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 September 28, 2014
or
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-35520
GIGOPTIX, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 26-2439072 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
130 Baytech Drive
San Jose, CA 95134
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of Common Stock outstanding as of October 31, 2014, the most recent practicable date prior to the filing of this Quarterly Report on Form 10-Q, was 32,860,266 shares.
PAGE NO | ||
| PART I FINANCIAL INFORMATION | ||
| ITEM 1 | Financial Statements (unaudited) | |
| 3 | ||
| 4 | ||
| 5 | ||
| 6 | ||
| 7 | ||
| ITEM 2 | 20 | |
| ITEM 3 | 28 | |
| ITEM 4 | 28 | |
| PART II OTHER INFORMATION | ||
| ITEM 1 | 28 | |
| ITEM 1A | 29 | |
| ITEM 6 | 30 | |
PART I
FINANCIAL INFORMATION
GIGOPTIX, INC.
(In thousands, except share and per share amounts)
| September 28, | December 31, | |||||||
| 2014 | 2013 | |||||||
| ASSETS | (Unaudited) | (1) | ||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 18,119 | $ | 20,377 | ||||
| Accounts receivable, net | 7,707 | 5,021 | ||||||
| Inventories | 4,021 | 4,617 | ||||||
| Prepaid and other current assets | 674 | 434 | ||||||
| Total current assets | 30,521 | 30,449 | ||||||
| Property and equipment, net | 2,047 | 2,999 | ||||||
| Intangible assets, net | 2,617 | 3,287 | ||||||
| Goodwill | 10,306 | 9,860 | ||||||
| Restricted cash | 130 | 284 | ||||||
| Other assets | 116 | 183 | ||||||
| Total assets | $ | 45,737 | $ | 47,062 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,860 | $ | 831 | ||||
| Accrued compensation | 1,079 | 1,170 | ||||||
| Other current liabilities | 2,247 | 2,746 | ||||||
| Total current liabilities | 5,186 | 4,747 | ||||||
| Pension liabilities | 131 | 140 | ||||||
| Deferred rent, noncurrent | 125 | 177 | ||||||
| Other long term liabilities | 444 | 418 | ||||||
| Total liabilities | 5,886 | 5,482 | ||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.001 par value; 50,000,000 shares authorized as of September 29, 2014 and December 31, 2013; 32,860,266 and 32,067,616 shares issued and outstanding as of September 29, 2014 and December 31, 2013, respectively | 32 | 32 | ||||||
| Additional paid-in capital | 142,757 | 139,710 | ||||||
| Treasury stock, at cost; 701,754 shares as of September 29, 2014 and December 31, 2013, respectively | (2,209 | ) | (2,209 | ) | ||||
| Accumulated other comprehensive income | 441 | 490 | ||||||
| Accumulated deficit | (101,170 | ) | (96,443 | ) | ||||
| Total stockholders’ equity | 39,851 | 41,580 | ||||||
| Total liabilities and stockholders’ equity | $ | 45,737 | $ | 47,062 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
| (1) | The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements at that date. |
GIGOPTIX, INC.
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Total revenue | $ | 8,484 | $ | 7,336 | $ | 23,907 | $ | 21,088 | ||||||||
| Total cost of revenue | 3,482 | 2,985 | 10,095 | 8,199 | ||||||||||||
| Gross profit | 5,002 | 4,351 | 13,812 | 12,889 | ||||||||||||
| Research and development expense | 3,257 | 3,984 | 10,357 | 10,397 | ||||||||||||
| Selling, general and administrative expense | 2,388 | 2,483 | 7,353 | 6,877 | ||||||||||||
| Restructuring expense, net | 36 | - | 343 | 950 | ||||||||||||
| Special litigation-related expense | - | (5,673 | ) | - | (4,786 | ) | ||||||||||
| Total operating expenses | 5,681 | 794 | 18,053 | 13,438 | ||||||||||||
| Income (loss) from operations | (679 | ) | 3,557 | (4,241 | ) | (549 | ) | |||||||||
| Interest expense, net | (9 | ) | (27 | ) | (36 | ) | (106 | ) | ||||||||
| Other income, net | 35 | 3 | 45 | 259 | ||||||||||||
| Income (loss) before provision for income taxes | (653 | ) | 3,533 | (4,232 | ) | (396 | ) | |||||||||
| Provision for income taxes | 8 | 1 | 39 | 28 | ||||||||||||
| Income (loss) from consolidated companies | (661 | ) | 3,532 | (4,271 | ) | (424 | ) | |||||||||
| Loss on equity investment | (125 | ) | - | (456 | ) | - | ||||||||||
| Net income (loss) | $ | (786 | ) | $ | 3,532 | $ | (4,727 | ) | $ | (424 | ) | |||||
| Net income (loss) per share—basic and diluted | $ | (0.02 | ) | $ | 0.16 | $ | (0.15 | ) | $ | (0.02 | ) | |||||
| Weighted average number of shares used in basic per share calculations | 31,866 | 21,656 | 31,636 | 21,610 | ||||||||||||
| Weighted average number of shares used in diluted per share calculations | 31,866 | 22,359 | 31,636 | 21,610 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
GIGOPTIX, INC.
(In thousands)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Net income (loss) | $ | (786 | ) | $ | 3,532 | $ | (4,727 | ) | $ | (424 | ) | |||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
| Foreign currency translation adjustment | (37 | ) | 51 | (49 | ) | 76 | ||||||||||
| Other comprehensive income (loss), net of tax | (37 | ) | 51 | (49 | ) | 76 | ||||||||||
| Comprehensive income (loss) | $ | (823 | ) | $ | 3,583 | $ | (4,776 | ) | $ | (348 | ) | |||||
See accompanying Notes to Condensed Consolidated Financial Statements
| Nine Months Ended | ||||||||
| September 28, | September 29, | |||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (4,727 | ) | $ | (424 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 2,736 | 2,843 | ||||||
| Stock-based compensation | 3,195 | 3,255 | ||||||
| Change in fair value of warrants | (7 | ) | (13 | ) | ||||
| Loss (gain) on property and equipment | 8 | (133 | ) | |||||
| Non-cash restructuring expense | 210 | - | ||||||
| Loss on equity investment | 456 | - | ||||||
| Changes in operating assets and liabilities, net of acquisition: | ||||||||
| Accounts receivable, net | (2,686 | ) | (2,073 | ) | ||||
| Inventories | 351 | (437 | ) | |||||
| Prepaid and other current assets | (726 | ) | (521 | ) | ||||
| Other assets | 24 | 22 | ||||||
| Accounts payable | 916 | 1,263 | ||||||
| Accrued restructuring | (3 | ) | (89 | ) | ||||
| Accrued compensation | (118 | ) | 675 | |||||
| Other current liabilities | (419 | ) | (97 | ) | ||||
| Other long-term liabilities | (22 | ) | (40 | ) | ||||
| Net cash provided by (used in) operating activities | (812 | ) | 4,231 | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (786 | ) | (1,319 | ) | ||||
| Proceeds from sale of property and equipment | - | 160 | ||||||
| Net cash used in investing activities | (786 | ) | (1,159 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of stock | 231 | 4 | ||||||
| Taxes paid related to net share settlement of equity awards | (379 | ) | (111 | ) | ||||
| Net borrowings on line of credit | - | 2,400 | ||||||
| Payment of debt assumed in acquisition | (176 | ) | - | |||||
| Repayment of capital lease | (283 | ) | (319 | ) | ||||
| Net cash provided by (used in) financing activities | (607 | ) | 1,974 | |||||
| Effect of exchange rates on cash and cash equivalents | (53 | ) | 67 | |||||
| Net increase (decrease) in cash and cash equivalents | (2,258 | ) | 5,113 | |||||
| Cash and cash equivalents as of beginning of period | 20,377 | 10,147 | ||||||
| Cash and cash equivalents as of end of period | $ | 18,119 | $ | 15,260 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Interest paid | $ | 37 | $ | 106 | ||||
| Property and equipment acquired with accounts payable | $ | 137 | $ | 11 | ||||
| Investment in unconsolidated affiliate acquired with property and equipment and inventories | $ | 456 | $ | - | ||||
| Liabilities assumed in acquisition | $ | 446 | $ | - | ||||
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 high speed semiconductor components that enable end-to-end information streaming over optical and wireless networks and address long haul and metro telecommunications applications as well as emerging high-growth opportunities for Cloud and datacenter connectivity, interactive applications for consumer electronics and the industrial, defense and avionics industries. The business is made up of two product lines: the High-Speed Communications (“HSC”) product line and the Industrial product line.
