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EX-32.1 - EXHIBIT 32.1 - GigPeak, Inc.ex32_1.htm
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EX-32.2 - EXHIBIT 32.2 - GigPeak, Inc.ex32_2.htm
EX-31.2 - EXHIBIT 31.2 - GigPeak, Inc.ex31_2.htm
EX-10.1 - EXHIBIT 10.1 - GigPeak, Inc.ex10_1.htm
EXCEL - IDEA: XBRL DOCUMENT - GigPeak, Inc.Financial_Report.xls


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 October 2, 2011
 
or
 
o
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 o
 
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 o
 
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
o
 
Accelerated filer
o
         
Non-accelerated filer
o
(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 o No x
 
The number of shares of Common Stock outstanding as of November 4, 2011, the most recent practicable date prior to the filing of this Quarterly Report on Form 10-Q, was 21,513,745 shares.
 


 
 

 
 
 
PART I FINANCIAL INFORMATION
   
    ITEM 1
 
Financial Statements (unaudited)
 
       
   
3
       
   
4
       
   
5
       
   
6
       
    ITEM 2
 
22
       
    ITEM 3
 
30
       
    ITEM 4
 
30
 
PART II OTHER INFORMATION
   
    ITEM 1
 
30
       
    ITEM 1A
 
31
       
    ITEM 5
 
33
       
    ITEM 6
 
34

 
PART I
FINANCIAL INFORMATION
GIGOPTIX, INC.
(In thousands, except share and per share amounts)
(Unaudited)
 
   
October 2, 2011
   
December 31, 2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 9,985     $ 4,502  
Short-term investments
    6,207       -  
Accounts receivable, net
    5,386       5,366  
Inventories
    2,533       1,609  
Prepaid and other current assets
    615       405  
Total current assets
    24,726       11,882  
Property and equipment, net
    4,855       3,717  
Intangible assets, net
    5,569       3,861  
Goodwill
    11,985       7,407  
Restricted cash
    258       356  
Other assets
    251       653  
Total assets
  $ 47,644     $ 27,876  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 4,396     $ 2,960  
Accrued and other current liabilities
    5,366       4,823  
Accrued restructuring
    939       -  
Line of credit and term loan
    1,012       3,226  
Total current liabilities
    11,713       11,009  
Pension liabilities
    219       211  
Other long term liabilities
    1,246       1,266  
Total liabilities
    13,178       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 October 2, 2011 and December 31, 2010
    -       -  
Common stock, $0.001 par value; 50,000,000 shares authorized; 21,513,784 and 12,210,264 shares issued and outstanding as of October 2, 2011 and December 31, 2010, respectively
    22       12  
Additional paid-in capital
    116,618       88,553  
Accumulated deficit
    (82,453 )     (73,353 )
Accumulated other comprehensive income
    279       178  
Total stockholders’ equity
    34,466       15,390  
Total liabilities and stockholders’ equity
  $ 47,644     $ 27,876  

See accompanying Notes to Condensed Consolidated Financial Statements
 
 
GIGOPTIX, INC.
(In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Revenue
                       
Product
  $ 8,363     $ 5,866     $ 23,016     $ 16,525  
Government contract
    -       1,357       628       2,251  
Total revenue
    8,363       7,223       23,644       18,776  
                                 
Cost of revenue
                               
Product
    3,709       3,106       11,158       8,329  
Government contract
    -       305       180       557  
Total cost of revenue
    3,709       3,411       11,338       8,886  
Gross profit
    4,654       3,812       12,306       9,890  
                                 
Research and development expense
    3,633       1,852       9,097       6,056  
Selling, general and administrative expense
    2,769       2,247       7,981       6,921  
Restructuring expense
    769       -       717       428  
Merger-related expense
    74       -       1,959       -  
Special litigation-related expense
    255       -       275       -  
Shareholder settlement expense
    -       -       1,064       -  
Total operating expenses
    7,500       4,099       21,093       13,405  
Loss from operations
    (2,846 )     (287 )     (8,787 )     (3,515 )
Interest expense, net
    (97 )     (105 )     (240 )     (335 )
Other expense, net
    (131 )     (16 )     (61 )     (132 )
Net loss before income taxes
    (3,074 )     (408 )     (9,088 )     (3,982 )
(Provision) benefit for income taxes
    -       2       (12 )     (22 )
Net loss
  $ (3,074 )   $ (406 )   $ (9,100 )   $ (4,004 )
                                 
Net loss per share - basic and diluted
  $ (0.14 )   $ (0.03 )   $ (0.57 )   $ (0.39 )
Shares used in computing basic and diluted net loss per shares
    21,511       11,972       15,888       10,204  

See accompanying Notes to Condensed Consolidated Financial Statements
 
 
GIGOPTIX, INC.
(In thousands)
(Unaudited)
 
   
Nine months ended
 
   
October 2,2011
   
October 3,2010
 
Cash flows from operating activities:
           
Net loss
  $ (9,100 )   $ (4,004 )
Adjustments to reconcile net loss to net cash used in operating activities:
    -          
Depreciation and amortization
    2,495       2,021  
Stock-based compensation
    2,320       1,189  
Non-cash litigation settlement
    1,064       -  
Write-down of fixed assets
    -       121  
Amortization of acquisition-related payment
    -       450  
Amortization of investments
    36       -  
(Gain)/Loss on sale of assets
    -       3  
Amortization of discount on loan
    -       152  
Changes in operating assets and liabilities, net of acquisition:
               
