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UNITED STATES

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		26-2439072
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting Company	x

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		PAGE NO
PART I FINANCIAL INFORMATION
ITEM 1	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of June 29, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 29, 2014 and June 30, 2013	4
	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 29, 2014 and June 30, 2013	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 29, 2014 and June 30, 2013	6
	Notes to Condensed Consolidated Financial Statements	7
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	28
ITEM 4	Controls and Procedures	28
PART II OTHER INFORMATION
ITEM 1	Legal Proceedings	28
ITEM 1A	Risk Factors	29
ITEM 6	Exhibits	30

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		June 29,				December 31,
		2014				2013
ASSETS		(Unaudited)				(1)
Current assets:
Cash and cash equivalents		$	18,541			$	20,377
Accounts receivable, net			7,029				5,021
Inventories			4,287				4,617
Prepaid and other current assets			739				434
Total current assets			30,596				30,449
Property and equipment, net			2,417				2,999
Intangible assets, net			2,840				3,287
Goodwill			9,860				9,860
Investment in unconsolidated affiliate			125				-
Restricted cash			133				284
Other assets			117				183
Total assets		$	46,088			$	47,062
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,652			$	831
Accrued compensation			903				1,170
Other current liabilities			2,281				2,746
Total current liabilities			5,836				4,747
Pension liabilities			140				140
Deferred rent, noncurrent			143				177
Other long term liabilities			441				418
Total liabilities			6,560				5,482
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized as of June 29, 2014 and December 31, 2013; 32,467,019 and 32,067,616 shares issued and outstanding as of June 29, 2014 and December 31, 2013, respectively			32				32
Additional paid-in capital			141,611				139,710
Treasury stock, at cost; 701,754 shares as of June 29, 2014 and December 31, 2013, respectively			(2,209	)			(2,209	)
Accumulated other comprehensive income			478				490
Accumulated deficit			(100,384	)			(96,443	)
Total stockholders’ equity			39,528				41,580
Total liabilities and stockholders’ equity		$	46,088			$	47,062

(1)	The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements as of that date.

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GIGOPTIX, INC.

 

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Total revenue		$	8,037			$	6,831			$	15,423			$	13,752
Total cost of revenue			3,487				2,578				6,613				5,214
Gross profit			4,550				4,253				8,810				8,538
Research and development expense			3,358				3,177				7,100				6,413
Selling, general and administrative expense			2,567				2,041				4,965				4,394
Restructuring expense, net			307				-				307				950
Special litigation-related expense			-				472				-				887
Total operating expenses			6,232				5,690				12,372				12,644
Loss from operations			(1,682	)			(1,437	)			(3,562	)			(4,106	)
Interest expense, net			(10	)			(25	)			(27	)			(79	)
Other income, net			-				88				10				256
Loss before provision for income taxes			(1,692	)			(1,374	)			(3,579	)			(3,929	)
Provision for income taxes			21				14				31				27
Loss from consolidated companies			(1,713	)			(1,388	)			(3,610	)			(3,956	)
Equity in earnings of unconsolidated affiliate			331				-				331				-
Net loss		$	(2,044	)		$	(1,388	)		$	(3,941	)		$	(3,956	)
Net loss per share—basic and diluted		$	(0.06	)		$	(0.06	)		$	(0.13	)		$	(0.18	)
Weighted average number of shares used in per share calculations - basic and diluted			31,607				21,628				31,521				21,588

See accompanying Notes to Condensed Consolidated Financial Statements

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		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Net loss		$	(2,044	)		$	(1,388	)		$	(3,941	)		$	(3,956	)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment			(10	)			17				(12	)			25
Other comprehensive income (loss), net of tax			(10	)			17				(12	)			25
Comprehensive loss		$	(2,054	)		$	(1,371	)		$	(3,953	)		$	(3,931	)

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		Six Months Ended
		June 29,				June 30,
		2014				2013
Cash flows from operating activities:
Net loss		$	(3,941	)		$	(3,956	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,813				1,881
Stock-based compensation			2,127				2,508
Change in fair value of warrants			(3	)			(12	)
Loss (gain) on property and equipment			8				(160	)
Non-cash restructuring expense			210				-
Equity in earnings of unconsolidated affiliate			331				-
Changes in operating assets and liabilities:
Accounts receivable, net			(2,008	)			(1,352	)
Inventories			85				158
Prepaid and other current assets			(582	)			(387	)
Other assets			23				18
Accounts payable			1,754				(409	)
Accrued restructuring			(29	)			13
Accrued compensation			(268	)			28
Other current liabilities			(248	)			(145	)
Other long-term liabilities			(10	)			(41	)
Net cash used in operating activities			(738	)			(1,856	)
Cash flows from investing activities:
Purchases of property and equipment			(682	)			(1,099	)
Proceeds from sale of property and equipment			-				160
Net cash used in investing activities			(682	)			(939	)
Cash flows from financing activities:
Proceeds from issuance of stock			40				-
Taxes paid related to net share settlement of equity awards			(266	)			(75	)
Net borrowings on line of credit			-				2,400
Repayment of capital lease			(181	)			(237	)
Net cash provided by (used in) financing activities			(407	)			2,088
Effect of exchange rates on cash and cash equivalents			(9	)			66
Net decrease in cash and cash equivalents			(1,836	)			(641	)
Cash and cash equivalents as of beginning of period			20,377				10,147
Cash and cash equivalents as of end of period		$	18,541			$	9,506
Supplemental disclosure of cash flow information
Interest paid		$	29			$	79
Property and equipment acquired with accounts payable		$	90			$	46
Investment in unconsolidated affiliate acquired with property and equipment and inventories		$	456			$	-

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Organization

The HSC product line offers a broad portfolio of high performance optical and wireless components to telecommunications (“telecom”) and data communications (“datacom”) customers, i) mixed signal radio frequency integrated circuits (“RFIC”), including 10 to 400 gigabit per second (“Gbps”) laser and optical drivers and trans-impedance amplifiers (“TIA”) for telecom, datacom, and consumer electronic fiber-optic applications; ii) power amplifiers and transceivers for microwave and millimeter monolithic microwave integrated circuit (“MMIC”) wireless applications including power amplifiers and transceiver chips at frequencies higher than 50 GHz; iii) integrated systems in a package (“SIP”) solutions for both fiber-optic and wireless applications; and iv) radio frequency (“RF’) chips for various consumer applications such as global navigation satellite systems (“GNSS”). The HSC product line also partners with key customers on development projects that generate engineering project revenue for the Company while helping to position the Company for future product revenues with these key customers.

The Industrial product line offers a wide range of digital and mixed-signal application specific integrated circuit (“ASIC”) solutions for industrial, military, avionics, medical and communications markets. The Industrial product line partners with ASIC customers on development projects that generate engineering project revenue for the Company which generally leads to future product revenues with these ASIC customers.

