UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
or
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-35520
GIGOPTIX, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 26-2439072 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
130 Baytech Drive
San Jose, CA 95134
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of Common Stock outstanding as of August 2, 2013, the most recent practicable date prior to the filing of this Quarterly Report on Form 10-Q, was 22,329,758 shares.
PAGE NO | ||
| PART I FINANCIAL INFORMATION | ||
| ITEM 1 | Financial Statements (unaudited) | |
| 3 | ||
| 4 | ||
| 5 | ||
| 6 | ||
| 7 | ||
| ITEM 2 | 21 | |
| ITEM 3 | 28 | |
| ITEM 4 | 28 | |
| PART II OTHER INFORMATION | ||
| ITEM 1 | 29 | |
| ITEM 1A | 29 | |
| ITEM 6 | 31 | |
PART I
FINANCIAL INFORMATION
GIGOPTIX, INC.
(In thousands, except share and per share amounts)
| June 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| ASSETS | (Unaudited) | (1) | ||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 9,506 | $ | 10,147 | ||||
| Accounts receivable, net | 6,408 | 5,056 | ||||||
| Inventories | 3,953 | 4,111 | ||||||
| Prepaid and other current assets | 461 | 295 | ||||||
| Total current assets | 20,328 | 19,609 | ||||||
| Property and equipment, net | 3,632 | 4,579 | ||||||
| Intangible assets, net | 3,766 | 4,270 | ||||||
| Goodwill | 9,860 | 9,860 | ||||||
| Restricted cash | 282 | 282 | ||||||
| Other assets | 211 | 228 | ||||||
| Total assets | $ | 38,079 | $ | 38,828 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,902 | $ | 3,174 | ||||
| Accrued compensation | 874 | 846 | ||||||
| Line of credit | 6,000 | 3,600 | ||||||
| Other current liabilities | 2,903 | 3,080 | ||||||
| Total current liabilities | 11,679 | 10,700 | ||||||
| Other long term liabilities | 898 | 1,128 | ||||||
| Total liabilities | 12,577 | 11,828 | ||||||
| Commitments and contingencies (Note 11) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding as of June 30, 2013 and December 31, 2012 | - | - | ||||||
| Common stock, $0.001 par value; 50,000,000 shares authorized as of June 30, 2013 and December 31, 2012; 22,329,758 and 22,205,746 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively | 22 | 22 | ||||||
| Additional paid-in capital | 125,819 | 123,386 | ||||||
| Treasury stock, at cost; 701,754 shares as of June 30, 2013 and December 31, 2012, respectively | (2,209 | ) | (2,209 | ) | ||||
| Accumulated other comprehensive income | 323 | 298 | ||||||
| Accumulated deficit | (98,453 | ) | (94,497 | ) | ||||
| Total stockholders’ equity | 25,502 | 27,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 38,079 | $ | 38,828 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
| (1) | The condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date. |
GIGOPTIX, INC.
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Total revenue | $ | 6,831 | $ | 9,588 | $ | 13,752 | $ | 18,739 | ||||||||
| Total cost of revenue | 2,578 | 4,537 | 5,214 | 8,715 | ||||||||||||
| Gross profit | 4,253 | 5,051 | 8,538 | 10,024 | ||||||||||||
| Research and development expense | 3,177 | 3,445 | 6,413 | 6,828 | ||||||||||||
| Selling, general and administrative expense | 2,041 | 3,152 | 4,394 | 5,959 | ||||||||||||
| Restructuring expense | - | (114 | ) | 950 | 93 | |||||||||||
| Special litigation-related expense | 472 | 212 | 887 | 353 | ||||||||||||
| Total operating expenses | 5,690 | 6,695 | 12,644 | 13,233 | ||||||||||||
| Loss from operations | (1,437 | ) | (1,644 | ) | (4,106 | ) | (3,209 | ) | ||||||||
| Interest expense, net | (25 | ) | (41 | ) | (79 | ) | (193 | ) | ||||||||
| Other income (expense), net | 88 | 72 | 256 | 57 | ||||||||||||
| Loss before provision for income taxes | (1,374 | ) | (1,613 | ) | (3,929 | ) | (3,345 | ) | ||||||||
| Provision for income taxes | 14 | 18 | 27 | 34 | ||||||||||||
| Net loss | $ | (1,388 | ) | $ | (1,631 | ) | $ | (3,956 | ) | $ | (3,379 | ) | ||||
| Net loss per share—basic and diluted | $ | (0.06 | ) | $ | (0.08 | ) | $ | (0.18 | ) | $ | (0.16 | ) | ||||
| Weighted average number of shares used in per share calculations - basic and diluted | 21,628 | 21,502 | 21,588 | 21,528 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
GIGOPTIX, INC.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Net loss | $ | (1,388 | ) | $ | (1,631 | ) | $ | (3,956 | ) | $ | (3,379 | ) | ||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
| Foreign currency translation adjustment | 17 | (129 | ) | 25 | (55 | ) | ||||||||||
| Change in pension liability in connection with actuarial gain | - | - | - | (54 | ) | |||||||||||
| Other comprehensive income (loss), net of tax | 17 | (129 | ) | 25 | (109 | ) | ||||||||||
| Comprehensive loss | $ | (1,371 | ) | $ | (1,760 | ) | $ | (3,931 | ) | $ | (3,488 | ) | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
GIGOPTIX, INC.
| Six Months Ended | ||||||||
| June 30, | July 1, | |||||||
| 2013 | 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (3,956 | ) | $ | (3,379 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,881 | 2,054 | ||||||
| Stock-based compensation | 2,508 | 2,536 | ||||||
| Change in fair value of warrants | (12 | ) | 14 | |||||
| Non-cash restructuring expense (benefits) | - | (114 | ) | |||||
| Gain on sale of property and equipment | (160 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | (1,352 | ) | (2,092 | ) | ||||
| Inventories | 158 | (1,371 | ) | |||||
| Prepaid and other current assets | (387 | ) | (302 | ) | ||||
| Other assets | 18 | (47 | ) | |||||
| Accounts payable | (409 | ) | 768 | |||||
| Accrued restructuring | 13 | (100 | ) | |||||
| Accrued compensation | 28 | 407 | ||||||
| Other current liabilities | (145 | ) | (378 | ) | ||||
| Other long-term liabilities | (41 | ) | (120 | ) | ||||
| Net cash used in operating activities | (1,856 | ) | (2,124 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale and maturity of investments | - | 400 | ||||||
| Purchases of property and equipment | (1,099 | ) | (1,648 | ) | ||||
| Proceeds from sale of property and equipment | 160 | - | ||||||
| Net cash used in investing activities | (939 | ) | (1,248 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of stock | - | 347 | ||||||
| Taxes paid related to net share settlement of equity awards | (75 | ) | (189 | ) | ||||
| Net borrowings on line of credit | 2,400 | 2,950 | ||||||
| Repayment of capital lease | (237 | ) | (297 | ) | ||||
| Purchases of treasury stock, including direct issuance costs | - | (2,209 | ) | |||||
| Net cash provided by financing activities | 2,088 | 602 | ||||||
| Effect of exchange rates on cash and cash equivalents | 66 | (96 | ) | |||||
| Net decrease in cash and cash equivalents | (641 | ) | (2,866 | ) | ||||
| Cash and cash equivalents at beginning of period | 10,147 | 15,788 | ||||||
| Cash and cash equivalents at end of period | $ | 9,506 | $ | 12,922 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Interest paid | $ | 79 | $ | 192 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION
Organization
GigOptix Inc. (“GigOptix” or the “Company”) is a leading fabless supplier of semiconductor components that enable high speed information streaming over network infrastructures, within data centers and in user devices. The business is made up of two product lines: High-Speed Communications Products and Industrial Products.
The High-Speed Communications product line offers a broad portfolio of high performance optical and wireless components to telecommunication (“telecom”) and data communication (“datacom”) customers, including i) mixed signal radio frequency integrated circuits (“RFIC”), such as 40G and 100G laser and optical modulator drivers and trans-impedance amplifiers (“TIA”) for telecom, datacom, and consumer electronic fiber-optic applications; ii) power amplifiers and transceivers for microwave and millimeter wave monolithic microwave integrated circuit (“MMIC”) wireless applications including 73 Ghz and 83 GHz power amplifiers and transceiver chips; iii) thin film polymer on silicon (“TFPS”) optical modulators for 40G and 100G fiber-optic telecom; and iv) integrated systems in a package (“SIP”) solutions for both fiber-optic and wireless applications. The High-Speed Communications product line also partners with key customers on joint development projects that generate engineering project revenue for the Company while helping to position the Company for future product revenues with these key customers.
The Industrial product line offers a wide range of digital and mixed-signal application specific integrated circuit (“ASIC”) solutions for industrial, military, avionics, medical and communications markets. The Industrial product line partners with ASIC customers on development projects that generate engineering project revenue for the Company that directly lead to future product revenues with these ASIC customers.
GigOptix, Inc., the successor to GigOptix LLC, was formed as a Delaware corporation in March 2008 in order to facilitate a combination between GigOptix LLC and Lumera Corporation (“Lumera”). Before the combination, GigOptix LLC acquired the assets of iTerra Communications LLC in July 2007 (“iTerra”) and Helix Semiconductors AG (“Helix”) in January 2008. On November 9, 2009, GigOptix acquired ChipX, Incorporated (“ChipX”). On June 17, 2011, GigOptix acquired Endwave Corporation (“Endwave”). As a result of the acquisitions, Helix, Lumera, ChipX and Endwave all became wholly owned subsidiaries of GigOptix.
