XASE:GIG GigOptix Inc Quarterly Report 10-Q Filing - 7/1/2012

Effective Date 7/1/2012

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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 July 1, 2012

or

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

For the transition period from   to

Commission file number: 001-35520

GIGOPTIX, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
26-2439072
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

130 Baytech Drive
San Jose, CA  95134

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
o
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting Company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x
 
The number of shares of Common Stock outstanding as of August 3, 2012, the most recent practicable date prior to the filing of this Amended Quarterly Report on Form 10-Q, was 21,191,686 shares.



 
 

 
 
Table of Contents
 
 
 
PAGE
NO
PART I FINANCIAL INFORMATION
 
 
 
 
ITEM 1
Financial Statements (unaudited)
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
     
 
6
     
 
7
 
 
 
ITEM 2
20
 
 
 
ITEM 3
27
 
 
 
ITEM 4
27
 
 
PART II OTHER INFORMATION
 
 
 
 
ITEM 1
28
 
 
 
ITEM 1A
29
 
 
 
ITEM 6
31
 
PART I
FINANCIAL INFORMATION
GIGOPTIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

   
July 1,
   
December 31,
 
   
2012
   
2011
 
ASSETS
 
(Unaudited)
    (1)  
Current assets:
             
Cash and cash equivalents
  $ 12,922     $ 15,788  
Short-term investments
    -       400  
Accounts receivable, net
    7,719       5,625  
Inventories
    3,591       2,220  
Prepaid and other current assets
    415       298  
Total current assets
    24,647       24,331  
Property and equipment, net
    5,412       4,488  
Intangible assets, net
    4,776       5,281  
Goodwill
    9,860       9,860  
Restricted cash
    255       255  
Other assets
    355       309  
Total assets
  $ 45,305     $ 44,524  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 3,941     $ 3,183  
Accrued compensation
    1,239       832  
Line of credit
    5,950       3,000  
Other current liabilities
    4,965       4,945  
Total current liabilities
    16,095       11,960  
Other long term liabilities
    899       1,250  
Total liabilities
    16,994       13,210  
Commitments and contingencies (Note 10)
               
                 
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding as of July 1, 2012 and December 31, 2011
    -       -  
Common stock, $0.001 par value; 50,000,000 shares authorized as of July 1, 2012 and December 31, 2011; 21,191,686 and 21,545,713 shares issued and outstanding as of July 1, 2012 and December 31, 2011, respectively
    21       22  
Additional paid-in capital
    121,057       118,362  
Treasury stock, at cost; 701,754 and zero shares as of July 1, 2012 and December 31, 2011, respectively
    (2,209 )     -  
Accumulated other comprehensive income
    314       423  
Accumulated deficit
    (90,872 )     (87,493 )
Total stockholders’ equity
    28,311       31,314  
Total liabilities and stockholders’ equity
  $ 45,305     $ 44,524  

See accompanying Notes to Condensed Consolidated Financial Statements

(1)
The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date.

 
GIGOPTIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
                         
Revenue
                       
Product
  $ 9,588     $ 7,601     $ 18,739     $ 14,653  
Government contract
    -       18       -       628  
Total revenue
    9,588       7,619       18,739       15,281  
                                 
Cost of revenue
                               
Product
    4,537       3,798       8,715       7,449  
Government contract
    -       -       -       180  
Total cost of revenue
    4,537       3,798       8,715       7,629  
Gross profit
    5,051       3,821       10,024       7,652  
                                 
Research and development expense
    3,445       3,074       6,828       5,464  
Selling, general and administrative expense
    3,152       2,719       5,959       5,342  
Restructuring expense, net
    (114 )     3,054       93       3,054  
Merger-related expense
    -       778       -       1,885  
Special litigation-related expense
    212       -       353       -  
Shareholder settlement expense
    -       -       -       1,064  
Total operating expenses
    6,695       9,625       13,233       16,809  
Loss from operations
    (1,644 )     (5,804 )     (3,209 )     (9,157 )
Interest expense, net
    (41 )     (47 )     (193 )     (143 )
Other income, net
    72       58       57       70  
Net loss before income taxes
    (1,613 )     (5,793 )     (3,345 )     (9,230 )
Provision for income taxes
    (18 )     (7 )     (34 )     (12 )
Net loss
  $ (1,631 )   $ (5,800 )   $ (3,379 )   $ (9,242 )
                                 
Net loss per share - basic and diluted
  $ (0.08 )   $ (0.42 )   $ (0.16 )   $ (0.71 )
                                 
Shares used in computing basic and diluted net loss per share
    21,502       13,906       21,528       13,107  

See accompanying Notes to Condensed Consolidated Financial Statements
 
GIGOPTIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
Net loss
  $ (1,631 )   $ (5,800 )   $ (3,379 )   $ (9,242 )
Other comprehensive income (loss), net of tax
                               
Foreign currency translation adjustment
    (129 )     101       (55 )     27  
Change in pension liability in connection with actuarial gain
    -       -       (54 )     -  
Other comprehensive income (loss), net of tax
    (129 )     101       (109 )     27  
Comprehensive loss
  $ (1,760 )   $ (5,699 )   $ (3,488 )   $ (9,215 )

See accompanying Notes to Condensed Consolidated Financial Statements
 
GIGOPTIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Six Months Ended
 
   
July 1,
   
July 3,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
  $ (3,379 )   $ (9,242 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    2,054       1,265  
Stock-based compensation
    2,536       1,513  
Non-cash litigation settlement
    -       1,064  
Non-cash restructuring expense
    (114 )     -  
Amortization of investments
    -       7  
Change in fair value of warrants
    14       (18 )
Changes in operating assets and liabilities, net of acquisition:
               
Accounts receivable, net
    (2,092 )     709  
Inventories
    (1,371 )     407  
Prepaid and other current assets
    (302 )     (45 )
Other assets
    (47 )     166  
Accounts payable
    768       (126 )
Accrued compensation
    218       1,074  
Other current liabilities
    (478 )     1,877  
Other long term liabilities
    (120 )     (67 )
Net cash used in operating activities
    (2,313 )     (1,416 )
Cash flows from investing activities:
               
Proceeds from sale and maturity of investments
    400       800  
Purchases of property and equipment
    (1,648 )     (1,167 )
Net cash received in the acquisition of Endwave
    -       8,824  
Change in restricted cash
    -       100  
Net cash provided by (used in) investing activities
    (1,248 )     8,557  
Cash flows from financing activities:
               
Proceeds from issuance of stock
    347       25  
Proceeds from line of credit
    10,660       4,990  
Repayment of line of credit
    (7,710 )     (7,182 )
Repayment of short-term loan
    -       (158 )
Repayment of capital lease
    (297 )     (114 )
Purchases of treasury stock, including direct issuance cost
    (2,209 )     -  
Net cash provided by (used in) financing activities
    791       (2,439 )
Effect of exchange rates on cash and cash equivalents
    (96 )     (68 )
Net increase (decrease) in cash and cash equivalents
    (2,866 )     4,634  
Cash and cash equivalents at beginning of period
    15,788       4,502  
Cash and cash equivalents at end of period
  $ 12,922     $ 9,136  
Supplemental disclosure of cash flow information
               
Interest paid
  $ 192     $ 163  

See accompanying Notes to Condensed Consolidated Financial Statements

 
GIGOPTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

Organization

GigOptix, Inc. (“GigOptix” or the “Company”), the successor to GigOptix LLC, was formed as a Delaware corporation in March 2008 in order to facilitate the acquisition of Lumera Corporation (“Lumera”) by GigOptix LLC. Before this combination, GigOptix LLC acquired the assets of iTerra Communications LLC in July 2007 (“iTerra”) and acquired Helix Semiconductors AG (“Helix”) in January 2008. On November 9, 2009, GigOptix acquired ChipX, Incorporated (“ChipX”). On June 17, 2011, GigOptix acquired Endwave Corporation (“Endwave”). As a result of the acquisitions, Helix, Lumera, ChipX, and Endwave all became wholly owned subsidiaries of GigOptix.