In February 2014, together with Fundação CPqD – Centro De Pesquisa e Desenvolvimento em Telecomunicações (“CPqD”), the Company incepted a new joint venture of which the Company owns 49% and CPqD owns 51%, BrPhotonics Produtos Optoeletrônicos LTDA. (“BrP”), based in Campinas, Brazil, which will be a provider of advanced high-speed devices for optical communications and integrated transceiver components that enable information streaming over communications networks. This joint venture is engaged in research and development of Silicon-Photonics (“SiPh”) advanced electro-optical products.  As of June 29, 2014, the Company had transferred its inventory related to the Thin Film Polymer on Silicon (“TFPS^TM”) platform and the production line equipment for use by BrP (see also Note 8).

In June 2014, the Company signed a definitive agreement to acquire, for cash only by way of assuming specified liabilities, substantially all of the assets of Tahoe RF Semiconductor, Inc. (“Tahoe RF”), a provider of RF/analog RFICs, intellectual property, and fully integrated systems and subsystems on a chip. This acquisition closed on June 30, 2014, which is the first day of the Company’s third quarter of fiscal 2014 (see also Note 14.)

The Company’s fiscal year ends on December 31. For quarterly reporting, the Company employs a five-week, four-week, four-week, reporting period. The second quarter of 2014 ended on Sunday, June 29, 2014. The second quarter of 2013 ended on Sunday, June 30, 2013. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements as of June 29, 2014 and for the three and six months ended June 29, 2014 and June 30, 2013, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X, and include the accounts of the Company and all of its subsidiaries. Accordingly, they do not include all of the information and footnotes required by such accounting principles for annual financial statements. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position as of June 29, 2014, the results of operations for the three and six months ended June 29, 2014 and June 30, 2013, and cash flows for the six months ended June 29, 2014 and June 30, 2013. The condensed consolidated results of operations for the three and six months ended June 29, 2014 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2014. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s 2013 Form 10-K.

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The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. These judgments can be subjective and complex, and consequently, actual results could differ materially from those estimates and assumptions. Descriptions of these estimates and assumptions are included in the 2013 Form 10-K and the Company encourages you to read its 2013 Form 10-K for more information about such estimates and assumptions.

 

		June 29,				December 31,
		2014				2013
Accounts receivable		$	7,093			$	5,241
Allowance for doubtful accounts			(64	)			(220	)
		$	7,029			$	5,021

		Life				June 29,				December 31,
		(In years)				2014				2013
Network and laboratory equipment			3 – 5			$	11,242			$	11,250
Computer software and equipment			2 – 3				3,985				3,928
Furniture and fixtures			3 – 7				172				176
Office equipment			3 – 5				137				137
Leasehold improvements			1 – 5				276				378
							15,812				15,869
Accumulated depreciation and amortization							(13,395	)			(12,870	)
Property and equipment, net						$	2,417			$	2,999

In addition to the property and equipment above, the Company has prepaid licenses. For the three and six months ended June 29, 2014, amortization related to these prepaid licenses was $125,000 and $276,000, respectively. For the three and six months ended June 30, 2013, amortization related to these prepaid licenses was $132,000 and $221,000, respectively.

Inventories consisted of the following (in thousands):

		June 29,				December 31,
		2014				2013
Raw materials		$	2,184			$	2,103
Work in process			333				780
Finished goods			1,770				1,734
		$	4,287			$	4,617

 

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Accrued and other current liabilities consisted of the following (in thousands):

		June 29,				December 31,
		2014				2013
Amounts billed to the U.S. government in excess of approved rates		$	191			$	191
Warranty liability			345				330
Customer deposits			264				313
Capital lease obligations, current portion			104				284
Restructuring liabilities, current portion			-				30
Sales return reserve			248				151
Other			1,129				1,447
		$	2,281			$	2,746

 

		Six months ended
		June 29, 2014				June 30, 2013
Beginning balance		$	330			$	612
Warranties accrued			226				256
Warranties settled or reversed			(211	)			(477	)
Ending balance		$	345			$	391

 

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						Fair Value Measurements Using
		Carrying Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
June 29, 2014:
Assets:
Cash equivalents:
Money market funds		$	12,358			$	12,358			$	-			$	-
		$	12,358			$	12,358			$	-			$	-
Current liabilities:
Liability warrants		$	12			$	-			$	-			$	12
December 31, 2013:
Assets:
Cash equivalents:
Money market funds		$	1,356			$	1,356			$	-			$	-
		$	1,356			$	1,356			$	-			$	-
Current liabilities:
Liability warrants		$	15			$	-			$	-			$	15

The Company’s financial assets and liabilities are valued using market prices on active markets (“Level 1”), less active markets (“Level 2”) and unobservable markets (“Level 3”). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments.  Level 3 instruments are valued using unobservable market values in which there is little or no market data, and which require the Company to apply judgment to determine the fair value.

For the period ended June 29, 2014, the Company did not have any significant transfers between Level 1, Level 2 and Level 3.

The amounts reported as cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other current liabilities approximate fair value due to their short-term maturities. The carrying value of the Company’s capital lease obligations approximates fair value and is based upon borrowing rates currently available to the Company for capital leases with similar terms.

Liability Warrants

 The Company issued warrants to Bridge Bank in connection with a waiver of certain events of default that arose under a November 2009 loan and security agreement with Bridge Bank. Certain provisions in the warrant agreements provided for down-round protection if the Company raised equity capital at a per share price which was less than the per share price of the warrants. Such down-round protection also requires the Company to classify the value of the warrants as a liability on the issuance date and then record changes in the fair value through the consolidated statements of operations for each reporting period until the warrants are either exercised or cancelled. The fair value of the liability is recalculated and adjusted each quarter with the differences being charged to other income (expense), net on the consolidated statements of operations. The fair value of these warrants was determined using a Black-Scholes option-pricing model, which requires the use of significant unobservable market values.  As a result, these warrants are classified as Level 3 financial instruments. On July 7, 2010, the Company raised additional equity through an offering of 2,760,000 shares at $1.75 per share, thus triggering the down-round protection and adjustment of the number of warrants issued to Bridge Bank. On December 24, 2013, the Company raised additional equity through an offering of 9,573,750 shares at $1.42 per share, thus triggering the down-round protection and adjustment of the number of warrants issued to Bridge Bank.