GigOptix Gmbh
In March 2013, the Company established a German subsidiary, GigOptix GmbH. The subsidiary is engaged in research and development for the Company’s High-Speed Communications product line including electro-optical products.
Basis of Presentation
The Company’s fiscal year ends on December 31. For quarterly reporting, the Company employs a five-week, four-week, four-week, reporting period. The second quarter of 2013 ended on Sunday, June 30, 2013. The second quarter of fiscal 2012 ended on Sunday, July 1, 2012. 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 June 30, 2013 and for the three and six months ended June 30, 2013 and July 1, 2012, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X, and include the accounts of the Company and all of its subsidiaries. Accordingly, they do not include all of the information and footnotes required by such accounting principles for annual financial statements. The condensed consolidated results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2013. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report for the year ended December 31, 2012 on Form 10-K (the “2012 Form 10-K”).
Certain prior year financial statement amounts have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on previously reported total assets, stockholders’ equity or net loss.
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. Descriptions of these estimates and assumptions are included in the 2012 Form 10-K and the Company encourages you to read its 2012 Form 10-K for more information about such estimates and assumptions.
NOTE 2—BALANCE SHEET COMPONENTS
Accounts receivable, net consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Billed accounts receivable | $ | 5,839 | $ | 5,137 | ||||
| Unbilled accounts receivable | 758 | 256 | ||||||
| Allowance for doubtful accounts | (189 | ) | (337 | ) | ||||
| $ | 6,408 | $ | 5,056 | |||||
Property and equipment, net consisted of the following (in thousands, except depreciable life):
| Life | June 30, | December 31, | |||||||||
| (In years) | 2013 | 2012 | |||||||||
| Network and laboratory equipment | 3 – 5 | $ | 10,648 | $ | 10,654 | ||||||
| Computer software and equipment | 2 – 3 | 3,711 | 3,747 | ||||||||
| Furniture and fixtures | 3 –10 | 176 | 176 | ||||||||
| Office equipment | 3 – 5 | 105 | 106 | ||||||||
| Leasehold improvements | 1 – 5 | 378 | 378 | ||||||||
| Construction-in-progress | — | 272 | 236 | ||||||||
| 15,290 | 15,297 | ||||||||||
| Accumulated depreciation and amortization | (11,658 | ) | (10,718 | ) | |||||||
| Property and equipment, net | $ | 3,632 | $ | 4,579 | |||||||
For the three and six months ended June 30, 2013, depreciation expense related to property and equipment was $584,000 and $1,156,000, respectively. For the three and six months ended July 1, 2012, depreciation expense related to property and equipment was $714,000 and $1,365,000, respectively.
In addition to the property and equipment above, the Company has prepaid licenses. For the three and six months ended June 30, 2013, amortization related to these prepaid licenses was $132,000 and $221,000, respectively. For the three and six months ended July 1, 2012, amortization related to these prepaid licenses was $60,000 and $151,000, respectively.
Inventories consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Raw materials | $ | 2,008 | $ | 2,290 | ||||
| Work in process | 895 | 687 | ||||||
| Finished goods | 1,050 | 1,134 | ||||||
| $ | 3,953 | $ | 4,111 | |||||
Accrued and other current liabilities consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Amounts billed to the U.S. government in excess of approved rates | $ | 191 | $ | 191 | ||||
| Warranty liability | 391 | 612 | ||||||
| Customer deposits | 377 | 432 | ||||||
| Capital lease obligations, current portion | 348 | 324 | ||||||
| Restructuring liabilities, current portion | 128 | 168 | ||||||
| Legal fees | 451 | 271 | ||||||
| Deferred revenue | 392 | 65 | ||||||
| Other | 625 | 1,017 | ||||||
| $ | 2,903 | $ | 3,080 | |||||
The Company generally offers a one year warranty on its products. The Company records a liability based on estimates of the costs that may be incurred under its warranty obligations and charges to the cost of revenue the amount of such costs at the time revenues are recognized. The warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The estimates of anticipated rates of warranty claims and costs per claim are primarily based on historical information and future forecasts.
Changes in the Company’s product warranty liability during the six months ended June 30, 2013 and July 1, 2012 are as follows (in thousands):
| Six months ended | ||||||||
| June 30, 2013 | July 1, 2012 | |||||||
| Beginning balance | $ | 612 | $ | 296 | ||||
| Warranties accrued | 256 | 988 | ||||||
| Warranties settled or reversed | (477 | ) | (649 | ) | ||||
| Ending balance | $ | 391 | $ | 635 | ||||
NOTE 3—FAIR VALUE
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 (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) | |||||||||||||
| June 30, 2013: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents: | ||||||||||||||||
| Money market funds | $ | 1,356 | $ | 1,356 | $ | - | $ | - | ||||||||
| $ | 1,356 | $ | 1,356 | $ | - | $ | - | |||||||||
| Current liabilities: | ||||||||||||||||
| Liability warrants | $ | 12 | $ | - | $ | - | $ | 12 | ||||||||
| December 31, 2012: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents: | ||||||||||||||||
| Money market funds | $ | 2,856 | $ | 2,856 | $ | - | $ | - | ||||||||
| $ | 2,856 | $ | 2,856 | $ | - | $ | - | |||||||||
| Current liabilities: | ||||||||||||||||
| Liability warrants | $ | 24 | $ | - | $ | - | $ | 24 | ||||||||
As of June 30, 2013, the Company had cash and cash equivalents of $9.5 million, which was comprised of $8.1 million of cash and $1.4 million of money market funds. As of December 31, 2012, the Company had cash and cash equivalents of $10.1 million, which comprised of $7.2 million cash and $2.9 million of money market funds.
The Company’s financial assets and liabilities are valued using market prices on active markets (“Level 1”), less active markets (“Level 2”) and unobservable markets (“Level 3”). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. Level 3 instruments are valued using unobservable market values in which there is little or no market data, and which require the Company to apply judgment to determine the fair value.
For the period ended June 30, 2013, the Company did not have any significant transfers between Level 1, Level 2 and Level 3.
The amounts reported as cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other current liabilities approximate fair value due to their short-term maturities. The fair value for the Company’s investments in marketable debt securities is estimated based on quoted market prices. The carrying value of the Company’s line of credit and capital lease obligations approximates fair value and is based upon borrowing rates currently available to the Company for loans and capital leases with similar terms.
Liability Warrants
In connection with a November 2009 loan and security agreement with Bridge Bank and a January 2010 secured line of credit facility with Agility Capital, the Company issued warrants to both Bridge Bank and Agility Capital. Certain provisions in the warrant agreements provided for down-round protection if the Company raised equity capital at a per share price which was less than the per share price of the warrants. Such down-round protection also requires the Company to classify the value of the warrants as a liability on the issuance date and then record changes in the fair value through the condensed consolidated statements of operations for each reporting period until the warrants are either exercised or cancelled. The fair value of the liability is recalculated and adjusted each quarter with the differences being charged to other income (expense), net on the condensed consolidated statements of operations. The fair value of these warrants was determined using a Monte Carlo simulation, which requires the use of significant unobservable market values. As a result, these warrants are classified as Level 3 financial instruments. On July 7, 2010, the Company raised additional equity through an offering of 2,760,000 shares at $1.75 per share, thus triggering the down-round protection and adjustment of the number of warrants in each warrant agreement.
The fair value of the warrants was estimated using the following assumptions:
| As of June 30, 2013 | As of December 31, 2012 | |||||||
| Stock price | $ | 1.31 | $ | 1.92 | ||||
| Strike price | $ | 3.32 | $ | 3.32 | ||||
| Expected life | 4.05 years | 4.55 years | ||||||
| Risk-free interest rate | 1.20 | % | 0.62 | % | ||||
| Volatility | 85 | % | 85 | % | ||||
| Fair value per share | $ | 0.56 | $ | 1.03 | ||||
The following table summarizes the warrants subject to liability accounting as of June 30, 2013 and December 31, 2012 (in thousands, except share and per share amounts) (see also Note 6):
Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 | |||||||||||||||||||||||||||||||||||||||
| Holder | Original Warrants | Adjusted Warrants | Grant Date | Expiration Date | Price per Share | Fair Value December 31, 2012 | Fair Value June 30, 2013 | Exercise of Warrants | Change in Fair Value | Exercise of Warrants | Change in Fair Value | Related Agreement | ||||||||||||||||||||||||||||
| Bridge Bank | 20,000 | 22,671 | 4/7/2010 | 7/7/2017 | $ | 3.32 | $ | 24 | $ | 12 | - | $ | 3 | - | $ | (12 | ) | Credit Agreement | ||||||||||||||||||||||
The change in the fair value of the Level 3 liability warrants during the three and six months ended June 30, 2013 is as follows (in thousands):
| Fair value at December 31, 2012 | $ | 24 | ||
| Exercise of warrants | - | |||
| Change in fair value | (15 | ) | ||
| Fair value at March 31, 2013 | $ | 9 | ||
| Exercise of warrants | - | |||
| Change in fair value | 3 | |||
| Fair value at June 30, 2013 | $ | 12 |
The warrant liability is included in other current liabilities on the condensed consolidated balance sheets.