GigOptix is a leading supplier of high performance semiconductor and electro-optical component products that enable end-to-end high-speed data information streaming over the global network using optical fiber, wireless telecommunications and the data-communications infrastructure. The Company’s products convert signals between electrical and optical formats for transmitting and receiving data over fiber optic networks and between electrical and high speed radio frequencies to enable the transmitting and receiving of data over wireless networks for short range through long haul distances.

Basis of Presentation

The Company’s fiscal year ends on December 31. For quarterly reporting, the Company employs a five-week, four-week, four-week, reporting period. The second quarter of 2012 ended on Sunday, July 1, 2012. The second quarter of fiscal 2011 ended on Sunday, July 3, 2011. 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 July 1, 2012 and for the three and six months ended July 1, 2012 and July 3, 2011, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X, and include the accounts of the Company and all of its subsidiaries. Accordingly, they do not include all of the information and footnotes required by such accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and those related to the acquisition of Endwave) considered necessary for a fair presentation of the Company’s consolidated financial position and operations have been included. The condensed consolidated results of operations for the three and six months ended July 1, 2012 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2012. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report for the year ended December 31, 2011 on Form 10-K (the “2011 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 2011 Form 10-K and the Company encourages you to read its 2011 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):

   
July 1, 2012
   
December 31, 2011
 
Billed accounts receivable
  $ 7,627     $ 5,503  
Unbilled accounts receivable
    441       479  
Allowance for doubtful accounts
    (349 )     (357 )
    $ 7,719     $ 5,625  
 
Property and equipment, net consisted of the following (in thousands, except depreciable life):

 
Life
 
July 1,
   
December 31,
 
 
(In years)
 
2012
   
2011
 
Network and laboratory equipment
3 – 5   $ 10,715     $ 8,839  
Computer software and equipment
2 – 3     3,657       3,125  
Furniture and fixtures
3 –10     176       169  
Office equipment
3 – 5     105       106  
Leasehold improvements
1 – 5     190       179  
Construction-in-progress
    236       389  
        15,079       12,807  
Accumulated depreciation
      (9,667 )     (8,319 )
Property and equipment, net
    $ 5,412     $ 4,488  

For the three and six months ended July 1, 2012, depreciation expense related to property and equipment was $714,000 and $1,365,000, respectively. For the three and six months ended July 3, 2011, depreciation expense related to property and equipment was $519,000 and $933,000, respectively.

Inventories consisted of the following (in thousands):

   
July 1, 2012
   
December 31, 2011
 
Raw materials
  $ 1,696     $ 1,334  
Work in process
    953       237  
Finished goods
    942       649  
    $ 3,591     $ 2,220  

Accrued and other current liabilities consisted of the following (in thousands):

 
 
July 1, 2012
   
December 31, 2011
 
             
Amounts billed to the U.S. government in excess of approved rates
  $ 1,154     $ 1,154  
Warranty Reserve
    635       296  
Customer deposits
    522       523  
Capital lease obligation, current portion
    455       436  
Restructuring liabilities, current portion
    245       458  
Other
    1,954       2,078  
    $ 4,965     $ 4,945  

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

 
Changes in the Company’s product warranty liability during the six months ended July 1, 2012 and July 3, 2011 are as follows (in thousands):

    Six months ended  
   
July 1,
   
July 3,
 
   
2012
   
2011
 
Balance at January 1
  $ 296     $ 143  
Warranties accrued
    988       492  
Warranties settled or reversed
    (649 )     (417 )
Warranties acquired from business combination
    -       496  
Ending balance
  $ 635     $ 714  

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 July 1, 2012 and December 31, 2011 (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)
 
July 1, 2012:
                       
Assets:
                       
Cash equivalents:
                       
Money market funds
  $ 5,356     $ 5,356     $ -     $ -  
    $ 5,356     $ 5,356     $ -     $ -  
Current liabilities:
                               
Liability warrants
  $ 35     $ -     $ -     $ 35  
                                 
December 31, 2011:
                               
Assets:
                               
Cash equivalents:
                               
Money market funds
  $ 9,199     $ 9,199     $ -     $ -  
Short-term investments:
                               
United States government agencies
    400       -       400       -  
    $ 9,599     $ 9,199     $ 400     $ -  
Current liabilities:
                               
Liability warrants
  $ 21     $ -     $ -     $ 21  

As of July 1, 2012, the Company had cash and cash equivalents of $12.9 million, which was comprised of $7.5 million of cash and $5.4 million of money market funds. As of December 31, 2011, the Company had cash and cash equivalents of $15.8 million, which comprised of $6.6 million cash and $9.2 million of money market funds.

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

For the period ended July 1, 2012, the Company did not have any significant transfers between Level 1 and Level 2.

 
The amounts reported as cash and cash equivalents, accounts receivable, accounts payable, accrued warranty, accrued compensation and other current liabilities approximate fair value due to their short-term maturities. The fair value for the Company’s investments in marketable debt securities is estimated based on quoted market prices. The carrying value of the Company’s capital lease obligations approximates fair value and is based upon borrowing rates currently available to the Company for capital leases with similar terms.

Liability Warrants

In connection with a November 2009 loan and security agreement with Bridge Bank and a January 2010 secured line of credit facility with Agility Capital, the Company issued warrants to both Bridge Bank and Agility Capital. Certain provisions in the warrant agreements provided for down-round protection if the Company raised equity capital at a per share price which was less than the per share price of the warrants. Such down-round protection also requires the Company to classify the value of the warrants as a liability on the issuance date and then record changes in the fair value through the statement of operations for each reporting period until the warrants are either exercised or cancelled. The fair value of the liability is recalculated and adjusted each quarter with the differences being charged to income. The fair value of these warrants was determined using a Monte Carlo simulation, which requires the use of significant unobservable market values.  As a result, these warrants are classified as Level 3 financial instruments. On July 7, 2010, the Company raised additional equity through an offering of 2,760,000 shares at $1.75 per share, thus triggering the down-round protection and adjustment of the number of warrants in each warrant agreement.