Accounts receivable, net
    295       (481 )
Inventories
    317       (523 )
Prepaid and other current assets
    (52 )     (200 )
Other assets
    485       69  
Accounts payable
    729       (1,259 )
Accrued restructuring
    (835 )     -  
Accrued and other current liabilities
    (766 )     (1,218 )
Net cash used in operating activities
    (3,012 )     (3,680 )
Cash flows from investing activities:
               
Proceeds from sale and maturity of investments
    3,700       -  
Purchases of property and equipment
    (1,840 )     (971 )
Net cash received in the acquisition of Endwave
    8,824       -  
Change in restricted cash
    99       200  
Net cash provided by (used in) investing activities
    10,783       (771 )
Cash flows from financing activities:
               
Proceeds from issuance of common stock and warrants
    38       4,076  
Proceeds from line of credit
    5,978       12,977  
Proceeds from short-term loan
    -       900  
Repayment of line of credit
    (7,989 )     (11,502 )
Repayment of short-term loan
    (203 )     (579 )
Repayment of capital lease
    (220 )     (157 )
Net cash provided by (used in) financing activities
    (2,396 )     5,715  
Effect of exchange rates on cash and cash equivalents
    108       5  
Net increase (decrease) in cash and cash equivalents
    5,483       1,269  
Cash and cash equivalents at beginning of period
    4,502       3,583  
Cash and cash equivalents at end of period
  $ 9,985     $ 4,852  
Supplemental disclosure of cash flow information
               
Interest paid
  $ 254     $ 213  
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
 
 
GIGOPTIX, INC.

NOTE 1ORGANIZATION 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 $2.0 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 third quarter of 2011 ended on Sunday, October 2, 2011. The third quarter of fiscal 2010 ended on Sunday, October 3, 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 October 2, 2011 are included in the condensed consolidated statement of operations for the three and nine months ended October 2, 2011 and the condensed consolidated statement of cash flows for the nine months ended October 2, 2011.  In addition, assets acquired and liabilities assumed from the Endwave acquisition are included in the condensed consolidated balance sheet as of October 2, 2011.

The accompanying unaudited condensed consolidated financial statements as of October 2, 2011 and for the three and nine months ended October 2, 2011 and October 3, 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 nine months ended October 2, 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 2INVESTMENTS

   
October 2, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
United States government agencies
  $ 5,605     $ 1     $ -     $ 5,606  
Corporate securities
    601       -       -       601  
    $ 6,206     $ 1     $ -     $ 6,207  
 
At October 2, 2011, the Company had $6.2 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 October 2, 2011, the Company had unrealized gains of $1,000 on its investments in debt securities.  The investments mature during 2011 and 2012. 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 nine months ended October 2, 2011.

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 through a charge to the condensed consolidated statement of operations. See additional discussion in Note 4, Fair Value.

NOTE 3BALANCE SHEET COMPONENTS

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

   
October 2,
2011
   
December 31,
2010
 
Billed accounts receivable
  $ 5,294     $ 4,572  
Unbilled accounts receivable
    423       965  
Allowance for doubtful accounts
    (331 )     (171 )
    $ 5,386     $ 5,366  
 
Inventories consisted of the following (in thousands):

   
October 2,
2011
   
December 31,
2010
 
Raw materials
  $ 954     $ 609  
Work in process
    377       250  
Finished goods
    1,202       750  
    $ 2,533     $ 1,609  
 
 
Property and equipment, net consisted of the following (in thousands, except depreciable life):

   
Depreciable
Life, in
Years
   
October 2,
2011
   
December 31,
2010
 
Machinery and equipment
    3-5     $ 8,424     $ 6,286  
Computer software and equipment
    2-3       3,467       3,006  
Furniture and fixtures
    3-10       169       159  
Office equipment
    3-5       107       107  
Leasehold improvements
    1-5       165       132  
Construction-in-progress
          304       77  
              12,636       9,767  
Accumulated depreciation and amortization
            (7,781 )     (6,050 )
Property and equipment, net
          $ 4,855     $ 3,717  
 
For the three months and nine months ended October 2, 2011, depreciation and amortization expense related to property and equipment was $788,000 and $1.7 million, respectively. For the three and nine months ended October 3, 2010, depreciation and amortization expense related to property and equipment was $412,000 and $1.2 million, 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 nine months ended October 3, 2010.   See additional discussion in Note 9, Restructuring.
 
Accrued and other current liabilities consisted of the following (in thousands):
 
   
October 2,
2011
   
December 31,
2010
 
Accrued compensation and related taxes
  $ 1,156     $ 705  
Amounts billed to the U.S. government in excess of approved rates
    1,154       1,154  
Accrued warranty
    530       143  
Customer deposits
    522       522  
Capital lease obligation, current portion
    438       239  
Deferred revenue
    221       568  
Accrued legal and audit fees
    75       147  
Warrants liability
    18       522  
Other
    1,252       823  
    $ 5,366     $ 4,823  
 
Other long-term liabilities consisted of the following (in thousands):
 
   
October 2,
2011
   
December 31,
2010
 
Capital lease obligation
  $ 788     $ 952  
Impaired facilities lease obligation
    274     $ -  
Severance liability in Israel
    12       276  
Deferred income taxes
    172       38  
    $ 1,246     $ 1,266  
 