NOTE 4—INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of the following (in thousands):
| June 30, 2013 | December 31, 2012 | |||||||||||||||||||||||
| Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
| Customer relationships | $ | 3,277 | $ | (1,486 | ) | $ | 1,791 | $ | 3,277 | $ | (1,274 | ) | $ | 2,003 | ||||||||||
| Existing technology | 3,783 | (2,269 | ) | 1,514 | 3,783 | (2,065 | ) | 1,718 | ||||||||||||||||
| Order backlog | 732 | (732 | ) | - | 732 | (732 | ) | - | ||||||||||||||||
| Patents | 457 | (361 | ) | 96 | 457 | (321 | ) | 136 | ||||||||||||||||
| Trade name | 659 | (294 | ) | 365 | 659 | (246 | ) | 413 | ||||||||||||||||
| Total | $ | 8,908 | $ | (5,142 | ) | $ | 3,766 | $ | 8,908 | $ | (4,638 | ) | $ | 4,270 | ||||||||||
For the three and six months ended June 30, 2013 and July 1, 2012, amortization of intangible assets was as follows (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Cost of revenue | $ | 122 | $ | 122 | $ | 244 | $ | 244 | ||||||||
| Selling, general and administrative expense | 129 | 130 | 260 | 261 | ||||||||||||
| $ | 251 | $ | 252 | $ | 504 | $ | 505 | |||||||||
Estimated future amortization expense related to intangible assets as of June 30, 2013 is as follows (in thousands):
| Years ending December 31, | ||||
| 2013 | $ | 479 | ||
| 2014 | 893 | |||
| 2015 | 893 | |||
| 2016 | 869 | |||
| 2017 | 632 | |||
| Total | $ | 3,766 | ||
As of June 30, 2013, the Company had $9.9 million of goodwill in connection with the acquisitions of ChipX and Endwave. In addition to its annual review, the Company also performs a review of the carrying value of its intangible assets if the Company believes that indicators of impairment exist. During the second quarter of 2013, there were no factors which indicated impairment. The Company did not record impairment on any intangibles, including goodwill, for the three and six months ended June 30, 2013. In addition, the Company did not record an impairment of goodwill for the year ended December 31, 2012 and will perform its annual impairment analysis during the fourth quarter of 2013.
NOTE 5—CREDIT FACILITIES
On March 25, 2013, the Company 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 on December 9, 2011. Pursuant to the Loan Agreement, the total aggregate amount that the Company is entitled to borrow from SVB has increased to $7 million, which is now 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 $3.5 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 and (ii) a new facility under which the Company is entitled to borrow from SVB up to $3.5 million without reference to accounts receivable under which the principal balance and accrued interest must be repaid within 3 business days after the date of any advance under the facility. In addition, the Loan Agreement eliminates the financial covenants contained in the previous loan agreement.
The Loan Agreement with SVB is secured by all of the Company’s assets, including all accounts, equipment, inventory, receivables, and general intangibles. The 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. |
The amount outstanding on the line of credit as of June 30, 2013 was $6.0 million. On July 1, 2013, the Company repaid the entire $6.0 million to SVB.
NOTE 6—STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Modified Dutch Auction Tender Offer
On March 23, 2012, the Company announced the commencement of a modified Dutch auction tender offer to purchase up to $2.0 million in value of the Company’s common stock, $0.001 par value per share, at a price not greater than $3.10 nor less than $2.85 per share.
On May 22, 2012, the Company completed its modified Dutch auction tender offer and repurchased 701,754 shares of its common stock, at a price of $2.85 per share and at a total cost of $2.2 million, which included $209,000 for investment banking, registration and other transaction costs. The repurchased shares are included as treasury shares in 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 of par value $0.001. In addition, the Company is authorized to issue 1,000,000 shares of preferred stock of $0.001 par value of which 300,000 shares have been designated Series A Junior Preferred Stock with powers, preferences and rights as set forth in the certificate of designation dated December 16, 2011; 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 June 30, 2013 and December 31, 2012, there were no shares of preferred stock issued or outstanding.
On December 16, 2011 (the “Adoption Date”), the Company adopted a rights agreement that may have the effect of deterring, delaying, or preventing a change in control. 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 $8.50 per right, subject to purchase price adjustments as set forth in the rights agreement. Each share of preferred stock has voting rights equal to one thousand shares of common stock. In the event that exercisability of the rights is triggered, each right held by an acquiring person or group would become void. As a result, upon triggering of exercisability of the rights, there would be significant dilution in the ownership interest of the acquiring person or group, making it difficult or unattractive for the acquiring person or group to pursue an acquisition of the Company. These rights expire in December of 2014, unless earlier redeemed or exchanged by the Company.
2008 Equity Incentive Plan
In December 2008, the Company adopted the 2008 Equity Incentive Plan (the “2008 Plan”) for directors, employees, consultants and advisors to the Company or its affiliates. Under the 2008 Plan, 2,500,000 shares of common stock were reserved for issuance upon the completion of a merger with Lumera Corporation (“Lumera”) on December 9, 2008. On January 1 of each year, starting in 2009, the aggregate number of shares reserved for issuance under the 2008 Plan increase automatically by the lesser of (i) 5% of the number of shares of common stock outstanding as of the Company’s immediately preceding fiscal year, or (ii) a number of shares determined by the Board of Directors. The maximum number of shares of common stock to be granted is up to 21,000,000 shares. Forfeited options or awards generally become available for future awards. As of December 31, 2012, the stockholders had approved 13,910,965 shares for future issuance. On January 1, 2013, there was an automatic increase of 1,110,287 shares. As of June 30, 2013, 10,487,602 options to purchase common stock and restricted stock were outstanding and 3,323,760 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. The Company has also issued restricted stock units. Vesting periods for awards are recommended by the CEO and generally provide for stock options to vest over a four-year period, with a one year vesting cliff of 25%, and have a maximum life of ten years from the date of grant, and for restricted stock units to vest over a one to two-year period.
2007 Equity Incentive Plan
In August 2007, GigOptix LLC adopted the GigOptix LLC Equity Incentive Plan (the "2007 Plan"). The 2007 Plan provided for grants of options to purchase membership units, membership awards and restricted membership units to employees, officers and non-employee directors, and upon the completion of the merger with Lumera were converted into grants of up to 632,500 shares of stock. Vesting periods are determined by the Board of Directors and generally provide for stock options to vest over a four-year period and expire ten years from date of grant. Vesting for certain shares of restricted stock is contingent upon both service and performance criteria. The 2007 Plan was terminated upon the completion of merger with Lumera on December 9, 2008 and the remaining 864 stock 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 June 30, 2013, no shares of common stock have been reserved for issuance for new grants under the 2007 Plan and options to purchase a total of 414,936 shares of common stock and 4,125 warrants to purchase common stock 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 June 30, 2013, no additional options can be granted under the Lumera Plan, and options to purchase a total of 76,133 shares of common stock were outstanding.
Warrants
As of December 31, 2012, the Company had a total of 1,810,595 warrants to purchase common stock outstanding under all warrant arrangements. During 2012, 137,500 warrants were exercised that resulted in 14,158 shares of common stock issued. During the six months ended June 30, 2013, 22,500 warrants expired. As a result, as of June 30, 2013 the Company had 1,788,095 warrants to purchase common stock outstanding under all warrant arrangements. Some of the warrants have anti-dilution provisions which adjust the number of warrants available to the holder such as, but not limited to, stock dividends, stock splits and certain reclassifications, exchanges, combinations or substitutions. These provisions are specific to each warrant agreement.
On April 8, 2011, the Company and the trustees for the DBSI Estate Litigation Trust and the DBSI Liquidating Trust (together “DBSI”) reached an agreement to settle a claim by DBSI against the Company. As part of the settlement, the Company in April 2011 issued two warrants for a total of 1 million shares of its common stock, and DBSI surrendered to the Company for cancellation all of DBSI’s previously outstanding warrants to purchase 660,473 shares of the Company’s common stock. These new warrants became exercisable on October 8, 2011. One of the two new warrants, for 500,000 shares of common stock, has a term of three years and an exercise price of $2.60 per share, and the other warrant, also for 500,000 shares of common stock, has a term of four years and an exercise price of $3.00 per share. The new warrants may be exercised on a cashless exercise basis. As of June 30, 2013, a total of 1,000,000 warrants to purchase common stock were outstanding related to the DBSI settlement.
The Company issued warrants to both Bridge Bank and Agility Capital in connection with the November 2009 loan and security agreement with Bridge Bank and the January 2010 secured line of credit facility with Agility Capital (see Note 3). On February 25, 2011, Agility Capital exercised both of the warrants issued to it. On March 23, 2011, Bridge Bank exercised 114,286 warrants. At June 30, 2013, Bridge Bank holds warrants to purchase 22,671 shares of common stock.
Stock-based Compensation Expense
The following table summarizes the Company’s stock-based compensation expense for the three and six months ended June 30, 2013 and July 1, 2012 (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Cost of revenue | $ | 59 | $ | 43 | $ | 139 | $ | 58 | ||||||||
| Research and development expense | 231 | 606 | 554 | 901 | ||||||||||||
| Selling, general and administrative expense | 448 | 1,017 | 1,153 | 1,445 | ||||||||||||
| Restructuring expense | - | - | 662 | 132 | ||||||||||||
| $ | 738 | $ | 1,666 | $ | 2,508 | $ | 2,536 | |||||||||
For the six months ended June 30, 2013, included in the $2.5 million of stock-based compensation expense is $662,000 in restructuring expense to modify the exercise period and accelerate the vesting of stock options and restricted stock units (see Note 7).