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		As of June 29, 2014				As of December 31, 2013
Stock price		$	1.45			$	1.53
Strike price		$	2.51			$	2.51
Expected life		3.05 years				3.55 years
Risk-free interest rate			0.90	%			1.30	%
Volatility			65	%			65	%
Fair value per share		$	0.42			$	0.52

																									Three Months Ended June 29, 2014								Six Months Ended June 29, 2014
Holder		Original Warrants				Adjusted Warrants			Grant Date		Expiration Date		Price per Share				Fair Value June 29, 2014				Fair Value December 31, 2013				Exercise of Warrants				Change in Fair Value				Exercise of Warrants				Change in Fair Value			Related Agreement
Bridge Bank			20,000				29,115		4/7/2010		7/7/2017		$	2.51			$	12			$	15				-			$	(5	)			-			$	(3	)	Credit Agreement

The change in the fair value of the Level 3 liability warrants during the three and six months ended June 29, 2014 is as follows (in thousands):

 

Fair value as of December 31, 2013		$	15
Exercise of warrants			-
Change in fair value			2
Fair value as of March 30, 2014			17
Exercise of warrants			-
Change in fair value			(5	)
Fair value as of June 29, 2014		$	12

The warrant liability is included in other current liabilities on the condensed consolidated balance sheets.

Intangible assets consist of the following (in thousands):

		June 29, 2014												December 31, 2013
		Gross				Accumulated Amortization				Net				Gross				Accumulated Amortization				Net
Customer relationships		$	3,277			$	(1,908	)		$	1,369			$	3,277			$	(1,697	)		$	1,580
Existing technology			3,783				(2,677	)			1,106				3,783				(2,473	)			1,310
Order backlog			732				(732	)			-				732				(732	)			-
Patents			457				(400	)			57				457				(397	)			60
Trade name			659				(351	)			308				659				(322	)			337
Total		$	8,908			$	(6,068	)		$	2,840			$	8,908			$	(5,621	)		$	3,287

For the three and six months ended June 29, 2014 and June 30, 2013, amortization of intangible assets was as follows (in thousands):

 

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Cost of revenue		$	103			$	122			$	206			$	244
Selling, general and administrative expense			121				129				241				260
		$	224			$	251			$	447			$	504

Years ending December 31,
2014		$	446
2015			893
2016			869
2017			487
2018			145
Total		$	2,840

 

As of June 29, 2014, the Company had $9.9 million of goodwill in connection with the acquisitions of ChipX and Endwave. In addition to its annual review, the Company also performs a review of the carrying value of its intangible assets if the Company believes that indicators of impairment exist. During the second quarter of 2014, there were no factors which indicated impairment. The Company did not record impairment on any intangibles, including goodwill, for the three and six months ended June 29, 2014.  In addition, the Company did not record an impairment of goodwill for the year ended December 31, 2013.

On March 25, 2013, the Company entered into a second amended and restated loan and security agreement (“Loan Agreement”) with Silicon Valley Bank (“SVB”) to replace the amended and restated loan and security agreement entered on December 9, 2011. Pursuant to the Loan Agreement, the total aggregate amount that the Company is entitled to borrow from SVB has increased to $7 million, which is now split into two different credit facilities, comprised of (i) the existing Revolving Loan facility which was amended to provide that the Company is entitled to borrow from SVB up to $3.5 million, based on net eligible accounts receivable after an 80% advance rate and subject to limits based on the Company’s eligible accounts as determined by SVB and (ii) a new facility under which the Company is entitled to borrow from SVB up to $3.5 million without reference to accounts receivable under which the principal balance and accrued interest must be repaid within 3 business days after the date of any advance under the facility. In addition, the Loan Agreement eliminates the financial covenants contained in the previous loan agreement.

The Loan Agreement with SVB is secured by all of the Company’s assets, including all accounts, equipment, inventory, receivables, and general intangibles. The Loan Agreement contains certain restrictive covenants that will impose significant operating and financial restrictions on its operations, including, but not limited to restrictions that limit its ability to:

·

Sell, lease, or otherwise transfer, or permit any of its subsidiaries to sell, lease or otherwise transfer, all or any part of its business or property, except in the ordinary course of business or in connection with certain indebtedness or investments permitted under the amended and restated loan agreement;

·

Merge or consolidate, or permit any of its subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its subsidiaries to acquire, all or substantially all of the capital stock or property of another person;

·

Create, incur, assume or be liable for any indebtedness, other than certain indebtedness permitted under the amended and restated loan and security agreement;

·

Pay any dividends or make any distribution or payment on, or redeem, retire, or repurchase, any capital stock; and

·

Make any investment, other than certain investments permitted under the amended and restated loan and security agreement.

The Company had no outstanding balance on its line of credit as of June 29, 2014.

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On December 19, 2013, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC as representative of several underwriters to the Underwriting Agreement relating to a public offering of an aggregate of 8,325,000 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share at a public offering price of $1.42 per share. The Shares are accompanied by the associated rights to purchase shares of Series A Junior Preferred Stock, par value $0.001 per share, of the Company created by the Rights Agreement, dated December 16, 2011, between the Company and the American Stock Transfer & Trust Company, LLC, as Rights Agent (the “Rights Agreement”).  Under the terms of the Underwriting Agreement, the Company granted the Underwriters a 30 day option to purchase up to an additional 1,248,750 shares of common stock to cover over-allotments.

On December 24, 2013, the Company completed its public offering of 9,573,750 newly issued shares of common stock at a price to the public of $1.42 per share. The number of shares sold in the offering included the underwriter’s full exercise on December 24, 2013 of their over-allotment option of 1,248,750 shares of common stock. The net proceeds to the Company from the offering was approximately $12.3 million which consisted of $12.5 million after underwriting discounts, commissions and expenses less an additional $250,000 for legal, accounting, registration and other transaction costs related to the public offering.

In December 2008, the Company’s stockholders approved an amendment to the Certificate of Incorporation to authorize 50,000,000 shares of common stock of par value $0.001. In addition, the Company is authorized to issue 1,000,000 shares of preferred stock of $0.001 par value of which 300,000 shares have been designated Series A Junior Preferred Stock with powers, preferences and rights as set forth in the certificate of designation dated December 16, 2011; the remainder of the shares of preferred stock are undesignated, for which the Board of Directors is authorized to fix the designation, powers, preferences and rights. As of June 29, 2014 and December 31, 2013, there were no shares of preferred stock issued or outstanding.

Under the 2008 Plan, the exercise price of a stock option is at least 100% of the stock’s fair market value on the date of grant, and if an ISO is granted to a 10% stockholder at least 110% of the stock’s fair market value on the date of grant. Vesting periods for awards are recommended by the chief executive officer and generally provide for stock options to vest over a four-year period, with a one year vesting cliff of 25%, and have a maximum life of ten years from the date of grant. The Company has also issued restricted stock units (“RSUs”) which generally vest over a one to four-year period.

