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PART I

(1)

The condensed consolidated balance sheet as of December 31, 2014 has been derived from the audited consolidated financial statements as of that date.

 

GIGOPTIX, INC.

GIGOPTIX, INC.

GIGOPTIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

GigOptix Inc. (“GigOptix” or the “Company”) is a lead fabless semiconductor designer, developer, and global supplier of broad range of analog, digital, and mixed signal components to enable high speed information streaming over the telecom networks, datacom infrastructure, and consumer electronics links. Our ability to innovate and create differentiated products is based on deployment of various semiconductor technologies that span from III-V compounds to SiGe-BiCMOS and CMOS based device designs. GigOptix’ product portfolio provides high speed solutions in markets such as fiber-optics telecom, wireless backhaul, datacom and consumer electronics, mil-aero, instrumentation, and medical equipment, for applications such as linecards and transponders, active optical cables and pluggables, point-to-point wireless radios, military electronic warfare systems, avionics electronics, GPS systems, and diverse medical equipment, such as ultrasound imaging, X-Ray, MRI, CT Scan, and Defibrillators.

The business comprises two product lines: the High-Speed Communications (“HSC”) product line and the Industrial product line.  Its products are highly customized and typically developed in partnership with key “Lighthouse” customers, generating engineering project revenues through the development stage and larger future product revenues through these customers and general market availability.

The HSC product line offers a broad portfolio of high performance semiconductor devices and multi-chip-modules (“MCMs”) aimed predominantly at the telecom, datacom, consumer-electronics, and wireless markets, and includes, among others, (i) 100 to 400 gigabit per second (“Gbps”) laser and optical-modulator drivers, and trans-impedance amplifier (“TIA”) devices; (ii) 10-100 Gbps Clock-data-recovery (“CDR”) devices; (iii) mixed signal radio frequency integrated circuits (“RFIC”) at 50 GHz and above; (iv) power amplifiers and transceivers, as well as monolithic microwave integrated circuits (“MMIC”), for microwave and wireless applications at frequencies higher than 50 GHz; (v) integrated systems in a package (“SIP”) solutions for both fiber-optic and wireless communication systems; and (vi) radio frequency (“RF”) chips for various consumer applications, such as global navigation satellite systems (“GNSS”).

The Industrial product line offers a wide range of digital and mixed-signal application specific integrated circuit (“ASIC”) solutions for various industrial applications used in the military, avionics, automotive, security and surveillance, medical and communications markets.

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

In June 2014, GigOptix Inc. acquired, for cash only by way of assuming specified liabilities, substantially all of the assets of Tahoe RF Semiconductor, Inc. (“Tahoe RF”).

On September 22, 2015, the Company announced signing a definitive agreement to acquire Terasquare, Co. Ltd., a Seoul, Korea-based, fabless semiconductor company and provider of low power, CMOS high speed communication interface semiconductors for 100Gbps Ethernet, Fiber Channel, and EDR Infiniband applications. The acquisition closed subsequent to the end of the quarter on September 30, 2015, and the acquired entity has been renamed GigOptix-Terasquare-Korea (GTK) Co., Ltd.

The Company’s fiscal year ends on December 31. For quarterly reporting, the Company employs a five-week month, four-week month, four-week month, reporting period. The third quarter of 2015 ended on Sunday, September 27, 2015. The third quarter of 2014 ended on Sunday, September 28, 2014. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

The accompanying unaudited condensed consolidated financial statements as of September 27, 2015 and for the three and nine months ended September 27, 2015 and September 28, 2014, 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 of Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. The statements include the accounts of the Company and all of its subsidiaries and they do not include all of the information and footnotes required by such accounting principles for annual financial statements. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position as of September 27, 2015, the results of operations for the three and nine months ended September 27, 2015 and September 28, 2014, and cash flows for the nine months ended September 27, 2015 and September 28, 2014. The condensed consolidated results of operations for the three and nine months ended September 27, 2015 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2015. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the 2014 Annual Report on Form 10-K.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. These judgments can be subjective and complex, and consequently, actual results could differ materially from those estimates and assumptions. Descriptions of these estimates and assumptions are included in the 2014 Annual Report on Form 10-K and the Company encourages you to read its 2014 Annual Report on Form 10-K for more information about such estimates and assumptions.

Other current liabilities consisted of the following (in thousands):

 

		September 27,				December 31,
		2015				2014
Amounts billed to the U.S. government in excess of approved rates		$	191			$	191
Warranty liability			335				334
Customer deposits			304				599
Capital lease obligations, current portion			3				3
Sales return reserve			431				412
Deferred revenue			381				327
Other			804				1,036
		$	2,449			$	2,902

The Company generally offers a one year warranty on its products. The Company records a liability based on estimates of the costs that may be incurred under its warranty obligations and charges to the cost of product revenue the amount of such costs at the time revenues are recognized. The warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The estimates of anticipated rates of warranty claims and costs per claim are primarily based on historical information and future forecasts.