For the six months ended July 1, 2012, included in the $2.5 million of stock-based compensation expense is $132,000 in restructuring expense to accelerate the vesting of stock options (see Note 7).
During the three months ended June 30, 2013 and July 1, 2012, the Company granted options to purchase 610,010 and 94,000 of common stock, respectively, with an estimated total grant-date fair value of $359,000 and $163,000, respectively.
During the three months ended June 30, 2013 and July 1, 2012, the Company granted 569,846 and 200,600 restricted stock units, respectively, with a grant-date fair value of $490,000 and $608,000 or $0.86 and $3.03 per share, respectively.
During the six months ended June 30, 2013 and July 1, 2012, the Company granted options to purchase 610,010 and 2,541,533 of common stock, respectively, with an estimated total grant-date fair value of $359,000 and $4.5 million, respectively.
During the six months ended June 30, 2013 and July 1, 2012, the Company granted 569,846 and 829,269 restricted stock units, respectively, with a grant-date fair value of $490,000 and $2.3 million or $0.86 and $2.78 per share, respectively.
As of June 30, 2013, the total compensation cost not yet recognized in connection with unvested stock options under the Company’s equity compensation plans was approximately $5.1 million. As of June 30, 2013, the total compensation cost not yet recognized in connection with unvested restricted stock units under the Company’s equity compensation plans was approximately $425,000. Unrecognized compensation will be amortized on a straight-line basis over a weighted-average period of approximately 2.33 years.
The Company generally estimates the fair value of stock options granted using a Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, including the options expected life and the price volatility of the Company’s underlying stock. Actual volatility, expected lives, interest rates and forfeitures may be different from the Company’s assumptions, which would result in an actual value of the options being different from estimated. This fair value of stock option grants is amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period.
The majority of the stock options that the Company grants to its employees provide for vesting over a specified period of time, normally a four-year period, with no other conditions to vesting. However, the Company may also grant stock options for which vesting occurs not only on the basis of elapsed time, but also on the basis of specified company performance criteria being satisfied. In this case, the Company makes a determination regarding the probability of the performance criteria being achieved and uses a Black-Scholes option-pricing model to value the options incorporating management’s assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield. Compensation expense is recognized ratably over the vesting period, if it is expected that the performance criteria will be met.
The fair value of the Company’s stock options granted to employees was estimated using the following weighted-average assumptions:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Valuation model | Black-Scholes | Black-Scholes | Black-Scholes | Black-Scholes | ||||||||||||
| Expected term | 6.08 years | 6.08 years | 6.08 years | 6.08 years | ||||||||||||
| Expected volatility | 80 | % | 75 | % | 80 | % | 75 | % | ||||||||
| Expected dividends | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
| Risk-free interest rate | 0.88 | % | 0.93% to 1.10 | % | 0.88 | % | 0.93% to 1.34 | % | ||||||||
| Weighted-average fair value | $ | 0.59 | $ | 1.74 | $ | 0.59 | $ | 1.76 | ||||||||
Expected Term—Expected term used in the Black-Scholes option-pricing model represents the period that the Company’s stock options are expected to be outstanding and is measured using the technique described in SEC Staff Accounting Bulletin No.107.
Expected Volatility—Expected volatility used in the Black-Scholes option-pricing model is derived from a combination of historical volatility of the Company’s common stock and guideline companies selected based on similar industry and product focus.
Expected Dividend—The Company has never paid dividends and currently does not intend to do so, and accordingly, the dividend yield percentage is zero for all periods.
Risk-Free Interest Rate—The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury constant maturities issued with a term equivalent to the expected term of the option.
Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Stock Options with Market Conditions Granted March 17, 2010
From time to time the Company also issues stock option grants to directors and employees that have a market condition. In such cases stock options will vest only if the average price of the Company’s stock is at or exceeds a certain price threshold during a specific, previously defined period of time. To the extent that the market condition is not met, the options do not vest and are cancelled. In these cases, the Company cannot use the Black-Scholes option-pricing model; instead, a binomial model must be used. For certain stock options, the Company utilizes the Monte Carlo simulation technique, which incorporates assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield. Compensation expense is recognized ratably until such time as the market condition is satisfied. Certain stock options granted on March 17, 2010 were classified as option grants having a market condition. On March 17, 2010, the Company granted 2,382,000 options, of which 1,181,000 vest on the basis of market conditions and the remaining 1,201,000 vest over a four-year period. The entire grant was comprised of 2,292,000 options to employees and consultants and 90,000 options to board members at an exercise price of $1.95, which was the closing price of the Company’s shares on the date of grant approval.
Below is the vesting schedule for the stock options with market conditions.
472,400 shares, less the shares cancelled for terminated employees, vested on April 1, 2011 as the result of the average share price during March 2011 being $3.01, which exceeded the $2.50 March 2011 average price per share requirement. The fair value per share of these options was $1.05, at the grant date, and the total expense associated with these options was $496,000. These options were amortized over one year.
472,400 shares, less the shares cancelled for terminated employees, were cancelled on April 1, 2012. Although the average share price during March 2012 was below the specified price of $3.50, the Company recognized the expense because there was a market condition. The fair value per share of these options was $1.01, at the grant date, and the total expense associated with these options was $477,000. These options were amortized over two years.
236,200 shares, less the shares cancelled for terminated employees, were cancelled on April 1, 2013. Although the average share price during March 2013 was below the specified price of $5.00, the Company recognized the expense because there was a market condition. The fair value per share of these options was $1.01, at the grant date, and the total expense associated with these options was $239,000. These options were amortized over three years.
Stock Option and Restricted Stock Unit Activity
The following is a summary of option activity for the Company’s equity incentive plans, including both the 2008 Plan and other prior plans for which there are outstanding options but no new grants since the 2008 Plan was adopted:
| Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term, in Years | ||||||||||
| Outstanding, December 31, 2012 | 10,100,429 | $ | 2.42 | |||||||||
| Granted | 610,010 | 0.86 | ||||||||||
| Exercised | - | - | ||||||||||
| Forfeited/Expired | (291,378 | ) | 2.09 | |||||||||
| Ending balance, June 30, 2013 | 10,419,061 | $ | 2.34 | 7.46 | ||||||||
| Vested and exercisable and expected to vest, June 30, 2013 | 10,104,725 | $ | 2.34 | 7.43 | ||||||||
| Vested and exercisable, June 30, 2013 | 6,537,340 | $ | 2.38 | 6.84 | ||||||||
The aggregate intrinsic value of options vested, exercisable and expected to vest, based on the fair value of the underlying stock options as of June 30, 2013 was approximately $839,000. The aggregate intrinsic value reflects the difference between the exercise price of the underlying stock options and the Company’s closing share price of $1.31 as of June 28, 2013.
During the six months ended June 30, 2013, the Company did not have any options exercised. The total intrinsic value of options exercised during the six months ended July 1, 2012 was approximately $149,000.
The following is a summary of restricted stock unit activity for the indicated periods:
| Number of Shares | Weighted-Average Grant Date Fair Value | Weighted-Average Remaining Contractual Term, Years | Aggregate Intrinsic Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Outstanding, December 31, 2012 | 199,005 | $ | 2.78 | 0.16 | $ | 382 | ||||||||||
| Granted | 569,846 | 0.86 | ||||||||||||||
| Released | (192,485 | ) | 2.78 | |||||||||||||
| Forfeited/expired | (16,756 | ) | 1.61 | |||||||||||||
| Outstanding, June 30, 2013 | 559,610 | $ | 0.86 | 1.83 | $ | 733 | ||||||||||
NOTE 7—RESTRUCTURING
During the first of quarter of 2013, the Company undertook restructuring activities to reduce its expenses. The components of the restructuring charge included $662,000 of non-cash expenses associated with the acceleration of stock options and restricted stock units, $288,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations. The net charge for these restructuring activities was $950,000.
During the first quarter of 2012, the Company undertook restructuring activities to reduce its expenses. The components of the restructuring charge included severance, benefits, payroll taxes, expenses associated with the acceleration of stock options and other costs associated with employee terminations. The net charge for these restructuring activities was $207,000.
In July 2011, the Company vacated its headquarters facilities in Palo Alto, California and relocated to Endwave’s facilities in San Jose, California. The Company has lease obligations through December 2013 for the Palo Alto facilities. In connection with vacating the Palo Alto facilities, the Company recognized $769,000 of restructuring expenses in July 2011. During the second quarter of 2012, the Company sublet the Palo Alto facility to a third-party, and as a result, recorded a restructuring benefit of $74,000. In addition, during the second quarter of 2012, the Company recorded a benefit of $40,000 due to lower than expected restructuring expenses originally booked as part of the restructuring undertaken by the Company in relation to its acquisition of Endwave.
The following is a summary of the restructuring activity (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Beginning balance | $ | 182 | $ | 641 | $ | 168 | $ | 696 | ||||||||
| Charges | - | - | 950 | 207 | ||||||||||||
| Uses and adjustments | (54 | ) | (334 | ) | (990 | ) | (596 | ) | ||||||||
| Ending balance | $ | 128 | $ | 307 | $ | 128 | $ | 307 | ||||||||
As of June 30, 2013, the $128,000 in accrued restructuring includes $104,000 for the Palo Alto facilities restructuring which is expected to be paid out by the fourth quarter of 2013, and $24,000 for restructuring activities the Company undertook during the first quarter of 2013 which is expected to be paid out by the first quarter of 2014.
