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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-Q
 

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended July 3, 2011
 
or
 
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from   to  
 
Commission file number: 333-153362
 

 
GIGOPTIX, INC.
(Exact name of registrant as specified in its charter)
 

 
   
Delaware
26-2439072
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
130 Baytech Drive
San Jose, CA  95134
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ¨

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):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨   No  x

The number of shares of Common Stock outstanding as of August 2, 2011, the most recent practicable date prior to the filing of this Quarterly Report on Form 10-Q, was 21,511,464 shares.
 


 
1

 

 
 
 
 
PAGE NO
PART I FINANCIAL INFORMATION
 
       
    ITEM 1
 
Financial Statements (unaudited)
 
       
   
3
       
   
4
       
   
5
       
   
6
       
    ITEM 2
 
20
       
    ITEM 3
 
26
       
    ITEM 4
 
26
   
PART II OTHER INFORMATION
 
       
    ITEM 1
 
27
       
    ITEM 1A
 
28
       
    ITEM 6
 
30


FINANCIAL INFORMATION
GIGOPTIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)

   
July 3, 2011
   
December 31, 2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 9,136     $ 4,502  
Short-term investments
    9,138       -  
Accounts receivable, net
    5,014       5,366  
Inventories
    2,464       1,609  
Prepaid and other current assets
    613       405  
Total current assets
    26,365       11,882  
Property and equipment, net
    5,044       3,717  
Intangible assets, net
    6,026       3,861  
Goodwill
    11,985       7,407  
Restricted cash
    261       356  
Other assets
    567       653  
Total assets
  $ 50,248     $ 27,876  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 3,545     $ 2,960  
Accrued and other current liabilities
    5,952       4,823  
Accrued restructuring
    1,791       -  
Line of credit and term loan
    877       3,226  
Total current liabilities
    12,165       11,009  
Pension liabilities
    234       211  
Other long term liabilities
    1,203       1,266  
Total liabilities
    13,602       12,486  
Commitments and contingencies (Note 12)
               
Stockholders’ equity
               
Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding as of July 3, 2011 and December 31, 2010
    -       -  
Common stock, $0.001 par value; 50,000,000 shares authorized; 21,505,599 and 12,210,264 shares issued and outstanding as of July 3, 2011 and December 31, 2010, respectively
    22       12  
Additional paid-in capital
    115,798       88,553  
Accumulated deficit
    (79,379 )     (73,353 )
Accumulated other comprehensive income
    205       178  
Total stockholders’ equity
    36,646       15,390  
Total liabilities and stockholders’ equity
  $ 50,248     $ 27,876  

See accompanying Notes to Condensed Consolidated Financial Statements


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

   
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Revenue
                       
Product
  $ 7,601     $ 5,524     $ 14,653     $ 10,658  
Government contract
    18       755       628       894  
Total revenue
    7,619       6,279       15,281       11,552  
                                 
Cost of revenue
                               
Product
    3,798       2,621       7,449       5,222  
Government contract
    -       158       180       252  
Total cost of revenue
    3,798       2,779       7,629       5,474  
Gross profit
    3,821       3,500       7,652       6,078  
                                 
Research and development expense
    3,074       2,124       5,464       4,204  
Selling, general and administrative expense
    2,609       2,540       5,232       4,674  
Restructuring expense
    (52 )     -       (52 )     428  
Merger-related expense
    778       -       1,885       -  
Shareholder settlement expense
    -       -       1,064       -  
Total operating expenses
    6,409       4,664       13,593       9,306  
Loss from operations
    (2,588 )     (1,164 )     (5,941 )     (3,228 )
Interest expense, net
    (47 )     (118 )     (143 )     (228 )
Other income (expense), net
    58       (105 )     70       (118 )
Net loss before income taxes
    (2,577 )     (1,387 )     (6,014 )     (3,574 )
Provision for income taxes
    (7 )     (24 )     (12 )     (24 )
Net loss
  $ (2,584 )   $ (1,411 )   $ (6,026 )   $ (3,598 )
Net loss per share - basic and diluted
  $ (0.19 )   $ (0.15 )   $ (0.46 )   $ (0.39 )
Shares used in computing basic and diluted net loss per shares
    13,906       9,353       13,107       9,329  

See accompanying Notes to Condensed Consolidated Financial Statements
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
 
Cash flows from operating activities:
           
Net loss
  $ (6,026 )   $ (3,598 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    1,265       1,378  
Stock-based compensation
    1,513       827  
Non-cash litigation settlement
    1,064       -  
Write-down of fixed assets
    -       121  
Deferred taxes, net
    -       (1 )
Amortization of acquisition-related payment
    -       300  
Amortization of investments
    7       -  
(Gain) loss on sale of assets
    -       4  
Amortization of discount on loan
    -       152  
Changes in operating assets and liabilities, net of acquisition:
               
Accounts receivable, net
    709       (206 )
Inventories
    407       (152 )
Prepaid and other current assets
    (45 )     (1,150 )
Other assets
    166       33  
Accounts payable
    (126 )     (515 )
Accrued restructuring
    (835 )     -  
Accrued and other current liabilities
    485       (1,172 )
Net cash used in operating activities
    (1,416 )     (3,979 )
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (1,167 )     (241 )
Net cash received in the acquisition of Endwave
    8,824       -  
Change in restricted cash
    100       200  
Net cash provided by (used in) investing activities
    7,757       (41 )
                 
Cash flows from financing activities:
               
Proceeds from sale and maturity of investments
    800       -  
Proceeds from issuance of common stock and warrants
    25       56  
Proceeds from line of credit
    4,990       8,332  
Proceeds from short-term loan
    -       900  
Repayment of line of credit
    (7,182 )     (7,437 )
Repayment of short-term loan
    (158 )     (515 )
Repayment of capital lease
    (114 )     (103 )
Net cash provided by (used in) financing activities
    (1,639 )     1,233  
                 
Effect of exchange rates on cash and cash equivalents
    (68 )     (32 )
Net increase (decrease) in cash and cash equivalents
    4,634       (2,819 )
Cash and cash equivalents at beginning of period
    4,502       3,583  
Cash and cash equivalents at end of period
  $ 9,136     $ 764  
                 
Supplemental disclosure of cash flow information
               
Interest paid
  $ 163     $ 108  
Income tax paid
  $ -     $ -  
                 
Non-cash financing activities:
               
GigOptix issued a total of 9,128,502 shares of its common stock in connection with the acquisition of Endwave Corporation.
               

See accompanying Notes to Condensed Consolidated Financial Statements


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

Organization

GigOptix, Inc. (“GigOptix” or the “Company”), the successor to GigOptix LLC, was formed as a Delaware corporation in March 2008 in order to facilitate a combination between GigOptix LLC and Lumera Corporation (“Lumera”). Before the combination, GigOptix LLC acquired the assets of iTerra Communications LLC in July 2007 (“iTerra”) and Helix Semiconductors AG (“Helix”) in January 2008. On November 9, 2009, GigOptix acquired ChipX, Incorporated (“ChipX”). As a result of the acquisitions, Helix, Lumera and ChipX all became wholly owned subsidiaries of GigOptix.

