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EX-32.2 - EXHIBIT 32.2 - GigPeak, Inc.ex32_2.htm
EX-32.1 - EXHIBIT 32.1 - GigPeak, Inc.ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - GigPeak, Inc.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - GigPeak, Inc.ex31_1.htm
EX-10.1 - EXHIBIT 10.1 - GigPeak, Inc.ex10_1.htm

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

FORM 10-Q

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

For the quarterly period ended September 25, 2016

or

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

For the transition period from   to

Commission file number: 001-35520

GIGPEAK, 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

(Address of principal executive offices, including zip code)

(408) 522-3100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (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      No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
Accelerated filer
       
Non-accelerated filer
  (Do not check if a smaller reporting company)
Smaller reporting Company

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

The number of shares of Common Stock outstanding as of October 28, 2016, the most recent practicable date prior to the filing of this Quarterly Report on Form 10-Q, was 67,737,381 shares.
 


Table of Contents

PAGE
NO
PART I FINANCIAL INFORMATION
 
     
ITEM 1
Financial Statements (unaudited)
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
ITEM 2
25
     
ITEM 3
34
     
ITEM 4
34
   
PART II OTHER INFORMATION
 
     
ITEM 1
34
     
ITEM 1A
35
     
ITEM 6
41
 
PART I
FINANCIAL INFORMATION
 
GIGPEAK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
 
September 25,
2016
   
December 31,
2015
 
   
(Unaudited)
     
(1)
 
ASSETS
             
Current assets:
             
Cash and cash equivalents
 
$
38,363
   
$
30,245
 
Accounts receivable, net
   
14,205
     
10,596
 
Inventories
   
11,199
     
6,880
 
Prepaid and other current assets
   
1,003
     
580
 
Total current assets
   
64,770
     
48,301
 
Property and equipment, net
   
3,730
     
3,133
 
Intangible assets, net
   
27,705
     
4,530
 
Goodwill
   
45,853
     
12,565
 
Restricted cash
   
197
     
330
 
Other assets
   
1,464
     
251
 
Total assets
 
$
143,719
   
$
69,110
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
8,675
   
$
3,659
 
Accrued compensation
   
3,457
     
1,782
 
Notes payable, current
   
2,905
     
 
Other current liabilities
   
3,083
     
2,219
 
Total current liabilities
   
18,120
     
7,660
 
Pension liabilities
   
357
     
349
 
Notes payable, net of current portion
   
10,555
     
 
Other long-term liabilities
   
4,018
     
912
 
Total liabilities
   
33,050
     
8,921
 
Commitments and contingencies (Note 8)
               
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding as of September 25, 2016 and December 31, 2015, respectively
   
     
 
Common stock, $0.001 par value; 100,000,000 shares authorized; 68,439,135 and 45,221,397 shares issued and outstanding as of September 25, 2016 and December 31, 2015, respectively
   
68
     
45
 
Additional paid-in capital
   
212,735
     
163,036
 
Treasury stock, at cost; 701,754 shares as of September 25, 2016 and December 31, 2015
   
(2,209
)
   
(2,209
)
Accumulated other comprehensive income
   
386
     
332
 
Accumulated deficit
   
(100,311
)
   
(101,015
)
Total stockholders’ equity
   
110,669
     
60,189
 
Total liabilities and stockholders’ equity
 
$
143,719
   
$
69,110
 
 
See accompanying notes to condensed consolidated financial statements.
 
(1)
The condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited consolidated financial statements as of that date.
 
GIGPEAK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
Revenue
 
$
15,796
   
$
10,419
   
$
42,526
   
$
29,319
 
Cost of revenue
   
5,148
     
3,762
     
14,024
     
11,040
 
Gross profit
   
10,648
     
6,657
     
28,502
     
18,279
 
Operating expenses:
                               
Research and development
   
5,395
     
3,100
     
14,610
     
9,572
 
Selling, general and administrative
   
4,360
     
2,468
     
12,528
     
7,680
 
Total operating expenses
   
9,755
     
5,568
     
27,138
     
17,252
 
Income from operations
   
893
     
1,089
     
1,364
     
1,027
 
Interest expense, net
   
(236
)
   
(6
)
   
(492
)
   
(12
)
Other income (expense), net
   
14
     
(5
)
   
(71
)
   
(23
)
Income before provision for income taxes
   
671
     
1,078
     
801
     
992
 
Provision for income taxes
   
     
48
     
97
     
73
 
Income from consolidated companies
   
671
     
1,030
     
704
     
919
 
Loss on equity investment
   
     
     
     
3
 
Net income
 
$
671
   
$
1,030
   
$
704
   
$
916
 
Net income per share—basic
 
$
0.01
   
$
0.03
   
$
0.01
   
$
0.03
 
Net income per share—diluted
 
$
0.01
   
$
0.03
   
$
0.01
   
$
0.03
 
Weighted average number of shares used in basic net income per share calculation
   
67,623
     
36,769
     
55,734
     
34,060
 
Weighted average number of shares used in diluted net income per share calculation
   
69,399
     
38,497
     
58,427
     
35,109
 

See accompanying notes to condensed consolidated financial statements.
 
GIGPEAK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
Net income
 
$
671
   
$
1,030
   
$
704
   
$
916
 
Other comprehensive income, net of tax
                               
Foreign currency translation adjustment
   
27
     
13
     
54
     
16
 
Other comprehensive income, net of tax
   
27
     
13
     
54
     
16
 
Comprehensive income
 
$
698
   
$
1,043
   
$
758
   
$
932
 

See accompanying notes to condensed consolidated financial statements.
 
GIGPEAK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Nine Months Ended
 
 
September 25,
2016
   
September 27,
2015
 
Cash flows from operating activities:
           
Net income
 
$
704
   
$
916
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
4,513
     
2,644
 
Stock-based compensation
   
3,454
     
3,132
 
Change in fair value of warrants
   
(28
)
   
6
 
Amortization of debt discount
   
53
     
 
Loss on equity investment
   
     
3
 
Provision for doubtful accounts
   
36
     
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(2,523
)
   
(1,595
)
Inventories
   
(2,847
)
   
(1,681
)
Prepaid and other current assets
   
(604
)
   
(1,052
)
Other assets
   
10
     
(19
)
Accounts payable
   
3,652
     
(580
)
Accrued compensation
   
474
     
1,001
 
Other current liabilities
   
(2,510
)
   
(582
)
Other long-term liabilities
   
(150
)
   
36
 
Net cash provided by operating activities
   
4,234
     
2,229
 
Cash flows from investing activities:
               
Acquisition, net of cash acquired
   
(35,443
)
   
 
Purchase of long-term investment
   
(1,200
)
   
 
Purchases of property and equipment
   
(1,655
)
   
(1,398
)
Change in restricted cash
   
144
     
 
Net cash used in investing activities
   
(38,154
)
   
(1,398
)
Cash flows from financing activities:
               
Proceeds from public offering of stock, net of issuance costs
   
24,531
     
16,483
 
Proceeds from revolving loan
   
7,100
     
 
Proceeds from term loan, net of issuance costs
   
14,800
     
 
Proceed from private offering of stock, net of issuance costs
   
4,618
     
 
Proceeds from exercise of stock options
   
677
     
113
 
Taxes paid related to net share settlement of equity awards
   
(1,362
)
   
(857
)
Repayments on revolving loan
   
(7,100
)
       
Repayments on term loan
   
(1,250
)
   
 
Repayments on capital leases
   
(13
)
   
(3
)
Net cash provided by financing activities
   
42,001
     
15,736
 
Effect of exchange rates on cash and cash equivalents
   
37
     
16
 
Net increase in cash and cash equivalents
   
8,118
     
16,583
 
Cash and cash equivalents at beginning of period
   
30,245
     
18,438
 
Cash and cash equivalents at end of period
 
$
38,363
   
$
35,021
 
Supplemental disclosure of cash flow information:
               
Interest paid
 
$
516
   
$
15
 
Taxes paid
 
$
116
   
$
 
Supplemental disclosure of non-cash investing and financing information:
               
Issuance of common stock in conjunction with acquisition
 
$
17,896
   
$
 
Purchase of property and equipment included in accounts payable
 
$
475
   
$
330
 
Offering costs included in accounts payable and other current liabilities
 
$
234
   
$
32
 
Incremental fair value of warrants modified in connection with SVB credit facilities
 
$
143
   
$
 
 
See accompanying notes to condensed consolidated financial statements.
 
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION
 
Organization
 
GigPeak Inc. (“GigPeak” or the “Company”), formerly known as GigOptix, Inc. until the second quarter of 2016, is a leading innovator of semiconductor integrated circuits (“ICs”) and software solutions for high-speed connectivity and high-quality video compression. The Company’s focus is to develop and deliver products that enable lower power consumption and faster data connectivity, more efficient use of network infrastructure and broader connectivity to the Cloud, reducing the total cost of ownership for the network’s operators. GigPeak addresses both the speed of data transmission and the amount of bandwidth the data consumes within the network, and its products also help to improve the efficiency of various Cloud-connected enterprise applications. The GigPeak product portfolio provides flexibility to support on-going changes in the connectivity that customers and markets require by deploying a wider offering of solutions from various kinds of semiconductor materials, ICs and Multi-Chip-Modules (“MCMs”), through cost-effective application-specific-integrated-circuits (“ASICs”) and system-on-chips (“SoCs”), and into full software programmable open-platform offerings.
 
Since inception in 2007, the Company has expanded its customer base through its sales and marketing activities, and by acquiring and integrating eight (8) companies with complementary and synergistic products and customers. GigPeak established a worldwide direct sales force which is supported by a number of channel representatives and distributors that sell its products throughout North America, Europe and Asia.
 
Basis of Presentation
 
The Company’s fiscal year ends on December 31. For quarterly reporting, the Company deploys a modified five-week, four-week, four-week, reporting period. The third quarter of 2016 ended on Sunday, September 25, 2016. 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 25, 2016 and for the three and nine months ended September 25, 2016 and September 27, 2015, 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. 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 25, 2016, and the results of operations and cash flows for the nine months ended September 25, 2016 and September 27, 2015. The condensed consolidated results of operations for the three and nine months ended September 25, 2016 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2016. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Form 10-K filed with the SEC on March 14, 2016 (the “2015 Form 10-K”).
 
Use of Estimates
 
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.
 
Revenue Recognition
 
The Company’s revenue is mainly derived from the following sources: (i) product revenue, which includes hardware, software and perpetual software license revenue; (ii) services revenue, which include post contract support (“PCS”), professional services, and training; (iii) royalty revenue based on the number of ICs the customers sold during a particular period by the agreed-upon royalty rate; and (iv) engineering project revenues associated with product development.
 
Revenue from sales of optical communication drivers and receivers and multi-chip modules, broadcasting SoCs for video broadcasting, distribution and contribution applications, networking ICs and MCMs for high-speed information streaming, and other hardware and software products is recognized when persuasive evidence of a sales arrangement exists, transfer of title occurs, the sales price is fixed or determinable and collection of the resulting receivable is reasonably assured. The Company generally provides a standard product warranty on its products and warranty reserves are made at the time revenue is recorded. See Note 8—Commitments and Contingencies for further detail related to the warranty reserve.
 
Customer purchase orders are generally used to determine the existence of an arrangement. Transfer of title and risk of ownership occur based on defined terms in customer purchase orders, and generally pass to the customer upon shipment, at which point goods are delivered to a carrier. There are no formal customer acceptance terms or further obligations, outside of a standard product warranty. The Company assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction. Collectibility is assessed based primarily on the credit worthiness of the customer as determined through ongoing credit evaluations of the customer’s financial condition as well as consideration of the customer’s payment history.
 
The Company sells some products to distributors at the price listed in its price book for that distributor. Certain of the Company’s distributor agreements provide for semi-annual stock rotation privileges of 5% to 10% of net sales for the previous six-month period. At the time of sale, the Company records a sales reserve against revenues for stock rotations approved by management. Each month the Company adjusts the sales reserve for the estimated stock rotation privilege anticipated to be utilized by the distributors. When the distributors pay the Company’s invoices, they may claim stock rotations when appropriate. Once claimed, the Company processes the requests against the prior authorizations and reduces the reserve previously established for that customer. As of September 25, 2016 and December 31, 2015, the reserve for stock rotations was $240,000 and $490,000, respectively, and is recorded in other current liabilities in the consolidated balance sheets.
 