As of June 30, 2013, all accrued restructuring is recorded in other current liabilities.
NOTE 8—INCOME TAXES
The Company recorded a provision for income taxes of $14,000 and $27,000 for the three and six months ended June 30, 2013, respectively, and $18,000 and $34,000 for the three and six months ended July 1, 2012, respectively. The Company's effective tax rate was less than 1% for the three and six months ended June 30, 2013 and July 1, 2012.
The income tax provision for the three and six months ended June 30, 2013 and July 1, 2012 was due primarily to state taxes and foreign taxes due. The Company has incurred book losses in all tax jurisdictions and has a full valuation allowance against such losses.
In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. In order to support a conclusion that a valuation allowance is not needed, positive evidence of sufficient quantity and quality is necessary to overcome negative evidence. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding realization of the asset including lack of profitability through June 30, 2013 and the uncertainty over future operating profitability and taxable income. The Company will continue to evaluate the potential realization of the deferred tax assets on a quarterly basis.
The Company is subject to income taxes in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. All tax years since the Company’s inception are open and may be subject to potential examination in one or more jurisdictions.
NOTE 9—NET LOSS PER SHARE
The following table summarizes total securities outstanding which were not included in the calculation of diluted net loss per share because to do so would have been anti-dilutive:
| June 30, | July 1, | |||||||
| 2013 | 2012 | |||||||
| Stock options and restricted stock units | 10,978,671 | 10,931,296 | ||||||
| Common stock warrants | 1,788,095 | 1,810,595 | ||||||
| Total | 12,766,766 | 12,741,891 | ||||||
NOTE 10—SEGMENT AND GEOGRAPHIC INFORMATION
The Company has determined that it operates as a single operating and reportable segment. The following tables reflect the results of the Company’s reportable segment consistent with the management system used by the Company’s Chief Executive Officer, the chief operating decision maker.
The following table summarizes revenue by geographic region (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||||||||||||||||||
| North America | $ | 2,094 | 31 | % | $ | 2,116 | 22 | % | $ | 4,073 | 30 | % | $ | 4,986 | 27 | % | ||||||||||||||||
| Asia | 1,895 | 28 | % | 2,436 | 25 | % | 4,175 | 30 | % | 5,498 | 29 | % | ||||||||||||||||||||
| Europe | 2,533 | 37 | % | 5,029 | 53 | % | 4,696 | 34 | % | 8,181 | 44 | % | ||||||||||||||||||||
| Other | 309 | 4 | % | 7 | 0 | % | 808 | 6 | % | 74 | 0 | % | ||||||||||||||||||||
| $ | 6,831 | 100 | % | $ | 9,588 | 100 | % | $ | 13,752 | 100 | % | $ | 18,739 | 100 | % | |||||||||||||||||
The Company determines geographic location of its revenue based upon the destination of shipments of its products.
For the three months ended June 30, 2013, two customers accounted for greater than 10% of total revenue and combined they accounted for 41% of total revenue, of which the largest accounted for 30% of the Company’s total revenue. For the three months ended July 1, 2012, two customers accounted for greater than 10% of total revenue and combined they accounted for 43% of total revenue, of which the largest accounted for 23% of the Company’s total revenue.
For the six months ended June 30, 2013, one customer accounted for 29% of total revenue. For the six months ended July 1, 2012, two customers accounted for greater than 10% of total revenue and combined they accounted for 35% of total revenue, of which the largest accounted for 19% of the Company’s total revenue.
During the three months ended June 30, 2013, Italy, the United States, and Japan accounted for 34%, 26%, and 16% of total revenue, respectively. During the three months ended July 1, 2012, Italy, Hungary, the United States, and Hong Kong accounted for 24%, 21%, 21%, and 11% of total revenue, respectively. No other countries accounted for more than 10% of the Company’s total revenue during the periods presented.
During the six months ended June 30, 2013, Italy, the United States, and Japan accounted for 30%, 27%, and 14% of total revenue, respectively. During the six months ended July 1, 2012, the United States, Italy, Hungary, Japan, and Hong Kong accounted for 24%, 19%, 15%, 12%, and 11% of total revenue, respectively. No other countries accounted for more than 10% of the Company’s total revenue during the periods presented.
The following table summarizes revenue by product line (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Optics | $ | 4,141 | $ | 4,776 | $ | 8,501 | $ | 8,911 | ||||||||
| RF | 422 | 860 | 627 | 1,428 | ||||||||||||
| High-Speed Communications | 4,563 | 5,636 | 9,128 | 10,339 | ||||||||||||
| Industrial (ASIC) | 2,268 | 3,952 | 4,624 | 8,400 | ||||||||||||
| Total revenue | $ | 6,831 | $ | 9,588 | $ | 13,752 | $ | 18,739 | ||||||||
The following table summarizes long-lived assets by country (in thousands):
June 30, 2013 | December 31, 2012 | |||||||
| United States | $ | 2,233 | $ | 2,595 | ||||
| Switzerland | 1,399 | 1,984 | ||||||
| $ | 3,632 | $ | 4,579 | |||||
Long-lived assets, comprised of property and equipment, are reported based on the location of the assets at each balance sheet date.
NOTE 11—COMMITMENTS AND CONTINGENCIES
Commitments
Leases
The Company leases its domestic and foreign sales offices under non-cancelable operating leases. These leases contain various expiration dates and renewal options. The Company also leases certain software licenses under operating leases. Total facilities rent expense for the three and six months ended June 30, 2013 was $140,000 and $280,000, respectively, and for the three and six months ended July 1, 2012 was $128,000 and $273,000. During the second quarter of 2012, the Company sublet the Palo Alto facility, and as a result, recorded a restructuring benefit of $74,000.
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 | Sublease payments | Net lease payments | ||||||||||||
| 2013 | $ | 200 | $ | 917 | $ | (122 | ) | $ | 795 | |||||||
| 2014 | 306 | 607 | - | 607 | ||||||||||||
| 2015 | - | 320 | - | 320 | ||||||||||||
| 2016 | - | 339 | - | 339 | ||||||||||||
| 2017 | - | 57 | - | 57 | ||||||||||||
| Total minimum lease payments | 506 | $ | 2,240 | $ | (122 | ) | $ | 2,118 | ||||||||
| Less: Amount representing interest | (57 | ) | ||||||||||||||
| Total capital lease obligations | 449 | |||||||||||||||
| Less: current portion | (348 | ) | ||||||||||||||
| Long-term portion of capital lease obligations | $ | 101 | ||||||||||||||
Legal Contingencies
From time to time, the Company may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When the Company believes a loss is probable and can be reasonably estimated, the Company accrues the estimated loss in the consolidated financial statements. Where the outcome of these matters is not determinable, the Company does not make a provision in the financial statements until the loss, if any, is probable and can be reasonably estimated or the outcome becomes known. There are no known losses at this time.
NOTE 12—RECENT ACCOUNTING PRONOUNCEMENTS
In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update requiring centralized disclosure of amounts reclassified from accumulated other comprehensive income (“AOCI”) to net income. The amounts and the source reclassified out of each component of AOCI and the income statement line item affected by the reclassification should be presented either parenthetically on the face of the financial statements or in the notes. The entity does not need to show the income statement line item affected for certain components that are not required to be reclassified to net income in their entirety to net income, instead they would cross reference to the related footnote. This standard is effective for reporting periods beginning after December 15, 2012 and early adoption is permitted. The Company adopted this standard and this adoption did not have a material impact on the Company’s condensed consolidated financial statements.
In February 2013, the FASB issued an accounting standards update requiring disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The entity has to disclose the following information about each obligation: the nature of the arrangement, the total outstanding amount under the arrangement, the carrying amount of a liability and the carrying amount of a receivable recognized, the nature of any recourse provisions, how liability was measured initially, and where the entry was recorded in the financial statements. This standard is effective for fiscal years beginning after December 15, 2013 and early adoption is permitted. The Company does not expect the adoption will have a material impact on the Company’s condensed consolidated financial statements.
In March 2013, the FASB issued an accounting standards update requiring derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. For transactions occurring within a foreign entity, cumulative translation adjustment (“CTA”) would be released only upon complete or substantially complete liquidation of the foreign entity. Transactions within a foreign entity involve a component of a foreign entity, such as a subsidiary, a group of assets, or an equity investment. For transactions occurring in a foreign entity, CTA will be released based on the type of transaction. Transactions in a foreign entity involve a direct ownership interest of a foreign entity. This standard is effective for fiscal years beginning after December 15, 2013 and early adoption is permitted. The Company does not expect the adoption will have a material impact on the Company’s condensed consolidated financial statements.
You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes included elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2012. 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, 2012 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
We are a leading fabless supplier of semiconductor components that enable high speed information streaming over network infrastructures, within data centers and in user devices. Our business is made up of two product lines, our High-Speed Communications Products and our Industrial Products.