On June 17, 2011, GigOptix completed its acquisition of Endwave Corporation (“Endwave”) pursuant to the terms of the Agreement and Plan of Merger, dated as of February 4, 2011 (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, upon the consummation of the Merger, each outstanding share of Endwave common stock converted into the right to receive approximately 0.908 shares of GigOptix common stock.  GigOptix issued a total of 9,128,502 shares of its common stock in the Merger representing approximately 42.45% of GigOptix’ outstanding common stock. The foregoing amounts take into account reductions in the number of shares issued to employees and directors of Endwave for any applicable withholding requirements for federal, state and other taxes.   More specifically, 9,060,740 shares of GigOptix common stock were issued to the holders of Endwave common stock, 46,081 shares of GigOptix common stock were issued to holders of Endwave restricted stock units, and 21,681 shares of GigOptix common stock were issued to the holders of options to purchase Endwave common stock with an exercise price less than $2.08, the Endwave closing price as reported on the Nasdaq Global Market on June 16, 2011 (the trading day immediately prior to the effective time of the Merger (the “Effective Date”)).  The total expenses in connection with the Endwave transaction, which were approximately $1.9 million, were comprised of legal, accounting and banking fees and employee expenses.
 
Basis of Presentation

The Company’s fiscal year ends on December 31. For quarterly reporting, the Company employs a four-week, four-week, five week reporting period. The second quarter of 2011 ended on Sunday, July 3, 2011. The second quarter of fiscal 2010 ended on Sunday, July 4, 2010. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.  Endwave’s results of operations and cash flows for the period from June 18, 2011 through July 3, 2011 are included in the condensed consolidated statement of operations for the three and six months ended July 3, 2011 and the condensed consolidated statement of cash flows for the six months ended July 3, 2011.  In addition, assets acquired and liabilities assumed from the Endwave acquisition are included in the condensed consolidated balance sheet as of July 3, 2011.

The accompanying unaudited condensed consolidated financial statements as of July 3, 2011 and for the three and six months ended July 3, 2011 and July 4, 2010, 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, all adjustments (consisting of normal recurring adjustments and those related to the acquisition of Endwave) considered necessary for a fair presentation of the Company’s consolidated financial position and operations have been included. The condensed consolidated results of operations for the three and six months ended July 3, 2011 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2011.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 Company’s Annual Report for the year ended December 31, 2010 on Form 10-K (the “2010 Form K”) and the Company encourages you to read its 2010 Form 10-K for more information about such estimates and assumptions.


NOTE 2—INVESTMENTS
 
   
July 3, 2011
 
 
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
   
(In thousands)
 
Commercial paper
  $ 550     $ -     $ -     $ 550  
United States government agencies
    7,976       5       1       7,980  
Corporate securities
    608       -       -       608  
    $ 9,134     $ 5     $ 1     $ 9,138  

At July 3, 2011, the Company had $9.1 million of short-term investments with maturities of less than one year and no long-term investments.  At December 31, 2010, the Company did not have any short-term or long-term investments.

At July 3, 2011, the Company had unrealized gains of $5,000 and unrealized losses of $1,000 related to investments in debt securities.  The investments mature during 2012 and the Company believes that it has the ability to hold these investments until the maturity date.  Realized gains and losses were insignificant for the three and six months ended July 3, 2011 and July 4, 2010.

The Company periodically reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, credit quality and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.  If the Company believes the carrying value of an investment is in excess of its fair value, and this difference is other-than-temporary, the Company will write down the investment to reduce its carrying value to fair value which will be reflected in the condensed consolidated statement of operations. See additional discussion in Note 4, Fair Value.

NOTE 3—BALANCE SHEET COMPONENTS

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

   
July 3, 2011
   
December 31, 2010
 
Billed accounts receivable
  $ 4,998     $ 4,572  
Unbilled accounts receivable
    360       965  
Allowance for doubtful accounts
    (344 )     (171 )
    $ 5,014     $ 5,366  

Inventories consisted of the following (in thousands):

   
July 3, 2011
   
December 31, 2010
 
Raw materials
  $ 1,126     $ 609  
Work in process
    613       250  
Finished goods
    725       750  
    $ 2,464     $ 1,609  

Prepaid and other current assets consisted of the following (in thousands):
 
   
July 3, 2011
   
December 31, 2010
 
Prepaid subscription software licenses and support
  $ 139     $ 93  
Prepaid rent
    100       -  
Prepaid insurance
    92       174  
Interest receivable
    45       -  
                 
Unamortized debt issuance costs
    149       -  
Other prepaid expenses
    88       138  
    $ 613     $ 405  


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

   
Depreciable Life, in Years
   
July 3, 2011
   
December 31, 2010
 
Machinery and equipment
    3-5     $ 7,985     $ 6,286  
Computer software and equipment
    2-3       3,461       3,006  
Furniture and fixtures
    3-10       170       159  
Office equipment
    3-5       112       107  
Leasehold improvements
    1-5       164       132  
Construction-in-progress
          201       77  
              12,093       9,767  
Accumulated depreciation and amortization
            (7,049 )     (6,050 )
Property and equipment, net
          $ 5,044     $ 3,717  

For the three months and six months ended July 3, 2011, depreciation and amortization expense related to property and equipment was $519,000 and $933,000, respectively. For the three and six months ended July 4, 2010, depreciation and amortization expense related to property and equipment was $371,000 and $756,000, respectively. A write down of fixed assets of $121,000 was recorded as part of a restructuring of the Company’s Israel design center during the six months ended July 4, 2010.   See additional discussion at Note 9, Restructuring.

Other assets consisted of the following (in thousands):

   
July 3, 2011
   
December 31, 2010
 
Severance fund in Israel
  $ 278     $ 275  
Deposits
    207       111  
Deferred tax assets
    34       30  
Unamortized debt issuance costs
    -       234  
Other
    48       3  
    $ 567     $ 653  

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

   
July 3, 2011
   
December 31, 2010
 
Accrued compensation and related taxes
  $ 1,669     $ 705  
Amounts billed to the U.S. government in excess of approved rates
    1,154       1,154  
Accrued warranty
    714       143  
Warrants liability
    24       522  
Customer deposits
    522       522  
Accrued legal and audit fees
    279       147  
Capital lease obligation, current portion
    263       239  
Deferred revenue
    200       568  
Other
    1,127       823  
 
  $ 5,952     $ 4,823  

Other long-term liabilities consisted of the following (in thousands):

   
July 3, 2011
   
December 31, 2010
 
Capital lease obligation
  $ 751     $ 952  
Severance liability in Israel
    282       276  
Deferred income taxes
    170       38  
    $ 1,203     $ 1,266  


NOTE 4—FAIR VALUE

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of July 3, 2011 and December 31, 2010 (in thousands):

         
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)
 
July 3, 2011:
                       
Assets:
                       
Cash equivalents:
                       
Money market funds
  $ 3,420     $ 3,420     $ -     $ -  
Short-term investments:
                               
Commercial paper
    550       -       550       -  
United States government agencies
    7,980       -       7,980       -  
Corporate securities
    608       -       608       -  
Subtotal short-term investments
    9,138       -       9,138       -  
    $ 12,558     $ 3,420     $ 9,138     $ -  
Current liabilities:
                               
Liability warrants
  $ 24     $ -     $ -     $ 24  
                                 
December 31, 2010:
                               
Assets
  $ -     $ -     $ -     $ -  
Current liabilities:
                               
Liability warrants
  $ 522     $ -     $ -     $ 522  

The Company’s financial assets and liabilities are valued using market prices on both active markets (“Level 1”) and less active markets (“Level 2”). 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 inputs in which there is little or no market data, and which require the Company to apply judgment to determine the applicable inputs.

As of July 3, 2011 and December 31, 2010, the Company did not have any significant transfers of investments between Level 1 and Level 2.