The HSC product line offers a broad portfolio of high performance optical and wireless components to telecommunications (“telecom”) and data communications (“datacom”) customers, including (i) mixed signal radio frequency integrated circuits (“RFIC”); (ii) 10 to 400 gigabit per second (“Gbps”) laser and optical drivers and trans-impedance amplifiers (“TIA”) for telecom, datacom, and consumer electronic fiber-optic applications; (iii) power amplifiers and transceivers for microwave and millimeter monolithic microwave integrated circuit (“MMIC”) wireless applications including power amplifiers and transceiver chips at frequencies higher than 50 GHz; (iv) integrated systems in a package (“SIP”) solutions for both fiber-optic and wireless applications; and (v) radio frequency (“RF’) chips for various consumer applications such as global navigation satellite systems (“GNSS”). The HSC product line also partners with key customers on 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 which generally leads 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. In March 2013, the Company established a German subsidiary, GigOptix GmbH; however it is in the process of being dissolved.
In February 2014, together with Fundação CPqD – Centro De Pesquisa e Desenvolvimento em Telecomunicações (“CPqD”), the Company incepted a new joint venture of which the Company owns 49% and CPqD owns 51%, BrPhotonics Produtos Optoeletrônicos LTDA. (“BrP”), based in Campinas, Brazil, which will be a provider of advanced high-speed devices for optical communications and integrated transceiver components that enable information streaming over communications networks. This joint venture is engaged in research and development of Silicon-Photonics (“SiPh”) advanced electro-optical products. During the second quarter of 2014, the Company transferred its inventory related to the Thin Film Polymer on Silicon (“TFPSTM”) platform and the production line equipment for use by BrP (see also Note 8).
In June 2014, the Company signed a definitive agreement to acquire, for cash only by way of assuming specified liabilities, substantially all of the assets of Tahoe RF Semiconductor, Inc. (“Tahoe RF”), a provider of RF/analog RFICs, intellectual property, and fully integrated systems and subsystems on a chip. That acquisition closed on June 30, 2014, which was the first day of the Company’s third quarter of fiscal 2014 (see also Note 4).
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 third quarter of 2014 ended on Sunday, September 28, 2014. The third quarter of 2013 ended on Sunday, September 29, 2013. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements as of September 28, 2014 and for the three and nine months ended September 28, 2014 and September 29, 2013, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X, and include the accounts of the Company and all of its subsidiaries. Accordingly, they do not include all of the information and footnotes required by such accounting principles for annual financial statements. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position as of September 28, 2014, the results of operations for the three and nine months ended September 28, 2014 and September 29, 2013, and cash flows for the nine months ended September 28, 2014 and September 29, 2013. The condensed consolidated results of operations for the three and nine months ended September 28, 2014 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2014. 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 2013 Form 10-K.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. These judgments can be subjective and complex, and consequently, actual results could differ materially from those estimates and assumptions. Descriptions of these estimates and assumptions are included in the 2013 Form 10-K and the Company encourages you to read its 2013 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):
| September 28, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Accounts receivable | $ | 7,790 | $ | 5,241 | ||||
| Allowance for doubtful accounts | (83 | ) | (220 | ) | ||||
| $ | 7,707 | $ | 5,021 | |||||
Property and equipment, net consisted of the following (in thousands, except depreciable life):
| Life | September 28, | December 31, | ||||||||||
| (In years) | 2014 | 2013 | ||||||||||
| Network and laboratory equipment | 3 – 5 | $ | 11,204 | $ | 11,250 | |||||||
| Computer software and equipment | 2 – 3 | 3,917 | 3,928 | |||||||||
| Furniture and fixtures | 3 – 7 | 171 | 176 | |||||||||
| Office equipment | 3 – 5 | 133 | 137 | |||||||||
| Leasehold improvements | 1 – 5 | 276 | 378 | |||||||||
| 15,701 | 15,869 | |||||||||||
| Accumulated depreciation and amortization | (13,654 | ) | (12,870 | ) | ||||||||
| Property and equipment, net | $ | 2,047 | $ | 2,999 | ||||||||
For the three and nine months ended September 28, 2014, depreciation expense related to property and equipment was $491,000 and $1.6 million, respectively. For the three and nine months ended September 29, 2013, depreciation expense related to property and equipment was $551,000 and $1.7 million, respectively.
In addition to the property and equipment above, the Company has prepaid licenses. For the three and nine months ended September 28, 2014, amortization related to these prepaid licenses was $208,000 and $485,000, respectively. For the three and nine months ended September 29, 2013, amortization related to these prepaid licenses was $168,000 and $389,000, respectively.
Inventories consisted of the following (in thousands):
| September 28, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Raw materials | $ | 1,689 | $ | 2,103 | ||||
| Work in process | 637 | 780 | ||||||
| Finished goods | 1,695 | 1,734 | ||||||
| $ | 4,021 | $ | 4,617 | |||||
Other current liabilities consisted of the following (in thousands):
| September 28, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Amounts billed to the U.S. government in excess of approved rates | $ | 191 | $ | 191 | ||||
| Warranty liability | 313 | 330 | ||||||
| Customer deposits | 173 | 313 | ||||||
| Capital lease obligations, current portion | 3 | 284 | ||||||
| Sales return reserve | 330 | 151 | ||||||
| Other | 1,237 | 1,477 | ||||||
| $ | 2,247 | $ | 2,746 | |||||
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 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 nine months ended September 28, 2014 and September 29, 2013 are as follows (in thousands):
| Nine months ended | ||||||||
| September 28, 2014 | September 29, 2013 | |||||||
| Beginning balance | $ | 330 | $ | 612 | ||||
| Warranties accrued | 354 | 396 | ||||||
| Warranties settled or reversed | (371 | ) | (654 | ) | ||||
| Ending balance | $ | 313 | $ | 354 | ||||
The warranty liability is included in other current liabilities on the condensed consolidated balance sheets.
NOTE 3—FAIR VALUE
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 28, 2014 and December 31, 2013 (in thousands):
| Fair Value Measurements Using | ||||||||||||||||
| Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| September 28, 2014: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents: | ||||||||||||||||
| Money market funds | $ | 12,359 | $ | 12,359 | ||||||||||||
| $ | 12,359 | $ | 12,359 | $ | - | $ | - | |||||||||
| Current liabilities: | ||||||||||||||||
| Liability warrants | $ | 8 | $ | - | $ | - | $ | 8 | ||||||||
| December 31, 2013: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents: | ||||||||||||||||
| Money market funds | $ | 1,356 | $ | 1,356 | $ | - | $ | - | ||||||||
| $ | 1,356 | $ | 1,356 | $ | - | $ | - | |||||||||
| Current liabilities: | ||||||||||||||||
| Liability warrants | $ | 15 | $ | - | $ | - | $ | 15 | ||||||||
The Company’s financial assets and liabilities are valued using market prices on active markets (“Level 1”), less active markets (“Level 2”) and unobservable markets (“Level 3”). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. Level 3 instruments are valued using unobservable market values in which there is little or no market data, and which require the Company to apply judgment to determine the fair value.