Through our High-Speed Communications product line we offer a broad portfolio of high performance optical and wireless components to telecommunication (“telecom”) and data communication (“datacom”) customers, including i) mixed signal radio frequency integrated circuits (“RFIC”) such as 40G and 100G laser and optical modulator drivers and trans-impedance amplifiers (“TIA”) for telecom, datacom, and consumer electronic fiber-optic applications; ii) power amplifiers and transceivers for microwave wave and millimeter monolithic microwave integrated circuit (“MMIC”) wireless applications including 73 Ghz and 83 GHz power amplifiers and transceiver chips; iii) thin film polymer on silicon (“TFPS”) optical modulators for 40G and 100G fiber-optic telecom; and iv) integrated systems in a package (“SIP”) solutions for both fiber-optic and wireless applications. The High-Speed Communications product line also partners with key customers on joint development projects that generate engineering project revenue for us while helping to position us for future product revenues with these key customers.
Our Industrial product line offers a wide range of digital and mixed-signal application specific integrated circuit (“ASIC”) solutions for industrial, military, avionics, medical and communications markets. The Industrial product line partners with ASIC customers on development projects that generate engineering project revenue for us that directly lead to future product revenues with these ASIC customers.
We focus on the specification, design, development and sale of analog semiconductor integrated circuits (”ICs”), multi-chip module (“MCM”) solutions, polymer modulators, and digital and analog ASICs, as well as wireless communications MMICs and modules. We believe we are an industry leader in the fast growing market for electronic solutions that enable high-bandwidth optical connections found in telecom, datacom and storage systems, and, increasingly, in consumer electronics and computing systems.
Since inception, we have expanded our customer base with the acquisition and integration of five businesses with complementary products and customers. In doing so, we have expanded our product line from a few leading 10 gigabit per second (“Gbps”) ultra-long haul electronic modulator drivers at our inception in July 2007 to a line of over 150 products today that include: drivers, receivers and modulators for 10 to 400 Gbps optical applications; power amplifiers, filters and attenuators spanning up to 86GHz wireless applications; and custom ASICs spanning 0.6um to 65nm technology nodes. Our direct sales force is based in 3 countries and is supported by a significant number of channel representatives and distributors that are selling our products throughout North America, Europe, Japan and Asia.
We have incurred negative cash flows from operations since inception. For the six months ended June 30, 2013 and the year ended December 31, 2012 we incurred net losses of $4.0 million and $7.0 million, respectively, and cash outflows from operations of $1.9 million and $2.0 million respectively. As of June 30, 2013 and December 31, 2012, we had an accumulated deficit of $98.5 million and $94.5 million, respectively.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update requiring centralized disclosure of amounts reclassified from accumulated other comprehensive income (“AOCI”) to net income. The amounts and their source reclassified out of each component of AOCI and the income statement line item affected by the reclassification should be presented either parenthetically on the face of the financial statements or in the notes. The entity does not need to show the income statement line item affected for certain components that are not required to be reclassified to net income in their entirety to net income, instead they would cross reference to the related footnote. This standard is effective for reporting periods beginning after December 15, 2012 and early adoption is permitted. We adopted the standard and this adoption did not have a material impact on our condensed consolidated financial statements.
In February 2013, the FASB issued an accounting standards update requiring disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The entity has to disclose the following information about each obligation: the nature of the arrangement, the total outstanding amount under the arrangement, the carrying amount of a liability and the carrying amount of a receivable recognized, the nature of any recourse provisions, how liability was measured initially, and where the entry was recorded in the financial statements. This standard is effective for fiscal years beginning after December 15, 2013 and early adoption is permitted. We do not expect the adoption will have a material impact on our condensed consolidated financial statements.
In March 2013, the FASB issued an accounting standards update requiring derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. For transactions occurring within a foreign entity, cumulative translation adjustment (“CTA”) would be released only upon complete or substantially complete liquidation of the foreign entity. Transactions within a foreign entity involve a component of a foreign entity, such as a subsidiary, a group of assets, or an equity investment. For transactions occurring in a foreign entity, CTA will be released based on the type of transaction. Transactions in a foreign entity involve a direct ownership interest of a foreign entity. This standard is effective for fiscal years beginning after December 15, 2013 and early adoption is permitted. We do not expect the adoption will have a material impact on our condensed consolidated financial statements.
Results of Operations
Revenue
Revenue for the periods reported was as follows (in thousands, except percentages):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Total revenue | $ | 6,831 | $ | 9,588 | $ | 13,752 | $ | 18,739 | ||||||||
| Decrease, period over period | $ | (2,757 | ) | $ | (4,987 | ) | ||||||||||
| Percentage decrease, period over period | -29 | % | -27 | % | ||||||||||||
Total revenue for the three months ended June 30, 2013 was $6.8 million, a decrease of $2.8 million or 29%, compared with $9.6 million for the three months ended July 1, 2012. The decrease in total revenue was primarily due to decreased revenue from both our Industrial (ASIC) and High-Speed Communications Products.
Total revenue for the six months ended June 30, 2013 was $13.8 million, a decrease of $5.0 million or 27%, compared with $18.7 million for the six months ended July 1, 2012. The decrease in total revenue was primarily due to decreased revenue from both our Industrial (ASIC) and High-Speed Communications 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 | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Total cost of revenue | $ | 2,578 | $ | 4,537 | $ | 5,214 | $ | 8,715 | ||||||||
| Gross profit | $ | 4,253 | $ | 5,051 | $ | 8,538 | $ | 10,024 | ||||||||
| Gross margin | 62 | % | 53 | % | 62 | % | 53 | % | ||||||||
| Decrease, period over period | (798 | ) | (1,486 | ) | ||||||||||||
| Percentage decrease, period over period | -16 | % | -15 | % | ||||||||||||
Gross profit consists of revenue less cost of revenue. Cost of revenue consists primarily of the costs to manufacture saleable chips, including outsourced wafer fabrication and testing; costs of direct materials; equipment depreciation; costs associated with procurement, production control, quality assurance and manufacturing engineering; fees paid to our offshore manufacturing vendors; reserves for potential excess or obsolete material; costs related to stock-based compensation; accrued costs associated with potential warranty returns; impairment of long-lived assets 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 June 30, 2013 was $4.3 million, or a gross margin of 62%, compared to a gross profit of $5.1 million, or a gross margin of 53%, for the three months ended July 1, 2012. The increase in gross margin is primarily due to a change in product mix towards certain higher margin products including revenue from joint development projects, and away from certain low margin RF transceivers and Industrial products. Revenue from our joint development projects is generally at 100% gross margin because the costs associated with joint development project revenue are expensed as incurred and generally included in research and development expense.
Gross profit for the six months ended June 30, 2013 was $8.5 million, or a gross margin of 62%, compared to a gross profit of $10.0 million, or a gross margin of 53%, for the six months ended July 1, 2012. The increase in gross margin is primarily due to a change in product mix towards certain higher margin products including revenue from joint development projects, and away from certain low margin RF transceivers and Industrial products. Revenue from our joint development projects is generally at 100% gross margin because the costs associated with joint development project revenue are expensed as incurred and generally included in research and development expense.
Research and Development Expense
Research and development expense for the periods presented was as follows (in thousands, except percentages):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Research and development expense | $ | 3,177 | $ | 3,445 | $ | 6,413 | $ | 6,828 | ||||||||
| Percentage of revenue | 47 | % | 36 | % | 47 | % | 36 | % | ||||||||
| Decrease, period over period | $ | (268 | ) | $ | (415 | ) | ||||||||||
| Percentage decrease, period over period | -8 | % | -6 | % | ||||||||||||
Research and development expenses are expensed as incurred. Research and development expense consists primarily of salaries and related expenses for research and development personnel, consulting and engineering design, non-capitalized tools and equipment, engineering related semiconductor masks, depreciation for equipment, engineering expenses paid to outside technology development suppliers, allocated facilities costs and expenses related to stock based compensation.
Research and development expense for the three months ended June 30, 2013 was $3.2 million compared to $3.4 million for the three months ended July 1, 2012, a decrease of $268,000 or 8%. Research and development costs decreased as compared to the second quarter of 2012 primarily due to a $375,000 decrease in stock based compensation which was partially offset by a $103,000 increase in project related expenses.
Research and development expense for the six months ended June 31, 2013 was $6.4 million compared to $6.8 million for the six months ended July 1, 2012, a decrease of $415,000 or 6%. Research and development costs decreased as compared to the second quarter of 2012 primarily due to a $347,000 decrease in stock based compensation.
We expect research and development expense to increase from the second quarter of 2013 to the third quarter of 2013, as we incur additional expenses associated with engineering projects during the third quarter.
Selling, General and Administrative Expense
Selling, general and administrative expense for the periods presented was as follows (in thousands, except percentages):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Selling, general and administrative expense | $ | 2,041 | $ | 3,152 | $ | 4,394 | $ | 5,959 | ||||||||
| Percentage of revenue | 30 | % | 33 | % | 32 | % | 32 | % | ||||||||
| Decrease, period over period | $ | (1,111 | ) | $ | (1,565 | ) | ||||||||||
| Percentage decrease, period over period | -35 | % | -26 | % | ||||||||||||
Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, accounting, finance, sales, marketing and administration personnel, professional fees, allocated facilities costs, promotional activities and expenses related to stock-based compensation.
Selling, general and administrative expense for the three months ended June 30, 2013 was $2.0 million compared to $3.2 million for the three months ended July 1, 2012, a decrease of $1.1 million or 35%. Selling, general and administrative expense decreased as compared to the second quarter of 2012 primarily due to a $569,000 decrease in stock based compensation, a $164,000 decrease in personnel related expenses, a $146,000 decrease in outside services, and $131,000 decrease in professional fees.