Changes in the Company’s product warranty liability during the nine months ended September 27, 2015 and September 28, 2014 are as follows (in thousands):

 

		Nine Months ended
		September 27, 2015				September 28, 2014
Beginning balance		$	334			$	330
Warranties accrued			395				354
Warranties settled or reversed			(394	)			(371	)
Ending balance		$	335			$	313

 

NOTE 3—FAIR VALUE

 

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 27, 2015 and December 31, 2014 (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)
September 27, 2015:
Assets:
Cash equivalents:
Money market funds		$	12,363			$	12,363			$	-			$	-
		$	12,363			$	12,363			$	-			$	-
Current liabilities:
Liability warrants		$	14			$	-			$	-			$	14
December 31, 2014:
Assets:
Cash equivalents:
Money market funds		$	12,360			$	12,360			$	-			$	-
		$	12,360			$	12,360			$	-			$	-
Current liabilities:
Liability warrants		$	8			$	-			$	-			$	8

 

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

For the period ended September 27, 2015, the Company did not have any significant transfers between Level 1, Level 2 and Level 3.

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

Liability Warrants

The Company issued warrants to Bridge Bank in connection with a waiver of certain events of default that arose under a November 2009 loan and security agreement with Bridge Bank. Certain provisions in the warrant agreements provided for down-round protection if the Company raised equity capital at a per share price which was less than the per share price of the warrants. Such down-round protection also requires the Company to classify the value of the warrants as a liability on the issuance date and then record changes in the fair value through the consolidated statements of operations for each reporting period until the warrants are either exercised or cancelled. The fair value of the liability is recalculated and adjusted each quarter with the differences being charged to other income (expense), net on the consolidated statements of operations. The fair value of these warrants was determined using a Black-Scholes option-pricing model, which requires the use of significant unobservable market values.  As a result, these warrants are classified as Level 3 financial instruments. On July 7, 2010, the Company raised additional equity through an offering of 2,760,000 shares at $1.75 per share, thus triggering the down-round protection and adjustment of the number of warrants issued to Bridge Bank. On December 24, 2013, the Company raised additional equity through an offering of 9,573,750 shares at $1.42 per share, thus triggering the down-round protection and adjustment of the number of warrants issued to Bridge Bank. In August and September of 2015, the Company raised additional equity through an offering of 10,643,000 shares at $1.70 per share, again triggering the down-round protection and adjustment of the number of warrants issued to Bridge Bank.

 

The fair value of the warrants was estimated using the following assumptions:

 

		As of September 27, 2015				As of December 31, 2014
Stock price		$	1.82			$	1.20
Exercise price		$	2.31			$	2.51
Expected life		1.81 years				2.55 years
Risk-free interest rate			0.70%				1.10%
Volatility			64%				69%
Fair value per share		$	0.47			$	0.27

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

Intangible assets consist of the following (in thousands):

 

		September 27, 2015												December 31, 2014
		Gross				Accumulated Amortization				Net				Gross				Accumulated Amortization				Net
Customer relationships		$	3,277			$	(2,436	)		$	841			$	3,277			$	(2,119	)		$	1,158
Existing technology			3,783				(3,187	)			596				3,783				(2,881	)			902
Order backlog			732				(732	)			-				732				(732	)			-
Patents			457				(406	)			51				457				(402	)			55
Trade name			659				(423	)			236				659				(380	)			279
Total		$	8,908			$	(7,184	)		$	1,724			$	8,908			$	(6,514	)		$	2,394

 

For the three and nine months ended September 27, 2015 and September 28, 2014, amortization of intangible assets was as follows (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
Cost of revenue		$	103			$	103			$	310			$	309
Selling, general and administrative expense			120				120				360				361
		$	223			$	223			$	670			$	670

 

Estimated future amortization expense related to intangible assets as of September 27, 2015 is as follows (in thousands):

 

Years ending December 31,
2015 (remainder of year)		$	223
2016			869
2017			487
2018			63
2019			54
Thereafter			28
Total		$	1,724

  As of September 27, 2015, the Company had $10.4 million of goodwill in connection with the acquisitions of ChipX, Endwave and Tahoe RF.  During the third quarter of 2014, the Company completed its acquisition of Tahoe RF which resulted in $446,000 of goodwill. During 2014, the Company assumed approximately $446,000 of liabilities of Tahoe RF and added RF/analog RFIC technology to the Company’s product portfolio and approximately 10 employees, primarily High-Speed and High-Frequency SiGe RF engineers focused on high growth areas such as wireless – E-Band and V-Band and GPS technologies. The Company agreed to pay up to an additional $254,000 in Tahoe RF expenses of which $20,000 had been accrued in other current liabilities on the Company’s condensed consolidated balance sheet as of December 31, 2014. During the first quarter of 2015, the Company assumed an additional $89,000 related to tax and legal expenses which resulted in an increase of Tahoe RF’s goodwill to $535,000. As of September 27, 2015, the Company does not expect any additional changes to the purchase price. Since the final additional assumed grossed up liabilities were less than $254,000, the Company paid $128,000 in bonus payments in the first quarter of 2015 to former employees of Tahoe RF who were eligible as active employees of GigOptix on January 1, 2015, which was recorded as compensation expense. In addition, beginning in July 2016 and continuing annually through July 2020, any former Tahoe RF employee who remains, at that time, as an active employee of the Company will be entitled to a pre-allocated percentage of an aggregate retention bonus of up to approximately $70,000 based on the remaining 8 employees. These payments will be recorded as compensation expense when incurred and are being accrued as they are earned. As of September 27, 2015, approximately $75,000 and $61,000 is recorded in other current liabilities and other long-term liabilities, respectively.

·

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

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

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

 

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

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

The Company had no outstanding balance on its line of credit as of September 27, 2015.