The Company records transaction-based taxes including, but not limited to, sales, use, value added, and excise taxes, on a net basis in its consolidated statements of operations.
 
Service revenue includes customer support services, primarily software maintenance contract services and professional services. Revenue from service contracts is recognized ratably over the contract term, generally ranging from one to three years. Professional services, such as training services, are offered under time and material or fixed-fee contracts. Professional services revenue is recognized as services are performed.
 
The Company recognizes royalty revenue based on reports received from customers during the quarter, assuming that all other revenue recognition criteria are met. The customers generally report shipment information typically within 45 days following the end of their respective quarters. If there is a reliable basis on which the Company can estimate its royalty revenues prior to obtaining the customers’ reports, the Company will recognize royalty revenues in the quarter in which they are earned. If there is not a reliable basis for estimating royalties, the Company will recognize revenue in the following quarter when the shipment report is received.
 
The Company also enters into product development arrangements with certain customers. In general, non-recurring engineering projects require complex technology development and achievement of the development milestones is dependent on the Company’s performance. The milestone payment is generally commensurate with the Company’s effort or the value of the deliverable and is nonrefundable. Although development milestones are typically accepted by the customers, the Company does not have certainty about its ability to achieve these milestones. As such, revenue from product development arrangements are recorded when development milestones are achieved. These revenues are typically recorded at 100% gross margin because the costs associated with non-recurring engineering projects are recorded in research and development as expenses are incurred. The development efforts related to non-recurring engineering projects generally benefit the Company’s overall product development programs beyond the specific project requested by its customers.
 
Deferred Revenue
 
Deferred revenue primarily represents PCS contracts billed in advance but yet to be recognized. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the balance sheet date. As of September 25, 2016, the current portion of deferred revenue of $1.0 million is included in other current liabilities and the noncurrent portion of deferred revenue of $2.5 million is included in other long-term liabilities in the condensed consolidated balance sheets.
 
Business Combination
 
The Company applied the purchase method of accounting to its recent acquisition of Magnum Semiconductor, Inc. (“Magnum”). See Note 4 —Acquisition for additional information on the Magnum acquisition. Under this method of accounting, all assets acquired and liabilities assumed are recorded at their respective fair values at the date of the completion of the transaction. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, intangibles and other asset lives, among other items. Fair value is defined as the price that would be received in a sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. As a result, the Company may have been required to value the acquired assets at fair value measurements that do not reflect its intended use of those assets. Use of different estimates and judgments could yield different results. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill.
 
The accounting for the Magnum acquisition is based on currently available information and is considered preliminary. Although the Company believes that the assumptions and estimates made are reasonable and appropriate, they are based in part on historical experience and information that may be obtained from management of the acquired company and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the Company’s condensed consolidated statements of operations.
 
Recent Accounting Pronouncements
 
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU No. 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of ASU No. 2016-15.
 
In June 2016 the FASB issued Accounting Standard Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to use a current expected credit loss (“CECL”) model which is a new impairment model based on expected losses rather than incurred losses. Under this model an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The entity’s estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts, which will result in recognition of lifetime expected credit losses upon loan origination. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. The Company is currently assessing the impact the adoption of ASU No. 2016-13 will have on its consolidated financial statements.
 
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) which clarified the revenue recognition implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing which clarified the revenue recognition guidance regarding the identification of performance obligations and the licensing implementation. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients which narrowly amended the revenue recognition guidance regarding collectibility, noncash consideration, presentation of sales tax and transition. ASU No. 2016-08, ASU No. 2016-10 and ASU No. 2016-12 are effective during the same period as ASU No. 2014-09, Revenue from Contracts with Customers, which is effective for annual reporting period beginning after December 15, 2017, with the option to adopt one year earlier. The Company is currently evaluating the impact of the adoption of ASU No. 2016-08, ASU No. 2016-10 and ASU No. 2016-12.
 
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU No. 2016-09.
 
In March 2016, the FASB issued ASU No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. This guidance eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU No. 2016-07 is effective for interim and annual reporting periods beginning after December 15, 2016. The Company does not expect the adoption will have a material impact on its condensed consolidated financial statements.
 
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. The guidance in this new standard requires lessees to recognize assets and liabilities arising from operating leases on the balance sheet. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis, and to classify all cash payments within operating activities in the statement of cash flows. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of the adoption of ASU No. 2016-02.
 
NOTE 2—BALANCE SHEET COMPONENTS
 
Accounts Receivable, net
 
Accounts receivable, net consisted of the following (in thousands):
 
   
September 25,
2016
   
December 31,
2015
 
Accounts receivable
 
$
14,299
   
$
10,659
 
Allowance for doubtful accounts
   
(94
)
   
(63
)
Total accounts receivable, net
 
$
14,205
   
$
10,596
 
 
Inventories
 
Inventories consisted of the following (in thousands):
 
   
September 25,
2016
   
December 31,
2015
 
Raw materials
 
$
3,765
   
$
2,379
 
Work in process
   
5,563
     
2,710
 
Finished goods
   
1,871
     
1,791
 
Total inventories
 
$
11,199
   
$
6,880
 
 
The Company writes down inventory for excess quantities and obsolescence based on estimated future demand. The Company incurred insignificant inventory write-offs during the three and nine months ended September 25, 2016 and September 27, 2015.
 
Property and Equipment, net
 
Property and equipment, net consisted of the following (in thousands, except depreciable life):

   
Life
(In Years)
   
September 25,
2016
   
December 31,
2015
 
Network and laboratory equipment
   
3 – 5
   
$
16,686
   
$
13,520
 
Computer software and equipment
   
2 – 3
     
6,159
     
4,207
 
Furniture and fixtures
   
3 – 7
     
194
     
165
 
Office equipment
   
3 – 5
     
154
     
142
 
Leasehold improvements
   
1 – 5
     
782
     
316
 
Property and equipment, gross
           
23,975
     
18,350
 
Accumulated depreciation and amortization
           
(20,245
)
   
(15,217
)
Property and equipment, net
         
$
3,730
   
$
3,133
 
 
For the three and nine months ended September 25, 2016, depreciation expense related to property and equipment was $433,000 and $1.2 million, respectively. For the three and nine months ended September 27, 2015, depreciation expense related to property and equipment was $332,000 and $1.1 million, respectively.
 
In addition to the property and equipment above, the Company has prepaid licenses recorded in prepaid and other current assets in the accompanying condensed consolidated balance sheets. For the three and nine months ended September 25, 2016, amortization related to these prepaid licenses was $477,000 and $1.3 million, respectively. For the three and nine months ended September 27, 2015, amortization related to these prepaid licenses was $313,000 and $846,000, respectively.
 
Other Current Liabilities
 
Other current liabilities consisted of the following (in thousands):
 
   
September 25,
2016
   
December 31,
2015
 
Accrued commission
 
$
152
   
$
157
 
Customer deposits
   
369
     
342
 
Deferred revenue
   
968
     
 
Warranty liability
   
408
     
325
 
Sales return reserve
   
240
     
490
 
Amounts billed to the U.S. government in excess of approved rates
   
191
     
191
 
Unearned government grant
   
143
     
278
 
Accrued legal and accounting expenses
   
165
     
129
 
Income tax payable
   
181
     
57
 
Common stock warrants liability
   
11
     
39
 
Accrued interest
   
54
     
 
Other
   
201
     
211
 
Total other current liabilities
 
$
3,083
   
$
2,219
 
 
Other Long-Term Liabilities
 
Other long-term liabilities consisted of the following (in thousands):
 
   
September 25,
2016
   
December 31,
2015
 
Deferred revenue
 
$
2,532
   
$
 
Deferred tax liabilities
   
328
     
318
 
Income taxes payable for unrecognized tax benefits
   
938
     
434
 
Accrued retention bonus
   
144
     
89
 
Other
   
76
     
71
 
Total other long-term liabilities
 
$
4,018
   
$
912
 
 
NOTE 3—FAIR VALUE MEASUREMENT
 
The Company’s financial assets and liabilities are valued using market prices on active markets (“Level 1”), less active markets (“Level 2”) and unobservable markets (“Level 3”). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. Level 3 instruments are valued using unobservable market values in which there is little or no market data, and which require the Company to apply judgment to determine the fair value.
 
The Company’s financial instruments measured at fair value on a recurring basis consist of Level I assets and Level III liabilities. Level I assets include highly liquid money market funds that are included in cash and cash equivalents. Level III liabilities consist of common stock warrants liability that are included in other current liabilities. For the nine months ended September 25, 2016, the Company did not have any significant transfers between Level 1, Level 2 and Level 3.
 
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 25, 2016 and December 31, 2015 (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 25, 2016:
                       
Financial Assets:
                       
Money market funds
 
$
12,390
   
$
12,390
   
$
     
$
   
Financial Liabilities:
                               
Common stock warrants liability
 
$
11
   
$
     
$
     
$
11
 
                                 
December 31, 2015:
                               
Financial Assets:
                               
Money market funds
 
$
12,364
   
$
12,364
   
$
   
$
 
Financial Liabilities:
                               
Common stock warrants liability
 
$
39
   
$
   
$
   
$
39
 
 
Cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other current liabilities are stated at carrying value, which approximates fair value due to their short-term maturities. The carrying value of the Company’s revolving loan, term loan and capital lease obligations approximates fair value as the stated borrowing rates approximate market rates currently available to the Company for loans and capital leases with similar terms.
 
Common Stock Warrants Liability
 
The Company issued warrants to purchase common stock 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 less than the per share price of the warrants. Such down-round protection requires the Company to classify the common stock warrants as a liability. Common stock warrants are initially measured at its estimated fair value on the issuance date. At the end of each reporting period, change in fair value of common stock warrants are recorded in other income (expense), net on the condensed consolidated statements of operations. The Company will continue to adjust the common stock warrants liability to its estimated fair value until the earlier of the exercise or expiration of the warrants.
 
In July 2010, December 2013 and September 2015, the Company raised additional capital through offerings of common stock of 2,760,000 shares, 9,573,750 shares and 10,643,000 shares at a price of $1.75 per share, $1.42 per share and $1.70 per share, respectively. In June 2016, the Company completed another round of equity financing through an offering of common stock of 13,194,643 shares at $2.00 per share (See Note 9—Stockholders’ Equity and Stock-based Compensation). All of these equity financing transactions triggered the down-round protection and adjustment of the number of warrants issued to Bridge Bank.
 
The following table summarizes the key terms of common stock warrants subject to liability classification as of September 25, 2016 and December 31, 2015 (in thousands, except share and per share amounts):
 
   
Number of Common Stock Warrants
         
Fair Value
 
Holder
 
Upon Issuance
 
As of
September 25,
2016
 
As of
December 31,
2015
 
Grant Date
 
Expiration
Date
 
Exercise Price
per Share
 
As of
September 25,
2016
 
As of
December 31,
2015
 
Bridge Bank
   
20,000
   
32,429
   
31,573
 
April 7, 2010
 
April 7, 2017
   
$
2.25
   
$
11
   
$
39
 
 
The fair value of common stock warrants was determined using Black-Scholes option-pricing model. The fair value of the warrants was estimated using the following assumptions:
 
   
September 25,
2016
   
December 31,
2015
 
Stock price
 
$
2.33
   
$
3.04
 
Exercise price
 
$
2.25
   
$
2.31
 
Expected life
 
0.53 years
   
1.55 years
 
Risk-free interest rate
   
0.40
%
   
0.86
%
Volatility
   
46
%
   
62
%
Fair value per share
 
$
0.35
   
$
1.23
 
 
The change in the fair value of the Level 3 common stock warrants liability during the three and nine months ended September 25, 2016 and September 27, 2015 is as follows (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Fair value—beginning of period
 
$
11
   
$
12
   
$
39
   
$
8
 
Change in fair value
   
     
2
     
(28
)
   
6
 
Fair value—end of period
 
$
11
   
$
14
   
$
11
   
$
14
 
 
NOTE 4—ACQUISITION
 
On April 5, 2016, the Company completed its acquisition of Magnum pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”). Magnum was a fabless semiconductor manufacturer and software solution developer, and provided a well-developed and comprehensive portfolio of video broadcasting and compression solutions to GigPeak. The total purchase consideration was a combination of equity and cash, including 6,990,654 shares of common stock with a fair value of $17.9 million and a cash payment of $37.1 million of which a significant portion was used to repay Magnum’s outstanding debt and other liabilities. Pursuant to the Merger Agreement, $6.0 million of the purchase consideration remains in escrow for a period of up to at least 12 months and relates to certain indemnification obligations of Magnum’s former equity holders. Of this $6.0 million, $5.0 million will be held for a period of up to at least 12 months, with the remainder held for an additional 12 months. After the end of the second quarter, in June 2016, the Company submitted a claim to the stockholder representative for a net working capital adjustment pursuant to the terms of the Merger Agreement with Magnum, and the Company is expecting to settle the claim and adjust the total purchase consideration during the quarter ending December 31, 2016. The Magnum acquisition was partially funded by borrowings of $22.1 million from Silicon Valley Bank (See Note 7—Credit Facilities).
 