2007 Equity Incentive Plan

 

In August 2007, GigOptix LLC adopted the GigOptix LLC Equity Incentive Plan (the "2007 Plan"). The 2007 Plan provided for grants of options to purchase membership units, membership awards and restricted membership units to employees, officers and non-employee directors, and upon the completion of the merger with Lumera were converted into grants of up to 632,500 shares of stock. Vesting periods are determined by the Board of Directors and generally provide for stock options to vest over a four-year period and expire ten years from date of grant. Vesting for certain shares of restricted stock is contingent upon both service and performance criteria. The 2007 Plan was terminated upon the completion of merger with Lumera on December 9, 2008 and the remaining 864 stock options not granted under the 2007 Plan were cancelled. No shares of the Company’s common stock remain available for issuance of new grants under the 2007 Plan other than for satisfying exercises of stock options granted under this plan prior to its termination. As of June 29, 2014, options to purchase a total of 413,497 shares of common stock and 4,125 warrants to purchase common stock were outstanding.

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As of December 31, 2013, the Company had a total of 1,468,239 warrants to purchase common stock outstanding under all warrant arrangements. During the six months ended June 29, 2014, no warrants were exercised and 784,999 warrants expired. As a result, as of June 29, 2014, the Company had 683,240 warrants to purchase common stock outstanding under all warrant arrangements. Some of the warrants have anti-dilution provisions which adjust the number of warrants available to the holder such as, but not limited to, stock dividends, stock splits and certain reclassifications, exchanges, combinations or substitutions. These provisions are specific to each warrant agreement.

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Cost of revenue		$	88			$	59			$	164			$	139
Research and development expense			292				231				567				554
Selling, general and administrative expense			728				448				1,387				1,153
Restructuring expense			9				-				9				662
		$	1,117			$	738			$	2,127			$	2,508

 

For the six months ended June 29, 2014, included in the $2.1 million of stock-based compensation expense was $9,000 in restructuring expense to modify the exercise period and accelerate the vesting of RSUs (see Note 7).

 

For the six months ended June 30, 2013, included in the $2.5 million of stock-based compensation expense is $662,000 in restructuring expense to modify the exercise period and accelerate the vesting of stock options and RSUs (see Note 7).

The following is a summary of option activity for the Company’s equity incentive plans, including both the 2008 Plan and other prior plans for which there are outstanding options but no new grants since the 2008 Plan was adopted:

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The following is a summary of RSU activity for the indicated periods:

 

		Number of Shares				Weighted- Average Grant Date Fair Value				Weighted- Average Remaining Vesting Term, Years				Aggregate Intrinsic Value
														(In thousands)
Outstanding, December 31, 2013			1,313,801			$	1.19				1.85			$	2,010
Granted			1,475,085				1.70
Released			(525,333	)			1.30
Forfeited/expired			(42,783	)			1.25
Outstanding, June 29, 2014			2,220,770			$	1.50				2.60			$	3,220

 

During the first of quarter of 2013, the Company undertook restructuring activities to reduce its expenses.  The components of the restructuring charge included $662,000 of non-cash expenses associated with the acceleration of stock options and RSUs, $288,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations. The net charge for these restructuring activities was $950,000.

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During the second of quarter of 2014, the Company undertook restructuring activities to reduce its expenses. In conjunction with the creation of the BrP joint venture and the subsequent relocation of the related manufacturing activities to BrP, the Company ended its lease in the Bothell, Washington location and reduced its headcount. The components of the restructuring charge included $43,000 of cash expenses for cleanup services, $210,000 of restricted cash and rent deposit forfeiture to move out of the Bothell facility, $45,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations, and $9,000 of non-cash expenses associated with the acceleration of RSUs. The total charge for these restructuring activities was $307,000.

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Beginning balance		$	-			$	182			$	30			$	168
Charges			307				-				307				950
Uses and adjustments			(307	)			(54	)			(337	)			(990	)
Ending balance		$	-			$	128			$	-			$	128

 

As of June 29, 2014, the Company had no balance in accrued restructuring.

NOTE 8— INVESTMENT IN UNCONSOLIDATED AFFILIATE

In February 2014, together with CPqD, the Company incepted a new joint venture, named BrP, of which the Company owns 49% and CPqD owns 51% of BrP. It is based in Campinas, Brazil. BrP will be a provider of advanced high-speed devices for optical communications and integrated transceiver components for information networks. It is engaged in research and development of SiPh advanced electro-optical products.

The Company has transferred into BrP its knowledge-base and intellectual property of TFPS^TM technology. The Company has transferred to CPqD, its inventory related to the TFPS^TM platform and the complete production line equipment that previously resided at its Bothell, Washington, facility for CPqD to use for the BrP joint venture. As of the transfer date, the Company’s net book value of the inventory and property and equipment was $245,000 and $211,000, respectively, which resulted in a $456,000 investment in BrP.

For the three and six months ended June 29, 2014, the Company’s allocated portion of BrP’s results was a loss of $331,000, respectively. This resulted in the Company’s investment in an unconsolidated affiliate of $125,000 as of June 29, 2014.

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NOTE 10—NET LOSS PER SHARE

 

The following table summarizes total securities outstanding which were not included in the calculation of diluted net loss per share because to do so would have been anti-dilutive:

		June 29,				June 30,
		2014				2013
Stock options and RSUs			12,276,382				10,978,671
Common stock warrants			683,240				1,788,095
Total			12,959,622				12,766,766

The Company has determined that it operates as a single operating and reportable segment. The following tables reflect the results of the Company’s reportable segment consistent with the management system used by the Company’s Chief Executive Officer, the chief operating decision maker.

The following table summarizes revenue by geographic region (in thousands):

		Three Months Ended																				Six Months Ended
		June 29, 2014								June 30, 2013								June 29, 2014								June 30, 2013
North America		$	1,875				23	%		$	2,094				31	%		$	4,102				27	%		$	4,073				30	%
Asia			2,456				31	%			1,895				28	%			4,614				30	%			4,175				30	%
Europe			3,647				45	%			2,533				37	%			6,556				42	%			4,696				34	%
Other			59				1	%			309				4	%			151				1	%			808				6	%
		$	8,037				100	%		$	6,831				100	%		$	15,423				100	%		$	13,752				100	%

For the three months ended June 29, 2014, two customers accounted for greater than 10% of total revenue and combined they accounted for 35% of total revenue, of which the largest accounted for 24% of the Company’s total revenue. For the three months ended June 30, 2013, two customers accounted for greater than 10% of total revenue and combined they accounted for 41% of total revenue, of which the largest accounted for 30% of the Company’s total revenue.

 

For the six months ended June 29, 2014, one customer accounted for 26% of total revenue. For the six months ended June 30, 2013, one customer accounted for 29% of total revenue.

