UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

For the quarterly period ended June 26, 2016

or

Commission file number: 001-35520

GIGPEAK, INC.

(Exact name of registrant as specified in its charter)

130 Baytech Drive

San Jose, CA  95134

(Address of principal executive offices, including zip code)

(408) 522-3100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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PART I

FINANCIAL INFORMATION

GIGPEAK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

		June 26,				December 31,
		2016				2015
ASSETS		(Unaudited)					(1)
Current assets:
Cash and cash equivalents		$	45,798			$	30,245
Accounts receivable, net			14,183				10,596
Inventories			9,072				6,880
Prepaid and other current assets			1,027				580
Total current assets			70,080				48,301
Property and equipment, net			3,628				3,133
Intangible assets, net			28,717				4,530
Goodwill			45,823				12,565
Restricted cash			229				330
Other assets			1,438				251
Total assets		$	149,915			$	69,110
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	7,137			$	3,659
Accrued compensation			2,886				1,782
Notes payable, current			2,924				-
Other current liabilities			4,789				2,219
Total current liabilities			17,736				7,660
Pension liabilities			356				349
Notes payable, net of current portion			18,343				-
Other long term liabilities			4,297				912
Total liabilities			40,732				8,921
Commitments and contingencies (Note 8)
Redeemable common stock, $0.001 par value; 1,754,385 shares issued and outstanding as of June 26, 2016			4,614				-
Stockholders’ equity:
Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding as of June 26, 2016 and December 31, 2015, respectively			-				-
Common stock, $0.001 par value; 100,000,000 shares authorized; 66,397,086 and 45,221,397 shares issued and outstanding as of June 26, 2016 and December 31, 2015, respectively			66				45
Additional paid-in capital			207,335				163,036
Treasury stock, at cost; 701,754 shares as of June 26, 2016 and December 31, 2015, respectively			(2,209	)			(2,209	)
Accumulated other comprehensive income			359				332
Accumulated deficit			(100,982	)			(101,015	)
Total stockholders’ equity			104,569				60,189
Total liabilities, redeemable common stock and stockholders’ equity		$	149,915			$	69,110

See accompanying notes to condensed consolidated financial statements.

 

(1)	The condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited consolidated financial statements as of that date.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

 

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GIGPEAK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

 

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GIGPEAK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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GIGPEAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

Organization

Basis of Presentation

Use of Estimates

The Company’s revenue is mainly derived from the following sources: (i) product revenue, which includes hardware, software and perpetual software license revenue; (ii) services revenue, which include post contract support (“PCS”), professional services, and training; (iii) royalty revenue based on the number of ICs the customers sold during a particular period by the agreed-upon royalty rate; and (iv) engineering project revenues through the development stage.

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Customer purchase orders are generally used to determine the existence of an arrangement. Transfer of title and risk of ownership occur based on defined terms in customer purchase orders, and generally pass to the customer upon shipment, at which point goods are delivered to a carrier. There are no formal customer acceptance terms or further obligations, outside of standard product warranty. The Company assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction. Collectibility is assessed based primarily on the credit worthiness of the customer as determined through ongoing credit evaluations of the customer’s financial condition as well as consideration of the customer’s payment history.

The Company sells some products to distributors at the price listed in its price book for that distributor. Certain of the Company’s distributor agreements provide for semi-annual stock rotation privileges of 5% to 10% of net sales for the previous six-month period. At the time of sale, the Company records a sales reserve against revenues for stock rotations approved by management. Each month the Company adjusts the sales reserve for the estimated stock rotation privilege anticipated to be utilized by the distributors. When the distributors pay the Company’s invoices, they may claim stock rotations when appropriate. Once claimed, the Company processes the requests against the prior authorizations and reduces the reserve previously established for that customer. As of June 26, 2016 and December 31, 2015, the reserve for stock rotations was $154,000 and $490,000, respectively, and is recorded in other current liabilities on the consolidated balance sheets.

The Company records transaction-based taxes including, but not limited to, sales, use, value added, and excise taxes, on a net basis in its consolidated statements of operations.

Service revenue includes customer support services, primarily software maintenance contract services and professional services. Revenue from service contracts is recognized ratably over the contract term, generally ranging from one to three years. Professional services, such as training services, are offered under time and material or fixed-fee contracts. Professional services revenue is recognized as services are performed.