The total purchase consideration of $55.0 million has been allocated on a preliminary basis to tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. The Company will continue to evaluate certain assets, liabilities and tax estimates that are subject to change within the measurement period (up to one year from the acquisition date).
 
The following table summarizes the fair values of assets acquired and liabilities assumed (in thousands):
 
        
September 25,
2016
 
Tangible assets acquired:
     
Cash and cash equivalents
 
$
1,707
 
Accounts receivable
   
1,122
 
Inventories
   
1,224
 
Other current assets
   
1,069
 
Property and equipment
   
233
 
Other long-term assets
   
15
 
Liabilities assumed:
       
Accounts payable
   
(1,279
)
Accrued and other current liabilities
   
(2,348
)
Deferred revenue, net of associated costs
   
(4,912
)
Other long-term liabilities
   
(593
)
Identifiable intangible assets acquired:
       
Developed technology
   
16,710
 
In-process research and development (IPR&D)
   
7,680
 
Customer relationships
   
800
 
Trade name
   
330
 
Goodwill arising from the acquisition:
       
Goodwill
   
33,288
 
Total purchase consideration
 
$
55,046
 
 
The Company determined the valuation of the identifiable intangible assets using established valuation techniques. The developed technology was valued using the forward looking multi-period excess earnings method under the income approach. The IPR&D was valued using the cost to recreate method under the asset approach. Customer relationships and trade name were valued under the distributor method and under the relief from royalty method, respectively. Identifiable intangible assets acquired are amortized on a straight line basis over their respective estimated useful lives of 15 months to 7 years (See Note 5—Intangible Assets and Goodwill).
 
Goodwill represents the excess of the purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Magnum acquisition primarily consisted of the business synergies expected from the combined entities.
 
For the nine months ended September 25, 2016, the Company incurred acquisition-related transaction costs of $1.3 million, which were recorded in general and administrative expenses in the condensed consolidated statements of operations.
 
Pro Forma Financial Information (Unaudited)
 
The following table presents the unaudited pro forma financial information for the combined entity of GigPeak and Magnum for the three and nine month periods ended September 25, 2016 and September 27, 2015, as if the acquisition had occurred at the beginning of the periods presented after giving effect to certain purchase accounting adjustments. Magnum was acquired on April 5, 2016.
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
   
(in thousands except per share amounts)
 
Net revenue
 
$
15,796
   
$
15,110
   
$
46,402
   
$
43,451
 
Net income (loss)
 
$
671
   
$
(2,671
)
 
$
(3,750
)
 
$
(10,281
)
Net income (loss) per share—basic and diluted
 
$
0.01
   
$
(0.06
)
 
$
(0.06
)
 
$
(0.25
)
 
NOTE 5—INTANGIBLE ASSETS AND GOODWILL
 
Intangible assets consist of the following (in thousands):
 
         
As of September 25, 2016
   
As of December 31, 2015
 
   
Life (years)
   
Gross
   
Accumulated
Amortization
   
Net
   
Gross
   
Accumulated
Amortization
   
Net
 
Definite-lived intangible assets:
                                         
Customer relationships
   
6-8
   
$
4,077
   
$
(2,915
)
 
$
1,162
   
$
3,277
   
$
(2,542
)
 
$
735
 
Developed technology
   
6-7
     
23,237
     
(5,180
)
   
18,057
     
6,527
     
(3,386
)
   
3,141
 
Patents
   
5-16
     
457
     
(411
)
   
46
     
457
     
(407
)
   
50
 
Trade name
   
1-10
     
989
       
(612
)
   
377
     
659
     
(438
)
   
221
 
Total definite-lived intangible assets
           
28,760
     
(9,118
)
   
19,642
     
10,920
     
(6,773
)
   
4,147
 
Indefinite-lived intangible assets:
                                                       
IPR&D
           
8,063
     
     
8,063
     
383
     
     
383
 
Total intangible assets
         
$
36,823
   
$
(9,118
)
 
$
27,705
   
$
11,303
   
$
(6,773
)
 
$
4,530
 
 
For the three and nine months ended September 25, 2016 and September 27, 2015, amortization of intangible assets was as follows (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Cost of revenue
 
$
452
   
$
103
   
$
1,255
   
$
310
 
Research and development expense
   
98
     
     
293
     
 
Selling, general and administrative expense
   
214
     
120
     
549
     
360
 
   
$
764
   
$
223
   
$
2,097
   
$
670
 
 
As of September 25, 2016, amortization of certain developed technologies of $248,000 was capitalized in inventory, and no amortization of intangible assets was capitalized in inventory as of December 31, 2015.
 
Estimated future amortization expense related to definite-lived intangible assets as of September 25, 2016 is as follows (in thousands):
 
Years Ending December 31,
   
2016 (remainder of the year)
 
$
988
 
2017
   
3,512
 
2018
   
2,955
 
2019
   
2,946
 
2020
   
2,897
 
Thereafter
   
6,344
 
Total
 
$
19,642
 
 
The Company did not record an impairment charge on any intangible assets or goodwill during the three and nine months ended September 25, 2016 and September 27, 2015.
 
As of December 31, 2015, the Company had $12.6 million of goodwill in connection with the acquisitions of ChipX, Endwave, Tahoe RF and Terasquare. The changes in the carrying amount of goodwill for the nine months ended September 25, 2016 are as follows (in thousands):
 
 
Amount
 
Balance as of December 31, 2015
 
$
12,565
 
Goodwill addition from Magnum acquisition
   
33,288
 
Balance as of September 25, 2016
 
$
45,853
 
 
On April 5, 2016, the Company completed its acquisition of Magnum, a fabless semiconductor manufacturer and software solution developer, with a well-developed and comprehensive portfolio of video broadcasting and compression solutions, which resulted in $33.3 million of goodwill. The acquisition closed for a total purchase consideration of $55.0 million, which included assumed liabilities of $9.1 million.
 
NOTE 6— INVESTMENT IN UNCONSOLIDATED AFFILIATES
 
In January 2016, the Company invested $1.2 million for a minority stake in Anagog Ltd. (“Anagog”), the developer of the world’s largest crowdsourced parking network. Anagog perfects the mobility status algorithms that allow for advanced on-phone machine learning capabilities for the best user experience with ultra-low battery consumption and a high level of privacy protection. As of September 25, 2016, this cost method investment of $1.2 million is recorded in other assets on the condensed consolidated balance sheets.
 
In February 2014, together with CPqD, the Company incepted a joint venture, originally named BrPhotonics Produtos Optoeletrônicos LTDA and after an investment in May 2016 by Inova Empresa Fundo De Investimento Em Participaçơes, now named BrPhotonics Produtos Optoeletrônicos S/A (“BrP”), of which the Company owns 37.9% of equity interest. BrP is a provider of advanced high-speed devices for optical communications and integrated transceiver components for information networks, and is based in Campinas, Brazil. 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 set of 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 total investment in BrP of $459,000.
 
For the years ended December 31, 2015 and 2014, the Company had losses of $3,000 and $456,000, respectively, for its allocated portion of BrP’s results. Since the Company’s share of the loss exceeded its carrying cost of the investment in BrP, the Company’s investment in an unconsolidated affiliate was written down to zero as of December 31, 2015.
 
NOTE 7—CREDIT FACILITIES
 
In March 25, 2013, the Company and its wholly owned subsidiaries, ChipX, Incorporated and Endwave Corporation (together with the Company, the “Prior Borrowers”) entered into a Second Amended and Restated Loan and Security Agreement (“Loan Agreement”) with Silicon Valley Bank (“SVB”) to replace the Amended and Restated Loan and Security Agreement entered in December 2011.
 
In May 2015, SVB and the Prior Borrowers amended the Loan Agreement by entering into a Second Amendment to the Second Restated Loan Agreement (the “Second Amendment”). Pursuant to the Second Amendment, the total aggregate amount that the Company was entitled to borrow from SVB under a Revolving Loan facility was $7.0 million, based on net eligible accounts receivable after an 80% advance rate and subject to limits based on the Company’s eligible accounts as determined by SVB. In addition, the applicable interest rate was decreased from Prime Rate plus 0.6% to Prime Rate plus 0.4%. The terms of the Second Amendment, were set to expire on May 6, 2016.
 
In April 2016, SVB and the Prior Borrowers, with newly acquired Magnum, entered into the Third Amended and Restated Loan and Security Agreement (the “Third Restated Loan Agreement”) , amending and restating the Loan Agreement, as amended, in its entirety. Pursuant to the Third Restated Loan Agreement, the total aggregate amount that the Company is entitled to borrow from SVB has increased to an amount not to exceed $29.0 million, which is split into two different credit facilities, comprised of (i) the existing Revolving Loan facility which was amended to provide that the Company is entitled to borrow from SVB up to an amount not to exceed $14.0 million, based on net eligible accounts receivable after an 80% advance rate and subject to limits based on the Company’s eligible accounts as determined by SVB (the “Amended Revolving Loan”) and (ii) a second facility under which the Company is entitled to borrow from SVB up to $15.0 million without reference to accounts receivable, and which must be repaid in sixty equal installments, unless the Company exercises its right to prepay the loan (the “Term Loan”). The interest rate for the revolving line is Prime Rate plus 0.4%, or 3.9% as of September 25, 2016. The interest rate for the term loan is Prime Rate plus 1.25%, or 4.75% as of September 25, 2016. The Amended Revolving Loan has a term of 24 months, and no balance is outstanding as of September 25, 2016. The outstanding balance of the Term Loan as of September 25, 2016 was $13.8 million, of which $3.0 million is recorded in the condensed consolidated balance sheet as notes payable, current.
 
Future principal payments under the Term Loan are as follows (in thousands):
 
Years Ending December 31,
     
2016 (remainder of the year)
 
$
750
 
2017
   
3,000
 
2018
   
3,000
 
2019
   
3,000
 
2020
   
3,000
 
Thereafter
   
1,000
 
Total
 
$
13,750
 
 
SVB had two outstanding existing warrants to purchase common stock of the Company: (i) a warrant to purchase 4,125 shares of common stock at an exercise price of $0.73, with an expiration date of October 5, 2017; and (ii) a warrant to purchase 125,000 shares of common stock at an exercise price of $4.00 per share, with an expiration date of April 23, 2017. In connection with the Third Restated Loan Agreement, these warrants have been amended and restated to extend the expiration date to October 5, 2022 and April 22, 2022, respectively. The change in the fair value of the common stock warrants related to the extension of the expiration date was $143,000 and was recorded as a debt discount on the SVB term loan.
 
In connection with the Third Restated Loan Agreement, the Company incurred legal and administrative expenses of $200,000 which was recorded as a discount on the SVB Term Loan. The debt discount will be amortized to interest expenses during the life of the term loan using the effective interest method. For the three and nine months ended September 25, 2016, the Company recorded amortization of debt discount of $43,000 and $53,000, respectively.
 
The Third Restated Loan Agreement with SVB is collateralized by all of the Company’s assets, including all accounts, equipment, inventory, receivables, and general intangibles. The Third Restated Loan Agreement contains certain restrictive covenants that will impose significant operating and financial restrictions on its operations, including, but not limited to restrictions that limit its ability to:
 
  ·
Sell, lease, or otherwise transfer, or permit any of its subsidiaries to sell, lease or otherwise transfer, all or any part of its business or property, except in the ordinary course of business or in connection with certain indebtedness or investments permitted under the amended and restated loan agreement;
 
·
Merge or consolidate, or permit any of its subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its subsidiaries to acquire, all or substantially all of the capital stock or property of another person;
 
·
Create, incur, assume or be liable for any indebtedness, other than certain indebtedness permitted under the amended and restated loan and security agreement;
 
·
Pay any dividends or make any distribution or payment on, or redeem, retire, or repurchase, any capital stock; and
 
·
Make any investment, other than certain investments permitted under the amended and restated loan and security agreement.
 