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

 
 As of July 1, 2012
   
 As of December 31, 2011
         
Stock price
$2.69
   
$1.80
Strike price
$3.32
   
$3.32
Expected life
 5.05 years
   
 5.55 years
Risk-free interest rate
0.76%
   
1.21%
Volatility
75%
   
75%
Fair value per share
$1.52
   
$0.93

The following table summarizes the warrants subject to liability accounting as of July 1, 2012 (in thousands, except share and per share amounts) (see also Note 5):

                                     
Three Months Ended
July 1, 2012
   
Six Months Ended
July 1, 2012
   
Holder
 
Original
Warrants
   
Adjusted
Warrants
 
 Grant
Date
 Expiration
Date
 
Price
per
Share
   
Fair Value
December
31, 2011
   
Fair Value
July 1,
2012
   
Exercise of
Warrants
   
Change in
Fair Value
   
Exercise of
Warrants
   
Change in
Fair Value
 
Related
Agreement
Bridge Bank
    20,000       22,671  
4/7/2010
7/7/2017
    3.32     $ 21     $ 35       -     $ (2 )     -     $ 14  
Credit Agreement

The change in the fair value of the Level 3 liability warrants during the three and six months ended July 1, 2012 is as follows (in thousands):

Fair value at December 31, 2011
  $ 21  
Change in fair value
    16  
Fair value at April 1, 2012
  $ 37  
Change in fair value
    (2 )
Fair value at July 1, 2012
  $ 35  

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):

   
July 1, 2012
   
December 31, 2011
 
   
Gross
   
Accumulated
Amortization
   
Net
   
Gross
   
Accumulated
Amortization
   
Net
 
Customer relationships
  $ 3,277     $ (1,062 )   $ 2,215     $ 3,277     $ (852 )   $ 2,425  
Existing technology
    3,783       (1,861 )     1,922       3,783       (1,657 )     2,126  
Order backlog
    732       (732 )     -       732       (732 )     -  
Patents
    457       (280 )     177       457       (239 )     218  
Trade name
    659       (197 )     462       659       (147 )     512  
Total
  $ 8,908     $ (4,132 )   $ 4,776     $ 8,908     $ (3,627 )   $ 5,281  
 
 For the three and six months ended July 1, 2012 and July 3, 2011, amortization of intangible assets was as follows (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
Cost of revenue
  $ 122     $ 106     $ 244     $ 172  
Selling, general and administrative expense
    130       96       261       193  
    $ 252     $ 202     $ 505     $ 365  

Estimated future amortization expense related to intangible assets as of July 1, 2012 is as follows (in thousands):

Years ending December 31,
 
 
 
2012 (remaining)
  $ 506  
2013
    983  
2014
    893  
2015
    893  
2016
    869  
Thereafter
    632  
Total
  $ 4,776  

As of July 1, 2012, the Company had $9.9 million of goodwill in connection with the acquisitions of ChipX and Endwave. In addition to its annual review, the Company also performs a review of the carrying value of its intangible assets if the Company believes that indicators of impairment exist. During the second quarter of 2012, there were no factors which indicated impairment. The Company did not record impairment on any intangibles, including goodwill, for the three or six months ended July 1, 2012.  In addition, the Company did not record an impairment of goodwill for the year ended December 31, 2011 and will perform its annual impairment analysis during the fourth quarter of 2012.

NOTE 5—STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Modified Dutch Auction Tender Offer

On March 23, 2012, the Company announced the commencement of a modified Dutch auction tender offer to purchase up to $2.0 million in value of the Company’s common stock, $0.001 par value per share, at a price not greater than $3.10 nor less than $2.85 per share.

On May 22, 2012, the Company completed its modified Dutch auction tender offer and repurchased 701,754 shares of its common stock, at a price of $2.85 per share and at a total cost of $2.2 million, which included $209,000 for investment banking, registration and other transaction costs.

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 July 1, 2012 and December 31, 2011, there were no shares of preferred stock issued or outstanding.

 
On December 16, 2011 (the “Adoption Date”), the Company adopted a rights agreement that may have the effect of deterring, delaying, or preventing a change in control.  Under the rights plan, the Company issued a dividend of one preferred share purchase right for each share of common stock held by stockholders of record as of January 6, 2012, and the Company will issue one preferred stock purchase right to each share of common stock issued between January 6, 2012 and the earlier of either the rights’ exercisability or the expiration of the Rights Agreement. Each right entitles stockholders to purchase one one-thousandth of the Company’s Series A Junior Preferred Stock.

In general, the exercisability of the rights to purchase preferred stock will be triggered if any person or group, including persons knowingly acting in concert to affect the control of the Company, is or becomes a beneficial owner of 10% or more of the outstanding shares of the Company’s common stock after the Adoption Date.  Stockholders or beneficial ownership groups who owned 10% or more of the outstanding shares of common stock of the Company on or before the Adoption Date will not trigger the preferred share purchase rights unless they acquire an additional 1% or more of the outstanding shares of the Company’s common stock. Each right entitles a holder with the right upon exercise to purchase one one-thousandth of a share of preferred stock at an exercise price that is currently set at $8.50 per right, subject to purchase price adjustments as set forth in the rights agreement. Each share of preferred stock has voting rights equal to one thousand shares of common stock. In the event that exercisability of the rights is triggered, each right held by an acquiring person or group would become void. As a result, upon triggering of exercisability of the rights, there would be significant dilution in the ownership interest of the acquiring person or group, making it difficult or unattractive for the acquiring person or group to pursue an acquisition of the Company.  These rights expire in December of 2014, unless earlier redeemed or exchanged by the Company.

2008 Equity Incentive Plan

In December 2008, the Company adopted the 2008 Equity Incentive Plan, or 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 merger with Lumera on December 9, 2008. On January 1 of each year, starting in 2009, the aggregate number of shares reserved for issuance under the 2008 Plan 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, 2011, the stockholders had approved 12,833,679 shares for future issuance. On January 1, 2012, there was an automatic increase of 1,077,286 shares. As of July 1, 2012, 10,363,931 options to purchase common stock and restricted stock were outstanding and 2,875,875 shares are authorized for future issuance under the 2008 equity incentive plan.

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

2007 Equity Incentive Plan

In August 2007, GigOptix LLC adopted the GigOptix LLC Equity Incentive Plan, or 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 July 1, 2012, no shares of common stock have been reserved for issuance for new grants under the 2007 Plan and options to purchase a total of 421,232 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 July 1, 2012, no additional options can be granted under the Lumera Plan, and options to purchase a total of 146,133 shares of common stock were outstanding.

Warrants

As of December 31, 2011, we had a total of 1,948,095 warrants to purchase common stock outstanding under all warrant arrangements. During 2012, 137,500 warrants were exercised that resulted in 14,158 shares of common stock issued. As of July 1, 2012 we had 1,810,595 warrants to purchase common stock outstanding under all warrant arrangements. Some of the warrants have anti-dilution provisions which adjust the number of warrants available to the holder such as, but not limited to, stock dividends, stock splits and certain reclassifications, exchanges, combinations or substitutions. These provisions are specific to each warrant agreement.

On April 8, 2011, the Company and the trustees for the DBSI Estate Litigation Trust and the DBSI Liquidating Trust (together “DBSI”) reached an agreement to settle a claim by DBSI against the Company. As part of the settlement, the Company in April 2011 issued two warrants for a total of 1 million shares of our common stock, and DBSI surrendered to the Company for cancellation all of DBSI’s previously outstanding warrants to purchase 660,473 shares of our common stock.  These new warrants became exercisable on October 8, 2011.  One of the two new warrants, for 500,000 shares of common stock, has a term of three years and an exercise price of $2.60 per share, and the other warrant, also for 500,000 shares of common stock, has a term of four years and an exercise price of $3.00 per share. The new warrants may be exercised on a cashless exercise basis. As of July 1, 2012, a total of 1,000,000 warrants to purchase common stock were outstanding related to the DBSI settlement.

The Company issued warrants to both Bridge Bank and Agility Capital in connection with the November 2009 loan and security agreement with Bridge Bank and the January 2010 secured line of credit facility with Agility Capital (see Note 3). On February 25, 2011, Agility Capital exercised both of the warrants issued to it. On March 23, 2011 Bridge Bank exercised 114,286 warrants.  At July 1, 2012, Bridge Bank holds warrants to purchase 22,671 shares.