On August 21, 2015, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Dr. Avi Katz, Andrea Betti-Berutto and John Mikulsky and Cowen and Company, LLC and Roth Capital Partners, LLC as representative of several underwriters to the Underwriting Agreement relating to (i) a public primary offering of an aggregate of 9,218,000 shares of the Company’s common stock, par value $0.001 per share at a public offering price of $1.70 per share (“the Offering Price”) and (ii) a public secondary offering by the individual Selling Stockholders of an aggregate of 282,000 shares of common stock at the Offering Price. The shares are accompanied by the associated rights to purchase shares of Series A Junior Preferred Stock, par value $0.001 per share, of the Company created by the Rights Agreement, dated December 16, 2011, between the Company and the American Stock Transfer & Trust Company, LLC, as Rights Agent, as amended by the Amended and Restated Rights Agreement, dated December 16, 2014. Under the terms of the Underwriting Agreement, the Company granted the underwriters a 30 day option to purchase up to an additional 1,425,000 shares of common stock to cover overallotments, if any.

On September 10, 2015, after exercise by the underwriters of the option to purchase an additional 1,425,000 shares of common stock to cover overallotments, the Company completed its public offering with a total of 10,643,000 newly issued shares of common stock at a price to the public of $1.70 per share. The number of shares sold in the offering included the underwriter’s full exercise on September 10, 2015 of their over-allotment option of 1,425,000 shares of common stock. The net proceeds to the Company from the offering were approximately $16.5 million which consisted of $16.9 million after underwriting discounts, commissions and expenses less an additional $420,000 for legal, accounting, registration and other transaction costs related to the public offering.

In December 2008, the Company’s stockholders approved an amendment to the Certificate of Incorporation to authorize 50,000,000 shares of common stock of par value $0.001. In November 2014, the Company’s stockholders approved an amendment to the Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 50,000,000 shares to 100,000,000 shares of par value $0.001. In addition, the Company is authorized to issue 1,000,000 shares of preferred stock of $0.001 par value of which 750,000 shares have been designated Series A Junior Preferred Stock with powers, preferences and rights as set forth in the amended and restated certificate of designation dated December 15, 2014; the remainder of the shares of preferred stock are undesignated, for which the Board of Directors is authorized to fix the designation, powers, preferences and rights. As of September 27, 2015 and December 31, 2014, there were no shares of preferred stock issued or outstanding.

On December 16, 2014, the Company entered into an Amended and Restated Rights Agreement to extend the expiration date of its stockholder rights plan that may have the effect of deterring, delaying, or preventing a change in control. The Amended and Restated Rights Agreement amends the Rights Agreement previously adopted by (i) extending the expiration date by three years to December 16, 2017, (ii) decreasing the exercise price per right issued to stockholders pursuant to the stockholder rights plan from $8.50 to $5.25, and (iii) making certain other technical and conforming changes. The Amended and Restated Rights Agreement (the “Rights Agreement”) was not adopted in response to any acquisition proposal.  Under the Rights Agreement, the Company issued a dividend of one preferred share purchase right for each share of common stock held by stockholders of record as of January 6, 2012, and the Company will issue one preferred stock purchase right to each share of common stock issued between January 6, 2012 and the earlier of either the rights’ exercisability or the expiration of the Rights Agreement. Each right entitles stockholders to purchase one one-thousandth of the Company’s Series A Junior Preferred Stock.

In general, the exercisability of the rights to purchase preferred stock will be triggered if any person or group, including persons knowingly acting in concert to affect the control of the Company, is or becomes a beneficial owner of 10% or more of the outstanding shares of the Company’s common stock after the Adoption Date. Stockholders or beneficial ownership groups who owned 10% or more of the outstanding shares of common stock of the Company on or before the Adoption Date will not trigger the preferred share purchase rights unless they acquire an additional 1% or more of the outstanding shares of the Company’s common stock. Each right entitles a holder with the right upon exercise to purchase one one-thousandth of a share of preferred stock at an exercise price that is currently set at $5.25 per right, subject to purchase price adjustments as set forth in the rights agreement. Each share of preferred stock has voting rights equal to one thousand shares of common stock. In the event that exercisability of the rights is triggered, each right held by an acquiring person or group would become void. As a result, upon triggering of exercisability of the rights, there would be significant dilution in the ownership interest of the acquiring person or group, making it difficult or unattractive for the acquiring person or group to pursue an acquisition of the Company. These rights expire in December of 2017, unless earlier redeemed or exchanged by the Company.

 

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 a merger with Lumera Corporation (“Lumera”) on December 9, 2008. On January 1 of each year, starting in 2009, the aggregate number of shares reserved for issuance under the 2008 Plan increase automatically by the lesser of (i) 5% of the number of shares of common stock outstanding as of the Company’s immediately preceding fiscal year, or (ii) a number of shares determined by the Board of Directors. The maximum number of shares of common stock to be granted is up to 21,000,000 shares. Forfeited options or awards generally become available for future awards. As of December 31, 2014, the stockholders had approved 16,624,634 shares for future issuance. On January 1, 2015, there was an automatic increase of 1,655,604 shares. As of September 27, 2015, 11,073,657 options to purchase common stock and restricted stock units (“RSUs”) were outstanding and 2,896,691 shares are authorized for future issuance under the 2008 equity incentive plan.