The Company recognizes royalty revenue based on reports received from customers during the quarter, assuming that all other revenue recognition criteria are met. The customers generally report shipment information typically within 45 days following the end of their respective quarters. If there is a reliable basis on which the Company can estimate its royalty revenues prior to obtaining the customers’ reports, the Company will recognize royalty revenues in the quarter in which they are earned. If there is not a reliable basis for estimating royalties, the Company will recognize revenue in the following quarter when the shipment report is received.

The Company also enters into product development arrangements with certain customers. In general, non-recurring engineering projects require complex technology development and achievement of the development milestones is dependent on the Company’s performance. The milestone payment is generally commensurate with the Company’s effort or the value of the deliverable and is nonrefundable. Although development milestones are typically accepted by the customers, the Company does not have certainty about its ability to achieve these milestones. As such, revenue from product development arrangements are recorded when development milestones are achieved. These revenues are typically recorded at 100% gross margin because the costs associated with non-recurring engineering projects are recorded in research and development as expenses are incurred. The development efforts related to non-recurring engineering projects generally benefit the Company’s overall product development programs beyond the specific project requested by its customers.

Deferred Revenue

 

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Recent Accounting Pronouncements

NOTE 2—BALANCE SHEET COMPONENTS

Accounts receivable, net consisted of the following (in thousands):

Property and equipment, net consisted of the following (in thousands, except depreciable life):

For the three and six months ended June 26, 2016, depreciation expense related to property and equipment was $391,000 and $729,000, respectively. For the three and six months ended June 28, 2015, depreciation expense related to property and equipment was $380,000 and $795,000, respectively.

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

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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.

The Company’s financial instruments measured at fair value on a recurring basis consist of Level I assets and Level III liabilities. Level I assets include highly liquid money market funds that are included in cash and cash equivalents. Level III liabilities consist of common stock warrants liability that are included in other current liabilities. For the six months ended June 26, 2016, the Company did not have any significant transfers between Level 1, Level 2 and Level 3.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 26, 2016 and December 31, 2015 (in thousands):

Common Stock Warrants Liability

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In July 2010, December 2013 and September 2015, the Company raised additional capital through offerings of common stock of 2,760,000 shares, 9,573,750 shares and 10,643,000 shares at a price of $1.75 per share, $1.42 per share and $1.70 per share, respectively. In June 2016, the Company completed another round of equity financing through an offering of common stock of 13,194,643 shares at $2.00 per share (See Note 9—Stockholders’ Equity and Stock-based Compensation). All of these equity financing transactions triggered the down-round protection and adjustment of the number of warrants issued to Bridge Bank.

The following table summarizes the key terms of common stock warrants subject to liability classification as of June 26, 2016 and December 31, 2015 (in thousands, except share and per share amounts):

The fair value of common stock warrants was determined using Black-Scholes option-pricing model. The fair value of the warrants was estimated using the following assumptions:

The change in the fair value of the Level 3 common stock warrants liability during the three and six months ended June 26, 2016 and June 28, 2015 is as follows (in thousands):

 

The total purchase consideration of $55.0 million has been allocated on a preliminary basis to tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. The Company will continue to evaluate certain assets, liabilities and tax estimates that are subject to change within the measurement period (up to one year from the acquisition date).

 

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The following table summarizes the fair values of assets acquired and liabilities assumed (in thousands):

 

The Company determined the valuation of the identifiable intangible assets using established valuation techniques. The developed technology was valued using the forward looking multi-period excess earnings method under the income approach. The IPR&D was valued using the cost to recreate method under the asset approach. Customer relationships and trade name were valued under the distributor method and under the relief from royalty method, respectively. Identifiable intangible assets acquired are amortized on a straight line basis over their respective estimated useful lives of 15 months to 7 years (See Note 5—Intangible Assets and Goodwill).

Goodwill represents the excess of the purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Magnum acquisition primarily consisted of the business synergies expected from the combined entities.

For the six months ended June 26, 2016, the Company incurred acquisition-related transaction costs of $1.3 million, which were recorded in general and administrative expenses in the condensed consolidated statements of operations.

Pro forma financial information (unaudited)

The following table presents the unaudited pro forma financial information for the combined entity of GigPeak and Magnum for the three and six month periods ended June 26, 2016 and June 28, 2015, as if the acquisition had occurred at the beginning of the periods presented after giving effect to certain purchase accounting adjustments. Magnum was acquired on April 5, 2016.

