Gresham’s performance under those contracts when they see fit. Audits are part of doing business with the government and typically focus on deliveries — on time project milestones as well as quality. The Royal Navy will review Gresham Power pricing of services provided under support contract every 12 months for reasonableness.

The Defense Federal Acquisition Regulation, as implemented in standard contract clauses, mandates that Microphase establish and follow extensive detailed processes and protocols to protect classified and Confidential Unclassified Information (CUI) from disclosure and unauthorized access. That mandate includes a requirement that Microphase formulate and implement a System Security Plan with 110 different elements and protocols for handling and protecting classified information and CUI. Over the next two years the U.S. DOD will require all participants in the defense supply chain to demonstrate compliance with the Capability Model Maturity Cybersecurity as verified through an independent third-party auditor. Compliance with these mandates requires and will require Microphase to invest significant resources to maintain compliance. For instance, compliance requires extensive security controls on access to Microphase IT systems, strong firewalls and intrusion monitoring. Microphase must hire a full-time person to ensure information security and act as a Facility Security Officer as well as oversee security of all Microphase employees. These investments add to indirect cost pools that Microphase must recover in the price of its products for U.S. DOD and contractors.

Gresham Power is fully certified as “Cyber Essentials Compliant.” Cyber Essentials is a Government-backed, industry-supported scheme to help organizations protect themselves against common online threats. The UK Government requires all suppliers bidding for contracts involving the handling of sensitive and personal information to be certified against the Cyber Essentials program criteria.

Enertec has implemented the strongest possible cyber security protections consistent with the resources available to a company its size.

 

92

Other Compliance Issues

In addition, Gresham is subject to the local, state and national laws and regulations of the jurisdictions where it operates that affect companies generally, including laws and regulations governing commerce, intellectual property, trade, health and safety, contracts, privacy and communications, consumer protection, web services, tax, and corporate laws and securities laws. These regulations and laws may change over time. Unfavorable changes in existing and new laws and regulations could increase Gresham’s cost of doing business and impede its growth.

Intellectual Property

Gresham’s trade names, trademarks, trade secrets, customer relationships, domain names, proprietary technologies and similar intellectual property are important to its success.

Gresham relies upon a combination of trade secrets, industry expertise, confidential procedures, and contractual provisions to protect its intellectual property. Gresham believes that because its products are continually updated and revised, obtaining patents would be costly and not beneficial. It is Gresham’s policy to enter into confidentiality and invention assignment agreements with its employees and contractors as well as nondisclosure agreements with its suppliers and strategic partners in order to limit access to and disclosure of its proprietary information.

Microphase and Enertec typically design custom products to Gresham’s customer specifications as “work for hire” and therefore own no intellectual property in the design. As the ultimate end user, the U.S. DOD and the Israeli MOD typically acquire and retain rights in all such technical data. Microphase does acquire and own intellectual property in the fabrication, assembly, tuning and testing protocols followed the produce the products. Microphase and Enertec conduct more independent research and development to new technology solutions, both companies plan to file for patents to protect their intellectual property.

In the UK, Gresham Power typically will retain ownership of the intellectual property of the designs of products developed for defense applications. However, neither Relec nor Gresham Power typically retain intellectual property in any of the standard power products that they sell on the commercial market.

Employees

As of June 30, 2022, Gresham had a total of 156 employees located in the United States, the United Kingdom and Israel, of whom 40 were engaged in engineering and product development, 13 in sales and marketing, 85 in general operations and 15 in general administration. All but eight of these employees are employed on a full-time basis. None of Gresham’s employees is currently represented by a trade union. Gresham considers its relations with its employees to be good. From time-to-time, Gresham may hire additional workers on an independent contractor basis as the need arises.

 

93

THE SHARE EXCHANGE AGREEMENT

General

The following is a summary of the material terms of the Share Exchange dated as of December 27, 2021 by and among Giga-tronics, BitNile and Gresham and the transaction contemplated therein. A copy of the Share Exchange Agreement is attached as Annex A to this proxy statement and is incorporated by reference. The Share Exchange Agreement has been attached to this proxy statement to provide you with information regarding its terms. It is not intended to provide any other factual information about us, BitNile or the Gresham to Giga-tronics shareholders. The following description does not purport to be complete and is qualified in its entirety by reference to the Share Exchange Agreement. You should refer to the full text of the Share Exchange Agreement for details of the Share Exchange and the terms and conditions of the Share Exchange Agreement.