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

2007 Equity Incentive Plan

In August 2007, GigOptix LLC adopted the GigOptix LLC Equity Incentive Plan (the “2007 Plan”). The 2007 Plan provided for grants of options to purchase membership units, membership awards and restricted membership units to employees, officers and non-employee directors, and upon the completion of the merger with Lumera were converted into grants of up to 632,500 shares of stock. Vesting periods are determined by the Board of Directors and generally provide for stock options to vest over a four-year period and expire ten years from date of grant. Vesting for certain shares of restricted stock is contingent upon both service and performance criteria. The 2007 Plan was terminated upon the completion of merger with Lumera on December 9, 2008 and the remaining 864 stock in options not granted under the 2007 Plan were cancelled. No shares of the Company’s common stock remain available for issuance of new grants under the 2007 Plan other than for satisfying exercises of stock options granted under this plan prior to its termination. As of September 27, 2015, options to purchase a total of 375,763 shares of common stock and 4,125 warrants to purchase common stock were outstanding.

As of September 27, 2015, the Company had a total of 160,698 warrants to purchase common stock outstanding under all warrant arrangements. During the nine months ended September 27, 2015, no warrants were exercised and 500,000 warrants expired. 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.

For the nine months ended September 28, 2014, included in the $3.2 million of stock-based compensation expense is $9,000 in restructuring expense to modify the exercise period and accelerate the vesting of RSUs (see Note 7).

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

 

		Options				Weighted- Average Exercise Price				Weighted-Average Remaining Contractual Term, in Years
Outstanding, December 31, 2014			8,801,160			$	2.35				5.91
Granted			-
Exercised			(89,192	)		$	1.26
Forfeited/Expired			(536,878	)		$	3.08
Ending balance, September 27, 2015			8,175,090			$	2.31				5.11
Vested and exercisable and expected to vest, September 27, 2015			8,162,430			$	2.31				5.11
Vested and exercisable, September 27, 2015			7,746,519			$	2.34				5.01

 

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

 

		Number of Shares				Weighted- Average Grant Date Fair Value				Weighted- Average Remaining Vesting Term, Years				Aggregate Intrinsic Value
														(In thousands)
Outstanding, December 31, 2014			1,915,858			$	1.55				3.11			$	1,990
Granted			2,970,822				1.28
Released			(1,420,375	)			1.35
Forfeited/expired			(134,784	)			1.77
Outstanding, September 27, 2015			3,331,521			$	1.38				2.94			$	6,063

NOTE 7—RESTRUCTURING

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

During the third quarter of 2014, the Company undertook restructuring activities to reduce its expenses. The component of the restructuring charge included $36,000 of cash expenses for severance associated with employee terminations.

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

 

		Three Months Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
Beginning balance		$	-			$	-			$	-			$	30
Charges			-				36				-				343
Uses and adjustments			-				(10	)			-				(347	)
Ending balance		$	-			$	26			$	-			$	26

 

The Company did not have any restructuring activity during the three and nine months ended September 27, 2015.

NOTE 8— INVESTMENT IN UNCONSOLIDATED AFFILIATE

In February 2014, together with CPqD, the Company incepted a new joint venture, named BrP, of which the Company owns 49% and CPqD owns 51% of BrP. It is based in Campinas, Brazil. BrP will be a provider of advanced high-speed devices for optical communications and integrated transceiver components for information networks. It is engaged in research and development of SiPh advanced electro-optical products. The Company transferred into BrP its knowledge-base and intellectual property of TFPS^TM technology. The Company transferred its inventory related to the TFPS^TM platform and the complete production line equipment that previously resided at its Bothell, Washington, facility to CPqD, for use on the BrP joint venture. As of the transfer date, the Company’s net book value of the inventory and property and equipment was $245,000 and $211,000, respectively. During the second quarter of 2015, the Company made an additional capital contribution of $3,000 pursuant to BrP’s Amended Articles of Association which resulted in a $459,000 investment in BrP. During the third quarter of 2015 no additional investment was made.

For the three months ended September 27, 2015, the Company did not recognize any allocated portion of BrP’s results as the carrying value of its investment in BrP was written down to zero. For the nine months ended September 27, 2015, the Company’s allocated portion of BrP’s results was a loss of $3,000. For the three and nine months ended September 28, 2014, the Company’s allocated portion of BrP’s results was a loss of $125,000 and $456,000, respectively.

Since the Company’s share of the loss exceeded the Company’s carrying value of its investment in BrP, the Company’s investment in an unconsolidated affiliate was written down to zero as of December 31, 2014 and September 27, 2015.

The Company files tax returns in the U.S. federal, U.S. state and foreign tax jurisdictions. The Company’s major tax jurisdictions are the U.S., California, Switzerland, Germany, Israel and Japan. The Company’s fiscal years through September 27, 2015 remain subject to examination by the tax authorities for U.S. federal, U.S. state and foreign tax purposes.

NOTE 10—NET INCOME (LOSS) PER SHARE

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

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

 

		Three Months Ended																Nine Months Ended
		September 27, 2015								September 28, 2014								September 27, 2015								September 28, 2014
North America		$	3,840				37	%		$	2,944				35	%		$	10,102				35	%		$	7,046				29	%
Asia			3,902				38	%			2,189				26	%			9,478				32	%			6,803				29	%
Europe			2,531				24	%			3,307				39	%			9,186				31	%			9,863				41	%
Other			146				1	%			44				0	%			553				2	%			195				1	%
		$	10,419				100	%		$	8,484				100	%		$	29,319				100	%		$	23,907				100	%

 

For the three months ended September 27, 2015, four customers accounted for greater than 10% of total revenue and combined they accounted for 60% of total revenue, of which the largest accounted for 20% of the Company’s total revenue. For the three months ended September 28, 2014, one customer accounted for 32% of total revenue

For the nine months ended September 27, 2015, three customers accounted for 41% of total revenue, of which the largest accounted for 17% of the Company’s total revenue. For the nine months ended September 28, 2014, one customer accounted for 28% of total revenue.