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Intangible assets consist of the following (in thousands):

For the three and six months ended June 26, 2016 and June 28, 2015, amortization of intangible assets was as follows (in thousands):

Estimated future amortization expense related to intangible assets as of June 26, 2016 is as follows (in thousands):

The Company did not record an impairment charge on any intangible assets or goodwill during the three and six months ended June 26, 2016 and June 28, 2015.

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NOTE 7—CREDIT FACILITIES

In May 2015, SVB and the Prior Borrowers amended the Loan Agreement by entering into a Second Amendment to the Second Restated Loan Agreement (the “Second Amendment”). Pursuant to the Second Amendment, the total aggregate amount that the Company was entitled to borrow from SVB under a Revolving Loan facility was $7 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. In addition, the applicable interest rate was decreased from Prime Rate plus 0.6% to Prime Rate plus 0.4%. The terms of the Second Amendment, were set to expire on May 6, 2016.

In April 2016, SVB and the Prior Borrowers, with newly acquired Magnum, entered into the Third Amended and Restated Loan and Security Agreement (the “Third Restated Loan Agreement”) , amending and restating the Loan Agreement, as amended, in its entirety. Pursuant to the Third Restated Loan Agreement, the total aggregate amount that the Company is entitled to borrow from SVB has increased to an amount not to exceed $29 million, which is 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 an amount not to exceed $14.0 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 (the “Amended Revolving Loan”) and (ii) a second facility under which the Company is entitled to borrow from SVB up to $15.0 million without reference to accounts receivable, and which must be repaid in sixty equal installments, unless the Company exercises its right to prepay the loan (the “Term Loan”). The interest rate for the revolving line is Prime Rate plus 0.4%, or 3.9% as of June 26, 2016. The interest rate for the term loan is Prime Rate plus 1.25%, or 4.75% as of June 26, 2016. The Amended Revolving Loan has a term of 24 months and an outstanding balance of $7.1 million as of June 26, 2016.  The outstanding balance of the Term Loan as of June 26, 2016 was $14.5 million, of which $3.0 million is recorded in the condensed consolidated balance sheet as notes payable, current.

In connection with the Third Restated Loan Agreement, the Company incurred legal and administrative expenses of $200,000 which was recorded as a discount on the SVB Term Loan. The debt discount will be amortized to interest expenses during the life of the term loan using the effective interest method.

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Commitments

Leases

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

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NOTE 9—STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Public Offering

Private Equity Placement

Common and Preferred Stock

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In December 2008, the Company adopted the 2008 Equity Incentive Plan (the “2008 Plan”) for directors, employees, consultants and advisors to the Company or its affiliates. Under the 2008 Plan, 2,500,000 shares of common stock were reserved for issuance upon the completion of a merger with Lumera Corporation (“Lumera”) on December 9, 2008. On January 1 of each year, starting in 2009, the aggregate number of shares reserved for issuance under the 2008 Plan increase automatically by the lesser of (i) 5% of the number of shares of common stock outstanding as of the Company’s immediately preceding fiscal year, or (ii) a number of shares determined by the Board of Directors. The maximum number of shares of common stock to be granted as incentive stock options (“ISOs”) and non-qualified stock options (“NSOs”) is up to 21,000,000 shares. Forfeited options or awards generally become available for future awards. As of December 31, 2015, the stockholders had approved 18,280,238 shares for future issuance. On January 1, 2016, there was an automatic increase of 2,260,527 shares. As of June 26, 2016, 12,230,527 options to purchase common stock and restricted stock units (“RSUs”) were outstanding and 2,026,448 shares are authorized for future issuance under the 2008 equity incentive plan.

 

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 approved by the Board of Directors or its Compensation Committee 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 been issuing RSUs which generally vest over a period range from nine months to four years.

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Lumera 2000 and 2004 Stock Option Plan

Warrants

Stock-based Compensation Expense

The following table summarizes the Company’s stock-based compensation expense for the three and six months ended June 26, 2016 and June 28, 2015 (in thousands):

Stock Options

The following table summarizes option activities under the Company’s equity incentive plans for the six months ended June 26, 2016:

The aggregate intrinsic value reflects the difference between the exercise price of stock options and the fair value of the underlying common stock as determined by the Company’s closing stock price. The total intrinsic value of options exercised during the six months ended June 26, 2016 was $457,000. The total intrinsic value of options exercised during the six months ended June 28, 2015 was $11,000.