The amounts reported as cash and cash equivalents, accounts receivable, note receivable, accounts payable and accrued warranty, compensation and other current liabilities approximate fair value due to their short-term maturities. The fair value for the Company’s investments in marketable debt securities is estimated based on quoted market prices. 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

In connection with the November 2009 loan and security agreement with Bridge Bank and the January 2010 secured line of credit facility with Agility Capital (see Note 8), the Company issued warrants to both Bridge Bank and Agility Capital. 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 statement 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 income. The fair value of these warrants was determined using a Monte Carlo simulation, which requires the use of significant unobservable inputs.  As a result, these warrants would be 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 adjusting the number of warrants in each warrant agreement.


The change in the fair value of the Level 3 liability warrants during the three and six months ended July 3, 2011 is as follows (in thousands):

Fair value at December 31, 2010
  $ 522  
Exercise of warrants
    (480 )
Change in fair value
    (5 )
Fair value at April 3, 2011
    37  
Change in fair value
    (13 )
Fair value at July 3, 2011
  $ 24  

NOTE 5—BUSINESS COMBINATIONS

Acquisition of Endwave Corporation

On June 17, 2011, the Company completed its acquisition of Endwave Corporation.  With the acquisition of Endwave, GigOptix obtained $18.8 million of cash and short-term investments, and a pipeline of new products that are currently in development.  Pursuant to the Merger Agreement the Merger Sub merged with and into Endwave, the separate corporate existence of Merger Sub ceased and Endwave became the surviving corporation and a wholly-owned subsidiary of GigOptix.

Pursuant to the terms of the Merger Agreement, upon the consummation of the Merger, each outstanding share of Endwave common stock converted into the right to receive approximately 0.908 shares of GigOptix common stock. 9,106,821 shares of GigOptix common stock were issued to the holders of Endwave common stock and restricted stock units, and 21,681 shares of GigOptix common stock were issued to the holders of options to purchase Endwave common stock with an exercise price less than $2.08, the Endwave closing price as reported on the Nasdaq Global Market on June 16, 2011 (the trading day immediately prior to the effective time of the Merger (the “Effective Date”)).  GigOptix issued 9,128,502 shares of its common stock in the Merger representing approximately 42.45% of GigOptix’ outstanding common stock. The foregoing amounts take into account reductions in the number of shares issued to employees and directors of Endwave for any applicable withholding requirements for federal, state and other taxes. Endwave stockholders will receive cash for any fractional share of GigOptix common stock that they would otherwise receive in the Merger.

The transaction was accounted for under the purchase method of accounting and, accordingly, the results of operations are included in the accompanying unaudited condensed consolidated statements of operations for all periods or partial periods subsequent to the acquisition date.

The net tangible assets acquired and liabilities assumed in the acquisition were recorded at fair value.  The Company determined the valuation of the identifiable intangible assets using future revenue assumptions and a valuation analysis.  The amounts allocated to the identifiable intangible assets were determined through established valuation techniques accepted in the technology industry.

The fair values of identifiable intangible assets related to customer relationships, customer backlog, developed technology and trade name were determined under the income approach.  The customer relationships were valued using the excess earnings and cost savings methods under the income approach.  The customer backlog was valued using the excess earnings method under the income approach.  The developed technology and trade name were valued using the relief from royalty method under the income approach.  The measurement period is still open and the value of the intangibles is subject to change; however, the fair value of the intangibles is management’s best estimate.

Goodwill represents the excess of the purchase price 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 transaction with Endwave primarily consisted of  in process research and development and the synergies expected from the merger with Endwave.

The purchase consideration for the merger of approximately $24.2 million consisted of the fair value of 9,128,502 shares of GigOptix common stock issued to Endwave’s stockholders, at a per share price of $2.65, which reflects the closing price of the Company’s common stock as of June 17, 2011.

The total purchase price of $24.2 million was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition as follows (in thousands):


Tangible assets acquired:
     
Cash and cash equivalents
  $ 8,824  
Short-term investments
    9,946  
Accounts receivable
    334  
Inventory
    1,228  
Other current assets
    159  
Property, plant and equipment
    967  
Other assets
    73  
Liabilities assumed:
       
Accounts payable
    (702 )
Accrued compensation
    (415 )
Accrued warranty
    (496 )
Accrued restructuring
    (2,593 )
Other current liabilities
    (120 )
Other long-term liabilities
    (124 )
         
Identifiable intangible assets acquired:
       
Customer relationships
    720  
Customer backlog
    273  
Developed technology
    1,455  
Trade name
    83  
Goodwill acquired:
       
Goodwill
    4,578  
Total purchase price
  $ 24,190  

Pro forma financial information

The following table presents the unaudited pro forma financial information for the combined entity of GigOptix and Endwave for the three and six month periods ended July 3, 2011, as if the acquisition had occurred at the beginning of the periods presented after giving effect to certain purchase accounting adjustments (in thousands, except per share amounts):
   
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Net revenue
  $ 8,796     $ 10,032     $ 17,695     $ 20,139  
Net loss
  $ (9,293 )   $ (4,225 )     (16,606 )   $ (7,695 )
Net loss per share - basic and diluted
  $ (0.45 )   $ (0.26 )   $ (0.83 )   $ (0.48 )

These results are presented for illustrative purposes only and are not necessarily indicative of the actual operating results or financial position that would have occurred if the Company and Endwave had been a consolidated entity during the periods presented.

NOTE 6—INTANGIBLE ASSETS AND GOODWILL

Intangible assets consist of the following (in thousands):

         
July 3, 2011
   
December 31, 2010
 
   
Weighted-average Life, in Years
   
Gross
   
Accumulated Amortization
   
Net
   
Gross
   
Accumulated Amortization
   
Net
 
Customer relationships
    7.6     $ 3,277     $ (641 )   $ 2,636     $ 2,557     $ (477 )   $ 2,080  
Existing technology
    6.6       3,783       (1,453 )     2,330       2,328       (1,356 )     972  
Order backlog
    0.7       732       (493 )     239       459       (459 )     -  
Patents
    6.9       457       (198 )     259       457       (158 )     299  
Trade name
    9.0       659       (97 )     562       577       (67 )     510  
Total
    6.7     $ 8,908     $ (2,882 )   $ 6,026     $ 6,378     $ (2,517 )   $ 3,861  
 

The amounts shown above include items that GigOptix acquired in its purchase of Endwave in June 2011.  The newly acquired intangibles are comprised of the following (in thousands):

   
Amount
   
Life, in Years
 
Customer relationships
  $ 720       6  
Existing technology
    1,455       6  
Order backlog
    273       0.3  
Trade name
    83       2  
Total
  $ 2,531          

For the three and six months ended July 3, 2011 and July 4, 2010, amortization of intangible assets was as follows (in thousands):

   
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Cost of revenue
  $ 106     $ 140     $ 172     $ 284  
Selling, general and administrative expense
    96       92       193       186  
    $ 202     $ 232     $ 365     $ 470  

Estimated future amortization expense related to intangible assets as of July 3, 2011 is as follows (in thousands):

Years ending December 31,
 
 
 
2011 (remaining)
  $ 744  
2012
    1,011  
2013
    984  
2014
    893  
2015
    893  
Thereafter
    1,501  
Total
  $ 6,026  

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 2011, there were no factors which indicated impairment. In its review, the Company compares the gross, undiscounted cash flows expected to be generated by the underlying assets against the carrying value of those assets. To the extent such cash flows do not exceed the carrying value of the underlying asset the Company will record an impairment charge for the difference between these asset’s fair value and its carrying value. The Company did not record an impairment charge during the three or six months ended July 3, 2011. The Company performs an impairment analysis of goodwill on an annual basis or if indicators of impairment exist. The Company did not record an impairment of goodwill for the year ended December 31, 2010 and will perform an analysis as of October 31, 2011.