During the three months ended September 27, 2015, the United States, Hong Kong, Italy, and Taiwan accounted for 33%, 22%, 20%, and 12% of total revenue, respectively. During the three months ended September 28, 2014, Italy and the United States accounted for 33% and 32% of total revenue, respectively. No other countries accounted for more than 10% of the Company’s total revenue during the three months ended September 27, 2015 and September 28, 2014.

During the nine months ended September 27, 2015, the United States, Italy, and Hong Kong accounted for 30%, 26%, and 16% of total revenue, respectively. During the nine months ended September 28, 2014, Italy and the United States accounted for 35% and 27% of total revenue, respectively. No other countries accounted for more than 10% of the Company’s total revenue during the nine months ended September 27, 2015 and September 28, 2014.

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

 

		Three Months Ended																Nine Months Ended
		September 27, 2015								September 28, 2014								September 27, 2015								September 28, 2014
HSC		$	7,624				73	%		$	5,393				64	%		$	20,411				70	%		$	16,284				68	%
Industrial			2,795				27	%			3,091				36	%			8,908				30	%			7,623				32	%
Total revenue		$	10,419				100	%		$	8,484				100	%		$	29,319				100	%		$	23,907				100	%

 

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

 

		September 27, 2015								December 31, 2014
United States		$	2,319				95	%		$	1,687				88	%
Switzerland			127				5	%			229				12	%
		$	2,446				100	%		$	1,916				100	%

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

 

		Capital Leases				Operating Leases
Years ending December 31,		Minimum lease payments				Minimum lease payments
2015 (remainder of year)		$	1			$	135
2016			3				546
2017			3				159
2018			-				73
2019			-				73
Thereafter			-				61
Total minimum lease payments			7			$	1,047
Less: Amount representing interest			-
Total capital lease obligations			7
Less: current portion			(3	)
Long-term portion of capital lease obligations		$	4

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

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard clarifying the principles for recognizing revenue by amending the FASB Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued an amendment to defer the effective date of this accounting standard for all entities by one year, to annual reporting periods beginning after December 15, 2017 and early adoption is not permitted. The Company is currently evaluating the effect of the standard on its ongoing financial reporting.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”. This update eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers would now recognize measurement-period adjustments during the period in which they determine the amount of the adjustment. This update is effective for annual and interim reporting periods beginning after December 15, 2015, including interim periods within those fiscal years, and should be applied prospectively to adjustments for provisional amounts that occur after the effective date with early adoption permitted for financial statements that have not been issued. The Company is currently evaluating the effect of the standard on its ongoing financial reporting.

On August 21, 2015, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Dr. Avi Katz, Andrea Betti-Berutto and John Mikulsky and Cowen and Company, LLC and Roth Capital Partners, LLC as representative of several underwriters to the Underwriting Agreement relating to (i) a public primary offering of an aggregate of 9,218,000 shares of the Company’s common stock, par value $0.001 per share at a public offering price of $1.70 per share and (ii) a public secondary offering by the individual Selling Stockholders of an aggregate of 282,000 shares of common stock at the Offering Price. The shares are accompanied by the associated rights to purchase shares of Series A Junior Preferred Stock, par value $0.001 per share, of the Company created by the Rights Agreement, dated December 16, 2011, between the Company and the American Stock Transfer & Trust Company, LLC, as Rights Agent, as amended by the Amended and Restated Rights Agreement, dated December 16, 2014. Under the terms of the Underwriting Agreement, the Company granted the underwriters a 30 day option to purchase up to an additional 1,425,000 shares of common stock to cover overallotments, if any.

On September 10, 2015, after the underwriters exercised the option to purchase an additional 1,425,000 shares of common stock to cover overallotments, the Company completed its public offering with a total of 10,643,000 newly issued shares of common stock at a price to the public of $1.70 per share. The number of shares sold in the offering included the underwriter’s full exercise on September 10, 2015 of their over-allotment option of 1,425,000 shares of common stock. Dr. Avi Katz is the Company’s Chairman of the Board of Directors and Chief Executive Officer, Andrea Betti-Berutto is the Company’s Senior Vice President and Chief Technical Officer and John Mikulsky is a member of the Company’s Board of Directors.

ITEM 2.

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

Overview

We are a lead fabless semiconductor designer, developer, and global supplier of broad range of analog, digital, and mixed signal components to enable high speed information streaming over the telecom networks, datacom infrastructure, and consumer electronics links. Our ability to innovate and create differentiated products is based on deployment of various semiconductor technologies that span from III-V compounds to SiGe-BiCMOS and CMOS based device designs. GigOptix’ product portfolio provides high speed solutions in markets such as fiber-optics telecom, wireless backhaul, datacom and consumer electronics, mil-aero, instrumentation, and medical equipment, for applications such as linecards and transponders, active optical cables and pluggables, point-to-point wireless radios, military electronic warfare systems, avionics electronics, GPS systems, and diverse medical equipment, such as ultrasound imaging, X-Ray, MRI, CT Scan, and Defibrillators.