For the period ended September 28, 2014, the Company did not have any significant transfers between Level 1, Level 2 and Level 3.
The amounts reported as cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other current liabilities approximate fair value due to their short-term maturities. The carrying value of the Company’s capital lease obligations approximates fair value and is based upon borrowing rates currently available to the Company for capital leases with similar terms.
Liability Warrants
The Company issued warrants to Bridge Bank in connection with a waiver of certain events of default that arose under a November 2009 loan and security agreement with Bridge Bank. Certain provisions in the warrant agreements provided for down-round protection if the Company raised equity capital at a per share price which was less than the per share price of the warrants. Such down-round protection also requires the Company to classify the value of the warrants as a liability on the issuance date and then record changes in the fair value through the consolidated statements of operations for each reporting period until the warrants are either exercised or cancelled. The fair value of the liability is recalculated and adjusted each quarter with the differences being charged to other income (expense), net on the consolidated statements of operations. The fair value of these warrants was determined using a Black-Scholes option-pricing model, which requires the use of significant unobservable market values. As a result, these warrants are classified as Level 3 financial instruments. On July 7, 2010, the Company raised additional equity through an offering of 2,760,000 shares at $1.75 per share, thus triggering the down-round protection and adjustment of the number of warrants issued to Bridge Bank. On December 24, 2013, the Company raised additional equity through an offering of 9,573,750 shares at $1.42 per share, thus triggering the down-round protection and adjustment of the number of warrants issued to Bridge Bank.
The fair value of the warrants was estimated using the following assumptions:
| As of September 28, 2014 | As of December 31, 2013 | |||||||
| Stock price | $ | 1.19 | $ | 1.53 | ||||
| Strike price | $ | 2.51 | $ | 2.51 | ||||
| Expected life | 2.80 years | 3.55 years | ||||||
| Risk-free interest rate | 1.08 | % | 1.30 | % | ||||
| Volatility | 65 | % | 65 | % | ||||
| Fair value per share | $ | 0.26 | $ | 0.52 | ||||
The following table summarizes the warrants subject to liability accounting as of September 28, 2014 and December 31, 2013 (in thousands, except share and per share amounts) (see also Note 6):
Three Months Ended September 28, 2014 | Nine Months Ended September 28, 2014 | ||||||||||||||||||||||||||||||||||||||||
| Holder | Original Warrants | Adjusted Warrants | Grant Date | Expiration Date | Exercise Price per Share | Fair Value September 28, 2014 | Fair Value December 31, 2013 | Exercise of Warrants | Change in Fair Value | Exercise of Warrants | Change in Fair Value | Related Agreement | |||||||||||||||||||||||||||||
| Bridge Bank | 20,000 | 29,115 | 4/7/2010 | 7/7/2017 | $ | 2.51 | $ | 8 | $ | 15 | - | $ | (4 | ) | - | $ | (7 | ) | Credit Agreement | ||||||||||||||||||||||
The change in the fair value of the Level 3 liability warrants during the three and nine months ended September 28, 2014 is as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||
| September 28, 2014 | September 28, 2014 | |||||||
| Beginning fair value balance | $ | 12 | $ | 15 | ||||
| Exercise of warrants | - | - | ||||||
| Change in fair value | (4 | ) | (7 | ) | ||||
| Ending fair value balance | $ | 8 | $ | 8 | ||||
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):
| September 28, 2014 | December 31, 2013 | |||||||||||||||||||||||
| Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
| Customer relationships | $ | 3,277 | $ | (2,014 | ) | $ | 1,263 | $ | 3,277 | $ | (1,697 | ) | $ | 1,580 | ||||||||||
| Existing technology | 3,783 | (2,778 | ) | 1,005 | 3,783 | (2,473 | ) | 1,310 | ||||||||||||||||
| Order backlog | 732 | (732 | ) | - | 732 | (732 | ) | - | ||||||||||||||||
| Patents | 457 | (401 | ) | 56 | 457 | (397 | ) | 60 | ||||||||||||||||
| Trade name | 659 | (366 | ) | 293 | 659 | (322 | ) | 337 | ||||||||||||||||
| Total | $ | 8,908 | $ | (6,291 | ) | $ | 2,617 | $ | 8,908 | $ | (5,621 | ) | $ | 3,287 | ||||||||||
For the three and nine months ended September 28, 2014 and September 29, 2013, amortization of intangible assets was as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Cost of revenue | $ | 103 | $ | 122 | $ | 309 | $ | 366 | ||||||||
| Selling, general and administrative expense | 120 | 120 | 361 | 380 | ||||||||||||
| $ | 223 | $ | 242 | $ | 670 | $ | 746 | |||||||||
Estimated future amortization expense related to intangible assets as of September 28, 2014 is as follows (in thousands):
| Years ending December 31, | ||||
| 2014 | $ | 223 | ||
| 2015 | 893 | |||
| 2016 | 869 | |||
| 2017 | 487 | |||
| 2018 | 145 | |||
| Total | $ | 2,617 | ||
During the third quarter of 2014, the Company completed its acquisition of Tahoe RF which resulted in $446,000 of goodwill. As a result of the Tahoe RF acquisition, the Company assumed approximately $446,000 of liabilities of Tahoe RF and added RF/analog RFIC technology to the Company’s product portfolio and approximately 10 employees, primarily RF engineers focused on the high growth areas of E-Band and V-Band technologies. Up to an additional approximately $200,000 in bonus payments are payable by the Company in January 2015 to these employees provided certain milestones are met and they remain employed by the Company. In addition, beginning in July 2016 and continuing annually through July 2020, these employees will be entitled to a retention bonus of approximately $100,000 in the aggregate if they remain employed with the Company. These payments will be recorded as compensation expense when incurred.
As of September 28, 2014, the Company had $10.3 million of goodwill in connection with the acquisitions of Tahoe RF, ChipX and Endwave. In addition to its annual review, the Company also performs a review of the carrying value of its intangible assets, including goodwill, if the Company believes that indicators of impairment exist. During the third quarter of 2014, there were no factors which indicated impairment. The Company did not record impairment on any intangible assets, including goodwill, for the three and nine months ended September 28, 2014. In addition, the Company did not record an impairment of goodwill for the year ended December 31, 2013 and will perform its annual impairment analysis during the fourth quarter of 2014.
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 Company had no outstanding balance on its line of credit as of September 28, 2014.
NOTE 6—STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Public Offering
On December 19, 2013, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC as representative of several underwriters to the Underwriting Agreement relating to a public offering of an aggregate of 8,325,000 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share at a public offering price of $1.42 per share. The Shares are accompanied by the associated rights to purchase shares of Series A Junior Preferred Stock, par value $0.001 per share, of the Company created by the Rights Agreement, dated December 16, 2011, between the Company and the American Stock Transfer & Trust Company, LLC, as Rights Agent (the “Rights Agreement”). Under the terms of the Underwriting Agreement, the Company granted the Underwriters a 30 day option to purchase up to an additional 1,248,750 shares of common stock to cover over-allotments.
On December 24, 2013, the Company completed its public offering of 9,573,750 newly issued shares of common stock at a price to the public of $1.42 per share. The number of shares sold in the offering included the underwriter’s full exercise on December 24, 2013 of their over-allotment option of 1,248,750 shares of common stock. The net proceeds to the Company from the offering was approximately $12.3 million which consisted of $12.5 million after underwriting discounts, commissions and expenses less an additional $250,000 for legal, accounting, registration and other transaction costs related to the public offering.
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 September 28, 2014 and December 31, 2013, there were no shares of preferred stock issued or outstanding.