Stock-based Compensation Expense

The following table summarizes the Company’s stock-based compensation expense for the three and six months ended July 1, 2012 and July 3, 2011 (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
Cost of revenue
  $ 43     $ 14     $ 58     $ 27  
Research and development expense
    606       288       901       513  
Selling, general and administrative expense
    1,017       535       1,445       973  
Restructuring expense, net
    -       -       132       -  
    $ 1,666     $ 837     $ 2,536     $ 1,513  

For the six months ended July 1, 2012, included in the $2.5 million of stock-based compensation expense is $132,000 in restructuring expenses to accelerate the vesting of stock options (see Note 7).

During the three months ended July 1, 2012 and July 3, 2011, the Company granted options to purchase 94,000 and 1,700,643 of common stock, respectively, with an estimated total grant-date fair value of $163,000 and $2.9 million, respectively.

During the three months ended July 1, 2012, the Company granted 200,600 restricted stock units with a grant-date fair value of $608,000 or $3.03 per share. The Company did not grant any restricted stock units during the three months ended July 3, 2011.

During the six months ended July 1, 2012 and July 3, 2011, the Company granted options to purchase 2,541,533 and 3,360,179 of common stock, respectively, with an estimated total grant-date fair value of $4.5 million and $5.5 million, respectively.

During the six months ended July 1, 2012, the Company granted 829,269 restricted stock units with a grant-date fair value of $2.3 million or $2.78 per share. The Company did not grant any restricted stock units during the six months ended July 3, 2011.

 
As of July 1, 2012, the total compensation cost not yet recognized in connection with unvested stock options and restricted stock units under the Company’s equity compensation plans was approximately $10.0 million. Unrecognized compensation will be amortized on a straight-line basis over a weighted-average period of approximately 2.6 years.

The Company generally estimates the fair value of stock options granted using a Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, including the options expected life and the price volatility of the Company’s underlying stock. Actual volatility, expected lives, interest rates and forfeitures may be different from the Company’s assumptions, which would result in an actual value of the options being different from estimated. This fair value of stock option grants is amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period.

The majority of the stock options that the Company grants to its employees provide for vesting over a specified period of time, normally a four-year period, with no other conditions to vesting.   However, the Company may also grant stock options for which vesting occurs not only on the basis of elapsed time, but also on the basis of specified company performance criteria being satisfied.  In this case, the Company makes a determination regarding the probability of the performance criteria being achieved and uses a Black-Scholes option-pricing model to value the options incorporating management’s assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield. Compensation expense is recognized ratably over the vesting period, if it is expected that the performance criteria will be met.

The fair value of the Company’s stock options granted to employees was estimated using the following weighted-average assumptions:

   
Three Months Ended
   
Six Months Ended
 
   
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
Valuation model
 
Black-Scholes
   
Black-Scholes
   
Black-Scholes
   
Black-Scholes
 
Expected term
 
6.08 years
   
5.00 to 6.25 years
   
6.08 years
   
5.00 to 6.25 years
 
Expected volatility
  75%     70%     75%     70%  
Expected dividends
  0%     0%     0%     0%  
Risk-free interest rate
 
0.93% to 1.10%
   
1.53% to 2.28%
   
0.93% to 1.34%
   
1.53% to 2.64%
 
Weighted-average fair value
  $1.74     $1.68     $1.76     $1.65  

Expected Term—Expected term used in the Black-Scholes option-pricing model represents the period that the Company’s stock options are expected to be outstanding and is measured using the technique described in SEC Staff Accounting Bulletin No.107.

Expected Volatility—Expected volatility used in the Black-Scholes option-pricing model is derived from a combination of historical and implied volatility of guideline companies selected based on similar industry and product focus. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Expected Dividend—The Company has never paid dividends and currently does not intend to do so, and accordingly, the dividend yield percentage is zero for all periods.

Risk-Free Interest Rate—The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury constant maturities issued with a term equivalent to the expected term of the option.

Stock Options with Market Conditions Granted March 17, 2010

From time to time the Company also issues stock option grants to directors and employees that have a market condition. In such cases stock options will vest only if the average price of the Company’s stock is at or exceeds a certain price threshold during a specific, previously defined period of time. To the extent that the market condition is not met, the options do not vest and are cancelled. In these cases, the Company cannot use the Black-Scholes option-pricing model; instead, a binomial model must be used. For certain stock options, the Company utilizes the Monte Carlo simulation technique, which incorporates assumptions for the expected holding period, risk-free interest rate, stock price volatility and dividend yield. Compensation expense is recognized ratably until such time as the market condition is satisfied. Certain stock options granted on March 17, 2010 were classified as option grants having a market condition. On March 17, 2010, the Company granted 2,382,000 options, of which 1,181,000 vest on the basis of market conditions and the remaining 1,201,000 vest over a four-year period.  The entire grant was comprised of 2,292,000 options to employees and consultants and 90,000 options to board members at an exercise price of $1.95, which was the closing price of the Company’s shares on the date of grant approval.

Below is the vesting schedule for the stock options with market conditions.

472,400 shares, less the shares cancelled for the terminated employees, vested on April 1, 2011 as the result of the average share price during March 2011 being $3.01, which exceeded the $2.50 March 2011 average price per share requirement. The fair value per share of these options was $1.05, at the grant date, and the total expense associated with these options was $496,000.  These options were amortized over one year.

 
472,400 shares, less the shares cancelled for the terminated employees, were cancelled on April 1, 2012. Although the average share price during March 2012 was below the specified price of $3.50, the Company recognized the expense because there was a market condition. The fair value per share of these options was $1.01, at the grant date, and the total expense associated with these options was $477,000.  These options were amortized over two years.

236,200 shares, less the shares cancelled for the terminated employees, will vest on April 1, 2013 if the average share price during March 2013 is at or above $5.00. The fair value per share of these options was $1.01, at the grant date, and the total expense associated with these options is $239,000.  These options are being amortized over three years.

For all of the stock options with market conditions granted on March 17, 2010, the amount of expense recognized for the three and six months ended July 1, 2012 and July 3, 2011 was as follows:

Three Months Ended
   
Six Months Ended
 
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
$ 9     $ 75     $ 59     $ 247  

Stock Option and Restricted Stock Unit Activity

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

   
Number of Shares
   
Weighted-
average
Exercise Price
   
Weighted-
average
Remaining
Contractual
Term, Years
 
Outstanding, December 31, 2011
    8,495,725     $ 2.58        
Granted
    2,541,533       2.67        
Exercised
    (193,572 )     1.79        
Forfeited/expired
    (528,612 )     2.29        
Ending balance, July 1, 2012
    10,315,074     $ 2.64       8.25  
                         
Vested and exercisable, July 1, 2012
    4,420,568     $ 2.85       7.25  
                         
Vested and exercisable and expected to vest, July 1, 2012
    9,640,362     $ 2.65       8.20  

The aggregate intrinsic value of options outstanding, based on the fair value of the underlying stock options as of July 1, 2012 was approximately $7.3 million. The aggregate intrinsic value reflects the difference between the exercise price of the underlying stock options and the Company’s closing share price of $2.69 as of July 1, 2012.

The following is a summary of restricted stock unit activity for the indicated periods:
 
     
Number of
Shares
   
Weighted-
Average Grant
Date Fair Value
    Weighted-
average
Remaining
Contractual Term,
Years
    Aggregate
Intrinsic
Value
 
                          (In thousands)  
Outstanding, December 31, 2011
    -     $ -              
Granted
    829,269       2.78              
Released
    (205,810 )     2.78              
Forfeited/expired
    (7,237 )     2.71              
Outstanding, July 1, 2012
    616,222     $ 2.78       0.67     $ 1,787  
 
At July 1, 2012, the Company had 553,985 restricted stock units vested and expected to vest with a weighted average remaining contractual term of 0.7 years and an aggregate intrinsic value of $1.6 million. The remaining restricted stock units will vest on the following dates: August 10, 2012, November 9, 2012 and March 1, 2013.   Upon vesting, a restricted stock unit is converted to an actual share of common stock.
 