As of June 26, 2016, the unrecognized stock-based compensation cost related to stock options, net of estimated forfeitures, was $45,000, which is expected to be recognized over a weighted-average period of 0.8 years.

 

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As of June 26, 2016, the unrecognized stock-based compensation cost related to RSUs, net of estimated forfeitures, was $9.5 million, which is expected to be recognized over a weighted-average period of 2.9 years.

NOTE 10—INCOME TAXES

The Company recorded a provision for income taxes of $57,000 and $97,000 for the three and six months ended June 26, 2016, respectively, and $16,000 and $25,000 for the three and six months ended June 28, 2015. The income tax provisions for the three and six months ended June 26, 2016 and June 28, 2015 were due primarily to state taxes and foreign taxes due. The Company has incurred tax losses in all tax jurisdictions except Korea, Japan, and Switzerland and has a full valuation allowance against such losses.

In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. In order to support a conclusion that a valuation allowance is not needed, positive evidence of sufficient quantity and quality is necessary to overcome negative evidence. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding realization of the asset including lack of profitability through June 26, 2016 and the uncertainty over future operating profitability and taxable income. The Company will continue to evaluate the potential realization of the deferred tax assets on a quarterly basis.

The Company files tax returns in the U.S. federal, U.S. state and foreign tax jurisdictions.  The Company’s major tax jurisdictions are the U.S., California, Canada, Switzerland, Korea, Japan, and Israel. The Company’s fiscal years through December 31, 2015 remain subject to examination by the tax authorities for U.S. federal, U.S. state and foreign tax purpose.

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The computations for basic and diluted net income (loss) per share are as follows (in thousands, except per share data);

 

The following weighted-average common stock equivalents were excluded from the calculation of diluted net loss per share for the periods presented because including them would have been anti-dilutive:

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

The Company determines geographic location of its revenue based upon the destination of shipments of its products.

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

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GigPeak Inc. (formerly GigOptix, Inc.) (“GigPeak”) is a leading innovator of semiconductor integrated circuits (“ICs”) and software solutions for high-speed connectivity and high-quality video compression. Our focus is to develop and deliver products that enable lower power consumption and faster data connectivity, more efficient use of network infrastructure and broader connectivity to the Cloud, reducing the total cost of ownership for the network’s operators. We address both the speed of data transmission and the amount of bandwidth the data consumes within the network, and its products also help to improve the efficiency of various Cloud-connected applications, such as the Internet-of-Things (“IoT”). The recently extended GigPeak product portfolio provides more flexibility to support on-going changes in the connectivity that customers and markets require by deploying a wider offering of solutions from various kinds of semiconductor materials, ICs and Multi-Chip-Modules (“MCMs”), through cost-effective application specific integrated circuit (“ASICs”) and system-on-chips (“SoCs”), and into full software programmable open-platform offerings.

Most of our products are highly customized and typically developed in partnership with key “Lighthouse” customers, occasionally generating some engineering project revenues through the development stage, but generating the majority of revenue from future device product shipments and sales through these customers and general market availability.

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Since the closing of the Magnum acquisition on April 5, 2016, we have reorganized our entire operation to line up with our targeted end-markets and customers. This has resulted in two market-oriented directions, based solely on the end-user customer that will procure the products. The first is addressed as ”Above the Cloud” applications, which include all of our products that are incorporated directly into the network infrastructure to enable the high-speed and high-quality streaming over the network, namely our telecom, Datacom and broadcasting products. The second is addressed as “Below the Cloud” applications, which include all of our products that are incorporated as the access and end-user enterprise and consumer products to enable high-speed and high-quality streaming into and out of the Cloud, namely our wireless and industrial ASIC products. Most of our current product lines will contribute various products to each one of those two market-oriented directions, and, hence, are classified based on the end-market they address.

 

GigPeak’s Solutions

After closing the Magnum acquisition, we refocused the Company’s direction. Hence, in addition to the solutions we previously offered, as described in our Annual Report on Form 10-K, we have added the following products and solutions.