The Share Exchange Agreement contains representations and warranties that we, BitNile and Gresham have made to each other as of specific dates. These representations and warranties have been made for the benefit of the parties to the Share Exchange Agreement and may be intended not as statements of fact but rather as a way of allocating the risk to one of the parties if those statements prove to be incorrect. In addition, the assertions embodied in the representations and warranties are qualified by information in confidential disclosure schedules exchanged by the parties in connection with signing the Share Exchange Agreement. While we, BitNile and Gresham do not believe that these disclosure schedules contain information required to be publicly disclosed under the applicable securities laws, other than information that has already been so disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached Share Exchange Agreement. Accordingly, you should not rely on the representations and warranties as current characterizations of factual information about us, BitNile or Gresham, because they were made as of specific dates, may be intended merely as a risk allocation mechanism among us, BitNile and Gresham and are modified by the disclosure schedules.

While we believe that this description covers the material terms of the Share Exchange Agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement for a more complete understanding of the Share Exchange and the Share Exchange Agreement attached as Annex A and the other documents to which you are referred herein. See the section entitled “Where You Can Find More Information” beginning on page 158.

Structure

Subject to the terms and conditions of the Share Exchange Agreement, we, BitNile and Gresham each agreed that, subject to the satisfaction or waiver of the closing conditions described in such agreement, we will acquire all of the outstanding shares of capital stock of Gresham in exchange for issuing to BitNile 2,920,085 shares of Giga-tronics common stock and 514.8 shares of a new series of preferred stock that are convertible into a total of 3,960,043 shares of Giga-tronics common stock. We have also agreed to assume Gresham’s outstanding equity awards representing the right to receive up to 749,626 shares of Giga-tronics common stock on an as-converted basis. For more information see page 51.

Immediately following the completion of the Share Exchange, Gresham will be a wholly-owned subsidiary of Giga-tronics. Outstanding shares of Giga-tronics common stock will remain outstanding and unaffected upon completion of the Share Exchange, as will outstanding warrants and options to purchase Giga-tronics common stock. Giga-tronics common stock will continue to be registered under the Exchange Act, immediately following the Share Exchange.

In addition, the Share Exchange Agreement further provides that, BitNile will loan to us $4.25 million upon the closing of the Share Exchange pursuant to a convertible promissory note and following the closing of the Share Exchange, we will repurchase or redeem the Outstanding Preferred Shares. Assuming the repurchase of the

 

94

Outstanding Preferred Shares, and based on 2,777,230 currently outstanding shares of Giga-tronics common stock, following the issuance of the shares of Giga-tronics common stock and preferred stock in the Share Exchange, BitNile will hold approximately 71.2% of the outstanding voting power and capital stock of Giga-tronics and existing holders of Giga-tronics common stock would hold approximately 28.8%. These numbers do not give effect to our assumption of 249,875 RSUs and 499,751 stock options exercisable at $2.93 per share held by Gresham’s Chief Executive Officer and Chief Operating Officer. The foregoing amounts do not include an additional 1,307,692 shares of Giga-tronics common stock that BitNile would have the right to acquire upon the optional conversion of the Convertible Note at the conversion price of $3.25 per share or shares of Giga-tronics common stock that BitNile has agreed to purchase in the Proposed Public Offering. The foregoing also does not include 461,538 shares of common stock issuable upon the exercise of warrants with a nominal exercise price.

Completion and Effectiveness of the Share Exchange

The Share Exchange will be completed as promptly as practicable after all of the conditions to completion of the Share Exchange are satisfied or waived, including the approval of our shareholders. We, BitNile and Gresham are working to complete the Share Exchange as quickly as practicable and we expect that the Share Exchange will be completed late in the third quarter of 2022. However, we cannot predict the exact timing of the completion of the Share Exchange because it is subject to various conditions.

Exchange Consideration

At the effective time of the Share Exchange, we will acquire all of the outstanding shares of capital stock of Gresham in exchange for issuing to BitNile 2,920,085 shares of Giga-tronics common stock and 514.8 shares of a new series of preferred stock that are convertible into an aggregate of 3,960,043 shares of Giga-tronics common stock. We have also agreed to assume Gresham’s outstanding equity awards representing the right to receive up to 749,626 shares of Giga-tronics common stock on an as-converted basis.

The Share Exchange Agreement does not include a price-based termination right, so there will be no adjustment to the total number of shares of Giga-tronics common stock that we will issue in exchange from the Gresham’s outstanding shares based on changes in the market price of Giga-tronics common stock or other changes. Accordingly, the market value of the shares of Giga-tronics common stock issued pursuant to the Share Exchange will depend on the market value of the shares of Giga-tronics common stock at the time the Share Exchange closes, and could vary significantly from the market value on the date of this proxy statement.