NOTE 8—COMMITMENTS AND CONTINGENCIES
 
Commitments
 
Leases
 
In July 2016, the Company entered into a Fifth Amendment to Lease Agreement related to its headquarters located at 130 Baytech Drive, San Jose, CA 95134. The amendment extended the term of the lease by another 64 months from March 1, 2017 to June 30, 2022. The amended lease provides for a rent holiday of four months and an option to further extend the lease term for five years with monthly rent at the then fair market value.
 
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 ended September 25, 2016 was $261,000 and $680,000, respectively, and for the three and nine months ended September 27, 2015 was $110,000 and $338,000, respectively.
 
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
 
2016 (remainder of the year)
 
$
7
   
$
271
 
2017
   
9
     
898
 
2018
   
     
955
 
2019
   
     
947
 
2020
   
     
858
 
Thereafter
   
     
1,167
 
Total minimum lease payments
   
16
   
$
5,096
 
Less: amount representing interest
   
         
Total capital lease obligations
   
16
         
Less: current portion
   
(16
)
       
Long-term portion of capital lease obligations
 
$
         
 
Contingencies
 
Tax Contingencies
 
The Company’s income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. Its tax filings, however, are subject to audit by the respective tax authorities. Accordingly, the Company recognizes tax liabilities based upon its estimate of whether, and the extent to which, additional taxes will be due.
 
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 it believes a loss is probable and can be reasonably estimated, the Company accrues the estimated loss in its consolidated financial statements. Where the outcome of these matters is not determinable, the Company does not make a provision in its consolidated financial statements until the loss, if any, is probable and can be reasonable estimated or the outcome becomes known.
 
Product Warranties
 
The Company’s products typically carry a standard warranty period of approximately one year. The Company records a liability based on estimates of the costs that may be incurred under its warranty obligations and charges such costs to the cost of revenue 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.
 
The table below summarizes the activities related to accrued product warranties, which is included as a component of other current liabilities, for the three and nine months ended September 25, 2016 and September 27, 2015 (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Accrued product warranties — beginning of period
 
$
301
   
$
357
   
$
325
   
$
334
 
Warranty charges
   
406
     
117
     
494
     
395
 
Warranties settled
   
(299
)
   
(139
)
   
(411
)
   
(394
)
Accrued product warranties end of period
 
$
408
   
$
335
   
$
408
   
$
335
 

NOTE 9—STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
 
Public Offering
 
On June 10, 2016, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with selling stockholders and Cowen and Company, LLC, Raymond James & Associates, Inc. and Needham & Company, LLC relating to (i) a public primary offering of an aggregate of 11,319,643 shares of the Company’s common stock, par value $0.001 per share, at a public offering price of $2.00 per share; (ii) a public secondary offering by certain of its officers and its directors of an aggregate of 684,600 shares of common stock at $2.00 per share; and (iii) a public secondary offering by certain of its stockholders who were former stockholders of Magnum of an aggregate of 495,757 shares of common stock at $2.00 per share. The shares were accompanied by the associated rights to purchase shares of Series A Junior Preferred Stock, par value $0.001 per share, which 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 1,875,000 shares of common stock to cover overallotments, which the underwriters subsequently exercised on June 15, 2016.
 
On June 15, 2016, the Company completed its public offering of the 13,194,643 newly issued shares of common stock. The net proceeds to the Company from the offering was approximately $24.3 million which consisted of proceeds of $24.7 million after underwriting discounts, commissions and expenses, less an additional $0.4 million for legal, accounting, registration and other transaction costs related to the public offering.
 
Private Equity Placement
 
On March 21, 2016, the Company entered into a Securities Purchase Agreement (the “PDSTI Agreement”) with Pudong Science and Technology Investment (Cayman) Co., Ltd., an affiliate of Shanghai Pudong Science and Technology Investment Co., Ltd. (collectively, “PDSTI”), pursuant to which PDSTI will purchase approximately $5.0 million of the Company’s common stock. Under the PDSTI Agreement, on March 24, 2016, the Company issued 1,754,385 shares of its common stock to PDSTI in a private placement at a purchase price of $2.85 per share.
 
Pursuant to the PDSTI Agreement, the Company agreed to file a registration statement on Form S-3 to provide registration rights to PDSTI in respect of the shares. The SEC declared the registration statement effective on June 3, 2016. The PDSTI Agreement provided that if the registration statement was not declared effective by July 7, 2016, the Company would pay to PDSTI, as liquidated damages, 0.4% of the aggregate purchase price on a monthly, prorated basis, until the registration statement was declared effective, with interest on these liquidated damages to accrue at the rate of 1.0% per month until paid in full. In the event that any U.S. governmental body or agency took any action or issued any order within six months that would have prevented PDSTI from holding the shares or invalidated the Company’s issuance of the shares to PDSTI, the Company had agreed to return PDSTI’s full purchase price, plus 0.4% interest on the purchase price (accruing monthly until paid in full), and to reimburse PDSTI’s expenses in connection with negotiating the private placement, up to $15,000. As of September 25, 2016, both of the loss contingencies on liquidated damages and the contingent redemption feature expired, and the net proceeds from the PDSTI Agreement of $4.6 million, comprised of the purchase price of $5.0 million net of $384,000 of related costs, were reclassified to permanent equity on the condensed consolidated balance sheets.
 
 
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, par value $0.001 per share. 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, par value $0.001 per share. In addition, the Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.001 per share, 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 25, 2016 and December 31, 2015, 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 was not adopted in response to any acquisition proposal. Under the rights plan, 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 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 as incentive stock options (“ISOs”) and non-qualified stock options (“NSOs”) is up to 21,000,000 shares. Forfeited options or awards generally become available for future awards. On January 1, 2016, there was an automatic increase of 2,260,527 shares. As of September 25, 2016, 12,033,086 options to purchase common stock and restricted stock units (“RSUs”) were outstanding and 1,805,444 shares are authorized for future issuance under the 2008 equity incentive plan.
 
Under the 2008 Plan, the exercise price of a stock option is at least 100% of the stock’s fair market value on the date of grant, and if an ISO is granted to a 10% stockholder at least 110% of the stock’s fair market value on the date of grant. Vesting periods for awards are recommended by the Chief Executive Officer, and approved by the Board of Directors or its Compensation Committee and generally provide for stock options to vest monthly over a four-year period, with a one year vesting cliff of 25%, and have a maximum life of ten years from the date of grant. The Company has also been issuing RSUs which generally vest over a period range from nine months to four years.
 
2007 Equity Incentive Plan
 
In August 2007, the Company adopted the 2007 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 common 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 shares of stock options not granted under the 2007 Plan were cancelled. No shares of the Company’s common stock remain available for issuance of new grants under the 2007 Plan other than for satisfying exercises of stock options granted under this plan prior to its termination. As of September 25, 2016, options to purchase a total of 321,450 shares of common stock and 4,125 shares of common stock warrants were outstanding.
 
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 September 25, 2016, no additional options can be granted under the Lumera Plan, and options to purchase a total of 40,436 shares of common stock were outstanding.
 
Warrants
 
As of September 25, 2016, the Company had a total of 161,554 warrants to purchase common stock outstanding under all warrant arrangements. During the nine months ended September 25, 2016, no warrants were exercised or 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.
 
Stock-Based Compensation Expense
 
The following table summarizes the Company’s stock-based compensation expense for the three and nine months ended September 25, 2016 and September 27, 2015 (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Cost of revenue
 
$
74
   
$
94
   
$
232
   
$
315
 
Research and development expense
   
277
     
287
     
879
     
896
 
Selling, general and administrative expense
   
745
     
562
     
2,343
     
1,921
 
Total Stock-Based Compensation Expense
 
$
1,096
   
$
943
   
$
3,454
   
$
3,132
 
 
The Company did not grant any options during the three or nine months ended September 25, 2016 and September 27, 2015.
 
Stock Options
 
The following table summarizes option activities under the Company’s equity incentive plans for the nine months ended September 25, 2016:
 
   
Options
   
Weighted-
Average
Exercise Price
   
Weighted-
Average
Remaining
Contractual
Term
   
Aggregate
Intrinsic Value
 
               
(in years)
   
(in thousands)
 
Outstanding—December 31, 2015
   
7,918,584
   
$
2.32
     
4.82
   
$
7,422
 
Exercised
   
(419,450
)
   
1.61
                 
Forfeited/Expired
   
(178,191
)
   
5.10
                 
Outstanding—September 25, 2016
   
7,320,943
   
$
2.29
     
4.06
   
$
2,846
 
Vested and exercisable, September 25, 2016
   
7,261,710
   
$
2.30
     
4.04
   
$
2,760
 
Vested and exercisable and expected to vest, September 25, 2016
   
7,316,946
   
$
2.29
     
4.06
   
$
2,840
 
 
The aggregate intrinsic value reflects the difference between the exercise price of stock options and the fair value of the underlying common stock as determined by the Company’s closing stock price. The total intrinsic value of options exercised during the nine months ended September 25, 2016 was $491,000. The total intrinsic value of options exercised during the nine months ended September 27, 2015 was $47,000.
 
As of September 25, 2016, the unrecognized stock-based compensation cost related to stock options, net of estimated forfeitures, was $30,000, which is expected to be recognized over a weighted-average period of 0.6 years.
 
RSUs
 
The following table summarizes RSU activities under the Company’s equity incentive plans for the nine months ended September 25, 2016:
 
   
Number of
Shares
   
Weighted
-Average
Grant Date
Fair Value
 
             
Unvested balance—December 31, 2015
   
4,361,833
   
$
1.64
 
Granted
   
2,999,443
     
2.65
 
Released
   
(1,411,074
)
   
1.84
 
Forfeited/expired
   
(876,173
)
   
2.18
 
Unvested balance— September 25, 2016
   
5,074,029
   
$
2.11
 
 
As of September 25, 2016, the unrecognized stock-based compensation cost related to RSUs, net of estimated forfeitures, was $8.8 million, which is expected to be recognized over a weighted-average period of 2.9 years.
 
The majority of the RSUs that vested in the nine months ended September 25, 2016 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the value of the RSUs on their vesting date as determined by the Company’s closing stock price. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company. For the nine months ended September 25, 2016, 1,411,074 shares of RSUs vested and the Company withheld 552,468 shares to satisfy approximately $1.4 million of employees’ minimum tax obligation on the vested RSUs.
 
On July 19, 2016, the Company rescinded certain RSUs granted to Dr. Avi S. Katz, its Chief Executive Officer, as the total number of RSUs granted to Dr. Katz in 2015 were in excess of the 1,000,000 share per calendar year per person award limit as required by the 2008 Plan. As a result, Dr. Katz offered to rescind certain RSUs from two separate grants made to him in 2015, and the Company, upon the recommendation of the Compensation Committee of the Board of Directors, i) rescinded 401,250 shares of unvested RSUs and concurrently issued an equal number of RSUs with the same vesting term; and ii) rescinded 60,106 shares of unvested RSUs and concurrently issued 39,121 shares of RSUs with the same vesting term as the rescinded grant but a reduced number of shares vesting in each tranche as compared to the rescinded grant of RSUs. The Company accounted for the rescission and subsequent grant of RSUs to Dr. Katz as a modification with no incremental fair value. As a result, the Company continued to record stock-based compensation expenses based on the original grant date fair value prior to the modification, and no additional expense was recorded by the Company.
 
NOTE 10—INCOME TAXES
 
The Company recorded a provision for income taxes of nil and $97,000 for the three and nine months ended September 25, 2016, respectively, and $48,000 and $73,000 for the three and nine months ended September 27, 2015. The income tax provisions for the three and nine months ended September 25, 2016 and September 27, 2015 were due primarily to state taxes and foreign taxes due. The Company has incurred tax losses in Israel, Germany, and China and has a full valuation allowance against such losses.
 
In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. In order to support a conclusion that a valuation allowance is not needed, positive evidence of sufficient quantity and quality is necessary to overcome negative evidence. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding realization of the asset including lack of profitability through September 25, 2016 and the uncertainty over future operating profitability and taxable income. The Company will continue to evaluate the potential realization of the deferred tax assets on a quarterly basis.
 
The Company files tax returns in the U.S. federal, U.S. state and foreign tax jurisdictions. The Company’s major tax jurisdictions are the U.S., California, Canada, Switzerland, Korea, Japan, and Israel. The Company’s fiscal years through December 31, 2015 remain subject to examination by the tax authorities for U.S. federal, U.S. state and foreign tax purpose.
 