2008 Equity Incentive Plan
In December 2008, the Company adopted the 2008 Equity Incentive Plan (the “2008 Plan”) for directors, employees, consultants and advisors to the Company or its affiliates. Under the 2008 Plan, 2,500,000 shares of common stock were reserved for issuance upon the completion of 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, 2013, the stockholders had approved 15,021,253 shares for future issuance. On January 1, 2014, there was an automatic increase of 1,603,381 shares. As of September 28, 2014, 10,664,161 options to purchase common stock and restricted stock were outstanding and 3,511,707 shares are authorized for future issuance under the 2008 equity incentive plan.
Under the 2008 Plan, the exercise price of a stock option is at least 100% of the stock’s fair market value on the date of grant, and if an ISO is granted to a 10% stockholder at least 110% of the stock’s fair market value on the date of grant. Vesting periods for awards are recommended by the chief executive officer and generally provide for stock options to vest over a four-year period, with a one year vesting cliff of 25%, and have a maximum life of ten years from the date of grant. The Company has also issued restricted stock units (“RSUs”) which generally vest over a one to four-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 September 28, 2014, options to purchase a total of 376,436 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 September 28, 2014, no additional options can be granted under the Lumera Plan, and options to purchase a total of 66,428 shares of common stock were outstanding.
Warrants
As of December 31, 2013, the Company had a total of 1,468,239 warrants to purchase common stock outstanding under all warrant arrangements. During the nine months ended September 28, 2014, no warrants were exercised and 809,999 warrants expired. As a result, as of September 28, 2014, the Company had 658,240 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.
Stock-based Compensation Expense
The following table summarizes the Company’s stock-based compensation expense for the three and nine months ended September 28, 2014 and September 29, 2013 (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Cost of revenue | $ | 85 | $ | 57 | $ | 249 | $ | 196 | ||||||||
| Research and development expense | 278 | 224 | 845 | 778 | ||||||||||||
| Selling, general and administrative expense | 705 | 466 | 2,092 | 1,619 | ||||||||||||
| Restructuring expense | - | - | 9 | 662 | ||||||||||||
| $ | 1,068 | $ | 747 | $ | 3,195 | $ | 3,255 | |||||||||
For the nine months ended September 28, 2014, included in the $3.2 million of stock-based compensation expense is $9,000 in restructuring expense to modify the exercise period and accelerate the vesting of RSUs (see Note 7).
For the nine months ended September 29, 2013, included in the $3.3 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 RSUs (see Note 7).
During the three months ended September 29, 2013, the Company granted options to purchase 35,000 of common stock with an estimated total grant-date fair value of $32,000 or $0.91 per share. During the three months ended September 28, 2014, the Company did not issue any option grants.
During the three months ended September 28, 2014 and September 29, 2013, the Company granted 135,000 and 1,008,527 RSUs, respectively, with a grant-date fair value of $185,000 or $1.37 per share and $1.3 million or $1.33 per share, respectively.
During the nine months ended September 28, 2014 and September 29, 2013, the Company granted options to purchase 25,000 and 645,010 of common stock, respectively, with an estimated total grant-date fair value of $28,000 or $1.10 per share and $391,000 or $0.61 per share, respectively.
During the nine months ended September 28, 2014 and September 29, 2013, the Company granted 1,610,085 and 1,578,373 RSUs, respectively, with a grant-date fair value of $2.7 million or $1.67 per share and $1.8 million or $1.16 per share, respectively.
As of September 28, 2014, the total compensation cost not yet recognized in connection with unvested stock options and RSUs under the Company’s equity compensation plans was approximately $2.0 million and $2.4 million, respectively. Unrecognized compensation will be amortized on a straight-line basis over a weighted-average period of approximately 1.50 years for stock options and approximately 2.45 years for RSUs.
Stock Option and RSU 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, 2013 | 10,306,671 | $ | 2.34 | 6.96 | ||||||||
| Granted | 25,000 | 1.59 | ||||||||||
| Exercised | (225,678 | ) | 1.02 | |||||||||
| Forfeited/Expired | (999,546 | ) | 2.51 | |||||||||
| Ending balance, September 28, 2014 | 9,106,447 | $ | 2.35 | 6.20 | ||||||||
| Vested and exercisable and expected to vest, September 28, 2014 | 9,001,301 | $ | 2.35 | 6.19 | ||||||||
| Vested and exercisable, September 28, 2014 | 7,562,900 | $ | 2.37 | 5.93 | ||||||||
The aggregate intrinsic value of options vested, exercisable and expected to vest, based on the fair value of the underlying stock options as of September 28, 2014 was approximately $459,000. The aggregate intrinsic value reflects the difference between the exercise price of the underlying stock options and the Company’s closing share price of $1.19 as of September 26, 2014.
The total intrinsic value of options exercised during the nine months ended September 28, 2014 and September 29, 2013 was approximately $84,000 and $1,000, respectively.
RSUs are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to the employee’s continuing service to the Company. RSUs generally vest over a period of one to four years and are expensed ratably on a straight line basis over their respective vesting period net of estimated forfeitures. The fair value of the RSUs granted is the product of the number of shares granted and the grant date fair value of the Company’s common stock.
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 Vesting Term, Years | Aggregate Intrinsic Value | |||||||||||||
| (in thousands) | ||||||||||||||||
| Outstanding, December 31, 2013 | 1,313,801 | $ | 1.19 | 1.85 | $ | 2,010 | ||||||||||
| Granted | 1,610,085 | 1.67 | ||||||||||||||
| Released | (815,526 | ) | 1.33 | |||||||||||||
| Forfeited/expired | (107,782 | ) | 1.43 | |||||||||||||
| Outstanding, September 28, 2014 | 2,000,578 | $ | 1.51 | 2.45 | $ | 2,381 | ||||||||||
The majority of the RSUs that vested in the nine months ended September 28, 2014 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the value of the RSUs on their vesting date as determined by the Company’s closing stock price. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company. For the nine months ended September 28, 2014, 815,526 shares of RSUs vested with an intrinsic value of approximately $970,000. The Company withheld 249,000 shares to satisfy approximately $378,000 of employees’ minimum tax obligation on the vested RSUs.
NOTE 7—RESTRUCTURING
During the first 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 RSUs, $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 second quarter of 2014, the Company undertook restructuring activities to reduce its expenses. In conjunction with the creation of the BrP joint venture and the subsequent relocation of the related manufacturing activities to BrP, the Company ended its lease in the Bothell, Washington location and reduced its headcount. The components of the restructuring charge included $43,000 of cash expenses for cleanup services, $210,000 of restricted cash and rent deposit forfeiture to move out of the Bothell facility, $45,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations, and $9,000 of non-cash expenses associated with the acceleration of RSUs. The total charge for these restructuring activities was $307,000.
During the third quarter of 2014, the Company undertook restructuring activities to reduce its expenses. The component of the restructuring charge included $36,000 of cash expenses for severance associated with employee terminations.
The following is a summary of the restructuring activity (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Beginning balance | $ | - | $ | 128 | $ | 30 | $ | 168 | ||||||||
| Charges | 36 | - | 343 | 950 | ||||||||||||
| Uses and adjustments | (10 | ) | (48 | ) | (347 | ) | (1,038 | ) | ||||||||
| Ending balance | $ | 26 | $ | 80 | $ | 26 | $ | 80 | ||||||||
As of September 28, 2014, the Company had a $26,000 balance in accrued restructuring included in other current liabilities.
NOTE 8— INVESTMENT IN UNCONSOLIDATED AFFILIATE
In February 2014, together with CPqD, the Company incepted a new joint venture, named BrP, of which the Company owns 49% and CPqD owns 51% of BrP. It is based in Campinas, Brazil. BrP will be a provider of advanced high-speed devices for optical communications and integrated transceiver components for information networks. It is engaged in research and development of SiPh advanced electro-optical products.