NOTE 7—STOCKHOLDERS’ EQUITY

Common and Preferred Stock

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 undesignated preferred stock of $0.001 par value, for which the Board of Directors is authorized to fix the designation, powers, preferences and rights. As of July 3, 2011 and December 31, 2010, there were no shares of preferred stock issued or outstanding.

2008 Equity Incentive Plan

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 the merger with 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 increases 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 is 21,000,000 shares. Forfeited options or awards generally become available for future awards.


The number of options available for future issuance as of July 3, 2011 was as follows:

   
Six Months Ended
July 3, 2011
 
Beginning shares available for future grants under 2008 Plan
    3,628,992  
Automatic increase January 1, 2011
    610,513  
Less: options granted
    (3,360,179 )
Add back: options forfeited
    482,499  
Ending shares authorized for future issuance under 2008 Plan
    1,361,825  
 
Under the 2008 Plan, the exercise price of (i) an award is at least 100% of the stock’s fair market value on the date of grant, and (ii) an ISO granted to a 10% stockholder is at least 110% of the stock’s fair market value on the date of grant. Vesting periods for awards are determined by the CEO and generally provide for stock options to vest over a four-year period and have a maximum life of ten years from the date of grant. As of July 3, 2011, 8,280,100 options to purchase common stock were outstanding in the 2008 Plan.

Lumera 2000 and 2004 Stock Option Plan

In December 2008, in connection with the merger with Lumera, the Company assumed the existing Lumera 2000 Equity Incentive Plan and the Lumera 2004 Stock Option Plan (the “Lumera Plan”). All unvested options granted under the Lumera Plan were assumed by the Company as part of the merger. All contractual terms of the assumed options remain the same, except for the converted number of shares and exercise price based on merger conversion ratio of 0.125. As of July 3, 2011, no additional options can be granted under the Lumera Plan, and options to purchase a total of 154,635 shares of common stock were outstanding.

Warrants

During the three months ended April 3, 2011, Bridge Bank exercised 114,286 warrants at an exercise price of $1.75 per share, in a cashless transaction, which resulted in the issuance of 48,496 shares to Bridge Bank.

As of July 3, 2011, a total of 2,235,841 warrants to purchase common stock were outstanding under all warrant arrangements. Many 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.

On April 8, 2011, GigOptix and the trustees for the DBSI Estate Litigation Trust and the DBSI Liquidating Trust (together “DBSI”) reached an agreement to settle a claim by DBSI against GigOptix. As part of the settlement, GigOptix in April 2011 issued two warrants for a total of 1 million shares of GigOptix common stock, and DBSI surrendered to GigOptix for cancellation all of DBSI’s previously outstanding warrants to purchase 660,473 shares of GigOptix common stock.  The two new warrants will become exercisable six months from the date of issuance.  One of the two new warrants, for 500,000 shares of common stock, has a term of three years and an exercise price of $2.60 per share, and the other warrant, also for 500,000 shares of common stock, has a term of four years and an exercise price of $3.00 per share. The Warrants may be exercised on a “cashless” exercise basis.  For the three and six months ended July 3, 2011, the Company recognized $0 and $1.1 million of expense in connection with the issuance of these warrants.

Stock-based Compensation Expense

The following table summarizes the Company’s stock-based compensation expense for the three and six months ended July 3, 2011 and the three and six months ended July 4, 2010 (in thousands):

   
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Cost of revenue
  $ 14     $ 4     $ 27     $ 5  
Research and development expense
    288       133       513       203  
Selling, general and administrative expense
    535       386       973       619  
    $ 837     $ 523     $ 1,513     $ 827  

As of July 3, 2011 and July 4, 2010, the total compensation cost not yet recognized in connection with unvested stock options under the Company’s equity compensation plan was approximately $9.2 million and $3.8 million, respectively. These amounts will be amortized on a straight-line basis over a weighted-average period of approximately 3.2 and 2.8 years, respectively.


The Company generally estimates the fair value of stock options granted using a Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, including the options’ expected life and the price volatility of the Company’s underlying stock options. Actual volatility, expected lives, interest rates and forfeitures may be different from the Company’s assumptions, which would result in an actual value of the options being different from estimated. This fair value of stock option grants is amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period.

From time to time the Company also issues stock option grants to directors and employees that have a market condition. In such cases stock options will vest only if the average price of the Company’s stock is at or exceeds a certain price threshold during a specific, previously defined period of time. To the extent that the market condition is not met, the options do not vest and are cancelled. In these cases, the Company cannot use the Black-Scholes model; instead, a binomial model must be used. For certain stock options, the Company utilizes the Monte Carlo simulation technique, which incorporates assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield. Compensation expense is recognized ratably until such time as the market condition is satisfied. Certain stock options granted on March 17, 2010 were classified as option grants having a market condition.
 
Performance-based Stock Options Granted March 17, 2010

Most stock options that the Company grants to its employees provide for vesting on the basis of time passing, usually over a four-year period.  However, the Company may also grant stock options for which vesting occurs not only on the basis of time passing, but also on the basis of specified company performance criteria being satisfied.  In this case, the Company makes a determination regarding the probability of the performance criteria being achieved and uses a Black-Scholes model to value the options incorporating management’s assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield. Compensation expense is recognized ratably over the vesting period, if it is expected that the performance criteria will be met; if the performance condition is subsequently not satisfied, then all previously recognized expense will be reversed and the options will be cancelled and returned to the pool. On March 17, 2010, the Company’s Board of Directors approved stock option grants, some of which included such performance-based vesting conditions.  On that date, the Company granted 2,382,000 options, of which 1,201,000 are vesting over a four-year period, and the remaining 1,181,000 are vesting on the basis of performance conditions.

The entire grant was comprised of 2,292,000 options to employees and consultants and 90,000 options to board members at an exercise price of $1.95, which was the closing price of GigOptix shares on the date of grant approval. 1,201,000 of these options will vest over 4 years with 25% vesting on the one year anniversary of the grant with the remaining options vesting at a rate of 1/36 per month over the remaining three years. The fair value per share of these options is $1.33, the total expense associated with these options is $1.6 million, and the amount of expense recognized for the three and six months ended July 3, 2011 and July 4, 2010 was as follows:

Three months ended
   
Six months ended
 
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
$ 92     $ 79     $ 179     $ 94  
 
The remaining performance-based options are vesting as follows:

472,400 shares vested on April 1, 2011 as the result of the average share price during March 2011 being $3.01, which exceeded a $2.50 March 2011 average price per share requirement. The fair value per share of these options is $1.05, and the total expense associated with these options was $496,000.  These options were amortized over one year.

472,400 shares will vest on April 1, 2012 if the average share price during March 2012 is at or above $3.50. The fair value per share of these options is $1.01, and the total expense associated with these options is $477,000.  These options are being amortized over two years.

236,200 shares will vest on April 1, 2013 if the average share price during March 2013 is at or above $5.00. The fair value per share of these options is $1.01, and the total expense associated with these options is $239,000.  These options are being amortized over three years.