 

During the three months ended June 29, 2014, Italy and the United States accounted for 36% and 20% of total revenue, respectively. During the three months ended June 30, 2013, Italy, the United States, and Japan accounted for 34%, 26%, and 16% of total revenue, respectively. No other countries accounted for more than 10% of the Company’s total revenue during the three months ended June 29, 2014 and June 30, 2013.

During the six months ended June 29, 2014, Italy, the United States, and Japan accounted for 36%, 24%, and 10% of total revenue, respectively. During the six months ended June 30, 2013, Italy, the United States, and Japan accounted for 30%, 27%, and 14% of total revenue, respectively. No other countries accounted for more than 10% of the Company’s total revenue during the six months ended June 29, 2014 and June 30, 2013.

The following table summarizes revenue by product line (in thousands):

 

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
HSC		$	5,609			$	4,563			$	10,891			$	9,128
Industrial			2,428				2,268				4,532				4,624
Total revenue		$	8,037			$	6,831			$	15,423			$	13,752

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The following table summarizes long-lived assets by country (in thousands):

 

		June 29, 2014				December 31, 2013
United States		$	1,851			$	2,004
Switzerland			566				995
		$	2,417			$	2,999

Long-lived assets, comprised of property and equipment, are reported based on the location of the assets as of each balance sheet date.

As of April 2014, the Company moved out of its Bothell, Washington facility which comprised 11,666 square feet and entered into a new one-year lease located in Bellevue, Washington which comprises approximately 2,100 square feet.

Aggregate non-cancelable future minimum rental payments under capital and operating leases are as follows (in thousands):

		Capital Leases				Operating Leases
Years ending December 31,		Minimum lease payments				Minimum lease  payments
2014		$	108			$	593
2015			4				432
2016			3				339
2017			3				57
Total minimum lease payments			118			$	1,421
Less: Amount representing interest			(6	)
Total capital lease obligations			112
Less: current portion			(104	)
Long-term portion of capital lease obligations		$	8

From time to time, the Company may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When the Company believes a loss is probable and can be reasonably estimated, the Company accrues the estimated loss in the consolidated financial statements. Where the outcome of these matters is not determinable, the Company does not make a provision in the financial statements until the loss, if any, is probable and can be reasonably estimated or the outcome becomes known. There are no known losses at this time.

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In May 2014, the FASB issued an accounting standard clarifying the principles for recognizing revenue by amending the FASB Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This standard is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company is currently evaluating the impact of the adoption on the Company’s condensed consolidated financial statements.

NOTE 14—SUBSEQUENT EVENTS

During the third quarter of 2014, the Company completed its acquisition of Tahoe RF. The Company acquired substantially all of the assets of Tahoe RF including one patent, equipment and inventory by assuming approximately $500,000 of liabilities of Tahoe RF. Through the acquisition the Company added 10 employees to its team, which are primarily RF engineers focused on the high growth areas of E-Band and V-Band technologies. In January 2015, up to an additional approximately $200,000 in bonus payments are payable by the Company to these employees provided certain milestones are met and they remain employed by the Company. In addition, beginning in July 2016 and continuing annually through July 2020, these employees will be entitled to a retention bonus of approximately, $100,000 in the aggregate, if they remain employed with the Company.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes included elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2013. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2013 and this Quarterly Report on Form 10-Q. We assume no obligation to update the forward-looking statements or such risk factors.

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference include forward-looking statements within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are also made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

 

Overview

 

We are a leading fabless supplier of high speed semiconductor components that enable end-to-end information streaming over optical and wireless networks.  Our products address long haul and metro telecommunications applications as well as emerging high-growth opportunities for Cloud and datacenter connectivity, interactive applications for consumer electronics, and the industrial, defense and avionics industries. The business is made up of two product lines: our High-Speed Communications (HSC) product line and our Industrial product line.

Through our HSC product line we offer a broad portfolio of high performance optical and wireless components to telecommunications (telecom) and data communications (datacom) customers, including i) mixed signal radio frequency integrated circuits (RFIC), including 10 to 400 gigabit per second (Gbps) laser and optical drivers and trans-impedance amplifiers (TIA) for telecom, datacom, and consumer electronic fiber-optic applications; ii) power amplifiers and transceivers for microwave and millimeter monolithic microwave integrated circuit (MMIC) wireless applications including power amplifiers and transceiver chips at frequencies higher than 50 GHz; iii) integrated systems in a package (SIP) solutions for both fiber-optic and wireless applications; and iv) radio frequency (RF) chips for various consumer applications such as global navigation satellite systems (GNSS). The HSC product line also partners with key customers on development projects that generate engineering project revenue and helps to position us for future product revenues with these key customers.

 

Through our Industrial product line, we offer a wide range of digital and mixed-signal application specific integrated circuit (ASIC) solutions for industrial, military, avionics, medical and communications markets. The Industrial product line partners with ASIC customers on development projects that generate engineering project revenue and which generally lead to future product revenues with these ASIC customers.

We focus on the specification, design, development and sale of analog semiconductor integrated circuits (ICs), multi-chip module (MCM) solutions, and digital and mixed signal ASICs, as well as wireless communications MMICs and modules. We believe we are an industry leader in the fast growing market for electronic solutions that enable high-bandwidth optical connections found in telecom, datacom and storage systems, and, increasingly, in consumer electronics and computing systems.

Since inception, we have expanded our customer base with the acquisition and integration of six businesses with complementary products and customers. In so doing, we have expanded our device product line in a few active areas, such growing our communication device offering from a few leading 10Gbps ultra-long haul optical drivers at our inception in July 2007 to a line of products today that include: drivers, receivers and TIAs for 10 to 400Gbps optical applications; power amplifiers; and custom ASICs spanning 0.6um to 65nm technology nodes. Our direct sales force is based in three countries and is supported by a significant number of channel representatives and distributors that sell our products throughout North America, Europe, Japan and Asia.

During the third quarter of 2014, we acquired substantially all of the assets of Tahoe RF Semiconductor, Inc. (Tahoe RF) including one patent, equipment and inventory by assuming approximately $500,000 of liabilities of Tahoe RF.  Through the acquisition, we have added RF/analog RFIC technology to our product portfolio and 10 employees to our team, primarily RF engineers focused on the high growth areas of E-Band and V-Band technologies.

Historically, we have incurred net losses. For the six months ended June 29, 2014 and the year ended December 31, 2013, we incurred net losses of $3.9 million and $1.9 million, respectively.  For the six months ended June 29, 2014, we had cash outflows from operations of $738,000. For the year ended December 31, 2013, we had cash inflows from operations of $3.3 million.  As of June 29, 2014 and December 31, 2013, we had an accumulated deficit of $100.4 million and $96.4 million, respectively.