 
NOTE 4FAIR VALUE
 
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of October 2, 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)
 
October 2, 2011:
                       
Assets:
                       
Cash equivalents:
                       
Money market funds
  $ 5,366     $ 5,366     $ -     $ -  
Short-term investments:
                               
United States government agencies
    5,606       -       5,606       -  
Corporate securities
    601       -       601       -  
Subtotal short-term investments
    6,207       -       6,207       -  
    $ 11,573     $ 5,366     $ 6,207     $ -  
Current liabilities:
                               
Liability warrants
  $ 18     $ -     $ -     $ 18  
                                 
December 31, 2010:
                               
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 October 2, 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 are classified as Level 3 financial instruments. On July 7, 2010 the Company raised additional equity through an offering of 2,760,000 shares at $1.75 per share, thus triggering the down-round protection and 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 nine months ended October 2, 2011 is as follows (in thousands):

       
Fair value at December 31, 2010
  $ 522  
Exercise of warrants
    (480 )
Change in fair value
    (18 )
Fair value at July 3, 2011
  $ 24  
Change in fair value
    (6 )
Fair value at October 2, 2011
  $ 18  

NOTE 5BUSINESS 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 statement of operations subsequent to June 17, 2011.

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 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 nine months ended October 2, 2011 and October 3, 2010, 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
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Net revenue
  $ 8,363     $ 11,281     $ 26,058     $ 31,421  
Net loss
  $ (3,074 )   $ (2,405 )   $ (19,680 )   $ (10,100 )
Net loss per share - basic and diluted
  $ (0.14 )   $ (0.13 )   $ (0.86 )   $ (0.59 )
 
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 6INTANGIBLE ASSETS AND GOODWILL

Intangible assets consist of the following (in thousands):

         
October 2, 2011
   
December 31, 2010
 
   
Weighted-
average Life,
in Years
   
Gross
   
Accumulated
Amortization
   
Net
   
Gross
   
Accumulated
Amortization
   
Net
 
Customer relationships
    7.6     $ 3,277     $ (745 )   $ 2,532     $ 2,557     $ (477 )   $ 2,080  
Existing technology
    6.6       3,783       (1,554 )     2,229       2,328       (1,356 )     972  
Order backlog
    0.7       732       (698 )     34       459       (459 )     -  
Patents
    6.9       457       (219 )     238       457       (158 )     299  
Trade name
    9.0       659       (123 )     536       577       (67 )     510  
Total
    6.7     $ 8,908     $ (3,339 )   $ 5,569     $ 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 nine months ended October 2, 2011 and October 3, 2010, amortization of intangible assets was as follows (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Cost of revenue
  $ 327     $ 139     $ 498     $ 423  
Selling, general and administrative expense
    130       92       325       278  
    $ 457     $ 231     $ 823     $ 701  
 
Estimated future amortization expense related to intangible assets as of October 2, 2011 is as follows (in thousands):

Years ending December 31,
 
 
 
2011 (remaining)
  $ 288  
2012
    1,011  
2013
    984  
2014
    893  
2015
    893  
Thereafter
    1,500  
Total
  $ 5,569  
 
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 third quarter of 2011, there were no factors which indicated impairment. The Company performs an impairment analysis of goodwill on an annual basis or if indicators of impairment exist. The Company did not record impairment on any intangibles, including goodwill for the three and nine months ended October 2, 2011.  In addition, the Company did not record an impairment of goodwill for the year ended December 31, 2010 and will perform its annual impairment analysis during the fourth quarter of 2011.

 
NOTE 7STOCKHOLDERS 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 October 2, 2011 and December 31, 2010, there were no shares of preferred stock issued or outstanding.

At the 2011 Annual Meeting presently scheduled for November 15, 2011, the shareholders of the Company are being asked to vote on a proposal to approve and ratify an amendment to the Company's Certificate of Incorporation to allow the Board of Directors to effect a reverse split of the Company's outstanding common stock in the range of one-for-three to one-for-five without further approval of the stockholders, if the Board of Directors, in its sole discretion, determines that such a reverse split is in the best interest of the Company and its stockholders .

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 October 2, 2011 was as follows:

   
Nine Months
Ended
October 2,
2011
 
Beginning shares available for future grants under 2008 Plan
    3,628,992  
Automatic increase January 1, 2011
    610,513  
Less: options granted
    (3,417,179 )
Add back: options forfeited
    691,334  
Ending shares authorized for future issuance under 2008 Plan
    1,513,660  
 
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 October 2, 2011, 8,120,267 options to purchase common stock were outstanding in the 2008 Plan.

At the 2011 Annual Meeting, the shareholders are also voting on a proposal to amend and restate the 2008 Plan to increase the number of shares available by 3,000,000.

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 October 2, 2011, no additional options can be granted under the Lumera Plan, and options to purchase a total of 148,282 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 October 2, 2011, a total of 2,335,841 warrants to purchase common stock were outstanding under all warrant arrangements. Some of the warrants have anti-dilution provisions which adjust the number of warrants available to the holder such as, but not limited to, stock dividends, stock splits and certain reclassifications, exchanges, combinations or substitutions. These provisions are specific to each warrant agreement.