NOTE 11—NET INCOME PER SHARE
 
The computations for basic and diluted net income per share are as follows (in thousands, except per share data):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Net income
 
$
671
   
$
1,030
   
$
704
   
$
916
 
Weighted-average number of shares used in basic net income per share
   
67,623
     
36,769
     
55,734
     
34,060
 
Effect of dilutive securities:
                               
Stock options
   
1,047
     
940
     
1,617
     
654
 
Restricted stock units
   
726
     
785
     
1,071
     
393
 
Common stock warrants
   
3
     
3
     
5
     
2
 
Weighted-average number of shares used in diluted net income per share
   
69,399
     
38,497
     
58,427
     
35,109
 
Net income per share—basic
 
$
0.01
   
$
0.03
   
$
0.01
   
$
0.03
 
Net income per share—diluted
 
$
0.01
   
$
0.03
   
$
0.01
   
$
0.03
 
 
The following weighted-average common stock equivalents were excluded from the calculation of diluted net income per share for the periods presented because including them would have been anti-dilutive:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Stock options and RSUs
   
6,899,132
     
3,182,471
     
5,732,330
     
5,719,305
 
Common stock warrants
   
157,429
     
156,573
     
135,810
     
158,544
 
Total
   
7,056,561
     
3,339,044
     
5,868,140
     
5,877,849
 
 
NOTE 12—SEGMENT AND GEOGRAPHIC INFORMATION
 
The Company’s chief operating decision maker is its Chief Executive Officer. The chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company has determined that it operates as a single operating and reportable segment.
 
The following table summarizes revenue by geographic region (in thousands, except percentages):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
North America
 
$
8,539
     
54
%
 
$
3,840
     
37
%
 
$
21,587
     
51
%
 
$
10,102
     
35
%
Asia
   
4,090
     
26
%
   
3,902
     
38
%
   
12,203
     
29
%
   
9,478
     
32
%
Europe
   
3,025
     
19
%
   
2,531
     
24
%
   
8,594
     
20
%
   
9,186
     
31
%
Rest of World
   
142
     
1
%
   
146
     
1
%
   
142
     
0
%
   
553
     
2
%
Total
 
$
15,796
     
100
%
 
$
10,419
     
100
%
 
$
42,526
     
100
%
 
$
29,319
     
100
%
 
The Company determines geographic location of its revenue based upon the destination of shipments of its products.
 
For the three months ended September 25, 2016, one distributor accounted for 15% of total revenue. For the three months ended September 27, 2015, four customers accounted for 60% of total revenue. No other customer accounted for more than 10% of revenue for the respective three month periods.
 
For the nine months ended September 25, 2016, one distributor accounted for 13% of total revenue. For the nine months ended September 27, 2015, three customers accounted for 41% of total revenue. No other customer accounted for more than 10% of revenue for the respective nine month periods.
 
The following table summarizes long-lived assets by geography (in thousands, except percentages):
 
   
September 25,
2016
   
December 31,
2015
 
Americas
 
$
3,129
     
84
%
 
$
2,680
     
85
%
Europe
   
448
     
12
%
   
435
     
14
%
Asia
   
153
     
4
%
   
18
     
1
%
Total
 
$
3,730
     
100
%
 
$
3,133
     
100
%
 
Long-lived assets, comprised of property and equipment, net are reported based on the location of the assets at each balance sheet date.
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in our Quarterly Report on Form 10-Q for the quarter ended September 25, 2016. 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, 2015 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

GigPeak Inc. (“GigPeak”), formerly known as GigOptix, Inc. until the second quarter of 2016, is a leading innovator of semiconductor integrated circuits (“ICs”) and software solutions for high-speed connectivity and high-quality video compression. Our focus is to develop and deliver products that enable lower power consumption and faster data connectivity, more efficient use of network infrastructure and broader connectivity to the Cloud, reducing the total cost of ownership for the network’s operators. We address both the speed of data transmission and the amount of bandwidth the data consumes within the network, and its products also help to improve the efficiency of various Cloud-connected enterprise applications. The GigPeak product portfolio provides flexibility to support on-going changes in the connectivity that customers and markets require by deploying a wider offering of solutions from various kinds of semiconductor materials, ICs and Multi-Chip-Modules (“MCMs”), through cost-effective application-specific- integrated-circuits (“ASICs”) and system-on-chips (“SoCs”), and into full software programmable open-platform offerings.

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

Since inception in 2007, we have expanded our customer base through our sales and marketing activities, and by acquiring and integrating eight (8) companies with complementary and synergistic products and customers. Our worldwide direct sales force is supported by a significant number of channel representatives and distributors that sell our products throughout North America, Europe and Asia.
 
As noted above, on April 5, 2016, we completed our most recent acquisition of Magnum, and simultaneously renamed ourselves as GigPeak, Inc., to reflect the extension of our solution offering into wider Cloud-connectivity applications. Magnum was a privately-held fabless semiconductor manufacturer and software solution developer, and brought a well-developed and comprehensive portfolio of video broadcasting and compression solutions to GigPeak, including silicon ICs, SoCs and software solutions, including high-end compression encoding and video-quality algorithm products, and a comprehensive library of intellectual property. The Magnum products, now marketed as GigPeak’s MX product-line, are offered solely for the professional and enterprise video broadcast infrastructure applications, yet are extendable to end-user applications, such as potentially the security and Internet-of-Things (“IoT”) camera markets. Those products are the top of the line products, tools and technologies that can be deployed for the entire universe of video content creation and the associated distribution chain, from contribution and production through distribution over cable, telecom, satellite and over-the-top (“OTT”) video streaming.
 
Today’s video service providers, which include cable operators, telecommunications companies and satellite TV providers, are continuously seeking to perfect their linear and nonlinear workflows and improve the quality of their video content, while simultaneously optimizing the efficiency of their networks and improving content quality in a constantly reducing bitrate environment. This enables the video service providers to stream larger amount of video and media data and increase channel density through the existing network pipes infrastructure. Our products, tools, and technologies are currently used in the entire video content creation and distribution chain. Specifically, our solutions are used to address challenges in video contribution, video production, primary and secondary distribution, and enterprise wide solutions. Over time, we may look to leverage those capabilities and seek opportunities to expand our offerings into new markets, such as potentially high-end cameras and other video IoT applications.
 
This blending of products and technologies gives GigPeak the capability to address both the speed of data transmission and the amount of bandwidth the data consumes within a network, driven in particular by video content, which is the source of a majority of the datacenter traffic and storage in today’s networks. Through this unique combination, we provide solutions to enhance the footprint utilization and reduce the total cost of ownership of existing network pipes from the core to the end user.  Our wide product portfolio and exceptional customer support practices will continue to serve the enterprise networking and broadcasting original equipment manufacturers (“OEMs”), as well as potentially IoT and other Cloud-connected enterprise and end-user consumers, and is very unique among all other semiconductor fabless companies in the industry.
 
Since the closing of the Magnum acquisition on April 5, 2016, we have reorganized our entire operation to line up with our targeted end-markets and customers. This has resulted in two market-oriented directions, based solely on the end-user customer that will procure the products. The first is addressed as ”Above the Cloud” applications, which include all of our products that are incorporated directly into the network infrastructure to enable the high-speed and high-quality streaming over the network, namely our telecom, datacom and broadcasting products. The second is addressed as “Below the Cloud” applications, which include all of our products that are incorporated as the access and end-user enterprise and consumer products to enable high-speed and high-quality streaming into and out of the Cloud, namely our wireless and industrial ASIC products. Most of our current product lines will contribute various products to each one of those two market-oriented directions, and, hence, are classified based on the end-market they address.
 
GigPeak’s Solutions
 
After closing the Magnum acquisition, we refocused the Company’s direction. Hence, in addition to the networking solutions we previously offered, as described in our Annual Report on Form 10-K, we have added the following products and solutions.
 
Broadcasting Solutions
 
Our broadcast solutions include a family of IC modules, software and IP for the professional broadcast infrastructure market. We provide top of the line products, tools and technologies for the entire video content creation and distribution chain, from contribution and production through distribution over cable, satellite and OTT video streaming, such as:
 
 
1.
Video Contribution: We were the first to market with a single chip to address all market needs, from legacy MPEG-2 4:2:0/4:2:2 8-bit to H.264 4:2:0/4:2:2 10-bit to AVC-I 50, AVC-I 100 and into future deployment of HEVC, encoding and decoding applications. With over a decade of video quality leadership and technology innovation behind it, our D7Pro offers advanced encoding and decoding solution for video contribution and news gathering. In addition, the D7Pro offers a complete video-audio-ancillary data-mux integrated solution enabling high video quality, low latency at low bit rates for video encoding and decoding.
 
2.
Video Production: As a market leader in professional video processing devices and software, we offer system vendors the market’s leading solutions for baseband video, audio and data processing. We enable a single design solution for all products within a production domain – routers, channel branding, video filtering, chroma/luma leveling, audio leveling and down mixing, format conversion, rescaling, low latency switching and more. Our solution is a dual channel 4:2:2 10-bit native solution with embedded memory and support for various I/O interfaces from storage, networking and PCIe to 1080p baseband video.
 
3.
Primary Video Distribution: Content originators are rapidly adopting advanced technologies such as H.264 and efficient statistical multiplexing systems as well as considering migration to H.265 compression for higher compression efficiency while continuing to support legacy MPEG-2 formats. Vendors of encoding, decoding and transcoding equipment for primary distribution must quickly bring to market solutions that support high video quality H.264 SD/HD, H.265 SD/HD as well as MPEG-2 SD/HD. Ideally, to minimize an operator’s operating expenses, these systems should enable both types of services to be aggregated in single bundle without compromising video quality.
 
Consumer and Cloud Connectivity – Video Solutions
 
To address both Cloud, and current and future consumer connected devices as well as IoTs, we may plan to use our stand-alone proprietary RF mixed signal technology, ASICs, video ICs, SoCs and software IP for various high volume applications such as Ultra-Wide Bandwidth TX/RX ICs, video and camera chips, etc. We already possess extensive experience with ultra-high-speed interfaces and now have the capability of adding SoCs and video capabilities to potentially address such sophisticated consumer and IoT applications.
 
Our broadcast and video-streaming products also now place us as a provider of professional video processing silicon solutions. We offer system vendors an advanced enterprise and secondary distribution video broadcasting solutions. Our ASICs, SoCs and software solutions are all-complete system solutions with rich features including high video quality SD/HD H.265, H.264, MPEG-2, VBR/CBR, low latency encoding and complete video, audio and data multiplexing.
 
Our solutions also offer a complete multi-format feature rich solutions with high-quality H.265/H.264/MPEG-2 CBR/VBR encoding; advanced, high density any-format-to-any-format transcoding; the ability to manipulate video content for multi-screen applications; support for digital program insertion; and comprehensive support for audio-ancillary data-mux system level features.
 
Products
 
Enterprise Networking “Above the Cloud”: Telecom, Datacom and Broadcasting
 
We design and market products that amplify electrical signals during both the transmission (amplifiers, drivers for various vertical-cavity-surface-emitting-laser (“VCSEL”), and direct-modulated-laser, (“DML”) laser devices and modulator, and clock-data-recovery, (“CDR”) devices and reception trans-impedance-amplifiers (“TIAs”) and DMLs of optical signals in the transmission of data. In addition, we offer microwave and millimeter wave amplifiers to enable amplification of small signal radio signals into more powerful signals that can be transmitted over long distances to establish high throughput data connections or enable radar based applications. We have a comprehensive product portfolio, particularly at data rates that exceed 10 Gbps. The primary target markets and applications for our products include optical interface modules such as line-cards, transponders and transceivers within telecom and datacom switches and routers, and high speed wireless point-to-point millimeter wave systems. Our products are critical blocks used in telecom and datacom optical communications networks. For telecom, these networks range from long haul to metro systems, and for datacom, from access to data links to the consumers, where the conversion of data from the electrical domain to the optical domain, or vice-versa occurs. Our optical drivers amplify the input digital data stream that is used to directly modulate the laser or to drive an external modulator that acts as a precise shutter to switch on and off the light that creates the modulated optical data stream. At the other end of the optical fiber, our sensitive receiver TIAs detect and amplify the small currents generated by photo-diodes converting the received light into an electrical current. The TIAs amplify the small current signals into a larger voltage signal that can be read by the electronics and processors in the network servers. We supply an optimized component for each type of laser and photo-diode depending upon the speed, reach and required cost. Generally, a shorter reach results in higher volume, and less demanding electrical product specifications to support the traveled optical signal.
 