Net Income (Loss) Per Share
 
    Basic net income (loss) per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period, if dilutive. Potential common stock equivalents include options to purchase common stock, restricted stock units and warrants to purchase common stock.
 
    Potential dilutive common shares of 12,741,891 as of July 1, 2012 and 11,011,572 as of July 3, 2011 from the assumed exercise of stock options, unvested restricted stock units and warrants were not included in the net income (loss) per share calculations as the Company incurred net losses for the periods presented and inclusion of such shares would have been anti-dilutive. As a result, diluted net loss per share is the same as basic net loss per share for all periods presented.
 
NOTE 6—CREDIT FACILITIES

On December 9, 2011, the Company entered into an amended and restated loan and security agreement with Silicon Valley Bank. Pursuant to the amended and restated loan and security agreement, the Company is entitled to borrow from Silicon Valley Bank up to $6.0 million, based on 80% of eligible accounts receivable subject to limits based on the Company’s eligible accounts as determined by Silicon Valley Bank. Interest on extensions of credit is equal to the prime rate of Wall Street Journal (“WSJ”) Prime, plus 0.75%, with a minimum interest rate of 4.00%. The amended and restated loan and security agreement will expire on December 9, 2013.
 
The amended and restated loan and security agreement with Silicon Valley Bank is secured by all of our assets, including all accounts, equipment, inventory, receivables, and general intangibles. The amended and restated loan and security agreement contains certain restrictive covenants that will impose significant operating and financial restrictions on our operations, including, but not limited to restrictions that limit our ability to:

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

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

Create, incur, assume or be liable for any indebtedness, other than certain indebtedness permitted under the amended and restated loan and security agreement;
 
Pay any dividends or make any distribution or payment on, or redeem, retire, or repurchase, any capital stock; and

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

The amount outstanding on the line of credit as of July 1, 2012 was $6.0 million.  On July 3, 2012, the Company repaid the entire $6.0 million to Silicon Valley Bank. The amended and restated loan and security agreement contains a covenant that requires that on the last day of every month, the ratio of the Company’s cash, cash equivalents and accounts receivable to the Company’s current liabilities which mature within the following year (including obligations to Silicon Valley Bank), be 1.50 to 1.00.  As of July 1, 2012, the Company was in violation of this covenant.  This violation was cured by the July 3, 2012 repayment of the $6.0 million borrowed from Silicon Valley Bank, and as a result, the consequence of the Company’s violation of the covenant was not material to the Company.

NOTE 7—RESTRUCTURING

During the first of quarter of 2012, the Company undertook restructuring activities to reduce its expenses.  The components of the restructuring charge included severance, benefits, payroll taxes, expenses associated with the acceleration of stock options, other costs associated with employee terminations. The net charge for these restructuring activities was $207,000.

In July 2011, the Company vacated its headquarters facilities in Palo Alto, California and relocated to Endwave’s facilities in San Jose, California.  The Company has lease obligations through December 2013 for the Palo Alto facilities.  In connection with the Company vacating the Palo Alto facilities, the Company recognized $769,000 of restructuring expenses in July 2011. During the second quarter of 2012, the Company sublet the Palo Alto facility, and as a result, recorded a restructuring benefit of $74,000. In addition, during the second quarter of 2012, the Company recorded a benefit of $40,000 due to lower than expected restructuring expenses originally booked as part of the restructuring undertaken by the Company in relation to its acquisition of Endwave.

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

    Three months ended     Six months ended  
    July 1,     July 3,     July 1,     July 3,  
    2012     2011     2012     2011  
Beginning balance
  $ 641     $ 34     $ 696     $ 62  
Restructuring liabilities assumed
    -       468       -       468  
Charges
    -       3,111       207       3,111  
Uses and adjustments
    (334 )     (1,822 )     (596 )     (1,850 )
Ending balance
  $ 307     $ 1,791     $ 307     $ 1,791  

As of July 1, 2012, the $307,000 in accrued restructuring includes $48,000 for the Endwave restructuring which is expected to be paid out by the second quarter of 2013 and $259,000 for the Palo Alto facilities restructuring which is expected to be paid out by the fourth quarter of 2013.
 
As of July 1, 2012, $307,000 in accrued restructuring includes $245,000 recorded in other current liabilities and $62,000 recorded in other long term liabilities.

NOTE 8—INCOME TAXES

The Company recorded a provision for income taxes of $18,000 and $34,000 for the three and six months ended July 1, 2012, respectively, and $7,000 and $12,000 for the three and six months ended July 3, 2011, respectively. The Company's effective tax rate was (1%) for the three and six months ended July 1, 2012 and less than 0% for the three and six months ended July 3, 2011.

The income tax provision for the three and six months ended July 1, 2012 and July 3, 2011 were due primarily to state and foreign income taxes due and losses in all tax jurisdictions and full valuation allowances against such losses.

In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. In order to support a conclusion that a valuation allowance in not needed, positive evidence of sufficient quantity and quality is necessary to overcome negative evidence. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding realization of the asset including lack of profitability through July 1, 2012 and the uncertainty over future operating profitability and taxable income. The Company will continue to evaluate the potential realization of the deferred tax assets on a quarterly basis.

The Company is subject to income taxes in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. All tax years since the Company’s inception are open and may be subject to potential examination in one or more jurisdictions.

NOTE 9—SEGMENT AND GEOGRAPHIC INFORMATION

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

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

    Three months ended   Six months ended
   
July 1,
2012
       
July, 3
2011
       
July 1,
2012
       
July 3,
2011
     
North America
  $ 2,116   22 %   $ 3,488   46 %   $ 4,986   27 %   $ 7,972   52 %
Asia
    2,436   25 %     2,633   35 %     5,498   29 %     4,138   27 %
Europe
    5,029   53 %     1,391   18 %     8,181   44 %     3,035   20 %
Other
    7   0 %     107   1 %     74   0 %     136   1 %
    $ 9,588   100 %   $ 7,619   100 %   $ 18,739   100 %   $ 15,281   100 %
 
The Company determines geographic location of its revenue based upon the destination of shipments of its products.

For the three months ended July 1, 2012, two customers each accounted for greater than 10% of total revenue and combined they accounted for 43% of our total revenue, the largest accounted for 23% of the Company’s total revenue. For the three months ended July 3, 2011, there was no customer which accounted for greater than 10% of total revenue.
 
 For the six months ended July 1, 2012, two customers each accounted for greater than 10% of total revenue and combined they accounted for 35% of our total revenue, the largest accounted for 19% of the Company’s total revenue. For the six months ended July 3, 2011, only one customer accounted for greater than 10% of total revenue which accounted for 10% of the Company’s total revenue.
 
The following table summarizes long-lived assets by country (in thousands):

   
July 1,
   
December 31,
 
   
2012
   
2011
 
United States
  $ 3,001     $ 3,431  
Switzerland
    2,411       1,057  
    $ 5,412     $ 4,488  

Long-lived assets, comprised of property and equipment, are reported based on the location of the assets at each balance sheet date.