Selling, general and administrative expense for the six months ended June 30, 2013 was $4.4 million compared to $6.0 million for the six months ended July 1, 2012, a decrease of $1.6 million or 26%. Selling, general and administrative expense decreased as compared to the second quarter of 2012 primarily due to a $423,000 decrease in professional fees, a $296,000 decrease in outside services, a $292,000 decrease in stock based compensation, and a $256,000 decrease in personnel related expenses.
We expect selling, general and administrative expense to moderately increase in absolute dollars from the second quarter of 2013 to the third quarter of 2013.
Restructuring Expense, Net
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Restructuring expense | $ | - | $ | (114 | ) | $ | 950 | $ | 93 | |||||||
| Percentage of revenue | 0 | % | -1 | % | 7 | % | 0 | % | ||||||||
During the six months ended June 30, 2013, we recorded $950,000 in restructuring expenses. The components of the restructuring charge included $662,000 of non-cash expenses associated with the acceleration of stock options and restricted stock units and $288,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations. No restructuring expenses were incurred in the three months ended June 30, 2013.
During the three months ended April 1, 2012, we undertook restructuring activities to reduce our expenses. The components of the restructuring charge included severance, benefits, payroll taxes, expenses associated with the acceleration of stock options and other costs associated with employee terminations. The net charge for these restructuring activities was $207,000.
During the three months ended July 1, 2012, we recorded a benefit of $114,000 for restructuring expense, comprised of a $74,000 benefit from the sublet of our Palo Alto facility, as we were able to sublet the property at a higher lease rate than we originally estimated, and a $40,000 benefit due to lower than anticipated restructuring charges related to the Endwave merger.
Special Litigation-Related Expense
During the three months ended June 30, 2013, we incurred special litigation-related expenses of $472,000, which was primarily due to legal fees associated with the Optomai case.
During the six months ended June 30, 2013, we incurred special litigation-related expenses of $887,000, which was primarily due to $770,000 of legal fees associated with the lawsuit against M/A-Com, Optomai and three former GigOptix employees and $108,000 of legal fees associated with the Advantech case.
During the three and six months ended July 1, 2012, we recorded special litigation-related expense of $212,000 and $353,000, respectively, which was related to costs associated with the litigation against M/A-Com Technology Solution, Inc. (Optomai), National Instruments and Telekenex matters.
Interest Expense, Net and Other Income (Expense), Net
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Interest expense, net | $ | (25 | ) | $ | (41 | ) | $ | (79 | ) | $ | (193 | ) | ||||
| Other income (expense), net | 88 | 72 | 256 | 57 | ||||||||||||
| Total | $ | 63 | $ | 31 | $ | 177 | $ | (136 | ) | |||||||
Interest expense, net and other income (expense), net consist primarily of gains and losses related to foreign currency transactions, gains and losses related to property and equipment disposals, interest on line of credit, interest on capital leases and amortization of loan fees in connection with our Silicon Valley Bank line of credit and loan.
Interest expense, net for the three months ended June 30, 2013 was $25,000 compared to $41,000 for the three months ended July 1, 2012. Interest expense, net decreased as compared to the second quarter of 2012 primarily due to a $10,000 decrease in interest on capital leases.
Interest expense, net for the six months ended June 30, 2013 was $79,000 compared to $193,000 for the six months ended July 1, 2012. Interest expense, net decreased as compared to the second quarter of 2012, primarily due to a $56,000 decrease in interest on capital leases and $39,000 decrease in loan fees.
Other income (expense), net for the three months ended June 30, 2013 was income of $88,000, which primarily consisted of $65,000 gain on sale of materials and $29,000 gain on sale of property and equipment. Other income (expense), net for the three months ended July 1, 2012 was an expense of $72,000, which primarily consisted of $35,000 gain on foreign currency transactions and $33,000 gain from the subsidiary deferred income taxes.
Other income (expense), net for the six months ended June 30, 2013 was income of $256,000, which primarily consisted of $160,000 gain on sale of property and equipment, $88,000 gain on sale of materials and $12,000 of liability warrants income. Other income (expense), net for the six months ended July 1, 2012 was an expense of $57,000, primarily due to $35,000 gain on foreign currency transactions, $33,000 gain from subsidiary deferred income taxes and $14,000 of liability warrants expenses.
Provision for Income Taxes
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2013 | July 1, 2012 | June 30, 2013 | July 1, 2012 | |||||||||||||
| Provision for income taxes | $ | 14 | $ | 18 | $ | 27 | $ | 34 | ||||||||
| Percentage of revenue | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
| Decrease, period over period | $ | (4 | ) | $ | (7 | ) | ||||||||||
| Percentage decrease, period over period | -22 | % | -21 | % | ||||||||||||
Income tax expense was $14,000 and $18,000 for three months ended June 30, 2013 and July 1, 2012, respectively, and our effective tax rate was less than 1% for those periods. The income tax provision for the three months ended June 30, 2013 and July 1, 2012 were due primarily to state taxes and foreign taxes due. We have incurred book losses in all tax jurisdictions and have a full valuation allowance against such losses.
Income tax expense was $27,000 and $34,000 for six months ended June 30, 2013 and July 1, 2012, respectively, and our effective tax rate was less than 1% for those periods. The income tax provision for the six months ended June 30, 2013 and July 1, 2012 were due primarily to state taxes and foreign taxes due. We have incurred book losses in all tax jurisdictions and have a full valuation allowance against such losses.
Liquidity and Capital Resources
On March 25, 2013, we 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 on December 9, 2011. Pursuant to the Loan Agreement, the total aggregate amount that we are entitled to borrow from SVB has increased to $7 million, which is now 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 $3.5 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 and (ii) a new facility under which we are entitled to borrow from SVB up to $3.5 million without reference to accounts receivable under which the principal balance and accrued interest must be repaid within 3 business days after the date of any advance under the facility. In addition, the Loan Agreement eliminates the financial covenants contained in the previous loan agreement.
The Loan Agreement with SVB is secured by all of our assets, including all accounts, equipment, inventory, receivables, and general intangibles. The Loan Agreement contains certain restrictive covenants that will impose significant operating and financial restrictions on our operations, including, but not limited to restrictions that limit our ability to:
| · | Sell, lease, or otherwise transfer, or permit any of our subsidiaries to sell, lease or otherwise transfer, all or any part of our 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 our subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of our subsidiaries to acquire, all or substantially all of the capital stock or property of another person; |
| · | Create, incur, assume or be liable for any indebtedness, other than certain indebtedness permitted under the amended and restated loan and security agreement; |
| · | Pay any dividends or make any distribution or payment on, or redeem, retire, or repurchase, any capital stock; and |
| · | Make any investment, other than certain investments permitted under the amended and restated loan and security agreement. |
The amount outstanding on the line of credit as of June 30, 2013 was $6.0 million. On July 1, 2013, the Company repaid the entire $6.0 million to SVB.
Cash and cash equivalents and cash flow data for the periods presented were as follows (in thousands):
June 30, 2013 | December 31, 2012 | |||||||
| Cash and cash equivalents | $ | 9,506 | $ | 10,147 | ||||
| Six Months Ended | ||||||||
| June 30, 2013 | July 1, 2012 | |||||||
| Net cash used in operating activities | $ | (1,856 | ) | $ | (2,124 | ) | ||
| Net cash used in investing activities | $ | (939 | ) | $ | (1,248 | ) | ||
| Net cash provided by financing activities | $ | 2,088 | $ | 602 | ||||
Operating Activities
Operating activities used cash of $1.9 million in the six months ended June 30, 2013. This resulted from a net loss of $4.0 million and we experienced cash usage for working capital for an increase in accounts receivable, net of $1.4 million, an increase in prepaid and other current assets of $387,000, a decrease in accounts payables of $409,000, and a decrease in other current and long-term liabilities of $186,000. These decreases were partially offset by a decrease in inventories of $158,000 and non-cash expenses of stock based compensation of $2.5 million and depreciation and amortization of $1.9 million.
Cash used in operating activities for the six months ended July 1, 2012 consisted of net loss adjusted for certain non-cash items, including depreciation and amortization, non-cash restructuring expense, and stock-based compensation expense, as well as the effect of changes in working capital. Operating activities used cash of $2.1 million during the six months ended July 1, 2012. This resulted from a net loss of $3.4 million and we experienced cash usage for working capital for an increase in accounts receivable of $2.1 million due to timing of collections, an increase in inventories of $1.4 million due to purchasing, an increase in prepaid and other assets of $302,000, a decrease in accrued restructuring of $100,000, and a decrease in other current and long-term liabilities of $498,000. These decreases were offset by an increase in accounts payable of $768,000 and an increase of $407,000 in accrued compensation. In addition, these uses were partially offset by the following non-cash expenses: stock-based compensation of $2.5 million and depreciation and amortization of $2.1 million.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2013 was $939,000 and consisted of $1.1 million of purchases of fixed assets partially offset by $160,000 proceeds from sale of property and equipment.
Net cash used in investing activities for the six months ended July 1, 2012 was $1.2 million and consisted of $1.6 million of purchases of property and equipment which was partially offset by $400,000 proceeds from sale and maturity of investments.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2013 was $2.1 million and consisted primarily of $11.9 million of proceeds from our line of credit facilities with Silicon Valley Bank, partially offset by a $9.5 million repayment of the line of credit and $237,000 for capital lease payments.