The Company transferred into BrP its knowledge-base and intellectual property of TFPSTM technology. The Company transferred to CPqD, its inventory related to the TFPSTM platform and the complete production line equipment that previously resided at its Bothell, Washington, facility for CPqD to use for the BrP joint venture. As of the transfer date, the Company’s net book value of the inventory and property and equipment was $245,000 and $211,000, respectively, which resulted in a $456,000 investment in BrP.
For the three and nine months ended September 28, 2014, the Company’s allocated portion of BrP’s results was a loss of $125,000 and $456,000, respectively. Since the Company’s share of the loss exceeded the Company’s carrying cost of its investment in BrP, the Company’s investment in an unconsolidated affiliate was written down to zero as of September 28, 2014.
NOTE 9—INCOME TAXES
The Company recorded a provision for income taxes of $8,000 and $39,000 for the three and nine months ended September 28, 2014, respectively, and $1,000 and $28,000 for the three and nine months ended September 29, 2013, respectively. The Company's effective tax rate was less than 1% for the three and nine months ended September 28, 2014 and September 29, 2013.
The income tax provision for the three and nine months ended September 28, 2014 and September 29, 2013 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 September 28, 2014 and the uncertainty over future operating profitability and taxable income. The Company will continue to evaluate the potential realization of the deferred tax assets on a quarterly basis.
The Company files tax returns as prescribed by the tax laws of the jurisdictions it operates which include U.S. federal, U.S. state and foreign tax returns. The Company’s major tax jurisdictions are the U.S., California, Switzerland, Germany and Israel. The Company’s federal and state tax returns for the years 2000 through 2013 remain subject to examination.
NOTE 10—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:
| Three Months Ended | Nine Months Ended | |||||||||||||||
September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Stock options and RSUs | 11,107,025 | 8,700,461 | 11,107,025 | 11,843,773 | ||||||||||||
| Common stock warrants | 658,240 | 1,704,170 | 658,240 | 1,708,295 | ||||||||||||
| Total | 11,765,265 | 10,404,631 | 11,765,265 | 13,552,068 | ||||||||||||
NOTE 11—SEGMENT AND GEOGRAPHIC INFORMATION
The Company has determined that it operates as a single operating and reportable segment. The following tables reflect the results of the Company’s reportable segment consistent with the management system used by the Company’s Chief Executive Officer, the chief operating decision maker.
The following table summarizes revenue by geographic region (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||||||||||||||
| North America | $ | 2,944 | 35 | % | $ | 2,210 | 30 | % | $ | 7,046 | 29 | % | $ | 6,283 | 30 | % | ||||||||||||
| Asia | 2,189 | 26 | % | 1,588 | 22 | % | 6,803 | 29 | % | 5,763 | 27 | % | ||||||||||||||||
| Europe | 3,307 | 39 | % | 3,385 | 46 | % | 9,863 | 41 | % | 8,081 | 38 | % | ||||||||||||||||
| Other | 44 | 0 | % | 153 | 2 | % | 195 | 1 | % | 961 | 5 | % | ||||||||||||||||
| $ | 8,484 | 100 | % | $ | 7,336 | 100 | % | $ | 23,907 | 100 | % | $ | 21,088 | 100 | % | |||||||||||||
The Company determines geographic location of its revenue based upon the destination of shipments of its products.
For the three months ended September 28, 2014, one customer accounted for 32% of total revenue. For the three months ended September 29, 2013, one customer accounted for 42% of total revenue.
For the nine months ended September 28, 2014, one customer accounted for 28% of total revenue. For the nine months ended September 29, 2013, one customer accounted for 33% of total revenue.
During the three months ended September 28, 2014, Italy and the United States accounted for 33% and 32% of total revenue, respectively. During the three months ended September 29, 2013, Italy, the United States, and Japan accounted for 44%, 25%, and 11% of total revenue, respectively. No other countries accounted for more than 10% of the Company’s total revenue during the three months ended September 28, 2014 and September 29, 2013.
During the nine months ended September 28, 2014, Italy and the United States accounted for 35% and 27% of total revenue, respectively. During the nine months ended September 29, 2013, Italy, the United States, and Japan accounted for 35%, 26%, and 13% of total revenue, respectively. No other countries accounted for more than 10% of the Company’s total revenue during the nine months ended September 28, 2014 and September 29, 2013.
The following table summarizes revenue by product line (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| HSC | $ | 5,393 | $ | 5,225 | $ | 16,284 | $ | 14,353 | ||||||||
| Industrial | 3,091 | 2,111 | 7,623 | 6,735 | ||||||||||||
| Total revenue | $ | 8,484 | $ | 7,336 | $ | 23,907 | $ | 21,088 | ||||||||
The following table summarizes long-lived assets by country (in thousands):
| September 28, 2014 | December 31, 2013 | |||||||
| United States | $ | 1,665 | $ | 2,004 | ||||
| Switzerland | 382 | 995 | ||||||
| $ | 2,047 | $ | 2,999 | |||||
Long-lived assets, comprised of property and equipment, are reported based on the location of the assets at each balance sheet date.
NOTE 12—COMMITMENTS AND CONTINGENCIES
Commitments
Leases
The Company leases its domestic and foreign sales offices under non-cancelable operating leases. These leases contain various expiration dates and renewal options. The Company also leases certain software licenses under operating leases. Total facilities rent expense for the three and nine months ended September 28, 2014 was $113,000 and $347,000, respectively, and for the three and nine months ended September 29, 2013 was $139,000 and $419,000, respectively.
As of April 2014, the Company moved out of its Bothell, Washington facility which comprised 11,666 square feet and entered into a new one-year lease located in Bellevue, Washington which comprises approximately 2,100 square feet.
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 | ||||||
| 2014 | $ | 1 | $ | 141 | ||||
| 2015 | 4 | 531 | ||||||
| 2016 | 3 | 439 | ||||||
| 2017 | 3 | 124 | ||||||
| Total minimum lease payments | 11 | $ | 1,235 | |||||
| Less: Amount representing interest | (1 | ) | ||||||
| Total capital lease obligations | 10 | |||||||
| Less: current portion | (3 | ) | ||||||
| Long-term portion of capital lease obligations | $ | 7 | ||||||
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 13—LEGAL SETTLEMENT
On September 24, 2013, pursuant to the terms of a settlement agreement with M/A-COM Technology Solutions, Inc. (“MACOM”), Optomai, Inc., and three former employees of GigOptix, the Company received a payment of $7.25 million. The $7.25 million has been recorded as special litigation-related income, net of legal fees in the operating section of the condensed consolidated statements of operations, for the nine months ended September 29, 2013.
NOTE 14—RECENT ACCOUNTING PRONOUNCEMENTS
In June 2014, the Financial Accounting Standard Board (“FASB”) issued an accounting standard update clarifying the accounting guidance on how to account for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. This standard is effective for periods beginning after December 15, 2015 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 May 2014, the FASB issued an accounting standard clarifying the principles for recognizing revenue by amending the FASB Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This standard is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company is currently evaluating the impact of the adoption 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, 2013. 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, 2013 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 high speed semiconductor components that enable end-to-end information streaming over optical and wireless networks. Our products address long haul and metro telecommunications applications as well as emerging high-growth opportunities for Cloud and datacenter connectivity, interactive applications for consumer electronics, and the industrial, defense and avionics industries. The business is made up of two product lines: our High-Speed Communications (HSC) product line and our Industrial product line.
Through our HSC product line we offer a broad portfolio of high performance optical and wireless components to telecommunications (telecom) and data communications (datacom) customers, including (i) mixed signal radio frequency integrated circuits (RFIC); (ii) 10 to 400 gigabit per second (Gbps) laser and optical drivers and trans-impedance amplifiers (TIA) for telecom, datacom, and consumer electronic fiber-optic applications; (iii) power amplifiers and transceivers for microwave and millimeter monolithic microwave integrated circuit (MMIC) wireless applications including power amplifiers and transceiver chips at frequencies higher than 50 GHz; (iv) integrated systems in a package (SIP) solutions for both fiber-optic and wireless applications; and (v) radio frequency (RF) chips for various consumer applications such as global navigation satellite systems (GNSS). The HSC product line also partners with key customers on development projects that generate engineering project revenue and helps to position us for future product revenues with these key customers.