The business comprises two product lines: our High-Speed Communications (HSC) product line and our Industrial product line. Its products are highly customized and typically developed in partnership with key ‘Lighthouse” customers, generating engineering project revenues through the development stage and larger future product revenues through these customers and general market availability.

The HSC product line offers a broad portfolio of high performance semiconductor devices and multi-chip-modules (“MCMs”) aimed predominantly at the telecom, datacom, consumer-electronics, and wireless markets, and includes, among others, (i) 100 to 400 gigabit per second (“Gbps”) laser and optical-modulator drivers, and trans-impedance amplifier (“TIA”) devices; (ii) 10-100 Gbps Clock-data-recovery (“CDR”) devices; (iii) mixed signal radio frequency integrated circuits (“RFIC”) at 50 GHz and above; (iv) power amplifiers and transceivers, as well as monolithic microwave integrated circuits (“MMIC”), for microwave and wireless applications at frequencies higher than 50 GHz; (v) integrated systems in a package (“SIP”) solutions for both fiber-optic and wireless communication systems; and (vi) radio frequency (“RF”) chips for various consumer applications, such as global navigation satellite systems (“GNSS”).

 

The Industrial product line offers a wide range of digital and mixed-signal application specific integrated circuit (ASIC) solutions for various industrial applications used in the military, avionics, automotive, security and surveillance, medical and communications markets.

 

Since inception in July 2007, we have expanded our customer base by acquiring and integrating seven businesses with complementary products and customers, and spun out one business to establish a joint-venture. In so doing, we have expanded our device product line in multiple areas, growing our communication device offering from a few leading 10 Gbps ultra-long haul optical drivers, to a line of products that includes: drivers and TIAs for 2 to 400 Gbps optical applications; power amplifiers; transceiver devices for 50 to 100 GHz; and custom ASICs spanning 0.6um to 40nm technology nodes. Our worldwide direct sales force is supported by a significant number of channel representatives and distributors that sell our products throughout North America, South America, Europe, Japan and Asia.

During the third quarter of 2014, we acquired substantially all of the assets of Tahoe RF Semiconductor, Inc. (Tahoe RF) by assuming at that time approximately $446,000 of liabilities of Tahoe RF. During the first quarter of 2015, we assumed an additional $89,000 related to tax and legal expenses which resulted in an increase of Tahoe RF’s goodwill to $535,000. Through the acquisition, we have added 8 employees to our team, who are primarily High-Speed and High-Frequency SiGe RF engineers.

On September 22, 2015, we announced signing a definitive agreement to acquire Terasquare, Co. Ltd., a Seoul, Korea-based, fabless semiconductor company and provider of low power, CMOS high speed communication interface semiconductors for 100Gbps Ethernet, Fiber Channel, and EDR Infiniband applications. The acquisition closed subsequent to the end of the quarter on September 30, 2015, and the acquired entity has been renamed GigOptix-Terasquare-Korea (GTK) Co., Ltd.

Historically, we have incurred net losses. However for the nine months ended September 27, 2015, we had a profit of $916,000. For the years ended December 31, 2014 and 2013, we incurred net losses of $5.8 million and $1.9 million, respectively. For the nine months ended September 27, 2015 and the years ended December 31, 2014 and 2013, we had cash inflows from operations of $2.2 million, $2,000 and $3.3 million, respectively. As of September 27, 2015, we had an accumulated deficit of $101.3 million.

Total revenue for the three months ended September 27, 2015 was $10.4 million, an increase of $1.9 million or 23%, compared with $8.5 million for the three months ended September 28, 2014. For the three months ended September 27, 2015, 97% of our revenue was contributed by product revenue and 3% of our revenue was contributed by development fees and other revenue. For the three months ended September 28, 2014, 92% of our revenue was contributed by product revenue and 8% of our revenue was contributed by development fees and other revenue.

Product revenue for the three months ended September 27, 2015 was $10.1 million, an increase of $2.3 million or 29%, compared with $7.8 million for the three months ended September 28, 2014. The increase in product revenue during the three months ended September 27, 2015 was due to the increased demand for our HSC product line.

Development fees and other revenue for the three months ended September 27, 2015 was $345,000, a decrease of $327,000 or 49%, compared with $672,000 for the three months ended September 28, 2014. We experienced a decrease in development fees and other revenue primarily due to the increase in the deployment into production of products that were developed over the last year using those development fees.

Total revenue for the nine months ended September 27, 2015 was $29.3 million, an increase of $5.4 million or 23%, compared with $23.9 million for the nine months ended September 28, 2014. For the nine months ended September 27, 2015, 96% of our revenue was contributed by product revenue and 4% of our revenue was contributed by development fees and other revenue. For the nine months ended September 28, 2014, 91% of our revenue was contributed by product revenue and 9% of our revenue was contributed by development fees and other revenue.

Product revenue for the nine months ended September 27, 2015 was $28.0 million, an increase of $6.3 million or 29%, compared with $21.7 million for the nine months ended September 28, 2014. The increase in product revenue during the nine months ended September 27, 2015 was due to increased shipments of both our HSC and Industrial product lines.

Development fees and other revenue for the nine months ended September 27, 2015 was $1.3 million, a decrease of $936,000 or 42%, compared with $2.2 million for the nine months ended September 28, 2014. We experienced a decrease in development fees and other revenue primarily due to the increase in the deployment into production of products that were developed over the last year using those development fees.