For all of the performance-based options granted on March 17, 2010, the amount of expense recognized for the three and six months ended July 3, 2011 and July 4, 2010 was as follows:

Three months ended
   
Six months ended
 
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
$ 75     $ 175     $ 247     $ 210  

The fair value of the Company’s stock options granted to employees was estimated using the following weighted-average assumptions:

 
   
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Valuation model
 
Black-Scholes
   
Black-Scholes
   
Black-Scholes
   
Black-Scholes
   
Lattice-binomial
 
Expected term
 
5.00 to 6.25 years
   
6.00 years
   
5.00 to 6.25 years
   
6.00 to 6.25 years
   
5 years
 
Expected volatility
    70 %     75 %     70 %     75 %     75 %
Expected dividends
    0 %     0 %     0 %     0 %     0 %
Risk-free interest rate
 
1.53% to 2.28%
      1.98 %  
1.53% to 2.64%
   
1.98% to 2.83%
      3.70 %
Weighted-average fair value
  $ 1.68     $ 2.19     $ 1.65     $ 1.36     $ 1.03  

Expected Term—Expected term used in the Black-Scholes valuation method represents the period that the Company’s stock options are expected to be outstanding and is measured using the technique described in SEC Staff Accounting Bulletin 107.

Expected Volatility—Expected volatility used in the Black-Scholes valuation method is derived from a combination of historical and implied volatility of “guideline” companies selected based on similar industry and product focus. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Expected Dividend—The Company has never paid dividends and currently does not intend to do so, and accordingly, the dividend yield percentage is zero for all periods.

Risk-Free Interest Rate—The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury constant maturities issued with a term equivalent to the expected term of the option.

Stock Option Activity

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:

   
Stock Options
   
Weighted-average Exercise Price
   
Weighted-average Remaining Contractual Term, Years
 
Outstanding, December 31, 2010
    6,024,201     $ 2.61        
Granted
    3,360,179     $ 2.57        
Exercised
    (51,026 )   $ 1.38        
Forfeited/expired
    (445,187 )   $ 3.23        
Ending balance, July 3, 2011
    8,888,167     $ 2.61       8.7  
                         
Exercisable, July 3, 2011
    2,679,777     $ 3.30       7.5  

The above number of options outstanding at July 3, 2011 also includes 200,000 options that the Company’s Board of Directors granted on June 17, 2011 to the Company’s president and chief executive officer.  Of the 200,000 shares, 100,000 were fully vested and exercisable upon grant, and the remaining 100,000 shares will vest and become exercisable, if ever, on December 17, 2011, which vesting is subject to and contingent upon the GigOptix’ board of directors’ sole approval of the satisfactory integration of the merger with Endwave.  The stock option has an exercise price of $2.65 per share, which was the price per share at which the Company’s common stock closed on June 17, 2011.

The aggregate intrinsic value of options outstanding, based on the fair value of the underlying stock options as of July 3, 2011 and July 4, 2010 was approximately $2.3 million and $1.9 million, respectively. The aggregate intrinsic value reflects the difference between the exercise price of the underlying stock options and the Company’s closing stock price of $2.01 as of July 3, 2011 and $1.80 as of July 4, 2010.

NOTE 8—LINE OF CREDIT

On April 23, 2010, the Company entered into a loan and security agreement with Silicon Valley Bank. Pursuant to the loan and security agreement, the Company is entitled to borrow from Silicon Valley Bank up to $3.0 million, based on 80% of eligible accounts receivable subject to limits based on the Company’s eligible accounts as determined by Silicon Valley Bank (“Revolving Loan”). Interest on extensions of credit under the Revolving Loan is equal to the prime rate of Silicon Valley Bank, which at July 3, 2011 was 4.0% per annum, plus 1.5% per annum, and at December 31, 2010 was 4.0% per annum, plus 1.5% per annum (“Applicable Rate”). In addition, a monthly collateral handling fee of 0.30% per each gross financed account receivable shall apply (“Collateral Handling Fee”). If the Company achieves certain quarterly financial performance targets as stated in the loan and security agreement, the Applicable Rate and the Collateral Handling Fee shall be reduced to the prime rate of Silicon Valley Bank plus 1.0% per annum and 0.20%, respectively. The Company used the Revolving Loan to replace the revolving accounts receivable credit line with Bridge Bank. With the initial funding by Silicon Valley Bank of the Revolving Loan, the Company terminated the loan and security agreement with Bridge Bank, which is discussed below. The loan and security agreement also contains events of default customary for credit facilities of this type, including, among other things, nonpayment of principal or interest when due. The loan and security agreement will expire on April 23, 2012. The amount outstanding on the line of credit on July 3, 2011 was $807,000.  Between July 4, 2011 and July 15, 2011, the Company repaid the entire $807,000 to Silicon Valley Bank.


Pursuant to the loan and security agreement, Silicon Valley Bank is making available a term loan in an amount of up to $400,000, subject to the satisfaction of terms and conditions of the loan and security agreement, which can be drawn down one time for the purpose of refinancing outstanding obligations to Agility Capital. The term loan is repayable in eighteen equal monthly installments and interest is fixed at a rate per annum of 9.0%. The Company used the proceeds of the term loan to pay off the loan and terminate the loan agreement with Agility Capital. The amount outstanding on the term loan on July 3, 2011 was $70,000.  The weighted average interest rate on loans outstanding at July 3, 2011 was 11.0%

The loan and security agreement with Silicon Valley Bank is secured by all of the Company’s assets, including all accounts, equipment, inventory, receivables, and intangibles. The loan and security agreement contains certain restrictive covenants that will impose significant operating and financial restrictions on the Company’s operations, including, but not limited to:
 
 
Merge or consolidate, or permit any of the Company’s subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of the Company’s 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 loan and security agreement; or

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

The acquisition of Endwave required, and Silicon Valley Bank provided, a waiver of the anti-merger provision in our loan and security agreement.

In connection with the loan and security agreement, the Company granted Silicon Valley Bank (i) a warrant to purchase 125,000 shares of the Company’s common stock at an exercise price equal to $4.00 per share (the “Warrant”), and (ii) a warrant to purchase a second tranche of up to 100,000 shares of the Company’s common stock which would vest 15,000 shares per month incrementally beginning September 1, 2010 (although the last monthly incremental vesting amount shall be 10,000 shares) at an exercise price equal to the closing market price on each date of vesting (“Second Tranche Warrant”), provided that in the event that either the Company closes an equity investment of at least $4.0 million or the Company has been EBITDA positive for the preceding three months, then vesting would cease, and all unvested shares under the Second Tranche Warrant would lapse. In July 2010, the Company satisfied the requirements of closing an equity investment of at least $4.0 million and the Second Tranche Warrant expired. The Warrant includes anti-dilution provisions and “piggy-back” registration rights permitting registration in a future public offering. The shares underlying the Warrant were registered on a Registration Statement on Form S-1 that was declared effective by the Securities and Exchange Commission on July 2, 2010. The Warrant may either be (i) converted, on a cashless, net settlement basis, based on the fair market value as determined pursuant to the terms of the Warrant, or (ii) exercised by delivering a duly executed notice of exercise. The Warrant has a term of seven years; the fair value of the Warrant has been determined using a Black-Scholes option-pricing model. The full fair value of the Warrant has been classified as a non-current asset and as equity on the balance sheet and is being amortized over two years; amortization during the three and six months ended July 3, 2011 was $47,000 and $93,000. The balance of the asset as of July 3, 2011 was $142,000.

In November 2009, the Company entered into a loan and security agreement with Bridge Bank (“Credit Agreement”) under which the Company could borrow up to $4.0 million, based on net eligible accounts receivable. On January 29, 2010, the Company entered into a loan agreement for a secured line of credit facility (“Secured Credit Facility”) with Agility Capital, LLC (“Agility Capital”) to pay for transaction expenses incurred by the Company in its acquisition of ChipX. In connection with the Credit Agreement and the Secured Credit Facility, the Company issued warrants to both Bridge Bank and Agility Capital. 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.
 