Through our Industrial product line, we offer 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 and which generally 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, and digital and mixed signal 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 six businesses with complementary products and customers. In so doing, we have expanded our device product line in multiple areas, growing our communication device offering from a few leading 10Gbps ultra-long haul optical drivers at our inception in July 2007 to a line of products today that include: drivers, receivers and TIAs for 10 to 400Gbps optical applications; power amplifiers; and custom ASICs spanning 0.6um to 65nm technology nodes. Our direct sales force is based in three countries and is supported by a significant number of channel representatives and distributors that sell our products throughout North America, Europe, Japan and Asia.
During the third quarter of 2014, we acquired substantially all of the assets of Tahoe RF Semiconductor, Inc. (Tahoe RF) by assuming approximately $446,000 of liabilities of Tahoe RF. Through the acquisition, we have added RF/analog RFIC technology to our product portfolio and 10 employees to our team, primarily RF engineers focused on the high growth areas of E-Band and V-Band technologies.
Historically, we have incurred net losses. For the nine months ended September 28, 2014 and the year ended December 31, 2013, we incurred net losses of $4.7 million and $1.9 million, respectively. For the nine months ended September 28, 2014, we had cash outflows from operations of $812,000. For the year ended December 31, 2013, we had cash inflows from operations of $3.3 million. As of September 28, 2014 and December 31, 2013, we had an accumulated deficit of $101.2 million and $96.4 million, respectively.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standard Board (FASB) issued an accounting standard update clarifying the accounting guidance on how to account for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. This standard is effective for periods beginning after December 15, 2015 and early adoption is permitted. We do not expect the adoption will have a material impact on our condensed consolidated financial statements.
In May 2014, the FASB issued an accounting standard clarifying the principles for recognizing revenue by amending the FASB Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This standard is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. We are currently evaluating the impact of the adoption 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 | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Product | $ | 7,812 | $ | 6,505 | $ | 21,692 | $ | 17,835 | ||||||||
| Development fees and other | 672 | 831 | 2,215 | 3,253 | ||||||||||||
| Total revenue | $ | 8,484 | $ | 7,336 | $ | 23,907 | $ | 21,088 | ||||||||
| Increase, period over period | $ | 1,148 | $ | 2,819 | ||||||||||||
| Percentage increase, period over period | 16 | % | 13 | % | ||||||||||||
Total revenue for the three months ended September 28, 2014 was $8.5 million, an increase of $1.1 million or 16%, compared with $7.3 million for the three months ended September 29, 2013. For the three months ended September 28, 2014, 92% of our revenue was contributed by product revenue and 8% of our revenue was contributed by development fees and other revenue. For the three months ended September 29, 2013, 89% of our revenue was contributed by product revenue and 11% of our revenue was contributed by development fees and other revenue.
Product revenue for the three months ended September 28, 2014 was $7.8 million, an increase of $1.3 million or 20%, compared with $6.5 million for the three months ended September 29, 2013. The increase in product revenue during the three months ended September 28, 2014 was due to the increased demand for both our Industrial and HSC products.
Development fees and other revenue for the three months ended September 28, 2014 was $672,000, a decrease of $159,000 or 19%, compared with $831,000 for the three months ended September 29, 2013. We experienced a decrease in development fees and other revenue primarily due to a decrease in the number and size of development projects in our HSC product line.
Total revenue for the nine months ended September 28, 2014 was $23.9 million, an increase of $2.8 million or 13%, compared with $21.1 million for the nine months ended September 29, 2013. For the nine months ended September 28, 2014, 91% of our revenue was contributed by product revenue and 9% of our revenue was contributed by development fees and other revenue. For the nine months ended September 29, 2013, 85% of our revenue was contributed by product revenue and 15% of our revenue was contributed by development fees and other revenue.
Product revenue for the nine months ended September 28, 2014 was $21.7 million, an increase of $3.9 million or 22%, compared with $17.8 million for the nine months ended September 29, 2013. The increase in product revenue during the nine months ended September 28, 2014 was due to increased revenue from our HSC and Industrial product lines.
Development fees and other revenue for the nine months ended September 28, 2014 was $2.2 million, compared with $3.3 million for the nine months ended September 29, 2013. We experienced a decrease in development fees and other revenue primarily due to a decrease in the number and size of development projects in our HSC and Industrial product line.
Cost of Revenue and Gross Profit
Cost of revenue and gross profit for the periods presented was as follows (in thousands, except percentages):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Total cost of revenue | $ | 3,482 | $ | 2,985 | $ | 10,095 | $ | 8,199 | ||||||||
| Gross profit | $ | 5,002 | $ | 4,351 | $ | 13,812 | $ | 12,889 | ||||||||
| Gross margin | 59 | % | 59 | % | 58 | % | 61 | % | ||||||||
| Increase, period over period | 651 | 923 | ||||||||||||||
| Percentage increase, period over period | 15 | % | 7 | % | ||||||||||||
Gross profit consists of revenue less cost of revenue. Cost of revenue consists primarily of the costs to manufacture saleable chips, including outsourced wafer fabrication and testing; costs of direct materials; equipment depreciation; costs associated with procurement, production control and quality assurance; fees paid to our offshore manufacturing vendors; reserves for potential excess or obsolete material; allocated facilities costs; costs related to stock-based compensation; accrued costs associated with potential warranty returns; and amortization of certain identified intangible assets. Amortization expense of identified intangible assets, namely existing technology, is presented within cost of revenue, as the intangible assets were determined to be directly attributable to revenue generating activities.
Gross profit for the three months ended September 28, 2014 was $5.0 million, or a gross margin of 59%, which was comparable to a gross profit of $4.4 million or a gross margin of 59%, for the three months ended September 29, 2013.
Gross profit for the nine months ended September 28, 2014 was $13.8 million, or a gross margin of 58%, compared to a gross profit of $12.9 million, or a gross margin of 61%, for the nine months ended September 29, 2013. The decrease in gross margin is primarily due to lower revenue from development projects.
We record revenue from non-recurring engineering projects associated with product development that we enter into with certain customers. In general, these projects are associated with complex technology development, and as such we do not have certainty about our ability to achieve the program milestones. Achievement of the milestone is dependent on our performance and is typically contingent upon acceptance by the customer. The payment associated with achieving the milestone is generally commensurate with our effort or the value of the deliverable and is nonrefundable. Therefore, we record the expenses related to these projects in the periods incurred and recognize revenue only when we have earned the revenue and achieved the development milestones. Revenue from these projects is typically recorded at 100% gross margin because the costs associated with these projects are expensed as incurred and generally included in research and development expense. These efforts generally benefit our overall product development programs beyond the specific project requested by our customer.
Development project revenue and other non-product revenue for the three months ended September 28, 2014 was $672,000 compared with $831,000 for the three months ended September 29, 2013. Excluding the revenue and gross profit associated with development programs and other non-product revenue, gross margin was 55% and 54% for the three months ended September 28, 2014 and September 29, 2013, respectively.
Development project revenue and other non-product revenue for the nine months ended September 28, 2014 was $2.2 million compared with $3.3 million for the nine months ended September 29, 2013. Excluding the revenue and gross profit associated with development programs and other non-product revenue, gross margin was 53% and 54% for the nine months ended September 28, 2014 and September 29, 2013, respectively.