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 nine months ended October 2, 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 nine months ended October 2, 2011 and the three and nine months ended October 3, 2010 (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Cost of revenue
  $ 14     $ 3     $ 41     $ 9  
Research and development expense
    292       125       805       327  
Selling, general and administrative expense
    501       234       1474       853  
    $ 807     $ 362     $ 2,320     $ 1,189  
 
As of October 2, 2011 and October 3, 2010, the total compensation cost not yet recognized in connection with unvested stock options under the Company’s equity compensation plan was approximately $8.4 million and $3.2 million, respectively. These amounts will be amortized on a straight-line basis over a weighted-average period of approximately 3.0 and 2.7 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.

The majority of the stock options that the Company grants to its employees provide for vesting over a specified period of time, normally a four-year period, with no other conditions to vesting.   However, the Company may also grant stock options for which vesting occurs not only on the basis of elapsed time, 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.

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.
 
 
Stock Options with Market Conditions Granted March 17, 2010

On March 17, 2010, 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 market 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 subsequent 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 nine months ended October 2, 2011 and October 3, 2010 was as follows:
 
Three Months Ended
   
Nine Months Ended
 
October 2,
2011
   
October 3,
2010
   
October 2,
 2011
   
October 3,
2010
 
$ 89     $ 72     $ 269     $ 166  
 
Below is the remaining vesting schedule for the stock options with market conditions.

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, as of grant date, 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, as of grant date, 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, as of grant date, and the total expense associated with these options is $239,000.  These options are being amortized over three years.

For all of the stock options with market conditions granted on March 17, 2010, the amount of expense recognized for the three and nine months ended October 2, 2011 and October 3, 2010 was as follows:

Three Months Ended
   
Nine Months Ended
 
October 2,
2011
   
October 3,
2010
   
October 2,
 2011
   
October 3,
2010
 
$ 74     $ 158     $ 322     $ 369  
 
The fair value of the Company’s stock options granted to employees was estimated using the following weighted-average assumptions:
 
   
Three Months Ended
   
Nine Months Ended
 
   
October 2, 2011
   
October 3, 2010
   
October 2, 2011
   
October 3, 2010
 
Valuation model
 
Black-Scholes
   
Black-Scholes
   
Black-Scholes
   
Black-Scholes
   
Lattice-binomial
 
Expected term
 
6.08 years
   
6.25 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
    1.95 %     2.07 %  
1.53% to 2.64
%  
1.98% to 2.83
%     3.65 %
Weighted-average fair value
  $ 1.28     $ 1.31     $ 1.65     $ 1.35     $ 1.03  

 
Expected TermExpected 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 VolatilityExpected 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 DividendThe 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 RateThe 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
    3,417,179     $ 2.56        
Exercised
    (59,161 )   $ 1.43        
Forfeited/expired
    (660,667 )   $ 3.33        
Ending balance, October 2, 2011
    8,721,552     $ 2.58       8.4  
                         
Exercisable, October 2, 2011
    2,938,567     $ 3.07       7.3  
 
The above number of options outstanding at October 2, 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 options, 100,000 were fully vested and exercisable upon grant, and the remaining 100,000 options will vest and become exercisable  on December 17, 2011,  subject to and contingent upon the Company’s 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 October 2, 2011 and October 3, 2010 was approximately $1.4 million and $4.8 million, respectively. The aggregate intrinsic value reflects the difference between the exercise price of the underlying stock options and the Company’s closing share price of $1.65 as of October 2, 2011 and $2.55 as of October 3, 2010.

NOTE 8LINE 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 October 2, 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 as of October 2, 2011 was $988,000.  On October 3, 2011, the Company repaid the entire $988,000 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. On October 2, 2011, the amount outstanding on the term loan was $24,000 and on October 3, 2011, the Company paid the remaining balance .  The weighted average interest rate on loans outstanding at October 2, 2011 was 6.4%

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 nine months ended October 2, 2011 was $47,000 and $140,000. The balance of the asset as of October 2, 2011 was $94,000.
 
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
October 2, 2011
   
Nine Months Ended
October 2, 2011
   
Holder
 
Original
Warrants
   
Adjusted
Warrants
 
Grant
Date
 
Expiration
Date
 
Price
per
Share
   
Fair Value
October 2,
2011
   
Fair Value
December 31,
2010
   
Change in Fair
Value
   
Exercise of
Warrants
   
Change
in Fair
Value
 
Related Agreement
Bridge Bank
    59,773       114,286  
11/12/2009
      $ 1.75     $ -     $ 240,000           $ (240,000 )      
Credit Agreement
Bridge Bank
    20,000       22,671  
4/7/2010
 
7/7/2017
    3.32       18,000       42,000     $ (6,000 )             (24,000 )
Credit Agreement
Agility Capital
    71,429       85,714  
1/29/2010
        1.75       -       180,000               (180,000 )        
Secured Credit Facility
Agility Capital
    25,000       28,571  
4/5/2010
        1.75       -       60,000               (60,000 )        
Secured Credit Facility
Total
    176,202       251,242  
 
 
 
          $ 18,000     $ 522,000     $ (6,000 )   $ (480,000 )   $ (24,000 )
 

NOTE 9RESTRUCTURING

In July 2011, the Company vacated its headquarters facilities in Palo Alto, California and relocated to Endwave’s facilities in San Jose, California.  The Company has lease obligations through December 2013 for the Palo Alto facilities.  In connection with the Company’s vacating the Palo Alto facilities, the Company recognized $825,000 of restructuring expenses during the three months ended October 2, 2011, of which $764,000 represented future obligations.

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.