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Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standard Board (FASB) issued an accounting standard update clarifying the accounting guidance on how to account for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. This standard is effective for periods beginning after December 15, 2015 and early adoption is permitted. We do not expect the adoption will have a material impact on our condensed consolidated financial statements.

In May 2014, the FASB issued an accounting standard clarifying the principles for recognizing revenue by amending the FASB Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This standard is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. We are currently evaluating the impact of the adoption on our condensed consolidated financial statements.

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Product		$	7,201			$	5,646			$	13,880			$	11,330
Development fees and other			836				1,185				1,543				2,422
Total revenue		$	8,037			$	6,831			$	15,423			$	13,752
Increase, period over period		$	1,206							$	1,671
Percentage increase, period over period			18	%							12	%

Total revenue for the three months ended June 29, 2014 was $8.0 million, an increase of $1.2 million or 18%, compared with $6.8 million for the three months ended June 30, 2013. For the three months ended June 29, 2014, 90% of our revenue was contributed by product revenue and 10% of our revenue was contributed by development fees and other revenue. For the three months ended June 30, 2013, 83% of our revenue was contributed by product revenue and 17% of our revenue was contributed by development fees and other revenue.

Product revenue for the three months ended June 29, 2014 was $7.2 million, an increase of $1.6 million or 28%, compared with $5.6 million for the three months ended June 30, 2013. The increase in product revenue during the three months ended June 29, 2014 was due to the increased demand for both our HSC and Industrial product lines.

Development fees and other revenue for the three months ended June 29, 2014 was $836,000, a decrease of $349,000 or 29%, compared with $1.2 million for the three months ended June 30, 2013.  We experienced a decrease in development fees and other revenue primarily due to a decrease in the number and size of development projects in our HSC product line.

Total revenue for the six months ended June 29, 2014 was $15.4 million, an increase of $1.7 million or 12%, compared with $13.8 million for the six months ended June 30, 2013. For the six months ended June 29, 2014, 90% of our revenue was contributed by product revenue and 10% of our revenue was contributed by development fees and other revenue. For the six months ended June 30, 2013, 82% of our revenue was contributed by product revenue and 18% of our revenue was contributed by development fees and other revenue.

Product revenue for the six months ended June 29, 2014 was $13.9 million, an increase of $2.6 million or 23%, compared with $11.3 million for the six months ended June 30, 2013. The increase in product revenue during the six months ended June 29, 2014 was due to increased revenue from our HSC product line, primarily our data communications and E-band products.

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Development fees and other revenue for the six months ended June 29, 2014 was $1.5 million, a decrease of $879,000 or 36%, compared with $2.4 million for the six months ended June 30, 2013. We experienced a decrease in development fees and other revenue primarily due to a decrease in the number and size of development projects in our HSC and Industrial product lines.

Cost of revenue and gross profit for the periods presented was as follows (in thousands, except percentages):

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Total cost of revenue		$	3,487			$	2,578			$	6,613			$	5,214
Gross profit		$	4,550			$	4,253			$	8,810			$	8,538
Gross margin			57	%			62	%			57	%			62	%
Increase, period over period			297								272
Percentage increase, period over period			7	%							3	%

Gross profit consists of revenue less cost of revenue. Cost of revenue consists primarily of the costs to manufacture saleable chips, including outsourced wafer fabrication and testing; costs of direct materials; equipment depreciation; costs associated with procurement, production control and quality assurance; fees paid to our offshore manufacturing vendors; reserves for potential excess or obsolete material; allocated facilities costs; costs related to stock-based compensation; accrued costs associated with potential warranty returns; and amortization of certain identified intangible assets. Amortization expense of identified intangible assets, namely existing technology, is presented within cost of revenue, as the intangible assets were determined to be directly attributable to revenue generating activities.

Gross profit for the three months ended June 29, 2014 was $4.6 million, or a gross margin of 57%, compared to a gross profit of $4.3 million or a gross margin of 62%, for the three months ended June 30, 2013. The decrease in gross margin is primarily due to increased overhead related costs and lower revenue from development projects.

Gross profit for the six months ended June 29, 2014 was $8.8 million, or a gross margin of 57%, compared to a gross profit of $8.5 million, or a gross margin of 62%, for the six months ended June 30, 2013. The decrease in gross margin is primarily due to increased overhead related costs and lower revenue from development projects.

We record revenue from non-recurring engineering projects associated with product development that we enter into with certain customers. In general, these projects are associated with complex technology development, and as such we do not have certainty about our ability to achieve the program milestones. Achievement of the milestone is dependent on our performance and is typically accepted by the customer. The payment associated with achieving the milestone is generally commensurate with our effort or the value of the deliverable and is nonrefundable. Therefore, we record the expenses related to these projects in the periods incurred and recognize revenue only when we have earned the revenue and achieved the development milestones. Revenue from these projects is typically recorded at 100% gross margin because the costs associated with these projects are expensed as incurred and generally included in research and development expense. These efforts generally benefit our overall product development programs beyond the specific project requested by our customer.

Development project revenue and other non-product revenue for the three months ended June 29, 2014 was $836,000 compared with $1.2 million for the three months ended June 30, 2013.  Excluding the revenue and gross profit associated with development programs and other non-product revenue, gross margin was 52% and 54% for the three months ended June 29, 2014 and June 30, 2013, respectively.

Development project revenue and other non-product revenue for the six months ended June 29, 2014 was $1.5 million compared with $2.4 million for the six months ended June 30, 2013.  Excluding the revenue and gross profit associated with development programs and other non-product revenue, gross margin was 52% and 54% for the six months ended June 29, 2014 and June 30, 2013, respectively.

Research and development expense for the periods presented was as follows (in thousands, except percentages):

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Research and development expense		$	3,358			$	3,177			$	7,100			$	6,413
Percentage of revenue			42	%			47	%			46	%			47	%
Increase, period over period		$	181							$	687
Percentage increase, period over period			6	%							11	%

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Research and development expenses are expensed as incurred. Research and development expense consists primarily of salaries and related expenses for research and development personnel, consulting and engineering design, non-capitalized tools and equipment, engineering related semiconductor masks, depreciation for equipment, engineering expenses paid to outside technology development suppliers, allocated facilities costs and expenses related to stock based compensation.

Research and development expense for the three months ended June 29, 2014 was $3.4 million compared to $3.2 million for the three months ended June 30, 2013, an increase of $181,000 or 6%. Research and development costs increased as compared to the second quarter of 2013 primarily due to a $305,000 increase in personnel related expenses which were partially offset by an $185,000 decrease in project related expenses.

Research and development expense for the six months ended June 29, 2014 was $7.1 million compared to $6.4 million for the six months ended June 30, 2013, an increase of $687,000 or 11%.  Research and development costs increased as compared to 2013 primarily due to a $347,000 increase in personnel related expenses and a $345,000 increase in materials and project-related services for developing new products.