NOTE 10—COMMITMENTS AND CONTINGENCIES

Commitments

Leases

The Company leases its domestic and foreign sales offices under non-cancelable operating leases. These leases contain various expiration dates and renewal options.  The Company also leases certain software licenses under operating leases. Total facilities rent expense for the three and six months ended July 1, 2012 was $128,000 and $273,000, respectively, and for the three and six months ended July 3, 2011 was $172,000, and $303,000, respectively. During the second quarter of 2012, the Company sublet the Palo Alto facility, and as a result, recorded a restructuring benefit of $74,000.

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

   
Capital Leases
   
Operating Leases
 
Years ending December 31,
 
Minimum
payments
   
Minimum
payments
   
Sublease
payments
   
Net lease
payments
 
2012 (remainder of year)
  $ 280     $ 575     $ (72 )   $ 503  
2013
    479       1,027       (250 )     777  
2014
    306       353               353  
2015
    -       320               320  
2016
    -       339               339  
Thereafter
    -       57               57  
Total minimum lease payments
  $ 1,065     $ 2,671     $ (322 )   $ 2,349  
Less: Amount representing interest
    (160 )                        
Total capital lease obligations
    905                          
Less: current portion
    (455 )                        
Long-term portion of capital lease obligations
  $ 450                          
 
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 11—RELATED PARTY TRANSACTIONS

During the three and six months ended July 1, 2012, the Company had sales to National Instruments Corporation (“National Instruments”) of approximately $2.0 million and $2.9 million. During the three and six months ended July 3, 2011, the Company had sales to National Instruments of approximately $315,000 and $797,000, respectively.  The accounts receivable balance from National Instruments was $1,526,000 and $78,000 at July 1, 2012 and December 31, 2011, respectively. As of July 1, 2012 and December 31, 2011, National Instruments was a shareholder.

On October 4, 2011, National Instruments filed a complaint against ChipX and GigOptix in the District Court of Travis County pertaining to two sales contracts to which National Instruments was a purchaser of products sold by ChipX.  GigOptix is not a party to either contract.  Prior to the filing of the complaint, the parties had been in discussions regarding the pricing of the products sold under these contracts, the number of products to be sold, and the length of time during which the products would be sold.  National Instruments’ complaint sought a declaration that it was not in material breach of one of the contracts, as ChipX had asserted, that ChipX could not modify the prices in the contracts, that National Instruments could purchase products sold under one of the contracts directly from a supplier, and that GigOptix was not entitled to any damages from National Instruments as it is not a party to the contracts.  The complaint also sought unspecified damages for alleged breach of contract by ChipX.  ChipX and GigOptix never responded to the complaint, or filed a cross-complaint against National Instruments.  The parties have now settled the matter.  Pursuant to the terms of the settlement, National Instruments has paid ChipX $500,000 to license rights from ChipX which will enable National Instruments to manufacture the products sold under one of the contracts, National Instruments will make one last purchase in the amount of $3,500,000 of such products from ChipX to be fulfilled during 2012, and National Instruments shall have the right to purchase products sold under the other contract directly from the supplier in exchange for a royalty which the supplier will pay to ChipX.

NOTE 12—RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The Company adopted this update in the first quarter of 2012 and it did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2011, the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to an existing accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The Company adopted this standard in the first quarter of 2012 and it did not have a material impact on the Company’s condensed consolidated financial statements.

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

 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes included elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2011. 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, 2011 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 supplier of high performance semiconductor and electro-optical component products that enable end-to-end high-speed data information streaming over the global networks using optical fiber, wireless telecommunications and the data-communications infrastructure. Our products convert signals between electrical and optical formats for transmitting and receiving data over fiber optic networks and between electrical and high speed radio frequencies to enable transmitting and receiving of data over wireless networks for short range through long haul distances. Our strategy is to apply our core technical expertise in optical, electro-optical and high speed analog technology to develop products that address high growth product and market opportunities.

We are creating innovations in both optical telecommunications and data-communications applications for fast growing markets in 10Gbps, 40Gbps, 100Gbps and 400Gbps drivers, receivers, and electro–optic modulator components and multi-chip-modules (MCM) as well as E-Band wireless components and MCMs for high speed mobile backhaul point-to-point systems.  We believe that our expertise in high speed and high frequency analog and mixed-signal semiconductor design and electro-optical technologies has helped us create a broad portfolio of products that addresses customer demand for performance at higher speeds, over wider temperature ranges, in smaller sizes, with lower power consumption and lower cost compared to other products currently available in the market.

The following sets forth our significant corporate and product milestones:

In April 2007 Newco LLC was formed and received funding in May 2007.

In July, 2007, Newco was named “GigOptix LLC” and acquired the assets of iTerra Communications LLC, a privately held company headquartered in Palo Alto, CA, USA.

In January 2008, GigOptix LLC acquired Helix Semiconductors AG, a privately held company headquartered in Zurich, Switzerland.

In March 2008, GigOptix, Inc. was formed to facilitate the acquisition of Lumera Corporation, a NASDAQ listed company headquartered in Bothell, WA, USA. The combined company began trading on the OTCBB under the symbol “GGOX” in December 2008, upon completion of the merger.

In November 2009 GigOptix, Inc. acquired ChipX, a privately held company headquartered in Santa Clara, CA, USA.

In June 2011, GigOptix, Inc. acquired Endwave Corporation, a NASDAQ listed company headquartered in San Jose, CA, USA.

On April 25, 2012, GigOptix, Inc. began trading on the NYSE MKT exchange under the symbol “GIG.”

In June 2012, GigOptix Inc. acquired the SiGe-based E-Band product licenses from IBM, Inc.

We have incurred negative cash flows from operations since inception. For the six months ended July 1, 2012 and the year ended December 31, 2011 we incurred net losses of $3.4 million and $14.1 million, respectively, and cash outflows from operations of $2.3 million and $4.9 million, respectively. As of July 1, 2012 and December 31, 2011, we had an accumulated deficit of $90.9 million and $87.5 million, respectively.

 
Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. We adopted this standard in the first quarter of 2012 and it did not have a material impact on our condensed consolidated financial statements.

In June 2011, the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to an existing accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. We adopted this standard in the first quarter of 2012 and it did not have a material impact on our condensed consolidated financial statements.
 
In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this standard in the first quarter of 2012 and it did not have a material impact on our condensed consolidated financial statements.

Results of Operations

Revenue

Revenue for the periods reported was as follows (in thousands, except percentages):

   
Three months ended
   
Six months ended
 
   
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
Total revenue
  $ 9,588     $ 7,619     $ 18,739     $ 15,281  
Increase period over period
  $ 1,969             $ 3,458          
Percentage increase, period over period
    26 %             23 %        

Total revenue primarily consists of product revenue from the sale of our optical, wireless components and ASIC products.  Product revenue includes non-recurring engineering (“NRE”) revenue for engineering and design work for certain customers as well as government contracts.  NRE revenue for customers is generally recorded on a percentage of completion basis, using project hours as the basis to measure progress toward completing the engagement and recognizing revenue.  The costs incurred under these development projects are expensed as incurred and generally are included in research and development expense.

Revenue for the three months ended July 1, 2012 was $9.6 million, an increase of $2.0 million, or 26%, compared with $7.6 million for the three months ended July 3, 2011.  The increase in revenue was primarily due to increased sales of our optical components and ASIC product line partially offset by a decrease in revenue from the legacy Endwave products.
 
Revenue for the six months ended July 1, 2012 was $18.7 million, an increase of $3.5 million, or 23%, compared with $15.3 million for the six months ended July 3, 2011.  The increase in revenue was primarily due to increased sales of our high speed 40Gbps and 100Gbps optical components partially offset by a decrease in revenue from the legacy Endwave products.
 