Net cash provided by financing activities during the six months ended July 1, 2012 was $602,000 and consisted primarily of $10.7 million proceeds less a $7.7 million repayment from line of credit facilities with Silicon Valley Bank and $347,000 of proceeds from issuance of stock which were partially offset by $2.2 million of treasury stock repurchase from our modified Dutch auction tender offer, $189,000 of taxes paid related to net share settlement of equity awards, and $297,000 of payments on our capital lease obligations.
Material Commitments
The following table summarizes our future net cash obligations for current debt, operating leases, and capital leases, in thousands of dollars, as of June 30, 2013:
| Contractual Obligations at June 30, 2013: | Total | Less than One Year | One to Three Years | More than Three Years | ||||||||||||
| Current debt obligation | $ | 6,000 | $ | 6,000 | $ | - | $ | - | ||||||||
| Operating lease obligations (net of sublease) | 2,118 | 795 | 927 | 396 | ||||||||||||
| Capital lease obligations (including interest) | 506 | 200 | 306 | |||||||||||||
| Total | $ | 8,624 | $ | 6,995 | $ | 1,233 | $ | 396 | ||||||||
Except for the future cash obligations above, GigOptix did not have any material commitments for capital expenditures as of June 30, 2013.
Impact of Inflation and Changing Prices on Net Sales, Revenue and Income
Inflation and changing prices have not had a material impact on the materials used in our production process during the periods and at balance sheet dates presented in this report.
Off-Balance Sheet Arrangements
GigOptix does not use off-balance-sheet arrangements with unconsolidated entities, nor does it use other forms of off-balance-sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, GigOptix 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.gigoptix.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the SEC. The information contained on our website is not a part of this Quarterly Report on Form 10-Q.
Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to also use the following social media channels as a means of disclosing information about the company, our services and other matters and for complying with our disclosure obligations under Regulation FD:
| • | GigOptix Twitter Account (https://twitter.com/GigOptix) |
The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q. Further, the references to the URLs for these websites are intended to be inactive textual references only.
You can also read and copy any document that we file, including this Annual Report on Form 10-K, 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.
This item has been omitted based on GigOptix’ status as a smaller reporting company.
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 and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management is responsible for establishing and maintaining our disclosure controls and procedures. Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2013. Our CEO and CFO have concluded that our disclosure controls and procedures were effective as of that date and have also 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
From time to time, we may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When we believe a loss is probable and can be reasonably estimated, we accrue the estimated loss in our consolidated financial statements. Where the outcome of these matters is not determinable, we do not make a provision in our financial statements until the loss, if any, is probable and can be reasonably estimated or the outcome becomes known.
Advantech Advanced Microwave Technologies Inc. (“Advantech”)
On October 31, 2008, Endwave filed a complaint with the Canadian Superior Court in Montreal, Quebec alleging that Advantech, the parent company of Allgon Microwave Corporation AB, or Allgon, had breached its contractual obligations with Endwave and owes Endwave $994,500 for amounts outstanding under a note receivable and for purchased inventory and authorized finished goods purchase orders. By virtue of the acquisition of Endwave, we have assumed this litigation. The case was tried before a Judge in February 2013, and the court has ruled against Endwave.
Optomai, Inc. and M/A-COM Technology Solutions, Inc.
On April 25, 2011, we initiated a lawsuit in the Superior Court of Santa Clara County, California, against five former employees of GigOptix, including our former Vice President of Sales and two design engineers, who left in 2009 and 2010 to launch a competing company, Optomai, Inc., which was formed in October 2009 while four of the five were still employed by GigOptix. At GigOptix, the former employees were responsible for the development and promotion of products for 40G and 100G fiber optic networks, among other Optix products. Only a few months after four of the five employees had left our company, in April 2010, their new company, Optomai, Inc., began marketing such products which were developed using GigOptix files which were copied. On the day in April 2011 that GigOptix filed the lawsuit, M/A-COM Technology Solutions, Inc. (“MACOM”) announced that it had acquired Optomai and we subsequently added M/A-COM to the suit as a defendant. In January 2013, we dismissed from the lawsuit without prejudice two of the employees, and we have maintained the claims against the former Vice President of Sales and two design engineers, as well as the two corporate defendants. In the lawsuit, GigOptix seeks damages and injunctive relief for misappropriation of confidential information and trade secrets and breach of the contractual and legal obligations to GigOptix of the former employees including while still employed by GigOptix. In preparation for the jury trial, GigOptix has engaged in forensic and damages discovery. On August 9, 2013, the court moved the date for the trial to begin to September 23, 2013 for administrative reasons. In addition, during July 2013, the court denied several motions brought by the defendants, including motions filed by the defendants to stay the lawsuit on the basis that certain individual defendants are being investigated by the United States Attorneys’ Office for the Northern District of California, and a motion for a judgment in favor of defendants on GigOptix’s breach of the duty of loyalty claims.
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, 2012 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.
We have incurred net losses since inception. For the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, we incurred net losses of $4.0 million, $7.0 million, and $14.1 million, respectively, and cash outflows from operations of $1.9 million, $2.0 million, and $4.9 million, respectively. As of June 30, 2013, we had an accumulated deficit of $98.5 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 expected increased 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 may require additional capital to continue to fund our operations. If we need but do not obtain additional capital, we may be required to substantially limit operations.
We may not generate sufficient cash from our operations to finance our anticipated operations for the foreseeable future from such operations. We could require additional financing sooner than expected if we have poor financial results, including unanticipated expenses, or an unanticipated drop in projected revenues. Such financing may be unavailable when needed or may not be available on acceptable terms. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our current stockholders will be reduced, and these securities may have rights superior to those of its common stock. If adequate funds are not available to satisfy either short-term or long-term capital requirements, or if planned revenues are not generated, we may be required to limit our operations substantially. These limitations of operations may include a possible sale or shutdown of portions of our business, reductions in capital expenditures and reductions in staff and discretionary costs.
We have incurred net losses since inception. As of June 30, 2013, we had an accumulated deficit of $98.5 million. We have incurred significant losses since inception, attributable to our efforts to design and commercialize our products. We have managed our liquidity during this time through a series of cost reduction initiatives and through increasing our line of credit with our bank. We had $9.5 million in cash and cash equivalents as of June 30, 2013. However, while we have additional cash available, our ability to continue as a going concern may be dependent on many events outside of our direct control, including, among other things, obtaining additional financing either privately or through public markets, should this be necessary, and customers purchasing our products in substantially higher volumes.
We could suffer unrecoverable losses on accounts receivable from our customers, which would adversely affect our financial results.
Our operating cash flows are dependent on the continued collection of receivables. Our accounts receivable as of June 30, 2013 increased by $1.4 million or 27% compared to the balance at December 31, 2012. We could suffer additional accounting losses as well as a reduction in liquidity if a customer is unable or refuses to pay. 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 North America comprised 70% and 73% of our revenue for the six months ended June 30, 2013 and July 1, 2012, respectively. In addition, we have two subsidiaries overseas (Switzerland and Germany) that record their operating expenses in a foreign currency. Since sales of our products have been denominated to date primarily in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in GigOptix’ results of operations. We currently do not have hedging or other programs in place to protect against adverse changes in the value of the U.S. dollar as compared to other currencies to minimize potential adverse effects.
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 further reduce our revenue and profits. There is no assurance that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers.
For the six months ended June 30, 2013, one customer accounted for 29% of total revenue. For the six months ended July 1, 2012, two customers accounted for greater than 10% of total revenue and combined they accounted for 35% of total revenue, of which the largest accounted for 19% of total revenue.
Our data and information systems and network infrastructure may be subject to hacking or other cybersecurity threats. If our security measures are breached and an unauthorized party obtains access to our customer data or our proprietary business information, our information systems may be perceived as being unsecure, which could harm our business and reputation, and our proprietary business information could be misappropriated which could have an adverse effect on our business and results of operations.
In our operations, we store and transmit our proprietary information and that of our customers. We have offices, research and development, and production facilities throughout the world, including key research and development facilities outside of the United States. Our operations are dependent upon the connectivity and continuity of our facilities and operations throughout the world. Despite our security measures, our information systems and network infrastructure may be vulnerable to cyber attacks or could be breached due to an employee error or other disruption that could result in unauthorized disclosure of sensitive information which has the potential to significantly interfere with our business operations. Breaches of our security measures could expose us to a risk of loss or misuse of this information, litigation and potential liability. Since techniques used to obtain unauthorized access or to sabotage information systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures in advance of such an attack on our systems. In addition, if we select a vendor that uses cyber or “cloud” storage of information as part of their service or product offerings, despite our attempts to validate the security of such services, our proprietary information may be misappropriated by third parties. In the event of an actual or perceived breach of our security, or the security of one of our vendors, the market perception of the effectiveness of our security measures could be harmed and we could suffer damage to our reputation or our business, or lose existing customers and lose our ability to obtain new customers. Additionally, misappropriation of our proprietary business information could prove competitively harmful to our business.
(a) Exhibits
| Exhibit Number | Description | |
| 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.
GIGOPTIX, INC.
| Date: August 13, 2013 | /S/ Avi S. Katz |
Dr. Avi S. Katz Chief Executive Officer and Chairman of the Board | |
| Date: August 13, 2013 | /S/ Curt P. Sacks |
Curt P. Sacks Chief Financial Officer |
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