We expect research and development expense to increase from the second quarter of 2014 to the third quarter of 2014 due to increased headcount as a result of the Tahoe RF acquisition.

Selling, General and Administrative Expense

 

 Selling, general and administrative expense for the periods presented was as follows (in thousands, except percentages):

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Selling, general and administrative expense		$	2,567			$	2,041			$	4,965			$	4,394
Percentage of revenue			32	%			30	%			32	%			32	%
Increase, period over period		$	526							$	571
Percentage increase, period over period			26	%							13	%

Selling, general and administrative expense for the three months ended June 29, 2014 was $2.6 million compared to $2.0 million for the three months ended June 30, 2013 an increase of $526,000 or 26%. Selling, general and administrative expense increased as compared to the second quarter of 2013 primarily due to a $375,000 increase in personnel related expenses and a $280,000 increase in stock-based compensation.

Selling, general and administrative expense for the six months ended June 29, 2014 was $5.0 million compared to $4.4 million for the six months ended June 30, 2013, an increase of $571,000 or 13%. Selling, general and administrative expense increased as compared to 2013 primarily due to a $428,000 increase in personnel related expenses and a $234,000 increase in stock-based compensation.

We expect selling, general and administrative expense to be comparable in absolute dollars from the second quarter of 2014 to the third quarter of 2014.

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Restructuring expense		$	307			$	-			$	307			$	950
Percentage of revenue			4	%			0	%			2	%			7	%
Increase (decrease), period over period		$	307							$	(643	)
Percentage increase (decrease), period over period			100	%							(68	%)

During the three months and six months ended June 29, 2014, we recorded $307,000 in restructuring expenses in order to end our lease in the Bothell, Washington location and reduce our headcount. The components of the restructuring charge included $43,000 of cash expenses for cleanup services, $210,000 of restricted cash and rent deposit forfeiture to move out of the Bothell facility, $45,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations, and $9,000 of non-cash expenses associated with the acceleration restricted stock units (“RSUs”).

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During the six months ended June 30, 2013, we recorded $950,000 in restructuring expenses. The components of the restructuring charge included $662,000 of non-cash expenses associated with the acceleration of stock options and RSUs and $288,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations. No restructuring expenses were incurred in the three months ended June 30, 2013.

Special Litigation-Related Expense

During the six months ended June 29, 2014, we incurred no special litigation-related expenses.

During the three months ended June 30, 2013, we incurred special litigation-related expenses of $472,000, which was primarily due to legal fees associated with the misappropriation of trade secrets and breach of contract case against M/A-COM Technology Solutions, Inc. (“MACOM”), MACOM’s wholly-owned subsidiary Optomai, Inc. (“Optomai”), and three former employees of GigOptix who founded Optomai.

During the six months ended June 30, 2013, we incurred special litigation-related expenses of $887,000, which was primarily due to $770,000 of legal fees associated with the lawsuit against MACOM, Optomai and the three former GigOptix employees and $108,000 of legal fees associated with the case against Advantech, the parent company of Allgon Microwave Corporation AB, or Allgon, for breach of contract.

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Interest expense, net		$	(10	)		$	(25	)		$	(27	)		$	(79	)
Other income, net			-				88				10				256
Total		$	(10	)		$	63			$	(17	)		$	177

Interest expense, net and other income, net consist primarily of gains and losses related to foreign currency transactions, gains and losses related to property and equipment disposals, interest on line of credit borrowings, interest on capital leases and amortization of loan fees in connection with our Silicon Valley Bank line of credit and loan.

Interest expense, net for the three months ended June 29, 2014 was $10,000 compared to $25,000 for the three months ended June 30, 2013. Interest expense, net decreased as compared to the second quarter of 2013 primarily due to a $12,000 decrease in interest on capital leases.

Interest expense, net for the six months ended June 29, 2014 was $27,000 compared to $79,000 for the six months ended June 30, 2013. Interest expense, net decreased as compared to the second quarter of 2013, primarily due to a $23,000 decrease in interest on capital leases and $19,000 decrease in loan fees.

Other income, net for the three months ended June 30, 2013 was income of $88,000, which primarily consisted of $65,000 gain on sale of materials and $29,000 gain on sale of property and equipment.

Other income, net for the six months ended June 30, 2013 was income of $256,000, which primarily consisted of $160,000 gain on sale of property and equipment, $88,000 gain on sale of materials and $12,000 from the change in the fair value of liability warrants.

Provision for Income Taxes

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Provision for income taxes		$	21			$	14			$	31			$	27
Percentage of revenue			0	%			0	%			0	%			0	%
Increase, period over period		$	7							$	4
Percentage increase, period over period			50	%							15	%

Equity in Earnings of Unconsolidated Affiliate

In February 2014, together with Fundação CPqD – Centro De Pesquisa e Desenvolvimento em Telecomunicações (“CPqD”), we incepted a new joint venture, of which we own 49% and CPqD owns 51%, BrPhotonics Produtos Optoeletrônicos LTDA. (“BrP”). It is based in Campinas, Brazil.  BrP will be a provider of advanced high-speed devices for optical communications and integrated transceiver components for information networks and is engaged in research and development of Silicon-Photonics (“SiPh”) advanced electro-optical products.

For the three and six months ended June 29, 2014, our allocated portion of BrP’s operating results was a loss of $331,000, respectively.

Liquidity and Capital Resources

		Six Months Ended
		June 29, 2014				June 30, 2013
Net cash used in operating activities		$	(738	)		$	(1,856	)
Net cash used in investing activities		$	(682	)		$	(939	)
Net cash provided by (used in) financing activities		$	(407	)		$	2,088

Public Offering

On December 19, 2013, we entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC as representative of several underwriters to the Underwriting Agreement relating to a public offering of an aggregate of 8,325,000 shares (the “Shares”) of our common stock, par value $0.001 per share at a public offering price of $1.42 per share. The Shares are accompanied by the associated rights to purchase shares of Series A Junior Preferred Stock, par value $0.001 per share, created by the Rights Agreement, dated December 16, 2011, between us and the American Stock Transfer & Trust Company, LLC, as Rights Agent (the “Rights Agreement”).  Under the terms of the Underwriting Agreement, we granted the underwriters a 30 day option to purchase up to an additional 1,248,750 shares of common stock to cover over-allotments.

Operating activities used cash of $738,000 in the six months ended June 29, 2014. Our net loss from continuing operations, adjusted for depreciation, stock-based compensation, equity in earnings of unconsolidated affiliate, non-cash restructuring expense and other non-cash items, was an income of $545,000. The remaining use of $1.3 million of cash was primarily due to an increase in accounts receivable, net of $2.0 million, an increase in prepaid and other current assets of $582,000, a decrease in accrued compensation of $268,000 and a decrease in other current liabilities of $248,000, which were partially offset by an increase in accounts payable of $1.8 million.