Gross Profit and Cost of Revenue
 
Cost of revenue and gross profit for the periods presented was as follows (in thousands, except percentages):

   
Three months ended
   
July 1, 2012
 
July 3, 2011
         
   
Amount
(in thousands)
   
% of
Revenue
 
Amount
(in thousands)
   
% of
Revenue
 
Change
(in thousands)
   
% Change
   
 
         
 
                   
Total cost of revenue
  $ 4,537       47 %   $ 3,798       50 %   $ 739       19 %
Gross profit
  $ 5,051       53 %   $ 3,821       50 %   $ 1,230       32 %
 
   
Six months ended
   
July 1, 2012
 
July 3, 2011
             
   
Amount
(in thousands)
   
% of
Revenue
 
Amount
(in thousands)
   
% of
Revenue
 
Change
(in thousands)
   
% Change
                                                 
Total cost of revenue
  $ 8,715       47 %   $ 7,629       50 %   $ 1,086       14 %
Gross profit
  $ 10,024       53 %   $ 7,652       50 %   $ 2,372       31 %

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

Gross profit for the three months ended July 1, 2012 was $5.1 million, or 53% of revenue, compared to $3.8 million, or 50% of revenue for the three months ended July 3, 2011.  The increase in gross margin is primarily due to a change in product mix towards higher margin high speed optical data-com and telecom products. We expect our gross margin as a percentage of revenue to be similar in the third quarter of 2012 compared to what we experienced in the second quarter of 2012.

Gross profit for the six months ended July 1, 2012 was $10.0 million, or 53% of revenue, compared to $7.7 million, or 50% of revenue for the six months ended July 3, 2011.  The increase in gross margin is primarily due to a change in product mix towards higher margin high speed optical data-com and telecom products.

Research and Development Expense

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

   
Three months ended
   
Six months ended
 
   
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
Research and development expense
  $ 3,445     $ 3,074     $ 6,828     $ 5,464  
Percentage of revenue
    36%       40%       36%       36%  
Increase, period over period
  $ 371             $ 1,364          
Percentage increase, period over period
    12%               25%          
 
Research and development expense is 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 July 1, 2012 was $3.4 million compared to $3.1 million for the three months ended July 3, 2011, an increase of $371,000 or 12%. Research and development expense increased in absolute dollars compared to the second quarter of 2011 primarily due to a $318,000 increase in stock-based compensation and a $315,000 increase in personnel related expenses, which were partially offset by a $335,000 decrease in project related expenses. We expect research and development expense to moderately increase in absolute dollars from the second quarter of 2012 to the third quarter of 2012 due to increased project related expenses.

Research and development expense for the six months ended July 1, 2012 was $6.8 million compared to $5.5 million for the six months ended July 3, 2011, an increase of $1.4 million or 25%.  Research and development expense increased in absolute dollars compared to the six months ended July 3, 2011, primarily due to a $721,000 increase in personnel related expenses and a $388,000 increase in stock-based compensation related expenses.

Selling, General and Administrative Expense

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

   
Three months ended
   
Six months ended
 
   
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
Selling, general and administrative expense
  $ 3,152     $ 2,719     $ 5,959     $ 5,342  
Percentage of revenue
    33 %     36 %     32 %     35 %
Increase period over period
  $ 433             $ 617          
Percentage increase, period over period
    16 %             12 %        

Selling, general and administrative expense consists primarily of salaries and related expenses for executive, accounting, finance and administration personnel, professional fees, allocated facilities costs and expenses related to stock-based compensation.

Selling, general and administrative expense for the three months ended July 1, 2012 was $3.2 million compared to $2.7 million for the three months ended July 3, 2011, an increase of $433,000 or 16%. Selling, general and administrative expense increased in absolute dollars compared to the second quarter of 2011 primarily due to a $482,000 increase in stock-based compensation expenses. We expect selling, general and administrative expense in the third quarter of 2012 to be consistent in absolute dollars with the second quarter of 2012.

Selling, general and administrative expense for the six months ended July 1, 2012 was $6.0 million compared to $5.3 million for the six months ended July 3, 2011, an increase of $617,000 or 12%.  Selling, general and administrative expense increased in absolute dollars compared to the six months ended July 3, 2011 primarily due to a $472,000 increase in stock-based compensation related expenses and an $87,000 increase in legal expenses.

Restructuring Expense, Net

During both the three and six months ended July 3, 2011, we recorded $3.1 million in restructuring expense which represented certain restructuring expenses incurred and booked by Endwave in anticipation of the acquisition and prior to the close of the transaction. Of the total $3.1 million of restructuring expense incurred by Endwave prior to the close of the transaction, $2.1 million remained in restructuring liabilities at the close of the merger and $1.0 million had been paid out prior to the close of the transaction.  Of the total $3.1 million, $2.8 million included severance, benefits, payroll taxes, expenses associated with the acceleration of stock options and other costs associated with employee terminations and $290,000 included facilities related expenses.

During the three months ended April 1, 2012, we undertook restructuring activities to reduce our expenses.  The components of the restructuring charge included severance, benefits, payroll taxes, expenses associated with the acceleration of stock options and other costs associated with employee terminations. The net charge for these restructuring activities was $207,000.

During the three months ended July 1, 2012, we recorded a benefit of $114,000 for restructuring expense, comprised of a $74,000 benefit from the sublet of our Palo Alto facility, as we were able to sublet the property at a higher lease rate than we originally estimated, and a $40,000 benefit due to lower than anticipated restructuring charges related to the Endwave merger.

 
Merger-related Expense

During the three and six months ended July 3, 2011, we incurred $778,000 and $1.9 million of expenses in connection with our June 2011 acquisition of Endwave Corporation.  The amounts primarily include employee retention compensation in connection with the completion of the merger and attorney, accounting and investment banking fees.  During the three and six months ended July 1, 2012, we did not incur any merger-related expense.

Special Litigation-Related Expense

During the three and six months ended July 1, 2012, we recorded special litigation-related expense of $212,000 and $353,000, respectively, which was related to costs associated with the litigation against M/A-Com Technology Solution, Inc. (Optomai), National Instruments and Telekenex matters. We did not have any special litigation-related expense for the three and six months ended July 3, 2011.

Shareholder Settlement Expense

On April 8, 2011, GigOptix and the trustees for the DBSI Estate Litigation Trust and the DBSI Liquidating Trust (together “DBSI”) reached agreement to settle a claim by DBSI against GigOptix. As part of the settlement, GigOptix issued warrants to DBSI for 1 million shares of common stock. During the second quarter of 2011, we recognized $1.1 million of expense in connection with the issuance of these warrants.

Interest Expense, Net and Other Expense, Net
 
   
Three months ended
   
Six months ended
 
   
July 1, 2012
   
July 3, 2011
   
July 1, 2012
   
July 3, 2011
 
Interest expense, net
  $ (41 )   $ (47 )   $ (193 )   $ (143 )
Other income (expense), net
    72       58       57       70  
Total
  $ 31     $ 11     $ (136 )   $ (73 )
 
Interest expense, net and other income, net consist primarily of gains and losses related to foreign currency transactions, 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 July 1, 2012 was comparable to the three months ended July 3, 2011.
 
Interest expense, net for the six months ended July 1, 2012 was $193,000 compared to $143,000 for the months ended July 3, 2011, an increase of $50,000.  For the six months ended July 1, 2012, interest expense, net increased in absolute dollars compared to the same period in the prior year primarily due to a $36,000 increase of capital lease interest expense and a $50,000 increase of amortization of the loan discount, which partially offset by a $40,000 decrease in loan fees.
 