As discussed above, with the completion of the Magnum acquisition and consolidation of Magnum, we now also offer enterprise video system vendors the market’s foremost advanced enterprise video broadcasting solutions. Our silicon and software are all-complete system solutions with rich features including high video quality SD/HD H.265, H.264, MPEG-2, VBR/CBR, video statistical multiplexing, digital ad-insertion, low latency encoding and complete video, audio and data multiplexing.
 
Enterprise and Cloud – Connectivity Customers “Below the Cloud”: Wireless and Industrial ASICs
 
Our semiconductor ICs, SoCs and software solutions are designed to address the challenges faced by network operators for high-speed connectivity and high-quality video compression over the enterprise network and the Cloud. Our focus is to deliver products that enable lower power consumption and faster data connectivity, better content quality streaming and broader connectivity into and out of the Cloud, for the end user appliances and terminals. Our products are deployed for use by various consumer and enterprise end user customers, both in the commercial, military and aerospace markets.
 
In addition, we offer complex ASIC solutions, such as high-speed, high-frequency and ultra-wide-bandwidth devices that are used in a number of applications such as mil-aero, test and measurement, medical equipment, security and surveillance applications, as well as emerging consumer electronics such as gaming and entertainment, to enable the high speed processing of complex signals.
 
Results of Operations
 
Historically, since inception in 2007 and through 2014, we have incurred net losses. However, for the three and nine months ended September 25, 2016 and for the year ended December 31, 2015, we recorded net income of $671,000, $704,000, and $1.2 million, respectively. For the nine months ended September 27, 2015, we incurred a net income of $916,000. For the nine months ended September 25, 2016 and the year ended December 31, 2015, we had cash inflows from operations of $4.2 million and $3.0 million, respectively. As of September 25, 2016, we had an accumulated deficit of $100.3 million.
 
Revenue
 
Revenue for the periods reported was as follows (in thousands, except percentages):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Revenue
 
$
15,796
   
$
10,419
   
$
42,526
   
$
29,319
 
Increase, period over period
 
$
5,377
           
$
13,207
         
Percentage increase, period over period
   
52
%
           
45
%
       
 
Total revenue for the three months ended September 25, 2016 was $15.8 million, an increase of $5.4 million or 52%, compared with $10.4 million for the three months ended September 27, 2015, due to increased growth resulting from the Magnum acquisition and organically from our existing products.
 
Total revenue for the nine months ended September 25, 2016 was $42.5 million, an increase of $13.2 million or 45%, compared with $29.3 million for the nine months ended September 27, 2015, due to increased growth resulting from the Magnum acquisition and organically from our existing products.
 
Cost of Revenue and Gross Profit
 
Cost of revenue and gross profit for the periods presented was as follows (in thousands, except percentages):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Cost of revenue
 
$
5,148
   
$
3,762
   
$
14,024
   
$
11,040
 
Gross profit
 
$
10,648
   
$
6,657
   
$
28,502
   
$
18,279
 
Gross margin
   
67
%
   
64
%
   
67
%
   
62
%
Increase, period over period
 
$
3,991
           
$
10,223
         
Percentage increase, period over period
   
60
%
           
56
%
       
 
Gross profit consists of revenue less cost of revenue. Cost of revenue consists primarily of the costs to manufacture saleable chips, SoCs, and MCMs, including outsourced wafer fabrication, dicing and testing; costs of direct materials; equipment depreciation; costs associated with procurement, production control and quality assurance; fees paid to our offshore manufacturing vendors; charges for potential excess or obsolete material; 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 25, 2016 was $10.6 million, or a gross margin of 67%, compared to a gross profit of $6.7 million, or a gross margin of 64%, for the three months ended September 27, 2015. The increase in gross margin is primarily due to increased growth resulting from the Magnum acquisition, and organically from our existing products and change in product mix in favor of higher margin products.
 
Gross profit for the nine months ended September 25, 2016 was $28.5 million, or a gross margin of 67%, compared to a gross profit of $18.3 million, or a gross margin of 62%, for the nine months ended September 27, 2015. The increase in gross margin is primarily due to the Magnum acquisition, and organically from our existing products and change in product mix in favor of higher margin products.
 
We record revenue from non-recurring engineering (“NRE”) projects associated with product development that we enter into with certain customers. In general, these projects are associated with complex technology development, and as such we do not have certainty about our ability to achieve the program milestones. Achievement of the milestone is typically dependent on our performance and acceptance by the customer. The payment associated with achieving the milestone is generally commensurate with our effort or the value of the deliverable and is nonrefundable. Therefore, we record the expenses related to these projects in the periods incurred and recognize revenue only when we have earned the revenue and achieved the development milestones. Revenue from these projects is typically recorded at 100% gross margin because the costs associated with these projects are expensed as incurred and generally included in research and development expense. These efforts generally benefit our overall product development programs beyond the specific project requested by our customer. The NRE revenues represents typically about 5-10% of our total revenue.
 
Research and Development Expense
 
Research and development (“R&D”) expense for the periods presented was as follows (in thousands, except percentages):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Research and development expense
 
$
5,395
   
$
3,100
   
$
14,610
   
$
9,572
 
Percentage of revenue
   
34
%
   
30
%
   
34
%
   
33
%
Increase, period over period
 
$
2,295
           
$
5,038
         
Percentage increase, period over period
   
74
%
           
53
%
       
 
R&D expense consists primarily of salaries and related expenses for R&D personnel, consulting and engineering design, non-capitalized tools and equipment, engineering related semiconductor masks, depreciation for equipment, engineering expenses paid to outside technology development suppliers, allocated facilities costs and expenses related to stock-based compensation.
 
R&D expense for the three months ended September 25, 2016 was $5.4 million compared to $3.1 million for the three months ended September 27, 2015, an increase of $2.3 million or 74%. R&D expense increased as compared to the third quarter of 2015 primarily due to a $1.4 million increase in personnel related expenses, a $0.3 million increase in expense related to amortization of software and intangible assets, a $0.2 million increase in facility related expenses, and a $0.2 million increase in consultant and outside service expenses. The majority of those increased expenses are due to the integration of the R&D resources and projects of Magnum as of the closing of the acquisition on April 5, 2016.
 
R&D expense for the nine months ended September 25, 2016 was $14.6 million compared to $9.6 million for the nine months ended September 27, 2015, an increase of $5.0 million or 53%. R&D expense increased as compared to 2015 primarily due to a $3.0 million increase in personnel related expenses, a $0.7 million increase in expense related to amortization of software and intangible assets, a $0.5 million increase in facility related expenses, and a $0.6 million increase in consultant and outside service expenses. The majority of those increased expenses are due to the integration of the R&D resources and projects of Magnum as of the closing of the acquisition on April 5, 2016.
 
Selling, General and Administrative Expense
 
Selling, general and administrative (“SG&A”) expense for the periods presented was as follows (in thousands, except percentages):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Selling, general and administrative expense
 
$
4,360
   
$
2,468
   
$
12,528
   
$
7,680
 
Percentage of revenue
   
28
%
   
24
%
   
29
%
   
26
%
Increase, period over period
 
$
1,892
           
$
4,848
         
Percentage increase, period over period
   
77
%
           
63
%
       
 
SG&A 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.
 
SG&A expense for the three months ended September 25, 2016 was $4.4 million compared to $2.5 million for the three months ended September 27, 2015, an increase of $1.9 million or 77%. SG&A expense increased as compared to the third quarter of 2015 primarily due to a $1.2 million increase in personnel related expenses, a $0.2 million increase in public company costs, a $0.2 million increase in stock-based compensation expenses, and an increase of $0.1 million in amortization of intangible assets. The majority of those increased expenses are due to the integration of the R&D resources and projects of Magnum as of the closing of the acquisition on April 5, 2016.
 
SG&A expense for the nine months ended September 25, 2016 was $12.5 million compared to $7.7 million for the nine months ended September 27, 2015, an increase of $4.8 million or 63%. SG&A expense increased as compared to 2015 primarily due to a $2.0 million increase in personnel related expenses, a $1.2 million increase in legal expenses, a $0.4 million increase in public company costs, a $0.4 million increase in stock-based compensation expenses, and a $0.2 million increase in amortization of intangible assets. The majority of those increased expenses are due to the integration of the R&D resources and projects of Magnum as of the closing of the acquisition on April 5, 2016.

Interest Expense, Net and Other Expense, Net
 
Interest expense, net and other expense, net for the periods presented was as follows (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Interest expense, net
 
$
(236
)
 
$
(6
)
 
$
(492
)
 
$
(12
)
Other income (expense), net
   
14
     
(5
)
   
(71
)
   
(23
)
Total
 
$
(222
)
 
$
(11
)
 
$
(563
)
 
$
(35
)
 
Interest expense, net and other 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, term loan and capital leases and amortization of loan fees in connection with our Silicon Valley Bank (“SVB”) line of credit and loan.
 
Interest expense, net for the three months ended September 25, 2016 was $236,000 compared to $6,000 for the three months ended September 27, 2015. Interest expense, net increased as compared to the third quarter of 2015 primarily due to interest on the line of credit and term loan with SVB. This increased expense is solely attributable to the loan we incurred to support the Magnum acquisition payment.
 
Interest expense, net for the nine months ended September 25, 2016 was $492,000 compared to $12,000 for the nine months ended September 27, 2015. Interest expense, net increased as compared to 2015, primarily due to interest on the line of credit and term loan with SVB.
 
Provision for Income Taxes
 
Tax provision for the periods presented was as follows (in thousands, except percentages):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
   
September 25,
2016
   
September 27,
2015
 
Provision for income taxes
 
$
   
$
48
   
$
97
   
$
73
 
Increase (decrease), period over period
 
$
(48
)
         
$
24
         
Percentage increase (decrease), period over period
   
(100
)%
           
33
%
       
 
Provision for income tax expense was nil and $48,000 for the three months ended September 25, 2016 and September 27, 2015, respectively. Our effective tax rate was nil and 4% for three months ended September 25, 2016 and September 27, 2015, respectively. The income tax provision for the three months ended September 25, 2016 and September 27, 2015 was due primarily to state taxes and foreign taxes due. We have incurred book losses in Israel, Germany, and China and have a full valuation allowance against such losses.
 
Income tax expense was $97,000 and $73,000 for the nine months ended September 25, 2016 and September 27, 2015, respectively. The income tax provision for the nine months ended September 25, 2016 and September 27, 2015 was due primarily to state taxes and foreign taxes due. Our effective tax rate was 12.1% and 7.4% for the nine months ended September 25, 2016 and September 27, 2015, respectively. We have incurred book losses in Israel, Germany, and China and have a full valuation allowance against such losses.
 
Liquidity and Capital Resources
 
Cash and cash equivalents and cash flow data for the periods presented were as follows (in thousands):
 
 
September 25,
2016
   
December 31,
2015
 
Cash and cash equivalents
 
$
38,363
   
$
30,245
 

   
Nine Months Ended
 
   
September 25,
2016
   
September 27,
2015
 
Net cash provided by operating activities
 
$
4,234
   
$
2,229
 
Net cash used in investing activities
 
$
(38,154
)
 
$
(1,398
)
Net cash provided by financing activities
 
$
42,001
   
$
15,736
 
 
Public Offering
 
On June 10, 2016, we entered into an underwriting agreement (the “Underwriting Agreement”) with selling stockholders and Cowen and Company, LLC, Raymond James & Associates, Inc. and Needham & Company, LLC relating to (i) a public primary offering of an aggregate of 11,319,643 shares of our common stock, par value $0.001 per share, at a public offering price of $2.00 per share; (ii) a public secondary offering by certain of its officers and directors of an aggregate of 684,600 shares of common stock at $2.00 per share; and (iii) a public secondary offering by certain of its stockholders who were former stockholders of Magnum of an aggregate of 495,757 shares of common stock at $2.00 per share. The shares were accompanied by the associated rights to purchase shares of Series A Junior Preferred Stock, par value $0.001 per share. Under the terms of the Underwriting Agreement, we granted the underwriters a 30 day option to purchase up to an additional 1,875,000 shares of common stock to cover overallotments, which the underwriters subsequently exercised on June 15, 2016.
 
On June 15, 2016, we completed our public offering of 13,194,643 newly issued shares of common stock. The net proceeds to us from the offering was approximately $24.3 million which consisted of a proceeds of $24.7 million after underwriting discounts, commissions and expenses, less an additional $0.4 million for legal, accounting, registration and other transaction costs related to the public offering.
 