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 nine months ended October 2, 2011 in connection with the 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 $500,000 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.

The following is a summary of the restructuring  activity (in thousands):
 
   
3 months ending
   
9 months ending
 
Beginning balance
  $ 1,791     $ 62  
Charges
    769       3,366  
Uses
    (1,347 )     (2,215 )
Accrual at October 2, 2011
  $ 1,213     $ 1,213  


NOTE 10INCOME TAXES

The Company recorded a provision for income taxes of $12,000 for the nine months ended October 2, 2011.  The Company did not record a provision for income taxes for the three months ended October 2, 2011.  The Company recorded a benefit for income taxes of $2,000 for the three months ended October 3, 2010 and a provision for income taxes of $22,000 for the nine months ended October 3, 2010. The Company’s effective tax rate was less than 1% for all of these periods. The income tax provision for the nine months ended October 2, 2011 and October 3, 2010 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. There are sufficient net operating losses carried forward to offset the taxable income generated in Switzerland. The benefit for income tax for the three months ended October 3, 2010 was due primarily to a reduction in state and foreign income taxes due and to losses in all tax jurisdictions and 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 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 October 2, 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 the Company’s inception are open and may be subject to potential examination in one or more jurisdictions.

NOTE 11SEGMENT 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
   
Nine Months Ended
 
   
October 2, 2011
   
October 3, 2010
   
October 2, 2011
   
October 3, 2010
 
North America
  $ 3,279       39 %   $ 3,521       49 %   $ 11,251       48 %   $ 9,521       51 %
Asia
    2,279       27 %     1,502       21 %     6,417       27 %     4,344       23 %
Europe
    2,778       33 %     2,200       30 %     5,813       25 %     4,780       25 %
South America
    27       0 %     -       0 %     163       1 %     131       1 %
    $ 8,363       100 %   $ 7,223       100 %   $ 23,644       100 %   $ 18,776       100 %
 
The Company determines geographic location of its revenue based upon the destination of shipments of its products.
 
During the three months ended October 2, 2011, the United States, Hong Kong, Japan and Italy accounted for 34%, 25%, 14% and 10% of the Company’s total revenue, respectively.  During the nine months ended October 2, 2011, United States, Japan and Hong Kong accounted for 45%, 13%, and 11% of the Company’s total revenue, respectively.  No other country accounted for more than 10% of the Company’s consolidated revenue during the three and nine months ended October 2, 2011.
 
During the three months ended October 3, 2010, the United States, Italy and Japan accounted for 48%, 15% and 13% of total revenue, respectively. During the nine months ended October 3, 2010, the United States and Japan accounted for 50% and 10% of total revenue, respectively.  No other country accounted for more than 10% of the Company’s consolidated revenue during the three and nine months ended October 3, 2010.

 
The following table summarizes long-lived assets by country (in thousands):
 
   
October 2, 2011
   
December 31, 2010
 
United States
  $ 3,674     $ 3,001  
Switzerland
    1,181       716  
    $ 4,855     $ 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 12COMMITMENTS 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 nine months ending October 2, 2011 was $154,000 and $508,000, respectively, and for the three and nine months ended October 3, 2010 was $125,000 and $394,000, respectively.

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)
  $ 142     $ 193  
2012
    567       878  
2013
    483       852  
2014
    306       353  
2015
    -       320  
Thereafter
    -       396  
Total minimum lease payments
    1,498     $ 2,992  
Less: Amount representing interest
    (272 )        
Total capital lease obligations
    1,226          
Less: current portion
    (438 )        
Long-term portion of capital lease obligations
  $ 788          

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 reasonably estimated or the outcome becomes known.

NOTE 13RELATED PARTY TRANSACTIONS

During the three and nine months ended October 2, 2011, the Company had sales to National Instruments Corporation (National Instruments)  of approximately $365,000 and $1.2 million, respectively. During the three and nine months ended October 3, 2010, we had sales to National Instruments of approximately $448,000 and $1.1 million respectively.  The accounts receivable balance from National Instruments at October 2, 2011 was $29,000 and National Instruments currently holds 1,066,270 shares of GigOptix common stock.

 
See additional discussions in Note 15, Subsequent Events, and in Legal Proceedings  regarding litigation involving the Company and National Instruments.

NOTE 14RECENT 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.

In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt this standard in the first quarter of 2012.

NOTE 15SUBSEQUENT EVENTS

Properties

Subsequent to October 2, 2011, GigOptix’ Palo Alto landlord agreed to an early lease termination for one of the two Palo Alto facilities leases.  Costs that GigOptix agreed to pay to terminate the lease prior to its expiration have been included in restructuring expense in the statement of operations for the three and nine months ended October 2, 2011, and are included in accrued and other current liabilities and in other non-current liabilities in the balance sheet at October 2, 2011.  See additional discussion in Note 9, Restructuring.