 

 

		Three Months Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
Total cost of revenue		$	3,762			$	3,482			$	11,040			$	10,095
Gross profit		$	6,657			$	5,002			$	18,279			$	13,812
Gross margin			64	%			59	%			62	%			58	%
Increase, period over period			1,655								4,467
Percentage increase, period over period			33	%							32	%

 

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

Gross profit for the three months ended September 27, 2015 was $6.7 million, or a gross margin of 64%, compared to a gross profit of $5.0 million, or a gross margin of 59%, for the three months ended September 28, 2014. The increase in gross margin is primarily due to change in product mix and improved production efficiencies.

Gross profit for the nine months ended September 27, 2015 was $18.3 million, or a gross margin of 62%, compared to a gross profit of $13.8 million, or a gross margin of 58%, for the nine months ended September 28, 2014. The increase in gross margin is primarily due to change in product mix and improved production efficiencies.

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

Development project revenue and other non-product revenue for the three months ended September 27, 2015 was $345,000 compared with $672,000 for the three months ended September 28, 2014. Excluding the revenue and gross profit associated with development programs and other non-product revenue, gross margin was 63% and 55% for the three months ended September 27, 2015 and September 28, 2014, respectively.

Development project revenue and other non-product revenue for the nine months ended September 27, 2015 was $1.3 million compared with $2.2 million for the nine months ended September 28, 2014. Excluding the revenue and gross profit associated with development programs and other non-product revenue, gross margin was 61% and 53% for the nine months ended September 27, 2015 and September 28, 2014, respectively.

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

 

		Three Months Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
Research and development expense		$	3,100			$	3,257			$	9,572			$	10,357
Percentage of revenue			30	%			38	%			33	%			43	%
Decrease, period over period		$	(157	)						$	(785	)
Percentage decrease, period over period			-5	%							-8	%

 

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

Research and development expense for the three months ended September 27, 2015 was $3.1 million compared to $3.3 million for the three months ended September 28, 2014, a decrease of $157,000 or 5%. Research and development costs decreased as compared to the third quarter of 2014 primarily due to a $161,000 decrease in project-related expenses.

 

Research and development expense for the nine months ended September 27, 2015 was $9.6 million compared to $10.4 million for the nine months ended September 28, 2014, a decrease of $785,000 or 8%. Research and development costs decreased as compared to 2014 primarily due to a $1.2 million decrease in project related expenses which was partially offset by a $616,000 increase in personnel related expenses.

Selling, General and Administrative Expense

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

 

		Three Months Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
Selling, general and administrative expense		$	2,468			$	2,388			$	7,680			$	7,353
Percentage of revenue			24	%			28	%			26	%			31	%
Increase, period over period		$	80							$	327
Percentage increase, period over period			3	%							4	%

 

Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, accounting, finance, sales, marketing and administration personnel, professional fees, allocated facilities costs, promotional activities and expenses related to stock-based compensation.

We expect selling, general and administrative expense to stay flat in absolute dollars from the third quarter of 2015 to the fourth quarter of 2015.

During the three months and nine months ended September 27, 2015, we recorded no restructuring expenses.

During the three months ended September 28, 2014, we recorded $36,000 in restructuring expenses to reduce headcount in our engineering team. The component of the restructuring charge included $36,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations.

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

 

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

 

		Three Months Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
Interest expense, net		$	(6	)		$	(9	)		$	(12	)		$	(36	)
Other income (expense), net			(5	)			35				(23	)			45
Total		$	(11	)		$	26			$	(35	)		$	9

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

Interest expense, net for the three months ended September 27, 2015 was $6,000 compared to $9,000 for the three months ended September 28, 2014. Interest expense, net decreased as compared to the third quarter of 2014 primarily due to a $5,000 decrease in interest on capital leases.

Interest expense, net for the nine months ended September 27, 2015 was $12,000 compared to $36,000 for the nine months ended September 28, 2014. Interest expense, net decreased as compared to the third quarter of 2014, primarily due to a $25,000 decrease in interest on capital leases.

Loss on Equity Investment

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

For the nine months ended September 27, 2015, our allocated portion of BrP’s operating results was a loss of $3,000. For the three and nine months ended September 28, 2014, our allocated portion of BrP’s operating results was a loss of $125,000 and $456,000 respectively.

Liquidity and Capital Resources

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

 

		September 27, 2015				December 31,  2014
Cash and cash equivalents		$	35,021			$	18,438
		Nine Months Ended
		September 27,  2015				September 28, 2014
Net cash provided by (used in) operating activities		$	2,229			$	(812	)
Net cash used in investing activities		$	(1,398	)		$	(786	)
Net cash provided by (used in) financing activities		$	15,736			$	(607	)

  

On August 21, 2015, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Dr. Avi Katz, Andrea Betti-Berutto and John Mikulsky and Cowen and Company, LLC and Roth Capital Partners, LLC as representative of several underwriters to the Underwriting Agreement relating to (i) a public primary offering of an aggregate of 9,218,000 shares of our common stock, par value $0.001 per share at a public offering price of $1.70 per share and (ii) a public secondary offering by the individual Selling Stockholders of an aggregate of 282,000 shares of common stock at the Offering Price. The shares are accompanied by the associated rights to purchase shares of Series A Junior Preferred Stock, par value $0.001 per share, of the Company created by the Rights Agreement, dated December 16, 2011, between us and the American Stock Transfer & Trust Company, LLC, as Rights Agent, as amended by the Amended and Restated Rights Agreement, dated December 16, 2014. Under the terms of the Underwriting Agreement, we granted the underwriters a 30 day option to purchase up to an additional 1,425,000 shares of common stock to cover overallotments, if any.