Private Equity Placement
 
On March 21, 2016, we entered into a Securities Purchase Agreement (the “PDSTI Agreement”) with Pudong Science and Technology Investment (Cayman) Co., Ltd., an affiliate of Shanghai Pudong Science and Technology Investment Co., Ltd. (collectively, “PDSTI”), pursuant to which PDSTI will purchase approximately $5.0 million of our common stock. Under the PDSTI Agreement, on March 24, 2016, we issued 1,754,385 shares of our common stock (the “Shares”) to PDSTI in a private placement at a purchase price of $2.85 per share.
 
Pursuant to the PDSTI Agreement, the Company agreed to file a registration statement on Form S-3 to provide registration rights to PDSTI in respect of the shares. The SEC declared the registration statement effective on June 3, 2016. The PDSTI Agreement provided that if the registration statement was not declared effective by July 7, 2016, the Company would pay to PDSTI, as liquidated damages, 0.4% of the aggregate purchase price on a monthly, prorated basis, until the registration statement was declared effective, with interest on these liquidated damages to accrue at the rate of 1.0% per month until paid in full. In the event that any U.S. governmental body or agency took any action or issued any order within six months that would have prevented PDSTI from holding the shares or invalidated the Company’s issuance of the shares to PDSTI, the Company had agreed to return PDSTI’s full purchase price, plus 0.4% interest on the purchase price (accruing monthly until paid in full), and to reimburse PDSTI’s expenses in connection with negotiating the private placement, up to $15,000. As of September 25, 2016, both of the loss contingencies on liquidated damages and the contingent redemption feature expired, and the net proceeds from the PDSTI Agreement of $4.6 million, comprised of the purchase price of $5.0 million net of $384,000 of related costs, were reclassified to permanent equity on the condensed consolidated balance sheets.
 
Operating Activities
 
Operating activities provided cash of $4.2 million in the nine months ended September 25, 2016. Our net income, adjusted for depreciation, stock-based compensation, and other non-cash items, was $8.7 million. The remaining use of $4.5 million of cash was primarily due to an increase in accounts receivable of $2.5 million, an increase in inventories of $2.8 million, an increase in prepaid and other current assets of $604,000, and a decrease in other current liabilities of $2.5 million, which were partially offset by an increase in accounts payable of $3.7 million.
 
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.
 
Investing Activities
 
Net cash used in investing activities for the nine months ended September 25, 2016 was $38.2 million and consisted primarily of $35.4 million used to acquire Magnum in April 2016, $1.7 million used to purchases property and equipment, and $1.2 million for investment in Anagog, Ltd.
 
Net cash used in investing activities for the nine months ended September 27, 2015 was $1.4 million for property and equipment purchases.
 
Financing Activities
 
Net cash provided by financing activities for the nine months ended September 25, 2016 was $42.0 million and consisted primarily of $24.5 million net proceeds from a public stock offering, $21.9 million from debt financing, $4.6 million from a private offering of stock and $0.7 million from the exercise of stock options, which were partially offset by $1.4 million of taxes paid related to net share settlement of restricted stock units and $8.4 million of repayment of debt.
 
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 net proceeds from our public stock offering and $113,000 proceeds from exercise of stock options, which were partially offset by $857,000 of taxes paid related to net share settlement of restricted stock units.
 
Material Commitments
 
The following table summarizes our future net cash obligations for operating leases and capital leases, in thousands of dollars, as of September 25, 2016 (in thousands):
 
Contractual Obligations as of September 25, 2016:
 
Total
   
Less than One
Year
   
One to Three
Years
   
Three to Five
Years
 
Operating lease obligations
 
$
5,096
   
$
885
   
$
1,947
   
$
2,264
 
Capital lease obligations (including interest)
   
16
     
16
     
     
 
Total
 
$
5,112
   
$
901
   
$
1,947
   
$
2,264
 
 
GigPeak did not have any material commitments for capital expenditures as of September 25, 2016.
 
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
 
GigPeak 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, GigPeak is not exposed to any financing or other risks that could arise if it had such relationships.
 
WHERE YOU CAN FIND MORE INFORMATION
 
Our filings with the Securities and Exchange Commission (the “SEC”), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended are available on our website at http://www.gigpeak.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:
 
 
GigPeak Twitter Account (https://twitter.com/gigpeak)
 
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 QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
This item has been omitted based on GigPeak’s status as a smaller reporting company.
 
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 25, 2016 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

ITEM 1.
LEGAL PROCEEDINGS
 
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.
 
ITEM 1A.
RISK FACTORS
 
We have revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede any similar the risks previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015 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, since inception in 2007 and through 2014, we have incurred net losses. However, for the three and nine months ended September 25, 2016 and for the year ended December 31, 2015, we recorded net income of $671,000, $704,000, and $1.2 million, respectively. For the nine months ended September 27, 2015, we incurred a net income of $916,000. For the nine months ended September 25, 2016 and the year ended December 31, 2015, we had cash inflows from operations of $4.2 million and $3.0 million, respectively. As of September 25, 2016, we had an accumulated deficit of $100.3 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.
 
Furthermore, as part of our strategy, we market and sell our products through third-party distributors in certain markets such as China, Taiwan and Japan where the ability to make sales to end-user customers is dependent upon such a channel. Although we develop relationships with distributors in these markets that further our sales efforts, we do not control the activities of our distributors with respect to the marketing and sale of our products. Therefore, the reputation and performance of our distributors and their ability and willingness to sell our products, uphold our brand reputation, and expand their businesses and sales channels are essential to the growth of our business in these markets. Similarly, factors which are under our control, such as the development of our products, are essential to the growth of our business in these markets. Consistent with our relationship with individual customers, we do not have long-term purchase commitments from these distributor customers, and certain distributor agreements provide for semi-annual stock rotation privileges of 5 to 10 percent of net sales for the previous six-month period. As product sales have continued to grow in Asia, primarily in China and Taiwan, the distributors in those markets are making sales to multiple end-user customers. Maintaining distributors in these markets is necessary to our ability to make sales in such jurisdictions, however, due to the nature of our customer relationships with the distributors and the structure of the distribution market, it is possible to cease business operations with any particular distributor and put in place an alternative distribution arrangement without materially impacting our sales, provided we have an appropriately planned transition. However, we cannot provide assurances that we can adequately plan for all such needs to replace any of our distributors in these markets, or that any changes will not result in delay of shipment of our product or disruptions of distribution arrangements in the future, and loss of a key distributor could have an adverse effect on our business, revenue and operating results.
 
In addition, certain end-user customers in the United States do not make direct purchases of our products from us. Rather, purchases are made by distributors that are engaged by the end-user customers to manage their long-term inventory needs. Unlike the distributors we engage, these distributors have no stock rotation rights and, in some cases, may pay in advance of shipment. Since purchase commitments are dependent upon the purchasing decisions of the end-user customers supported by these distributors, there are no long-term purchase commitments necessary from these distributor customers, and the risks that exist with individual customers apply equally to these customer relationships.
 
For the nine months ended September 25, 2016, one distributor accounted for 13% of total revenue. For the nine months ended September 27, 2015, three customers accounted for 41% of our total revenue. No other customers accounted for more than 10% of total revenue during the nine months ended September 25, 2016 and September 27, 2015.
 
There may be a possible effect from the acquisition of Magnum on our future revenue recognition policy.
 
Historically, one of the primary revenue recognition models used by Magnum is to recognize license royalty revenue based upon reports received by customers during the quarter, assuming all other revenue recognition criteria are met. The customers generally report shipment information typically within 45 days following the end of their respective quarters. If there is a reliable basis upon which the Company can estimate its royalty revenue prior to obtaining the customers’ reports, the Company will recognize the royalty revenues in the quarter in which they are earned. If there is not a reliable basis for estimating royalties, the Company will recognize revenue in the following quarter when the shipment report is received. Because GigPeak has not previously sold software or had license royalty revenue, this is a different type of revenue and revenue recognition policy than previously used by GigPeak. The application of revenue recognition or other accounting methodologies, assumptions, and estimates that are different from those we have historically used in our business could complicate our financial statements, expose us to additional accounting and audit costs, and increase the risk of accounting errors in our estimates and financial statements. In addition, this revenue recognition policy can lead to volatility from quarter to quarter in the amount of revenue recognized from license royalties.
 
If increasing use of our software fails to grow adequately such that we do not see growing license royalty revenues from our customers, our business may suffer. Our future growth and financial performance will depend in part on broad market acceptance and use of our software.
 
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. Our accounts receivable as of September 25, 2016 increased by $3.6 million or 34% compared to the balance as of December 31, 2015. Historically, we have not had significant uncollectible accounts. However, if a customer is unable or refuses to pay we could suffer additional accounting losses as well as a reduction in liquidity. A significant increase in uncollectible accounts would have an adverse impact on our business, liquidity and financial results.
 
Our business is subject to foreign currency risk.
 
Sales to customers located outside the United States comprised 51% and 70% of our revenue for the nine months ended September 25, 2016 and September 27, 2015, respectively. In addition, we have four subsidiaries overseas (Switzerland, Japan, Canada and Korea) 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 GigPeak’s 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.
 
If our customers do not design our solutions into their product offerings, or if our customers’ product offerings are not commercially successful, our business would suffer.
 
With the acquisition of Magnum, we sell video processing SoC solutions to original equipment manufacturers, or OEMs, who include our SoCs in their products, and to original design manufacturers, or ODMs, who include our SoCs in the products that they supply to OEMs. We refer to ODMs as our customers and OEMs as our end customers, except as otherwise indicated or as the context otherwise requires. Our video processing SoCs are generally incorporated into our customers’ products at the design stage, which is referred to as a design win. As a result, we rely on OEMs to design our solutions into the products that they design and sell. Without these design wins, our business would be harmed. We often incur significant expenditures developing a new SoC solution without any assurance that an OEM will select our solution for design into its own product. Once an OEM designs a competitor’s device into its product, it becomes significantly more difficult for us to sell our SoC solutions to that OEM because changing suppliers involves significant cost, time, effort and risk for the OEM. Furthermore, even if an OEM designs one of our SoC solutions into its product, we cannot be assured that the OEM’s product will be commercially successful over time or at all or that we will receive or continue to receive any revenue from that OEM. If products or other product categories incorporating our SoC solutions are not commercially successful or experience rapid decline, our revenue and business will suffer.
 
Our video processing SoC product strategy, which is targeted at markets demanding superior video quality, may not address the demands of our target customers and may not lead to increased revenue in a timely manner or at all, or even may deteriorate significantly, which could materially adversely affect our results of operations and limit our ability to grow.
 
We have adopted a product strategy for our video processing SoCs that focuses on our core competencies in video processing and delivering high levels of video quality. With this strategy, we continue to make further investments in the development of our video processor architecture. This strategy is designed to address the needs of customers in the market for video processing SoCs. Such markets may not develop, may take longer to develop than we expect, or may change direction altogether. We cannot assure you that the products we are currently selling and developing will adequately address the demands of our target customers, or that we will be able to produce our new products at costs that enable us to price these products competitively.
 
Rapidly changing industry standards could make our video processing solutions obsolete, which would cause our operating results to suffer.
 
We design our video processing solutions to conform to video compression standards, including MPEG-2, H.264 and H.265, set by industry standards setting bodies such as ITU-T Video Coding Experts Group and the ISO/IEC Moving Picture Experts Group. Generally, our solutions comprise only a part of a camera or broadcast infrastructure equipment device. All components of these devices must uniformly comply with industry standards in order to operate efficiently together. We depend on companies that provide other components of the devices to support prevailing industry standards. Many of these companies are significantly larger and more influential in driving industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or by consumers. If our customers or the suppliers that provide other device components adopt new or competing industry standards with which our solutions are not compatible, or if the industry groups fail to adopt standards with which our solutions are compatible, or adopt free open source codecs, our existing solutions would become less desirable to our customers. As a result, our sales would suffer or even completely vanish, and not only would we lose a major source of revenue, but we could be required to make significant expenditures to develop new SoC solutions. For example, if the new H.265 video compression standard is not broadly adopted by our customers or potential customers, sales of our H.265 compliant solutions would suffer and we may be required to expend substantial resources to comply with an alternative video compression standard. In addition, existing standards may be challenged as infringing upon the intellectual property rights of other companies or may be superseded by new innovations or standards.
 