On February 25, 2011, Agility Capital net share exercised both of the warrants issued to it. On March 23, 2011 Bridge Bank net share exercised 114,286 warrants granted to it on November 12, 2009.

The following table summarizes the warrants subject to liability accounting:

                                             
Three Months Ended July 3, 2011
   
Six Months Ended July 3, 2011
   
Holder
 
Original Warrants
   
Adjusted Warrants
 
Grant Date
 
Expiration Date
 
Price per Share
   
Fair Value July 3, 2011
   
Fair Value December 31, 2010
   
Change
   
Change in Fair Value
   
Exercise of Warrants
   
Change in Fair Value
   
Total Change
 
Related Agreement
Bridge Bank
    59,773       114,286  
11/12/2009
      $ 1.75     $ -     $ 240,000     $ (240,000 )         $ (240,000 )         $ (240,000 )
Credit Agreement
Bridge Bank
    20,000       22,671  
4/7/2010
 
7/7/2017
    3.32       24,000       42,000       (18,000 )   $ (13,000 )             (18,000 )     (18,000 )
Credit Agreement
Agility Capital
    71,429       85,714  
1/29/2010
        1.75       -       180,000       (180,000 )             (180,000 )             (180,000 )
Secured Credit Facility
Agility Capital
    25,000       28,571  
4/5/2010
        1.75       -       60,000       (60,000 )             (60,000 )             (60,000 )
Secured Credit Facility
Total
    176,202       251,242  
 
 
 
          $ 24,000     $ 522,000     $ (498,000 )   $ (13,000 )   $ (480,000 )   $ (18,000 )   $ (498,000 )
 
 

NOTE 9—RESTRUCTURING

In December 2009, the Company adopted a plan to reduce the size of its facilities in Bothell, Washington. The Company reduced the amount of square footage it occupies from approximately 32,000 square feet to approximately 12,000 square feet and recognized restructuring expense of $0.5 million for expenses incurred through January 2011 for the unoccupied space. The existing lease on the facility expires in March 2013.  The Company paid out the remaining $28,000 balance related to unoccupied space in Bothell in January 2011.

During the three months ended April 4, 2010 the Company decided to close its R&D design center in Haifa, Israel which was acquired as part of the merger with ChipX in 2009. The Company took a restructuring charge of $428,000 to account for employee severance of $196,000, future facility rent expense of $61,000 for the remainder of the lease term through the end of fiscal 2010, a write-down of fixed assets of $121,000, and accounting and legal expenses of approximately $50,000. The Company did not make any payments during the three months and six months ended July 3, 2011 in connection with the restructuring.

On June 17, 2011, the Company completed its acquisition of Endwave Corporation.  The net tangible assets acquired and liabilities assumed in the acquisition were recorded at fair value and included an accrued restructuring liability of $1.8 million.  These charges include restructuring activities for severance, benefits, payroll taxes and facilities charges and the payments are expected to be substantially completed by the end of the fourth quarter of 2011.

The following is a summary of restructuring plans activity (in thousands):

           
Israel Restructuring
           
Endwave Restructuring
       
   
Bothell Excess Space
   
Severance
   
Legal and Accounting
   
Israel Subtotal
   
GigOptix U.S. Severance
   
Severance
   
Facilities
   
Endwave Subtotal
   
Grand Total
 
Balance, December 31, 2010
  $ 28     $ 21     $ 13     $ 34     $ -     $ -     $ -     $ -     $ 62  
Charges
    -       -       -       -       -       -       -       -       -  
Uses
    (28 )     -       -       -       -       -       -       -       (28 )
Balance, April 3, 2011
    -       21       13       34       -       -       -       -       34  
Charges
    -       -       -       -       5       2,395       197       2,592       2,597  
Uses
    -       -       -       -       -       (827 )     (13 )     (840 )     (840 )
Balance, July 3, 2011
  $ -     $ 21     $ 13     $ 34     $ 5     $ 1,568     $ 184     $ 1,752     $ 1,791  

NOTE 10—INCOME TAXES

The Company recorded a provision for income taxes of $7,000 and $12,000 for the three and six months ended July 3, 2011, respectively, and $24,000 for both the three and six months ended July 4, 2010, respectively. The Company’s effective tax rate was less than 1% for all of these periods. The income tax provision for the three and six months ended July 3, 2011 was due primarily to state and foreign income taxes due and to losses in all tax jurisdictions, and a full valuation allowance against such losses. There are sufficient net operating losses carried forward to offset the taxable income generated in Switzerland. The income tax provision for the three and six months ended July 4, 2010 was due to a franchise tax liability in the state of Texas based on revenues as opposed to income.

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 in 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 July 3, 2011 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 is subject to income taxes in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. All tax years since inception are open and may be subject to potential examination in one or more jurisdictions.

NOTE 11—SEGMENT AND GEOGRAPHIC INFORMATION

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 operating decision maker. The Company’s Chief Executive Officer is the chief operating decision maker.

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


   
Three months ended
   
Six months ended
 
 
 
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
North America
  $ 3,488       46 %   $ 3,501       56 %   $ 7,972       52 %   $ 6,000       52 %
Asia
    2,633       35 %     1,558       25 %     4,138       27 %     2,841       25 %
Europe
    1,391       18 %     1,220       19 %     3,035       20 %     2,580       22 %
South America
    107       1 %     -       0 %     136       1 %     131       1 %
 
  $ 7,619       100 %   $ 6,279       100 %   $ 15,281       100 %   $ 11,552       100 %

The Company determines geographic location of its revenue based upon the destination of shipments of its products.
 
During the three months ended July 3, 2011, the United States and Japan accounted for 43.9% and 13.7% of the Company’s total revenue.  During the six months ended July 3, 2011, the United States and Japan accounted for 50.1% and 13.2% of the Company’s total revenue.

During the three months ended July 4, 2010, the United States and Japan accounted for 56% and 12% of total revenue, respectively. During the six months ended July 4, 2010, the United States and France accounted for 52% and 10% of total revenue, respectively.  No other countries accounted for more than 10% of the Company’s consolidated revenue during the periods presented.

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

   
July 3, 2011
   
December 31, 2010
 
United States
  $ 3,932     $ 3,001  
Switzerland
    1,112       716  
 
  $ 5,044     $ 3,717  

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

NOTE 12—COMMITMENTS AND CONTINGENCIES

Commitments

Leases

The Company leases its domestic and foreign sales offices under non-cancelable operating leases. These leases contain various expiration dates and renewal options.  The Company also leases certain software licenses under operating leases. Total facilities rent expense for the three and six months ending July 3, 2011 was $172,000 and $303,000, respectively, and for the three and six months ended July 4, 2010 was $100,000 and $225,000, respectively.

In June 2011, the Company entered into a facilities lease for its offices in San Jose, California occupied by Endwave prior to GigOptix’ acquisition of Endwave.  The lease period will begin in September 2011 and will continue through February 2017.  Total base rent under the lease will be $1.5 million.

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

Years ending December 31,
 
Capital Leases
   
Operating Leases
 
2011 (remainder of year)
  $ 200     $ 440  
2012
    400       895  
2013
    400       852  
2014
    305       353  
2015
    -       320  
Thereafter
    -       396  
Total minimum lease payments
    1,305     $ 3,256  
Less: Amount representing interest
    (291 )        
Total capital lease obligations
    1,014          
Less: current portion
    (263 )        
Long-term portion of capital lease obligations
  $ 751          


Legal Contingencies

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 reasonable estimated or the outcome becomes known.