National Instruments

On October 4, 2011, National Instruments filed a complaint against ChipX and GigOptix in the District Court of Travis County pertaining to two sales contracts to which National Instruments was a purchaser of products sold by ChipX.  GigOptix is not a party to either contract.  Prior to the filing of the complaint, the parties had been in discussions regarding the pricing of the products sold under these contracts, the number of products to be sold, and the length of period of time during which the products would be sold.  National Instruments’ complaint sought a declaration that it was not in material breach of one of the contracts, as ChipX had asserted, that ChipX could not modify the prices in the contracts, that National Instruments could purchase products sold under one of the contracts directly from a supplier, and that GigOptix was not entitled to any damages from National Instruments as it is not a party to the contracts.  The complaint also sought unspecified damages for alleged breach of contract by ChipX.  ChipX and GigOptix have not yet responded to the complaint, or filed a cross-complaint against National Instruments.  The parties have now settled the matter.  Pursuant to the terms of the settlement, National Instruments will pay ChipX $500,000 to license rights from ChipX which will enable National Instruments to manufacture the products sold under one of the contracts, National Instruments will make one last purchase in the amount of $3,500,000 of such products from ChipX to be fulfilled during 2012, and National Instruments shall have the right to purchase products sold under the other contract directly from the supplier in exchange for a royalty which the supplier will pay to ChipX.

 
 
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 52%, 49% and 51% for the first nine 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 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 its inception. For the nine months ended October 2, 2011 and for the years ended December 31, 2010 and 2009, GigOptix incurred net losses of $9.1 million, $4.4 million and $10.0 million respectively, and used cash in operations of $3.0 million, $3.8 million and $4.1 million, respectively. As of October 2, 2011 GigOptix had an accumulated deficit of $82.5 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 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 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.

In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company 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
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Product
  $ 8,363     $ 5,866     $ 23,016     $ 16,525  
Government contract
    -       1,357       628       2,251  
Total revenue
  $ 8,363     $ 7,223     $ 23,644     $ 18,776  
Increase period over period
  $ 1,140             $ 4,868          
Percentage increase, period over period
    16 %             26 %        
 
Revenue for the three months ended October 2, 2011 was $8.4 million, an increase of $1.1 million, or 16%, compared with $7.2 million for the three months ended October 3, 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 $1.4 million.

Revenue for the nine months ended October 2, 2011 was $23.6 million, an increase of $4.9 million, or 26%, compared with $18.8 million for the nine months ended October 3, 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.  This increase was partially offset by a decrease in billings under government contracts of $1.6 million.

 
Gross Profit

Gross profit consists of revenue less cost of revenue. Cost of revenue consists primarily of the costs to manufacture saleable parts, 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
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Product
  $ 3,709     $ 3,106     $ 11,158     $ 8,329  
Government contract
    -       305       180       557  
Total cost of revenue
  $ 3,709     $ 3,411     $ 11,338     $ 8,886  
Percentage of revenue
    44 %     47 %     48 %     47 %
Increase period over period
  $ 298             $ 2,452          
Percentage increase, period over period
    9 %             28 %        
                                 
Gross Profit
 
Three months ended
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Product
  $ 4,654     $ 2,760     $ 11,858     $ 8,196  
Government contract
    -       1,052       448       1,694  
Total gross profit
  $ 4,654     $ 3,812     $ 12,306     $ 9,890  
Gross margin
    56 %     53 %     52 %     53 %
Increase, period over period
  $ 842             $ 2,416          
Percentage increase, period over period
    22 %             24 %        
 
Gross profit for the three months ended October 2, 2011 was $4.7 million, or 56% of revenue, compared to $3.8 million, or 53% of revenue for the three months ended October 3, 2010.  The increase in gross profit is due to a $1.1 million increase in total revenue.  The increase in gross margin from 53% to 56% is primarily due to an increased absorption of our overhead costs resulting from increased production and a change in product mix.

Gross profit for the nine months ended October 2, 2011 was $12.3 million, or 52% of revenue, compared to $9.9 million, or 53% of revenue for the nine months ended October 3, 2010.  The increase in gross profit is due to a $4.9 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 costs 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
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Research and development expense
  $ 3,633     $ 1,852     $ 9,097     $ 6,056  
Percentage of revenue
    43 %     26 %     38 %     32 %
Increase, period over period
    1,781               3,041          
Percentage increase, period over period
    96 %             50 %        
 
 
During the third quarter of 2011, research and development costs increased in absolute dollars compared to the third quarter of 2010 which primarily due to a $397,000 increase in personnel related expenses, a $349,000 increase in project related expenses, a $210,000 increase in depreciation and amortization and a $167,000 increase in stock-based compensation.  The addition of Endwave to our operations also added approximately $586,000 of research and development related expenses.

During the first nine months of 2011, research and development costs increased in absolute dollars compared to the first nine months of 2010 primarily due to a $771,000 increase in personnel related expenses, a $653,000 increase in depreciation and amortization, a $477,000 increase in stock-based compensation and a $349,000 increase in project related expenses.  The addition of Endwave to our operations also added approximately $723,000 of research and development related expenses.

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
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Selling, general and administrative expense
  $ 2,769     $ 2,247     $ 7,981     $ 6,921  
Percentage of revenue
    33 %     31 %     34 %     37 %
Increase period over period
    522               1,060          
Percentage increase, period over period
    23 %             15 %        
 
For the three months ended October 2, 2011 and October 3, 2010, selling, general and administrative expense was $2.8 million and $2.3 million, respectively.  For the nine months ended October 2, 2011 and October 3, 2010, selling, general and administrative expense was $8.0 million and $6.9 million, respectively.  The three month increase was primarily due to a $267,000 increase in stock compensation expense, $158,000 increase in professional and outside services and $48,000 of additional expenses which resulted from adding Endwave’s staff into GigOptix’s operations.

The nine month increase was primarily due to a $620,000 increase in stock compensation expense, $294,000 increase in professional and outside services and $141,000 of additional expenses which resulted from adding Endwave’s staff into GigOptix’s operations.