Products for communications applications are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards, including any new video compression standards, and our ability to deliver superior products against potential open source free products that will be made available in the market. The emergence of new industry standards could render our solutions incompatible with products developed by other suppliers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our solutions to ensure compliance with relevant standards. If our solutions are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins, which could harm our business.
 
The complexity of our video processing SoC solutions could result in unforeseen delays or expenses from undetected defects, errors or bugs in hardware or software which could reduce the market adoption of our new solutions, damage our reputation with current or prospective customers and adversely affect our operating costs.
 
Highly complex video processing SoC solutions such as ours frequently contain defects, errors and bugs when they are first introduced or as new versions are released. We have in the past and may in the future experience these defects, errors and bugs. If any of our solutions have reliability, quality or compatibility problems, we may not be able to successfully correct these problems in a timely manner or at all. In addition, if any of our proprietary features contain defects, errors or bugs when first introduced or as new versions of our solutions are released, we may be unable to timely correct these problems. Consequently, our reputation may be damaged and customers may be reluctant to buy our solutions, which could harm our ability to retain existing customers and attract new customers, and could adversely affect our financial results. In addition, these defects, errors or bugs could interrupt or delay sales to our customers. If any of these problems are not found until after we have commenced commercial production of a new product, we may incur significant additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others.
 
Unknowing use of open source software in our products, processes and technology may expose us to additional risks and compromise our proprietary intellectual property.
 
We may unknowingly utilize and incorporate software that is subject to an open source license in our products, processes and technology in a manner that could create unintended risks. Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses, such as the GNU General Public License, require a user who distributes the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on terms unfavorable to us or at no cost. This can subject previously proprietary software to open source license terms.
 
While we monitor the use of open source software in our products, processes and technology and try to ensure that no open source software is used in such a way as to require us to disclose the source code to the related product, processes or technology when we do not wish to do so, such use could inadvertently occur. Additionally, if a third-party software provider has incorporated certain types of open source software into software we license from such third-party for our products, processes or technology, we could, under certain circumstances, be required to disclose the source code to our products, processes or technology. This could harm our intellectual property position and our business, results of operations and financial condition.
 
Risk Factors Related to the Merger
 
Although we expect to realize certain benefits as a result of the Merger, there is the possibility that we may be unable to successfully integrate the business of Magnum, realize the anticipated benefits of the Merger or do so within the intended timeframe.
 
We are devoting significant management attention and resources to integrating the business practices and operations of Magnum with ours. We are still determining the exact nature of how the business and operations of Magnum will be run. Potential difficulties we may encounter as part of the integration process include the following:
 
 
the costs of integration and compliance and the possibility that the full benefits anticipated to result from the Merger will not be realized;
 
 
any delay in the integration of management teams, strategies, operations, products and services;
 
diversion of the attention of management as a result of the Merger;
 
lack of engineering knowledge and ability to overcome and fix deficiencies that are reported by customers pertaining to lack of competitiveness of our products or insufficient features and functionalities of our products that are demanded by customers;
 
lack of going forward commitment of Magnum customers, based on fatigue, loss of trust, or disapproval of the directions of Magnum pre-acquisition, or GigPeak post-acquisition;
 
loss of customers that will consider GigPeak to be a competitor post-acquisition, or due to the acquisition of a customer by a competitor to GigPeak;
 
loss of projected revenues to GigPeak due to undisclosed arrangements that Magnum had done with customers pre-acquisition, leading to excessive pull-in of products prior to the acquisition closing, resulting in large inventory of products with the customer and lack of need to purchase products from GigPeak for a short or long period of time. There may also be occurrences of customer demand for return (RMA) of purportedly defective products that were shipped by Magnum prior to the acquisition closing, and are to be corrected, guaranteed and replaced by GigPeak and will lead to further financial losses;
 
differences in business backgrounds, corporate cultures and management philosophies that may delay successful integration;
 
the ability to create and enforce uniform standards, controls, procedures, policies and information systems;
 
the challenge of integrating complex systems, technology, networks and other assets of Magnum into those of GigPeak in a manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies;
 
potential unknown liabilities and unforeseen increased expenses or delays associated with the Merger, including costs to integrate Magnum;
 
the disruption of, or the loss of momentum in, our ongoing businesses; and
 
the potential unknown and undisclosed technical deficiencies and lack of required features and functionalities in the Magnum products that will prevent the deployment and sale of those products. It is only through our interactions with the customers during the months following the acquisition that we will be able to define whether our products are salable and deployable what-so-ever, or are not competitive, and hence will not be capable of generating meaningful revenue.
 
Any of these factors could adversely affect the ability of GigPeak following the Merger to benefit financially from the Merger, maintain relationships with customers, suppliers, employees and other constituencies or its ability to achieve the anticipated benefits of the Merger or could reduce or even completely diminish the earnings or otherwise adversely affect the business and financial results of GigPeak after the Merger.
 
The Merger may not be accretive, or even dilutive, and may cause dilution to GigPeak’s earnings per share, which may harm the market price of GigPeak common stock following the Merger.
 
While the Merger is expected to be accretive to GigPeak’s future earnings per share, there can be no assurance with respect to the timing and scope of the accretive effect or whether it will be accretive at all. GigPeak following the Merger could encounter additional transaction and integration-related costs or other factors such as the failure to realize all of the benefits anticipated in the Merger or a downturn in its business. All of these factors could cause dilution to GigPeak’s earnings per share following the Merger, decrease the expected accretive effect of the Merger, or even cause meaningful losses to GigPeak, and cause a decrease in the price of shares of GigPeak common stock following the Merger.
 
After paying the cash consideration to the former Magnum stockholders upon the Closing of the Merger as well as the other cash expenditures related to the Merger, GigPeak will have a substantially lower balance of cash and cash equivalents, and increased borrowings under its credit agreement.
 
To partially finance amounts being spent in the Merger, GigPeak entered into a Third Amended and Restated Loan and Security Agreement (the “Third Restated Loan Agreement”) with Silicon Valley Bank (“SVB”). Pursuant to the Third Restated Loan Agreement, the total aggregate amount that we are entitled to borrow from SVB has increased to $29.0 million, which is split into two different credit facilities, comprised of (i) the existing Revolving Loan facility which was amended to provide that we are entitled to borrow from SVB up to $14.0 million, based on net eligible accounts receivable after an 80% advance rate and subject to limits based on our eligible accounts as determined by SVB (the “Amended Revolving Loan”) and (ii) a second facility under which we are entitled to borrow from SVB up to $15.0 million without reference to accounts receivable, and which must be repaid in sixty equal installments, unless we exercise our right to prepay the loan under the conditions of, and subject to the limitations to, the Third Restated Loan Agreement (the “Acquisition Term Loan”). At the Closing of the Merger, we borrowed a combined total of $22.1 million from SVB pursuant to the terms of the Third Restated Loan Agreement. Immediately prior to the Closing of the Merger, we had no outstanding obligations to SVB. In addition, we used approximately $13.6 million, net, of our cash to pay amounts being spent in the Merger. As a result of the use of cash for the Merger, and subsequent payment of the Amended Revolving Loan, we do not have this cash available for other uses. There is also an element of significant interest payments of approximately $160,000 per quarter that will further negatively impact the cash balances of GigPeak.
 
GigPeak following the Merger is incurring and will continue to incur significant transaction and integration related costs in connection with the Merger.
 
GigPeak is incurring costs associated with integrating the operations of Magnum following the Closing of the Merger which it expects to continue to incur for a period of time. The amount of these costs could be material to the financial position and results of operations of GigPeak following the Merger. A substantial amount of such expenses will be comprised of transaction costs related to the Merger, facilities and systems consolidation costs, and employee-related costs. GigPeak will also incur fees and costs related to formulating integration plans and performing these activities. Additional unanticipated costs may be incurred in the integration of the two companies’ businesses. The elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may not offset incremental integration related costs in the near term.
 
GigPeak may not have discovered undisclosed liabilities and product deficiencies of Magnum.
 
GigPeak’s due diligence review of Magnum may not have discovered undisclosed liabilities and product deficiencies of Magnum. If Magnum has undisclosed liabilities or product deficiencies, GigPeak as a successor owner may be responsible for such undisclosed liabilities. GigPeak has tried to control its exposure to undisclosed liabilities by obtaining certain protections under the Merger Agreement, including representations and warranties from Magnum regarding undisclosed liabilities, however, such representations and warranties expired by their terms on the completion of the Merger. There can be no assurance that such provisions in the Merger Agreement will protect GigPeak against any undisclosed liabilities or product deficiencies being discovered or provide an adequate remedy for any undisclosed liabilities that are discovered. Such undisclosed liabilities could have an adverse effect on the business and results of operations of GigPeak and may adversely affect the value of GigPeak common stock after the consummation of the Merger.
 
Uncertainties associated with the Merger may cause a loss of employees and may otherwise materially adversely affect the future business and operations of GigPeak following the Merger.
 
GigPeak’s success following the Merger will depend upon the ability of GigPeak to retain senior management and key employees of GigPeak and Magnum following the Merger. In some of the fields in which GigPeak and Magnum operate, there are only a limited number of people in the job market who possess the requisite skills, and it may be increasingly difficult for GigPeak following the Merger to hire personnel over time. GigPeak following the Merger will operate in many geographic locations, including Silicon Valley and Ontario, Canada, where the labor markets, especially for engineers, are particularly competitive.
 
Current and prospective employees of GigPeak and Magnum may experience uncertainty about their roles with GigPeak following the Merger. In addition, key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with GigPeak following the Merger. The loss of services of certain senior management or key employees of GigPeak and Magnum or the inability to hire new personnel with the requisite skills could restrict the ability of GigPeak following the Merger to develop new products or enhance existing products in a timely manner, or to sell products to customers or to manage the business of GigPeak following the Merger effectively. Also, the business, financial condition and results of operations of GigPeak following the Merger could be materially adversely affected by the loss of any of its key employees, by the failure of any key employee to perform in his or her current position, or by GigPeak’s inability to attract and retain skilled employees, particularly engineers.
 
If the stockholders who received our stock in the Merger sell our common stock that they received in the Merger, they could cause our common stock price to decline.
 
The issuance of our common stock in connection with the Merger could have the effect of depressing the market price for our common stock now that such shares are registered and freely tradable. A total of 6,990,654 shares were issued in the Merger; of this amount, 2,015,180 were registered initially upon the June 3, 2016 effectiveness of the registration statement that we filed with the SEC, freely tradable and available for sale at the discretion of the stockholder, and 495,757 of those shares were sold as part of the public offering completed on June 15, 2016. Of the remaining 4,975,474 shares, in conjunction with our public offering of common stock completed on June 15, 2016, certain of these stockholders who received our common stock in the Merger agreed to restrict sales for a total of 2,652,465 shares for a period of 90 days, which time has now passed. In addition, 2,323,009 shares of our common stock are held in an escrow account pursuant to the terms of the Merger and therefore not available for sale and, depending upon resolution of any claims that have been or will be made against the escrow account, including for a net working capital adjustment pursuant to the terms of the Merger Agreement with Magnum, will not be released before the one year anniversary of the Merger. The other shares received in the Merger and registered on the Form S-3 registration statement, filed with the SEC on April 15, 2016 and declared effective by the SEC on June 3, 2016 can be sold by the holders of such shares without restrictions.
 
ITEM 6.
EXHIBITS
 
(a) Exhibits

Exhibit
Number
 
 
Description
     
 
Fifth Amendment to Lease Agreement dated as of July 15, 2016, by and between G&I VIII Baytech LP and GigPeak, Inc.
     
 
Chief Executive Officer certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
Chief Financial Officer certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
Chief Executive Officer certification pursuant to Rule 13a-14(b) or Rule 13d-14(b) and Section 1350, Chapter 63 of Title 18 United States Code (18 U.S.C. 1350) as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
     
 
Chief Financial Officer certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350, Chapter 63 of Title 18 United States Code (18 U.S.C. 1350) as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
     
101.INS*
 
Instance Document
     
101.SCH*
 
XBRL Taxonomy Extension Schema Document
     
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document

*
Filed herewith
 
 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.

 
GIGPEAK, INC.
   
Date: November 2, 2016
/S/  AVI S. KATZ
 
Dr. Avi S. Katz
 
Chief Executive Officer and Chairman of the Board
   
Date: November 2, 2016
/S/ DARREN MA
 
Darren Ma
 
Chief Financial Officer
 
 
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