Broadcasting Solutions

Consumer and Cloud Connectivity – Video Solutions

To address both Cloud, and current and future consumer connected devices as well as IoTs, we may plan to use our stand-alone proprietary RF mixed signal technology, ASICs, video ICs, SoCs and software IP for various high volume applications such as Ultra-Wide Bandwidth TX/RX ICs, video and camera chips, etc. We already possess extensive experience with ultra-high-speed interfaces and now have the capability of adding SoCs and video capabilities to potentially address such sophisticated consumer and IoT applications.

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Products

Enterprise Networking “Above the Cloud”: Telecom, Datacom and Broadcasting

We design and market products that amplify electrical signals during both the transmission (amplifiers, drivers for various vertical-cavity-surface-emitting-laser (“VCSEL”), and direct-modulated-laser, (“DML”) laser devices and modulator, and clock-data-recovery, (“CDR”) devices and reception trans-impedance-amplifiers (“TIAs”) and DMLs of optical signals in the transmission of data. In addition, we offer microwave and millimeter wave amplifiers to enable amplification of small signal radio signals into more powerful signals that can be transmitted over long distances to establish high throughput data connections or enable radar based applications. We have a comprehensive product portfolio, particularly at data rates that exceed 140 Gbps. The primary target markets and applications for our products include optical interface modules such as line-cards, transponders and transceivers within telecom and Datacom switches and routers, high speed wireless point-to-point millimeter wave systems and defense systems. Our products are critical blocks used in telecom and Datacom optical communications networks. For telecom, these networks range from long haul to metro systems, and for Datacom, from access to data links to the consumers, where the conversion of data from the electrical domain to the optical domain, or vice-versa occurs. Our optical drivers amplify the input digital data stream that is used to directly modulate the laser or to drive an external modulator that acts as a precise shutter to switch on and off the light that creates the modulated optical data stream. At the other end of the optical fiber, our sensitive receiver TIAs detect and amplify the small currents generated by photo-diodes converting the received light into an electrical current. The TIAs amplify the small current signals into a larger voltage signal that can be read by the electronics and processors in the network servers. We supply an optimized component for each type of laser and photo-diode depending upon the speed, reach and required cost. Generally, a shorter reach results in higher volume, and less demanding electrical product specifications to support the traveled optical signal.

As discussed above, with the completion of the Magnum acquisition and consolidation of Magnum, we now also offer enterprise video system vendors the market’s foremost advanced enterprise video broadcasting solutions. Our silicon and software are all-complete system solutions with rich features including high video quality SD/HD H.265, H.264, MPEG-2, VBR/CBR, video statistical multiplexing, digital ad-insertion, low latency encoding and complete video, audio and data multiplexing.

Consumer and Cloud- Connectivity “Below the Cloud”: Wireless and Industrial ASICs

Results of Operations

 

Historically, since inception in 2007 and through 2014, we have incurred net losses. For the three and six months ended June 26, 2016 and for the year ended December 31, 2015, we recorded net income of $85,000, $33,000 and $1.2 million, respectively. For the six months ended June 28, 2015 we incurred a net loss of $114,000. For the six months ended June 26, 2016 and the year ended December 31, 2015, we had cash inflows from operations of $2.7 million and $3.0 million, respectively. As of June 26, 2016, we had an accumulated deficit of $101.0 million.

  

Revenue

Revenue for the periods reported was as follows (in thousands, except percentages):

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Cost of Revenue and Gross Profit

 

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

Research and Development Expense

Research and development (“R&D”) expense for the periods presented was as follows (in thousands, except percentages):

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R&D expense consists primarily of salaries and related expenses for R&D 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.

R&D expense for the three months ended June 26, 2016 was $5.7 million compared to $3.2 million for the three months ended June 28, 2015, an increase of $2.5 million or 76%. R&D expense increased as compared to the second quarter of 2015 primarily due to a $1.4 million increase in personnel related expenses, $290,000 increase in expense related to amortization of software and intangible assets, $279,000 increase in facility-related expenses, a $258,000 increase in consulting expenses, and a $157,000 increase for project-related expenses. The majority of those increased expenses are due to the integration of the R&D resources and projects of Magnum, as of the closing of the acquisition on April 5, 2016.

R&D expense for the six months ended June 26, 2016 was $9.2 million compared to $6.5 million for the six months ended June 28, 2015, an increase of $2.7 million or 42%. R&D expense increased as compared to 2015 primarily due to a $1.4 million increase in personnel related expenses, $438,000 increase in expense related to amortization of software and intangible assets, $332,000 increase in consulting expenses, $283,000 increase in facilities related expenses and a $253,000 increase in project related expenses. The majority of those increased expenses are due to the integration of the R&D resources and projects of Magnum, as of the closing of the acquisition on April 5, 2016.