Merger-related Expense

During the three and nine months ended October 2, 2011, we incurred $74,000 and $2.0 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
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Restructuring expense
  $ 769     $ -     $ 717     $ 428  
 
During the three months ended October 2, 2011, we recorded restructuring expense of $769,000 which was primarily due to costs associated with vacating  previous headquarters facilities in Palo Alto, California, for which we have facilities lease obligations through December 2013.

For the nine months ended October 2, 2011, restructuring expense includes a $52,000 benefit that is 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 October 2, 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 nine months ended October 2, 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 issued warrants to DBSI for 1 million shares of common stock. During the three and nine months ended October 2, 2011, we recognized $0 and $1.1 million of expense in connection with the issuance of these warrants.

Interest Expense, Net and Other Expense, Net

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

   
Three months ended
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Interest expense, net
  $ (97 )   $ (105 )   $ (240 )   $ (335 )
Other expense, net
    (131 )     (16 )     (61 )     (132 )
Total
  $ (228 )   $ (121 )   $ (301 )   $ (467 )
 
Interest expense for the three and nine months ended October 2, 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 expense, net during the three and nine months ended October 2, 2011 was comprised primarily of foreign exchange losses of $105,000 and $22,000, respectively, which were the result of the change in foreign exchange rates between the Swiss Franc and the U.S. dollar on the operations of our Swiss business unit.  Other expense for the nine months ended October 3, 2010 was comprised primarily of $98,000 of note discount amortization on a loan from Bridge Bank.
 
Provision for Income Taxes

We recorded a provision for income taxes of $12,000 for the nine months ended October 2, 2011 and did not record a provision for income taxes for the three months ended October 2, 2011. We recorded a provision for income taxes of $22,000 for the nine months ended October 3, 2010. Our effective tax rate was less than 1% for all of these periods. The income tax provision for the nine months ended October 2, 2011 and October 3, 2010 were due primarily to state and foreign income taxes due and to losses in all tax jurisdictions.  We have a full valuation allowance against such losses. There are sufficient net operating losses carried forward to offset the taxable income generated in Switzerland.

We recorded a benefit for income taxes of $2,000 for the three months ended October 3, 2010. The benefit for income tax for the three months ended October 3, 2010 was due primarily to a reduction in state and foreign income taxes due and to losses in all tax jurisdictions and 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):

   
October 2,
2011
   
December 31,
2010
 
Cash and cash equivalents
  $ 9,985     $ 4,502  
       
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
 
Net cash used in operating activities
    (3,012 )     (3,680 )
Net cash provided by (used in) investing activities
    10,783       (771 )
Net cash provided by (used in) financing activities
    (2,396 )     5,715  
 
In July 2010, we sold 2,760,000 shares of common stock in a public offering at a price of $1.75 per share. Gross proceeds from the sale were $4.8 million from which we received net proceeds of $3.9 million after deducting total expenses of the offering.

On April 23, 2010, we entered into a loan and security agreement with Silicon Valley Bank. Pursuant to the loan and security agreement, we are entitled to borrow through a revolving loan facility from Silicon Valley Bank up to $3 million, based on net eligible accounts receivable after an 80% advance rate and subject to limits based on our eligible accounts receivable as determined by Silicon Valley Bank. Interest on extensions of credit under the revolving loan is equal to the prime rate of Silicon Valley Bank, which is 4.0% per annum, plus 1.50% per annum (the Applicable Rate”). In addition, a monthly collateral handling fee of 0.30% per each gross financed account receivable shall apply (“Collateral Handing Fee”). Notwithstanding the foregoing, if we achieve 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 revolving loan was used to replace our revolving accounts receivable credit line with Bridge Bank which is discussed below. On April 28, 2010 with $1.6 million of initial funding by Silicon Valley Bank on the revolving loan, we terminated our loan and security agreement with Bridge Bank as having been fully performed.

Pursuant to the loan and security agreement, Silicon Valley Bank also 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 our outstanding obligations to Agility Capital (we previously disclosed these obligations to Agility Capital on our Current Report on Form 8-K filed on February 4, 2010). The term loan is repayable in eighteen equal monthly installments and interest is fixed at a rate per annum equal to 9.00%. With the funding by Silicon Valley Bank of the term loan, we terminated our loan agreement with Agility Capital.
 
The loan and security agreement with Silicon Valley Bank is secured by all of our assets, including all accounts, equipment, inventory, receivables, and general intangibles.

On January 29, 2010, we 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 we incurred in our acquisition of ChipX. The Secured Credit Facility provided that we may borrow one advance of up to $500,000 and had a maturity date of December 1, 2010. Borrowings incurred interest at 14.0% per annum. Beginning March 1, 2010, and on the first day of each month thereafter, $50,000 plus accrued but unpaid interest was to be paid to Agility Capital, and all amounts outstanding on December 1, 2010 were due and payable at that time.

On June 17, 2011 we completed our merger with Endwave Corporation, which resulted in Endwave becoming our wholly-owned subsidiary. Under the terms of the Merger Agreement, all outstanding shares of Endwave common stock, including those issuable upon settlement of outstanding restricted stock units, and outstanding in-the-money Endwave stock options, were converted into shares of our common stock such that immediately after the Merger, such shares represented approximately 42.45% of all outstanding shares of our common stock. On the effective date of the acquisition, GigOptix issued 9,128,502 shares of GigOptix common stock to holders of Endwave common stock, restricted stock units and in-the-money stock options.  Our total expenses in connection with the Endwave transaction, which were approximately $2.0 million, were comprised of legal, accounting, investment banking and printing fees, and employee expenses.  As a result of this transaction we received approximately $18.8 million of cash, cash equivalents and short-term investments.