NOTE 13—RELATED PARTY TRANSACTIONS

During the three and six months ended July 3, 2011, the Company had sales to National Instruments of approximately $315,000 and $797,000, respectively. During the three and six months ended July 4, 2010, we had sales to National Instruments of approximately $407,000 and $694,000, respectively.  The accounts receivable balance from National Instruments at July 3, 2011 was $152,000 and National Instruments currently holds 1,066,270 shares of GigOptix common stock.

NOTE 14—RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The Company will adopt this standard in the first quarter of 2012 and are currently evaluating its impact on the Company’s financial statements and disclosures.

In June 2011, the FASB issued a new accounting standard, which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The Company will adopt this standard in the first quarter of 2012.

NOTE 15—SUBSEQUENT EVENTS

Properties

During the third quarter of 2011, GigOptix exited its facilities in Palo Alto, California and moved its headquarters to San Jose, California, the former headquarters for Endwave.  Remaining amounts due to the landlord are included in operating lease amounts in Note 12.  GigOptix entered into a lease for the San Jose property during the second quarter of 2011, and the future lease payments are included in the Company’s future operating lease schedules.  See additional discussion in Note 12, Commitments and Contingencies.

Repayment of Line of Credit

Between July 4, 2011 and July 15, 2011, GigOptix paid in full the $807,000 line of credit balance that was owed to Silicon Valley Bank at July 3, 2011.  See additional discussion in Note 8, Line of Credit.



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, 2010. 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, 2010 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
 
GigOptix is a leading supplier of electronic and electro-optical components that enable high-speed telecommunications and data-communications networks globally. GigOptix’ strategy is to apply GigOptix’ core technical expertise in optical, electro-optical and high speed analog technology to develop products that address high growth product and market opportunities.

The following sets forth GigOptix’ significant corporate and product milestones:

 
In 2007, GigOptix LLC was formed and received initial funding.

 
GigOptix LLC acquired the assets of iTerra Communications LLC in July 2007 and Helix Semiconductors AG in January 2008.

 
In March 2008, GigOptix, Inc. was formed to facilitate a combination with Lumera Corporation. The combined company began trading on the OTCBB under the symbol GGOX in December 2008.

 
In November 2009, GigOptix acquired ChipX.

 
In June 2011, GigOptix acquired Endwave Corporation.

GigOptix focuses on the specification, design, development and sale of analog semiconductor ICs, MCMs, polymer modulators, and analog and mixed signal custom ASICs. GigOptix believes that it is an industry leader in the fast growing market for electronic solutions that enable high-bandwidth optical connections found in telecom systems, data-com and storage systems, and, increasingly, in consumer electronics and computing systems.

GigOptix’ products fall into the following main categories:

 
Laser and modulator Driver ICs and MCMs;

 
Transimpedance and Limiting Amplifier ICs

 
Optical Modulators;

 
Radio Frequency (“RF”) Amplifiers, Semiconductor Devices and Modules; and

 
Custom analog and mixed signal ASICs.

These products are capable of performing in various applications, demanding a wide range of data processing speeds, from consumer electronics, which perform at data processing speeds of 3Gbps to 10Gbps, to sophisticated ultra-long haul submarine telecommunications systems, which require performance at data processing speeds from 10Gbps and 40Gbps to 100Gbps.

GigOptix markets and sells GigOptix’ products in North America, Asia and Europe and other locations through GigOptix’ direct sales force, distributors and sales representatives. The percentage of GigOptix’ revenue generated from shipments outside North America was approximately 48%, 49% and 51% for the first six months of 2011 and for fiscal 2010 and fiscal 2009, respectively. GigOptix measures sales location by the shipping destination, even if the customer is headquartered in the U.S. GigOptix anticipates that sales to international customers will continue to represent a significant percentage of GigOptix’ revenue.

Customer purchase orders are generally used to establish terms of sale. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog may not be a good indicator of GigOptix’ future revenues. Cancellations of customer orders or changes in product specifications could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses.


GigOptix’ business may be subject to seasonality, with increased revenues in the third and fourth calendar quarters of each year, when customers place orders to meet year-end holiday demand. However, due to the complex nature of the markets GigOptix serves and the broad fluctuations in economic conditions in the U.S. and other countries, it is difficult for GigOptix to assess the impact of seasonal factors on GigOptix’ business.

GigOptix has incurred negative cash flows from operations since inception. For the six months ended July 3, 2011 and for the years ended December 31, 2010 and 2009, GigOptix incurred net losses of $6.0 million, $4.4 million and $10.0 million respectively, and cash outflows from operations of $1.4 million, $3.8 million and $4.1 million, respectively. As of July 3, 2011 GigOptix had an accumulated deficit of $79.4 million.

GigOptix is subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and China, changes in trade policy and regulatory requirements, duties, tariffs and other trade barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. Most of GigOptix’ foundries and all of GigOptix’ assembly and test subcontractors are located in Asia. Although GigOptix’ international sales are largely denominated in U.S. dollars, GigOptix also enters into sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, GigOptix has foreign operations where expenses are generally denominated in the local currency. Such transactions expose GigOptix to the risk of exchange rate fluctuations. GigOptix monitors its exposure to foreign currency fluctuations, but has not adopted any hedging strategies to date. There can be no assurance that exchange rate fluctuations will not harm GigOptix’ business and operating results in the future.

Due to continued uncertain economic conditions, GigOptix’ current or potential customers may delay or reduce purchases of GigOptix’ products, which would adversely affect GigOptix’ revenues and harm GigOptix’ business and financial results. GigOptix expects its business to be adversely impacted by any future downturn in the U.S. or global economies. In the past, industry downturns have resulted in reduced demand and declining average selling prices for GigOptix’ products which adversely affected GigOptix’ business. GigOptix expects to continue to experience these adverse business conditions in the event of further downturns.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued a new accounting standards update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. We will adopt this standard in the first quarter of 2012 and are currently evaluating its impact on our financial statements and disclosures.

In June 2011, the FASB issued a new accounting standards update, which eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. We will adopt this standard in the first quarter of 2012.

Results of Operations

Revenue

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

   
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Product
  $ 7,601     $ 5,524     $ 14,653     $ 10,658  
Government contract
    18       755       628       894  
Total revenue
  $ 7,619     $ 6,279     $ 15,281     $ 11,552  
Increase period over period
  $ 1,340             $ 3,729          
Percentage increase, period over period
    21 %             32 %        

Revenue for the three months ended July 3, 2011 was $7.6 million, an increase of $1.3 million, or 21%, compared with $6.3 million for the three months ended July 4, 2010.  The increase in revenue was primarily due to an increase in product revenue which includes revenue derived from the Endwave acquisition in June 2011.  This increase was partially offset by a decrease in billings under government contracts of $0.7 million.


Revenue for the six months ended July 3, 2011 was $15.3 million, an increase of $3.7 million, or 32%, compared with $11.6 million for the six months ended July 4, 2010.  The increase in revenue was primarily due to an increase in product revenue which included revenue derived from the Endwave acquisition in June 2011.

Gross Profit

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, and amortization expense of certain intangible assets.
 