Effect on Outstanding Giga-tronics Common Stock, Warrants and Options

Each share of Giga-tronics common stock issued and outstanding at the time of the Share Exchange will remain issued and outstanding and will be unaffected by the Share Exchange. Giga-tronics warrants and stock options and other equity awards that are outstanding immediately prior to the effective time of the Share Exchange will also remain outstanding and be unaffected by the Share Exchange. As of the closing of the Share Exchange, assuming the repurchase of the Outstanding Preferred Shares, and based on 2,777,230 currently outstanding shares of Giga-tronics common stock, following the issuance of the shares of Giga-tronics common stock and preferred stock in the Share Exchange, BitNile will hold approximately 71.2% of the outstanding voting power and capital stock of Giga-tronics and existing holders of Giga-tronics common stock would hold approximately 28.8%.

Representations and Warranties

The Share Exchange contains customary representations and warranties made by Giga-tronics, BitNile and Gresham, as well as other facts pertinent to the Share Exchange. The representations, warranties, and covenants of each party set forth in the Share Exchange Agreement have been made only for the purposes of, and were and are solely for the benefit of the parties to, the Share Exchange Agreement, may be subject to limitations agreed

 

95

upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Share Exchange Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Accordingly, the representations and warranties may not describe the actual state of affairs at the date they were made or at any other time, and investors should not rely on them as statements of fact. In addition, such representations and warranties (i) will only survive the consummation of the Share Exchange as specifically set forth therein and (ii) were made only as of the date of the Share Exchange Agreement or such other date as is specified in the Share Exchange Agreement. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Share Exchange Agreement, which subsequent information may or may not be fully reflected in the parties’ public disclosures. The Share Exchange Agreement should not be read alone, but should instead be read in conjunction with the other information regarding us, BitNile and Gresham, and the Share Exchange Agreement that is contained in this proxy statement.

In the Share Exchange Agreement, we made certain representations and warranties (which are required to be re-certified at closing), many of which are qualified by concepts of knowledge, materiality and/or dollar thresholds, relating to, among other things:

 

•

organization, standing and power;

 

•

accuracy of charter documents;

 

•

ownership and status of subsidiaries, including the outstanding securities of such subsidiaries;

 

•

the authorized Giga-tronics capital stock and stock awards;

 

•

that there is no voting debt;

 

•

the authorization, performance and enforceability of the Share Exchange Agreement;

 

•

that the execution of the Share Exchange Agreement and performance of the terms does not constitute a breach of laws or any provision of any contract to which we are bound;

 

•

that no approval by any governmental body is required to be obtained in connection with the execution of the Share Exchange Agreement except for filing with the SEC the proxy statement, a Form D and other required filing, such reports required in connection with the Share Exchange Agreement, and such other consents which if not obtained or made would not have, a material adverse effect on us;

 

•

that the Board has approved the Share Exchange Agreement;

 

•

anti-takeover statutes;

 

•

that we have filed with the SEC all documents required to be filed by it with the SEC;

 

•

that our financial statements are complete and correct and Giga-tronics has not received any complaint regarding its financial accounting;

 

•

that we and each of our subsidiaries has established and maintains a system of internal controls over financial reporting that is sufficient to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP including policies and procedures;

 

•

that we have the required disclosure controls and procedures;

 

•

that we are able to maintain an adequate quantity of inventory and raw materials that are useable and saleable, merchantable and fit and sufficient for their particular purpose, not slow moving or obsolete based on our accounting policies and practices, and reasonable in kind and amount in light of our normal needs and forecasted sales;

 

•

that we have no undisclosed liabilities;

 

96

•

that we have no off-balance sheet arrangements;

 

•

that we are complaint with the applicable provisions of the Sarbanes-Oxley Act;

 

•

that (i) since March 27, 2021, we had not received any complaint, allegation, assertion, or claim regarding (A) our financial accounting, internal accounting controls, or auditing practices, procedures, methodologies, or methods or those of our subsidiaries or (B) questionable financial accounting or auditing matters with respect to us or our subsidiaries; and (ii) no attorney representing us or any of our subsidiaries has reported credible evidence of any material violation by us or any of our subsidiaries, or any of our or our subsidiaries’ respective officers, directors, employees, or agents to the Board or any committee thereof, or our chief executive officer, chief financial officer, or chief operating officer;

 

•

that no material adverse effect has occurred with respect to us and that we have not breached of the Share Exchange Agreement;

 

•

taxes;

 

•

intellectual property;

 

•

that we and each of our subsidiaries have been in material compliance with all laws;

 

•

that we and our subsidiaries hold all necessary permits;

 

•

that there is no pending or threatened actions preventing the transactions contemplated by the Share Exchange Agreement from being completed;

 

•

that there are no brokers or finders’ fees payable by us, except for fees payable to Roth;

 