Operating activities used cash of $1.9 million in the six months ended June 30, 2013. This resulted from a net loss of $4.0 million and we experienced cash usage for working capital for an increase in accounts receivable, net of $1.4 million, an increase in prepaid and other current assets of $387,000, a decrease in accounts payables of $409,000, and a decrease in other current and long-term liabilities of $186,000. These decreases were partially offset by a decrease in inventories of $158,000 and non-cash expenses of stock-based compensation of $2.5 million and depreciation and amortization of $1.9 million.

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Net cash used in investing activities for the six months ended June 29, 2014 was $682,000 and consisted of purchases of property and equipment.

Net cash used in investing activities for the six months ended June 30, 2013 was $939,000 and consisted of $1.1 million of purchases of property and equipment partially offset by $160,000 proceeds from sale of property and equipment.

Net cash used in financing activities for the six months ended June 29, 2014 was $407,000 and consisted primarily of $266,000 of taxes paid related to net share settlement of equity awards and $181,000 for capital lease payments.

Net cash provided by financing activities for the six months ended June 30, 2013 was $2.1 million and consisted primarily of $2.4 million of net borrowings on our line of credit facilities with Silicon Valley Bank partially offset by $237,000 for capital lease payments.

 

Material Commitments

 

Contractual Obligations at June 29, 2014:		Total				Less than One Year				One to Three Years				More than Three Years
Operating lease obligations		$	1,421			$	593			$	771			$	57
Capital lease obligations (including interest)			118				108				7				3
Total		$	1,539			$	701			$	778			$	60

Inflation and changing prices have not had a material impact on the materials used in our production process during the periods and at balance sheet dates presented in this report.

Off-Balance Sheet Arrangements

GigOptix does not use off-balance-sheet arrangements with unconsolidated entities, nor does it use other forms of off-balance-sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, GigOptix is not exposed to any financing or other risks that could arise if it had such relationships.

 

WHERE YOU CAN FIND MORE INFORMATION

 

Our filings with the Securities and Exchange Commission (the “SEC”), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended are available on our website at http://www.gigoptix.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the SEC. The information contained on our website is not a part of this Quarterly Report on Form 10-Q.

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to also use the following social media channels as a means of disclosing information about the company, our services and other matters and for complying with our disclosure obligations under Regulation FD:

 

•	GigOptix Twitter Account (https://twitter.com/GigOptix)

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The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q.  Further, the references to the URLs for these websites are intended to be inactive textual references only.

You can also read and copy any document that we file, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Call the SEC at 1-800-SEC-0330 for information on the operation of the Public Reference Room. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You can electronically access our SEC filings there.  Additionally, the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, by our predecessor registrant Lumera are also available at http://www.sec.gov.

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ITEM 3.

QUANTITATIVE AND QUALTATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management is responsible for establishing and maintaining our disclosure controls and procedures. Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated the effectiveness of our disclosure controls and procedures as of June 29, 2014. Our CEO and CFO have concluded that our disclosure controls and procedures were effective as of that date and have also concluded that our consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II     OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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ITEM 1A.

RISK FACTORS

We have revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede any similar the risks previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013 and otherwise supplement those risks. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K, as well as those contained in Part 1, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.

We have incurred substantial operating losses in the past and we may not be able to achieve profitability in the future.

Historically, we have incurred net losses. For the six months ended June 29, 2014 and the years ended December 31, 2013 and 2012, we incurred net losses of $3.9 million, $1.9 million and $7.0 million, respectively. For the six months ended June 29, 2014, we had cash outflows from operations of $738,000. For the year ended December 31, 2013, we had cash inflows from operations of $3.3 million. For the year ended December 31, 2012, we had cash outflows from operations of $2.0 million. As of June 29, 2014, we had an accumulated deficit of $100.4 million. We expect development, sales and other operating expenses to increase in the future as we expand our business. If our revenue does not grow to offset these current expenses, we may not be profitable. In fact, in future quarters we may not have any revenue growth and our revenues could decline. Furthermore, if our operating expenses exceed expectations, financial performance will be adversely affected and we may continue to incur significant losses in the future.

We derive a significant portion of our revenue from a small number of customers and the loss of one or more of these key customers, the diminished demand for our products from a key customer, or the failure to obtain certifications from a key customer or its distribution channel could significantly reduce our revenue and profits.

A relatively small number of customers account for a significant portion of our revenue in any particular period. One or more of our key customers may discontinue operations as a result of consolidation, liquidation or otherwise, or reduce significantly its business with us due to the current economic conditions or their current situation. Reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers could significantly reduce our revenue and profits. There is no assurance that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers.

For the six months ended June 29, 2014, one customer accounted for 26% of total revenue. For the six months ended June 30, 2013, one customer accounted for 29% of our total revenue. No other customers accounted for more than 10% of total revenue during the six months ended June 29, 2014 and June 30, 2013.

 

We could suffer unrecoverable losses on our customers’ accounts receivable, which would adversely affect our financial results.

Our operating cash flows are dependent on the continued collection of receivables. Although our accounts receivable as of June 29, 2014 increased by $2.0 million, or 40%, compared to the balance as of December 31, 2013 we have not had significant uncollectable accounts. However, if a customer is unable or refuses to pay, we could suffer additional accounting losses as well as a reduction in liquidity. A significant increase in uncollectible accounts would have an adverse impact on our business, liquidity and financial results.

Our business is subject to foreign currency risk.

Sales to customers located outside the United States comprised 76% and 73% of our revenue for the six months ended June 29, 2014 and June 30, 2013, respectively. In addition, we have two subsidiaries overseas (Switzerland and Germany) that record their operating expenses in a foreign currency.  Since sales of our products have been denominated to date primarily in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in GigOptix’ results of operations. We currently do not have hedging or other programs in place to protect against adverse changes in the value of the U.S. dollar as compared to other currencies to minimize potential adverse effects.

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ITEM 6.

EXHIBITS

Exhibit Number		Description
31.1*		Chief Executive Officer certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Chief Financial Officer certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Chief Executive Officer certification pursuant to Rule 13a-14(b) or Rule 13d-14(b) and Section 1350, Chapter 63 of Title 18 United States Code (18 U.S.C. 1350) as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2*		Chief Financial Officer certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350, Chapter 63 of Title 18 United States Code (18 U.S.C. 1350) as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

101.INS*		Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 12, 2014	/S/    Avi S. Katz
	Dr. Avi S. Katz Chief Executive Officer and Chairman of the Board
Date: August 12, 2014	/S/ Curt P. Sacks
	Curt P. Sacks Chief Financial Officer

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