Research and Development Expense
Research and development expense for the periods presented was as follows (in thousands, except percentages):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Research and development expense | $ | 3,257 | $ | 3,984 | $ | 10,357 | $ | 10,397 | ||||||||
| Percentage of revenue | 38 | % | 54 | % | 43 | % | 49 | % | ||||||||
| Decrease, period over period | $ | (727 | ) | $ | (40 | ) | ||||||||||
| Percentage decrease, period over period | -18 | % | 0 | % | ||||||||||||
Research and development expenses are expensed as incurred. Research and development expense consists primarily of salaries and related expenses for research and development personnel, consulting and engineering design, non-capitalized tools and equipment, engineering related semiconductor masks, depreciation for equipment, engineering expenses paid to outside technology development suppliers, allocated facilities costs and expenses related to stock based compensation.
Research and development expense for the three months ended September 28, 2014 was $3.3 million compared to $4.0 million for the three months ended September 29, 2013, a decrease of $727,000 or 18%. Research and development costs decreased as compared to the third quarter of 2013 primarily due to $730,000 decrease in materials and project-related services.
Research and development expense for the nine months ended September 28, 2014 and September 29, 2013 were comparable at $10.4 million. For the nine months ended September 28, 2014 compared to the nine months ended September 29, 2013, there was a $249,000 decrease in materials and project-related services partially offset by an increase of $216,000 in personnel related expenses.
We expect research and development expense to increase from the third quarter of 2014 to the fourth quarter of 2014 due to increased materials and project-related expenses to develop new products.
Selling, General and Administrative Expense
Selling, general and administrative expense for the periods presented was as follows (in thousands, except percentages):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Selling, general and administrative expense | $ | 2,388 | $ | 2,483 | $ | 7,353 | $ | 6,877 | ||||||||
| Percentage of revenue | 28 | % | 34 | % | 31 | % | 33 | % | ||||||||
| Increase (Decrease), period over period | $ | (95 | ) | $ | 476 | |||||||||||
| Percentage increase (decrease), period over period | -4 | % | 7 | % | ||||||||||||
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 September 28, 2014 was $2.4 million compared to $2.5 million for the three months ended September 29, 2013, a decrease of $95,000 or 4%. Selling, general and administrative expense decreased as compared to the third quarter of 2013 primarily due to a $283,000 decrease in personnel related expenses, partially offset by a $239,000 increase in stock-based compensation.
Selling, general and administrative expense for the nine months ended September 28, 2014 was $7.4 million compared to $6.9 million for the nine months ended September 29, 2013, an increase of $476,000 or 7%. Selling, general and administrative expense increased as compared to 2013 primarily due to a $473,000 increase in stock-based compensation and a $144,000 increase in personnel related expenses, partially offset by a $106,000 decrease in employees’ travel-related expenses.
We expect selling, general and administrative expense to be comparable in absolute dollars from the third quarter of 2014 to the fourth quarter of 2014.
Restructuring Expense, Net
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Restructuring expense | $ | 36 | $ | - | $ | 343 | $ | 950 | ||||||||
| Percentage of revenue | 0 | % | 0 | % | 1 | % | 5 | % | ||||||||
| Increase (decrease), period over period | $ | 36 | $ | (607 | ) | |||||||||||
| Percentage increase (decrease), period over period | 100 | % | -64 | % | ||||||||||||
During the three months ended September 28, 2014, we recorded $36,000 in restructuring expenses to reduce headcount in our engineering team. The component of the restructuring charge included $36,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations.
During the second quarter of 2014, we recorded $307,000 in restructuring expenses in order to end our lease in the Bothell, Washington location and reduce our headcount. The components of the restructuring charge included $43,000 of cash expenses for cleanup services, $210,000 of restricted cash and rent deposit forfeiture to move out of the Bothell facility, $45,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations, and $9,000 of non-cash expenses associated with the acceleration restricted stock units (“RSUs”).
During the nine months ended September 29, 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 RSUs 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 September 29, 2013.
Special Litigation-Related Expense (Income)
During the nine months ended September 28, 2014, we incurred no special litigation-related expenses.
During the three months ended September 29, 2013, we incurred a special litigation-related benefit of $5.7 million, which was due to a $7.3 million one-time litigation settlement for the settlement of the lawsuit against M/A-Com Technology Solution, Inc., its subsidiary, Optomai, and three former GigOptix employees (the Optomai case) partially offset by $1.6 million of legal fees associated with the Optomai case.
During the nine months ended September 29, 2013, we incurred a special litigation-related benefit of $4.8 million, which was due to a $7.3 million one-time litigation settlement for the Optomai case, partially offset by $2.5 million of legal fees associated with the Optomai case and $108,000 of legal fees associated with the Advantech case.
Interest Expense, Net and Other Income, Net
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Interest expense, net | $ | (9 | ) | $ | (27 | ) | $ | (36 | ) | $ | (106 | ) | ||||
| Other income, net | 35 | 3 | 45 | 259 | ||||||||||||
| Total | $ | 26 | $ | (24 | ) | $ | 9 | $ | 153 | |||||||
Interest expense, net and other income, net consist primarily of gains and losses related to foreign currency transactions, gains and losses related to property and equipment disposals, interest on line of credit borrowings, interest on capital leases and amortization of loan fees in connection with our Silicon Valley Bank line of credit and loan.
Interest expense, net for the three months ended September 28, 2014 was $9,000 compared to $27,000 for the three months ended September 29, 2013. Interest expense, net decreased as compared to the third quarter of 2013 primarily due to a $12,000 decrease in interest on capital leases.
Interest expense, net for the nine months ended September 28, 2014 was $36,000 compared to $106,000 for the nine months ended September 29, 2013. Interest expense, net decreased as compared to the third quarter of 2013, primarily due to a $35,000 decrease in interest on capital leases and $19,000 decrease in loan fees.
Other income, net for the three and nine months ended September 28, 2014 was income of $35,000 and $45,000, respectively, which primarily consisted of $29,000 and $33,000 gain on foreign currency exchange, respectively.
Other income, net for the nine months ended September 29, 2013 was income of $259,000, which primarily consisted of $160,000 gain on sale of property and equipment, $95,000 gain on sale of materials and $12,000 from the change in the fair value of liability warrants.
Provision for Income Taxes
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 28, 2014 | September 29, 2013 | September 28, 2014 | September 29, 2013 | |||||||||||||
| Provision for income taxes | $ | 8 | $ | 1 | $ | 39 | $ | 28 | ||||||||
| Percentage of revenue | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
| Increase, period over period | $ | 7 | $ | 11 | ||||||||||||
| Percentage increase, period over period | 700 | % | 39 | % | ||||||||||||
Income tax expense was $8,000 and $1,000 for three months ended September 28, 2014 and September 29, 2013, respectively, and our effective tax rate was less than 1% for those periods. The income tax provision for the three months ended September 28, 2014 and September 29, 2013 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 $39,000 and $28,000 for nine months ended September 28, 2014 and September 29, 2013, respectively, and our effective tax rate was less than 1% for those periods. The income tax provision for the nine months ended September 28, 2014 and September 29, 2013 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.
Loss on Equity Investment
In February 2014, together with Fundação CPqD – Centro De Pesquisa e Desenvolvimento em Telecomunicações (“CPqD”), we incepted a new joint venture, of which we own 49% and CPqD owns 51%, BrPhotonics Produtos Optoeletrônicos LTDA. (“BrP”). It is based in Campinas, Brazil. BrP will be a provider of advanced high-speed devices for optical communications and integrated transceiver components for information networks and is engaged in research and development of Silicon-Photonics (“SiPh”) advanced electro-optical products.
For the three and nine months ended September 28, 2014, our allocated portion of BrP’s operating results was a loss of $125,000 and $456,000 respectively.