•

that there are and have been no contracts, transactions, arrangements, or understandings between us or any of our subsidiaries and any affiliate thereof or any holder of more than 5% or more of the shares of Giga-tronics common stock but not including any wholly-owned subsidiary that we would be required to be disclose that has not been disclosed;

 

•

that we have made available to BitNile correct and complete copies of necessary documents related to employee benefit issues;

 

•

that each Giga-tronics employee plan has been established, administered, and maintained in all material respects in accordance with its terms and in material compliance with applicable laws and that no termination of any Giga-tronics employee plan has occurred or is expected to occur;

 

•

employee plan liabilities;

 

•

certain employee plans;

 

•

that no Giga-tronics employee plan provides post-termination or retiree health benefits to any person for any reason, except as may be required by law, and either we nor any ERISA affiliate of us has any liability to provide post-termination or retiree health benefits to any person or ever represented, promised, or contracted to any Giga-tronics employee or any other person that such employee or other person could be provided with post-termination or retiree health benefits, except to the extent required by law;

 

•

that other than routine claims for benefits: (i) there are no pending or, to our knowledge threatened claims by or on behalf of any participant in any Giga-tronics employee plan, or otherwise involving any Giga-tronics employee plan or the assets of any Giga-tronics employee plan; and (ii) no Giga-tronics employee plan is presently or has been the subject of an examination or audit by a governmental authority or is the subject of an application or filing under, or is a participant in, an amnesty, voluntary compliance, self-correction, or similar program sponsored by any governmental authority;

 

•

that each Giga-tronics employee plan that is subject to Section 409A of the Code has been operated in compliance with such section and all applicable regulatory guidance (including, without limitation, proposed regulations, notices, rulings, and final regulations);

 

97

•

that we and each of our subsidiaries comply in all material respects with the applicable federal requirements for employer-sponsored health plans, and any corresponding requirements under state statutes;

 

•

that neither the execution or delivery of the Share Exchange Agreement, the consummation of the Share Exchange, nor any of the other transactions contemplated by the Share Exchange Agreement will (either alone or in combination with any other event): (i) entitle any current or former director, employee, contractor, or consultant of Giga-tronics or any of our subsidiaries to severance pay or any other payment; (ii) accelerate the timing of payment, funding, or vesting, or increase the amount of compensation due to any such individual; (iii) limit or restrict the our right to merge, amend, or terminate any Giga-tronics employee plan; or (iv) increase the amount payable or result in any other material obligation pursuant to any Giga-tronics employee plan; and that no amount that could be received (whether in cash or property or the vesting of any property) as a result of the consummation of the transactions contemplated by the Share Exchange Agreement by any employee, director, or other service provider of Giga-tronics under any Giga-tronics employee plan or otherwise would not be deductible nor would be subject to an excise tax;

 

•

employment law matters;

 

•

ownership of real estate;

 

•

our leased real estate;

 

•

that we have disclosed all of the real property used or intended to be used in, or otherwise related to, our business and that of our subsidiaries;

 

•

ownership of personal property;

 

•

the sufficiency of our and each of our subsidiaries’ rights properties and assets for the conduct of our respective business as presently conducted in all material respects now and at closing;

 

•

that we are in compliance with all environmental laws and neither we nor any of our subsidiaries has received notice of and there is no legal proceeding pending or to our knowledge threatened alleging any liability or responsibility under non-compliance with environmental law nor assumed or retained any liabilities under environmental laws;

 

•

that all our material contracts are legal, valid, and binding on us or our applicable subsidiary, enforceable against it in accordance with its terms, and is in full force and effect; (ii) neither we nor any of our subsidiaries nor, to our knowledge, any third party has violated any provision of, or failed to perform any obligation required under the provisions of, any of our material contracts; and (iii) neither we nor any of our subsidiaries nor, to our knowledge, any third party is in breach, or has received written notice of breach, of any of our material contracts;

 

•

insurance;

 

•

the accuracy of information provided in this proxy statement;

 

•

anti-corruption matters;

 

•

that we are not subject to COVID-19 measures such that we may not continue to operate in the ordinary course of business and we (i) have in place and maintains in effect business continuity, risk management, emergency and disaster plans, procedures, protocols and facilities appropriate for the nature of the risks associated with its business, (ii) have taken reasonable actions to reduce the potentially adverse effects of COVID-19 and COVID-19 measures on us and to access and monitor risks which may arise from the continuation of the COVID-19 pandemic, (iii) has not had, nor to our knowledge are there any facts that would give rise to, any workforce changes resulting from disruptions due to COVID-19 or COVID-19 measures and (iv) have no knowledge that any personnel has any plans to terminate their status as an employee or independent contractor of ours, including upon or in connection with the consummation of the transactions contemplated by the Share Exchange Agreement or as a result of COVID-19 or COVID-19 measures;

 

98