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

SG&A administrative expense for the six months ended June 26, 2016 was $8.2 million compared to $5.2 million for the six months ended June 28, 2015, an increase of $3.0 million or 57%. SG&A expense increased as compared to 2015 primarily due to a $1.5 million increase in accounting and legal fees, an $808,000 increase in personnel related expenses, a $239,000 increase in stock-based compensation, and an increase of $95,000 in sales and marketing related expenses in amortization of intangible assets.

Interest expense, net for the three months ended June 26, 2016 was $256,000 compared to $3,000 for the three months ended June 28, 2015. Interest expense, net increased as compared to the second quarter of 2015 primarily due to interest on the line of credit and term loan with SVB. This increased expense is solely attributable to the loan we incurred to support the Magnum acquisition payment.

 

Interest expense, net for the six months ended June 26, 2016 was $256,000 compared to $6,000 for the six months ended June 28, 2015. Interest expense, net increased as compared to the second quarter of 2015, primarily due to interest on the line of credit and term loan with SVB.

Provision for Income Taxes

Income tax expense was $97,000 and $25,000 for six months ended June 26, 2016 and June 28, 2015, respectively. The income tax provision for the six months ended June 26, 2016 and June 28, 2015 was due primarily to state taxes and foreign taxes due. Our effective tax rate was 75% for the six months ended June 26, 2016. We have incurred book losses in all tax jurisdictions except Korea, Japan, Canada, and Switzerland and have a full valuation allowance against such losses.

Cash and cash equivalents and cash flow data for the periods presented were as follows (in thousands):

Public Offering

Private Equity Placement

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Pursuant to the PDSTI Agreement, the Company agreed to file a registration statement on Form S-3 to provide registration rights to PDSTI in respect of the shares. The SEC declared the registration statement effective on June 3, 2016. The PDSTI Agreement provided that if the registration statement was not declared effective by July 7, 2016, the Company would pay to PDSTI, as liquidated damages, 0.4% of the aggregate purchase price on a monthly, prorated basis, until the registration statement was declared effective, with interest on these liquidated damages to accrue at the rate of 1.0% per month until paid in full. With the declaration of effectiveness, the Company has deemed this loss contingency to be remote and as such has not recorded a liability as of June 26, 2016.

In the event that any U.S. governmental body or agency takes any action or issues any order within six months that would prevent PDSTI from holding the shares or invalidates the Company’s issuance of the shares to PDSTI, the Company has agreed to return PDSTI’s full purchase price, plus 0.4% interest on the purchase price (accruing monthly until paid in full), and to reimburse PDSTI’s expenses in connection with negotiating the private placement, up to $15,000. As a result of this contingent redemption clause, the net proceeds of $4.6 million are classified outside permanent equity until the contingency is resolved.

As of June 26, 2016, we recorded $4.6 million, comprised of the purchase price of $5.0 million net of $386,000 of related costs (which included a $250,000 commission fee to Cowen & Company for their services as placement agent), on the condensed consolidated balance sheets as redeemable common stock due to the redemption clause in the PDSTI Agreement.

Operating activities provided cash of $2.7 million in the six months ended June 26, 2016. Our net income, adjusted for depreciation, stock-based compensation, and other non-cash items, was $5.2 million. The remaining use of $2.6 million of cash was primarily due to an increase in accounts receivable of $2.5 million, an increase in inventories of $899,000, and a decrease in other current liabilities of $991,000, which were partially offset by an increase in accounts payable of $1.9 million.

Operating activities provided cash of $1.5 million in the six months ended June 28, 2015. Our net income, adjusted for depreciation, stock-based compensation, equity in earnings of unconsolidated affiliate, non-cash restructuring expense and other non-cash items, was $3.9 million. The remaining use of $2.4 million of cash was primarily due to an increase in inventories of $1.7 million, an increase in prepaid and other current assets of $888,000, and a decrease in other current liabilities of $381,000, which were partially offset by an increase in accrued compensation of $491,000, a decrease of accounts receivable of $112,000, and an increase in other long-term liabilities of $104,000.

Investing Activities