Liquidity and Capital Resources
Cash and cash equivalents and cash flow data for the periods presented were as follows (in thousands):
September 28, 2014 | December 31, 2013 | |||||||
| Cash and cash equivalents | $ | 18,119 | $ | 20,377 | ||||
| Nine Months Ended | ||||||||
| September 28, 2014 | September 29, 2013 | |||||||
| Net cash provided by (used in) operating activities | $ | (812 | ) | $ | 4,231 | |||
| Net cash used in investing activities | $ | (786 | ) | $ | (1,159 | ) | ||
| Net cash provided by (used in) financing activities | $ | (607 | ) | $ | 1,974 | |||
Public Offering
On December 19, 2013, we entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC as representative of several underwriters to the Underwriting Agreement relating to a public offering of an aggregate of 8,325,000 shares (the “Shares”) of our common stock, par value $0.001 per share at a public offering price of $1.42 per share. The Shares are accompanied by the associated rights to purchase shares of Series A Junior Preferred Stock, par value $0.001 per share, created by the Rights Agreement, dated December 16, 2011, between us and the American Stock Transfer & Trust Company, LLC, as Rights Agent (the “Rights Agreement”). Under the terms of the Underwriting Agreement, we granted the underwriters a 30 day option to purchase up to an additional 1,248,750 shares of common stock to cover over-allotments.
On December 24, 2013, we completed our public offering of 9,573,750 newly issued shares of common stock at a price to the public of $1.42 per share. The number of shares sold in the offering included the underwriter’s full exercise on December 24, 2013 of their over-allotment option of 1,248,750 shares of common stock. The net proceeds from the offering was approximately $12.3 million which consisted of $12.5 million after underwriting discounts, commissions and expenses less an additional $250,000 for legal, accounting, registration and other transaction costs related to the public offering.
Operating Activities
Operating activities used cash of $812,000 in the nine months ended September 28, 2014. Our net loss from continuing operations, adjusted for depreciation, stock-based compensation, loss on equity investment, non-cash restructuring expense and other non-cash items, was an income of $1.9 million. The remaining use of $2.7 million of cash was primarily due to an increase in accounts receivable, net of $2.7 million, an increase in prepaid and other assets of $702,000, a decrease in accrued compensation of $118,000 and a decrease in other current liabilities of $419,000, which were partially offset by a decrease in inventories of $351,000 and an increase in accounts payable of $916,000.
Operating activities provided cash of $4.2 million in the nine months ended September 29, 2013. This resulted from a net loss of $424,000 and non-cash gain on sale of property and equipment of $133,000, and we experienced cash usage for working capital for an increase in accounts receivable, net of $2.1 million, an increase in inventories of $437,000, an increase in prepaid and other current assets of $521,000, a decrease in accrued restructuring of $89,000, and a decrease in other current and long-term liabilities of $137,000. These decreases were offset by an increase in accounts payable of $1.3 million, an increase in accrued compensation of $675,000 and non-cash expenses for stock-based compensation of $3.3 million and depreciation and amortization of $2.8 million. In addition, we incurred a special litigation-related benefit of $4.8 million, which was due to a $7.3 million one-time litigation settlement for the Optomai case, partially offset by $2.5 million of legal fees associated with the Optomai case.
Investing Activities
Net cash used in investing activities for the nine months ended September 28, 2014 was $786,000 and consisted of purchases of property and equipment.
Net cash used in investing activities for the nine months ended September 29, 2013 was $1.2 million and consisted of $1.3 million of purchases of property and equipment partially offset by $160,000 of proceeds from sale of property and equipment.
Financing Activities
Net cash used in financing activities for the nine months ended September 28, 2014 was $607,000 and consisted primarily of $379,000 of taxes paid related to net share settlement of equity awards, $283,000 for capital lease payments and a $176,000 payment of debt assumed in our acquisition of Tahoe RF, partially offset by $231,000 proceeds from issuance of stock.
Net cash provided by financing activities for the nine months ended September 29, 2013 was $2.0 million and consisted primarily of $2.4 million of net proceeds from our line of credit facilities with Silicon Valley Bank, partially offset by $319,000 for capital lease payments and $111,000 for taxes paid related to net share settlement of equity awards.
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 September 28, 2014:
| Contractual Obligations as of September 28, 2014: | Total | Less than One Year | One to Three Years | Three to Five Years | ||||||||||||
| Operating lease obligations | $ | 1,235 | $ | 141 | $ | 970 | $ | 124 | ||||||||
| Capital lease obligations (including interest) | 11 | 1 | 7 | 3 | ||||||||||||
| Total | $ | 1,246 | $ | 142 | $ | 977 | $ | 127 | ||||||||
Except for the future cash obligations above, GigOptix did not have any material commitments for capital expenditures as of September 28, 2014.
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.
| QUANTITATIVE AND QUALTATIVE DISCLOSURES ABOUT MARKET RISK |
This item has been omitted based on GigOptix’ status as a smaller reporting company.
| CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer 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 September 28, 2014. 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.
| RISK FACTORS |
We have revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede any similar the risks previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013 and otherwise supplement those risks. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K, as well as those contained in Part 1, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.
We have incurred substantial operating losses in the past and we may not be able to achieve profitability in the future.
Historically, we have incurred net losses. For the nine months ended September 28, 2014 and the years ended December 31, 2013 and 2012, we incurred net losses of $4.7 million, $1.9 million and $7.0 million, respectively. For the nine months ended September 28, 2014, we had cash outflows from operations of $812,000. For the year ended December 31, 2013, we had cash inflows from operations of $3.3 million. For the year ended December 31, 2012, we had cash outflows from operations of $2.0 million. As of September 28, 2014, we had an accumulated deficit of $101.2 million. We expect development, sales and other operating expenses to increase in the future as we expand our business. If our revenue does not grow to offset these current expenses, we may not be profitable. In fact, in future quarters we may not have any revenue growth or our revenues could decline. Furthermore, if our operating expenses exceed expectations, financial performance will be adversely affected and we may continue to incur significant losses in the future.
We derive a significant portion of our revenue from a small number of customers and the loss of one or more of these key customers, the diminished demand for our products from a key customer, or the failure to obtain certifications from a key customer or its distribution channel could significantly reduce our revenue and profits.
A relatively small number of customers account for a significant portion of our revenue in any particular period. One or more of our key customers may discontinue operations as a result of consolidation, liquidation or otherwise, or reduce significantly its business with us due to the current economic conditions or their current situation. Reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers could significantly reduce our revenue and profits. There is no assurance that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers.
For the nine months ended September 28, 2014, one customer accounted for 28% of total revenue. For the nine months ended September 29, 2013, one customer accounted for 33% of total revenue. No other customers accounted for more than 10% of total revenue during the nine months ended September 28, 2014 and September 29, 2013.
We could suffer unrecoverable losses on our customers’ accounts receivable, which would adversely affect our financial results.
Our operating cash flows are dependent on the continued collection of receivables. Although our accounts receivable as of September 28, 2014 increased by $2.7 million, or 53%, compared to the balance as of December 31, 2013 we have not had significant uncollectable accounts. However, if a customer is unable or refuses to pay, we could suffer additional accounting losses as well as a reduction in liquidity. A significant increase in uncollectible accounts would have an adverse impact on our business, liquidity and financial results.
Our business is subject to foreign currency risk.
Sales to customers located outside the United States comprised 73% and 74% of our revenue for the nine months ended September 28, 2014 and September 29, 2013, 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. 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.
| EXHIBITS |
(a) Exhibits
Exhibit Number | Description | |
31.1* | 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. | |
31.2* | 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. | |
32.1* | 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 | |
32.2* | 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: November 10, 2014 | /S/ Avi S. Katz |
| Dr. Avi S. Katz | |
| Chief Executive Officer and Chairman of the Board | |
| Date: November 10, 2014 | /S/ Curt P. Sacks |
| Curt P. Sacks | |
| Chief Financial Officer |
31