Cost of revenue and gross profit for the periods presented was as follows (in thousands, except percentages):

Cost of Revenue
 
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Product
  $ 3,798     $ 2,621     $ 7,449     $ 5,222  
Government contract
    -       158       180       252  
Total cost of revenue
  $ 3,798     $ 2,779     $ 7,629     $ 5,474  
Percentage of revenue
    50 %     44 %     50 %     47 %
Increase period over period
  $ 1,019             $ 2,155          
Percentage increase, period over period
    37 %             39 %        

Gross Profit
 
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Product
  $ 3,803     $ 2,903     $ 7,204     $ 5,436  
Government contract
    18       597       448       642  
Total gross profit
  $ 3,821     $ 3,500     $ 7,652     $ 6,078  
Gross margin
    50 %     56 %     50 %     53 %
Increase, period over period
  $ 321             $ 1,574          
Percentage increase, period over period
    9 %             26 %        

Gross profit for the three months ended July 3, 2011 was $3.8 million, or 50% of revenue, compared to $3.5 million, or 56% of revenue for the three months ended July 4, 2010.  The increase in gross profit is due to a $1.3 million increase in total revenue from Q2 2010 to Q2 2011.  The decrease in gross margin from 56% to 50% is primarily due to a decrease of $737,000 in billings associated with government contracts, which typically carry a higher gross margin percentage than product revenue.

Gross profit for the six months ended July 3, 2011 was $7.7 million, or 50% of revenue, compared to $6.1 million, or 53% of revenue for the six months ended July 4, 2010.  The increase in gross profit is due to a $3.7 million increase in total revenue in 2011 as compared to 2010.  The decrease in gross margin is due to reduced billings from government contracts which typically carry a higher gross margin as well as the impact of a change in product mix.

Research and Development Expense

Research and development expenses are expensed as incurred. Research and development costs consist primarily of employee compensation, consulting and engineering design, non-capitalized tools and equipment depreciation.

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

   
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Research and development expense
  $ 3,074     $ 2,124     $ 5,464     $ 4,204  
Percentage of revenue
    40 %     34 %     36 %     36 %
Increase, period over period
    950               1,260          
Percentage increase, period over period
    45 %             30 %        

For the three months ended July 3, 2011 and July 4, 2010, research and development expense was $3.1 million and $2.1 million, respectively.  For the six months ended July 3, 2011 and July 4, 2010, research and development expense was $5.5 million and $4.2 million, respectively.


For the three months ended July 3, 2011, research and development expense increased by $950,000, or 45%, in comparison to the prior year period.  Of the increase, $321,000 was due to a 9% increase in headcount and the restoration of salary rates that had previously been reduced.  Another $374,000 of the increase was due to increased depreciation on new equipment purchases, and increases in subscription software and R&D materials and supplies.  Stock-based compensation increased by $155,000, and the addition of Endwave to our operations in June 2011 added $137,000.

For the six months ended July 3, 2011, research and development expense increased by $1.3 million, or 30%, in comparison to the prior year period.  Of the increase, $374,000 was due to an increase in headcount and the restoration of salary rates that had previously been reduced.  Another $857,000 of the increase was due to increased depreciation on new equipment purchases, and increases in subscription software and R&D materials and supplies.  Stock-based compensation increased by $324,000, and the addition of Endwave to our operations in June 2011 added $137,000.  Finally, the growth of R&D activities supporting manufacturing operations resulted in increased charges to cost of revenue, which reduced research and development expense by $666,000.

Selling, General and Administrative Expense

Selling, general and administrative expenses consist primarily of salaries and benefits for management, marketing and administration personnel, as well as fees for consultants.

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

   
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Selling, general and administrative expense
  $ 2,609     $ 2,540     $ 5,232     $ 4,674  
Percentage of revenue
    34 %     40 %     34 %     40 %
Increase period over period
    69               558          
Percentage increase, period over period
    3 %             12 %        

For the three ended July 3, 2011 and July 4, 2010, selling, general and administrative expense was $2.6 million and $2.5 million, respectively.  For the six months ended July 3, 2011 and July 4, 2010, selling, general and administrative expense was $5.2 million and 4.7 million, respectively.  The three month increase was primarily due to $93,000 of additional expenses which resulted from adding Endwave’s staff into GigOptix’ operations in June 2011.

The six month increase was primarily due to a $158,000 increase in sales commissions, a $136,000 increase in professional fees, and $93,000 of additional expenses which resulted from adding Endwave’s staff into GigOptix’ operations in June 2011.

Merger-related Expense

During the three and six months ended July 3, 2011, we incurred $778,000 and $1.9 million of expenses in connection with our June 2011 acquisition of Endwave Corporation.  The amounts primarily include employee retention compensation in connection with the completion of the merger and attorney, accounting and investment banking fees.

Restructuring Expense

Restructuring expense for the periods presented was as follows (in thousands):
 
   
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Restructuring expense
  $ (52 )   $ -     $ (52 )   $ 428  

During both the three and six months ended July 3, 2011, we recorded a benefit of $52,000 in restructuring expense.  The benefit was the result of a reduction in previously accrued severance benefits.

During the three months ended April 4, 2010 we decided to close our R&D design center in Haifa, Israel which was acquired as part of the merger with ChipX in 2009. We recorded a restructuring charge of $428,000 to account for employee severance of $196,000, future facility rent expense of $61,000 for the remainder of the lease term through the end of fiscal 2010, a write-down of fixed assets of $121,000, and accounting and legal expenses of approximately, $50,000.

During the three months ended July 3, 2011, we made no cash payments in connection with the restructuring of our Bothell, Washington facilities or the 2010 shutdown of the Haifa R&D design center.

During the six months ended July 3, 2011, we made cash payments of $28,000 in connection with the restructuring of our Bothell, Washington facilities, and made no cash payments in connection with the 2010 shutdown of the Haifa R&D design center.
 

Shareholder Settlement Expense

On April 8, 2011, GigOptix and the trustees for the DBSI Estate Litigation Trust and the DBSI Liquidating Trust (together “DBSI”) reached agreement to settle a claim by DBSI against GigOptix. As part of the settlement, GigOptix in April 2011 issued warrants to DBSI for 1 million shares of common stock. During the three and six months ended July 3, 2011, we recognized $0 and $1.1 million of expense in connection with the issuance of these warrants.

Interest Expense, Net and Other Income (Expense), Net

Interest expense, net and other (income) expense for the periods presented were as follows (in thousands):

   
Three months ended
   
Six months ended
 
   
July 3, 2011
   
July 4, 2010
   
July 3, 2011
   
July 4, 2010
 
Interest expense, net
  $ (47 )   $ (118 )   $ (143 )   $ (228 )
Other income (expense), net
    58       (105 )     70       (118 )
Total
  $ 11     $ (223 )   $ (73 )   $ (346 )

Interest expense for the three and six months ended July 3, 2011 decreased in comparison to the same periods in 2010 due primarily to our no longer having borrowings in 2011 from Bridge Bank and Agility Capital.

Other income during the three and six months ended July 3, 2011 was comprised primarily of foreign exchange gains of $78,000 and $83,000, respectively, which were the result of the impact of the strengthening Swiss Franc in relation to the U.S. dollar on the operations of our Swiss business unit.  Other expense for the three and six months ended July 4, 2010 was comprised primarily of $98,000 of note discount amortization on a loan from Bridge Bank.

Provision for Income Taxes

The provisions for income taxes were $7,000 and $12,000 for the three and six months ended July 3, 2011, respectively, and $24,000 and $24,000 for the three and six months ended July 4, 2010, respectively. Our effective tax rate was less than 1% for all of these periods. The income tax provisions were due primarily to state and foreign income taxes due and to losses in all tax jurisdictions and a full valuation allowance against such losses.

Liquidity and Capital Resources

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

   
July 3, 2011