 
Operating Activities

Operating activities used cash of $3.0 million during the nine months ended October 2, 2011 and resulted primarily from a net loss of $9.1 million, offset by depreciation and amortization of $2.5 million, stock-based compensation of $2.3 million, non-cash litigation expense of $1.1 million and a decrease in accounts receivable, inventories and other current assets of $1.0 million offset by a decrease in accounts payable and accrued and other current liabilities of $871,000.

Operating activities used cash of $4.0 million during the nine months ended October 3, 2010 and resulted from a net loss of $4.0 million, increases in accounts receivables, inventories, prepaids and other assets totaling $1.2 million, and decreases in accounts payable and accrued liabilities of $2.5 million. These uses were partially offset by the following non-cash expenses: depreciation and amortization of $2.0 million, stock based compensation of $1.2 million, a fixed asset write down of $121,000, the amortization of an acquisition related payment of $450,000 and the amortization of a discount on loan of $152,000.

Investing Activities

Net cash provided by investing activities for the nine months ended October 2, 2011 was $10.8 million and consisted of $3.7 million proceeds from sale and maturity of investments, the receipt of $8.8 million as a result of the acquisition of Endwave and a $99,000 reduction in restricted cash, partially offset by $1.8 million of purchases of fixed assets.

Net cash used in investing activities for the nine months ended October 3, 2010 was $771,000 and consisted of purchases of fixed assets of $971,000 offset by a decrease in restricted cash of $200,000.

Financing Activities

Net cash used in financing activities during the nine months ended October 2, 2011 was $2.4 million and consisted primarily of $6.0 million proceeds from line of credit facilities with Bridge Bank and Silicon Valley Bank, an $8.0 million repayment of line of credit, a $203,000 repayment of short-term loan and a $220,000 repayment of our capital lease obligation.

Net cash provided by financing activities during the nine months ended October 3, 2010 was $5.7 million and consisted of: $4,1million in proceeds from the issuance of common stock and warrants, including $3.9 million in proceeds from our public offering in July 2010, net borrowing under the Company’s line of credit facilities with Bridge Bank and Silicon Valley Bank of $1.5 million, net borrowings of $321,000 under a term loan arrangement with Agility Capital subsequently refinanced by Silicon Valley Bank offset by capital lease payments of $157,000.

Material Commitments

GigOptix did not have any material commitments for capital expenditures as of October 2, 2011.

Impact of Inflation and Changing Prices on Net Sales, Revenue and Income

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

Off-Balance Sheet Arrangements

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

 
This item has been omitted based on GigOptix’ status as a smaller reporting company.
 
ITEM 4.

Evaluation of Disclosure Controls and Procedures

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

Our management, including our CEO and CFO, is responsible for establishing and maintaining our disclosure controls and procedures. Our CEO and CFO have evaluated the effectiveness of our disclosure controls and procedures as of October 2, 2011. In light of the material weaknesses set forth below, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of that date. Notwithstanding the material weaknesses described below, our management performed additional analyses, reconciliations and other post-closing procedures and has concluded that our consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States.

As of December 31, 2010, our CEO and CFO determined that we have the following material weaknesses in our internal control over financial reporting as of December 31, 2010:
 
 
·
We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with their financial reporting requirements. This deficiency resulted in multiple audit adjustments. Accordingly, we have determined this control deficiency constitutes a material weakness.

 
·
We did not maintain effective policies, procedures and controls surrounding the financial reporting processes. Specifically, policies, procedures and controls were not documented, designed or in place to ensure that:
 
·
all journal entries, both recurring and non-recurring, were reviewed and approved; and
 
·
monthly closing checklists were used consistently and thoroughly to ensure all financial reporting procedures and controls have been performed.

Changes in Internal Control

In response to the material weaknesses discussed above, during the second and third quarters of 2011, we hired a new CFO and added more experienced accounting personnel.  In addition, we strengthened our accounting policies and procedures by using of checklists and certifications and establishing formal review processes.

PART II
OTHER INFORMATION
 
ITEM 1.  
 
From time to time, we may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When we believe a loss is probable and can be reasonably estimated, we accrue the estimated loss in our consolidated financial statements. Where the outcome of these matters is not determinable, we do not make a provision in our financial statements until the loss, if any, is probable and can be reasonably estimated or the outcome becomes known.
 
 
Advantech Advanced Microwave Technologies Inc. (“Advantech”)

On October 31, 2008, Endwave filed a complaint with the Canadian Superior Court in Montreal, Quebec alleging that Advantech , the parent company of Allgon Microwave Corporation AB, or Allgon, had breached its contractual obligations with Endwave and owes it $994,500 for amounts outstanding under a note receivable and for purchased inventory and authorized finished goods purchase orders. By virtue of the acquisition of Endwave, we have assumed this litigation. The litigation is at an early stage, and a trial date has been set for February 2013; we cannot predict the outcome of these proceedings.

Optomai, Inc. and M/A-COM Technology Solutions, Inc.

On April 25, 2011, GigO