On September 10, 2015, after exercise by the underwriters of the option to purchase an additional 1,425,000 shares of common stock to cover overallotments, we completed our public offering with a total of 10,643,000 newly issued shares of common stock at a price to the public of $1.70 per share. The number of shares sold in the offering included the underwriter’s full exercise on September 10, 2015 of their over-allotment option of 1,425,000 shares of common stock. The net proceeds to us from the offering were approximately $16.5 million which consisted of $16.9 million after underwriting discounts, commissions and expenses less an additional $420,000 for legal, accounting, registration and other transaction costs related to the public offering.

Operating activities provided cash of $2.2 million in the nine months ended September 27, 2015. Our net income, adjusted for depreciation, stock-based compensation, equity in loss of unconsolidated affiliate and other non-cash items, was $6.7 million. The remaining use of $4.5 million of cash was primarily due to an increase in inventories of $1.7 million, an increase of accounts receivable of $1.6 million, an increase in prepaid and other current assets of $1.1 million, a decrease in accounts payable of $580,000 and a decrease in other current liabilities of $582,000, which were partially offset by an increase in accrued compensation of $1.0 million.

Operating activities used cash of $812,000 in the nine months ended September 28, 2014. Our net loss, adjusted for depreciation, stock-based compensation, loss on equity investment, non-cash restructuring expense and other non-cash items, was an income of $1.9 million. The remaining use of $2.7 million of cash was primarily due to an increase in accounts receivable, net of $2.7 million, an increase in prepaid and other assets of $702,000, a decrease in accrued compensation of $118,000 and a decrease in other current liabilities of $419,000, which were partially offset by a decrease in inventories of $351,000 and an increase in accounts payable of $916,000.

Financing Activities

Net cash provided by financing activities for the nine months ended September 27, 2015 was $15.7 million and consisted primarily of $16.5 million of proceeds from our public offering, net of costs, and $113,000 proceeds from exercise of stock options, which was partially offset by $857,000 of taxes paid related to net share settlement of restricted stock units.

Net cash used in financing activities for the nine months ended September 28, 2014 was $607,000 and consisted primarily of $379,000 of taxes paid related to net share settlement of equity awards, $283,000 for capital lease payments and a $176,000 payment of debt assumed in our acquisition of Tahoe RF, partially offset by $231,000 proceeds from issuance of stock.

Material Commitments

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

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

Off-Balance Sheet Arrangements

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

WHERE YOU CAN FIND MORE INFORMATION

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

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

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

 

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

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

ITEM 3.

QUANTITATIVE AND QUALTATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Our management 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 September 27, 2015 and have concluded that these controls and procedures were effective. We believe that a control system, no matter how well designed and operated, can only provide reasonable assurance and cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our CEO and CFO have concluded that our consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States

Changes in Internal Control over Financial Reporting

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

PART II     OTHER INFORMATION

We have revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede any similar the risks previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2014 and otherwise supplement those risks. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K, as well as those contained in Part 1, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.

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

Historically, we have incurred net losses. While we had net income for the three and nine months ended September 27, 2015 of $1.0 million and $916,000 respectively, for the years ended December 31, 2014 and 2013, we incurred net losses of $5.8 million and $1.9 million, respectively. For the nine months ended September 27, 2015 and for the years ended December 31, 2014 and 2013, we had cash inflows from operations of $2.2 million, $2,000 and $3.3 million, respectively. As of September 27, 2015, we had an accumulated deficit of $101.3 million. We expect development, sales and other operating expenses to increase in the future as we expand our business. If our revenue does not grow to offset these current expenses, we may not be profitable. In fact, in future quarters we may not have any revenue growth and our revenues could decline. Furthermore, if our operating expenses exceed expectations, financial performance will be adversely affected and we may continue to incur significant losses in the future.

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

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

For the nine months ended September 27, 2015, three customers accounted for 41% of total revenue. For the nine months ended September 28, 2014, one customer accounted for 28% of total revenue. No other customers accounted for more than 10% of total revenue during the nine months ended September 27, 2015 and September 28, 2014.

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

Our operating cash flows are dependent on the continued collection of receivables. Although our accounts receivable as of September 27, 2015 increased by $1.6 million, or 20%, compared to the balance as of December 31, 2014 we have not had significant uncollectable accounts. However, if a customer is unable to or refuses to pay, we could suffer additional accounting losses as well as a reduction in liquidity. A significant increase in uncollectible accounts would have an adverse impact on our business, liquidity and financial results.

Our business is subject to foreign currency risk.

Sales to customers located outside the United States comprised 70% and 73% of our revenue for the nine months ended September 27, 2015 and September 28, 2014, respectively. In addition, we have four subsidiaries overseas (Japan, Israel, Switzerland and Germany) that record their operating expenses in a foreign currency.  Since sales of our products have been denominated to date primarily in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in GigOptix’ results of operations. We currently do not have hedging or other programs in place to protect against adverse changes in the value of the U.S. dollar as compared to other currencies to minimize potential adverse effects.

 

SIGNATURES

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

 

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