Other income, net for the three and six months ended July 1, 2012 was comparable to the three and six months ended July 3, 2011.

Provision for Income Taxes

We recorded a provision for income taxes of $18,000 and $34,000 for the three and six months ended July 1, 2012, respectively, and $7,000 and $12,000 for the three and six months ended July 3, 2011, respectively.  Our effective tax rate was (1%) for the three and six months ended July 1, 2012 and less than 0% for the three and six months ended July 3, 2011.
 
The income tax provision for the three months and six months ended July 1, 2012 and July 3, 2011 was due primarily to state and foreign income taxes due and to losses in all tax jurisdictions.  We have a full valuation allowance against such losses.
 
Liquidity and Capital Resources

On December 9, 2011, we entered into an amended and restated loan and security agreement with Silicon Valley Bank. Pursuant to the amended and restated loan and security agreement, we are entitled to borrow from Silicon Valley Bank up to $6.0 million, based on 80% of eligible accounts receivable subject to limits based on the Company’s eligible accounts as determined by Silicon Valley Bank. Interest on extensions of credit is equal to the prime rate of Wall Street Journal (“WSJ”) Prime, plus 0.75%, with a minimum interest rate of 4.00%. The amended and restated loan and security agreement will expire on December 9, 2013.

 
The amended and restated loan and security agreement with Silicon Valley Bank is secured by all of our assets, including all accounts, equipment, inventory, receivables, and general intangibles. The amended and restated loan and security agreement contains certain restrictive covenants that will impose significant operating and financial restrictions on our operations, including, but not limited to restrictions that limit our ability to:

Sell, lease, or otherwise transfer, or permit any of our subsidiaries to sell, lease or otherwise transfer, all or any part of our business or property, except in the ordinary course of business or in connection with certain indebtedness or investments permitted under the amended and restated loan agreement;
 
Merge or consolidate, or permit any of our subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of our subsidiaries to acquire, all or substantially all of the capital stock or property of another person;
 
Create, incur, assume or be liable for any indebtedness, other than certain indebtedness permitted under the amended and restated loan and security agreement;
 
Pay any dividends or make any distribution or payment on, or redeem, retire, or repurchase, any capital stock; and
 
Make any investment, other than certain investments permitted under the amended and restated loan and security agreement.
 
The amount outstanding on the line of credit as of July 1, 2012 was $6.0 million.  On July 3, 2012, we repaid the entire $6.0 million to Silicon Valley Bank.  The amended and restated loan and security agreement contains a covenant that requires that on the last day of every month, the ratio of our cash, cash equivalents and accounts receivable to our current liabilities which mature within the following year (including obligations to Silicon Valley Bank), be 1.50 to 1.00.  As of July 1, 2012, we were in violation of this covenant. This violation was cured by the July 3, 2012 repayment of the $6.0 million borrowed from Silicon Valley Bank, and as a result, the consequence of our violation of the covenant was not material to us.

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

   
July 1,
2012
   
December 31,
2011
 
Cash and cash equivalents
  $ 12,922     $ 15,788  
                 
   
Six months ended
 
   
July 1,
2012
   
July 3,
2011
 
Net cash used in operating activities
  $ (2,313 )   $ (1,416 )
Net cash (used in) provided by investing activities
  $ (1,248 )   $ 8,557  
Net cash provided by (used in) financing activities
  $ 791     $ (2,439 )

Operating Activities

Cash used in operating activities for the six months ended July 1, 2012 consisted of net loss adjusted for certain non-cash items, including depreciation and amortization, non-cash restructuring expense, and stock-based compensation expense, as well as the effect of changes in working capital.  Operating activities used cash of $2.3 million during the six months ended July 1, 2012. This resulted from a net loss of $3.4 million and we experienced cash usage for working capital for an increase in accounts receivable of $2.1 million due to timing of collections, an increase in inventories of $1.4 million due to purchasing, an increase in prepaid and other assets of $349,000 and a decrease in other current and long-term liabilities of $598,000. These decreases were offset by an increase in accounts payable of $768,000 and an increase of $218,000 in accrued compensation. In addition, these uses were partially offset by the following non-cash expenses: stock-based compensation of $2.5 million and depreciation and amortization of $2.1 million.
 
Operating activities used cash of $1.4 million during the six months ended July 3, 2011 and resulted primarily from a net loss of $9.2 million and a decrease in accounts payable and other long term liabilities of $193,000, partially offset by depreciation and amortization of $1.3 million, stock-based compensation of $1.5 million, non-cash litigation expense of $1.1 million, an increase in accrued compensation of $1.1 million, a decrease in accounts receivable, inventories and other assets of $1.3 million, and an increase in other current liabilities of $1.9 million.

 
Investing Activities
 
Net cash used in investing activities for the six months ended July 1, 2012 was $1.2 million and consisted of $1.6 million of purchases of property and equipment which was partially offset by $400,000 proceeds from sale and maturity of investments.
 
Net cash provided by investing activities for the six months ended July 3, 2011 was $8.6 million and consisted of the receipt of $8.8 million as a result of the acquisition of Endwave and $800,000 proceeds from sale and maturity of investments, which were partially offset by $1.2 million of purchases of fixed assets.

Financing Activities
 
Net cash provided by financing activities during the six months ended July 1, 2012 was $791,000 and consisted primarily of $10.7 million proceeds less a $7.7 million repayment from line of credit facilities with Silicon Valley Bank and $347,000 of proceeds from issuance of stock which were partially offset by $2.2 million of treasury stock repurchase from our modified Dutch auction tender offer and $297,000 of payments on our capital lease obligations.
 
Net cash used in financing activities during the six months ended July 3, 2011 was $2.4 million and consisted primarily of $2.2 million in net repayments of our line of credit, a $158,000 repayment of our short-term loan with Silicon Valley Bank, and an $114,000 repayment on our capital lease obligations.
 
On June 12, 2012, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”). This shelf registration statement allows us to offer, issue or sell from time to time, together or separately, (i) senior or subordinated debt securities, which may be convertible into shares of our common stock, preferred stock or other securities; (ii) shares of our common stock; (iii) shares of our preferred stock, which we may issue in one or more series; or (iv) warrants to purchase our equity or debt securities or other securities.  The total offering price of the securities will not exceed $20 million in the aggregate. The shelf registration became effective on June 25, 2012.  We do not currently have any commitments to sell securities pursuant to this registration statement. Future offerings thereunder, if any, will be made only by means of a written prospectus or other permitted documents. At that time, we will file a prospectus supplement with the SEC outlining the type of securities, amounts, prices, use of proceeds and other terms.
 
Material Commitments

GigOptix did not have any material commitments for capital expenditures as of July 1, 2012.
 
Impact of Inflation and Changing Prices on Net Sales, Revenue and Income
 
Inflation and changing prices have not had a material impact on our revenue and income during the periods and at balance sheet dates presented in this report.
 
Off-Balance Sheet Arrangements
 
GigOptix does not use off-balance-sheet arrangements with unconsolidated entities, nor does it use other forms of off-balance-sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, GigOptix is not exposed to any financing or other risks that could arise if it had such relationships.
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
This item has been omitted based on GigOptix’ status as a smaller reporting company.

ITEM 4.
CONTROLS AND PROCEDURES

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

Our management, including our CEO and CFO, is responsible for establishing and maintaining our disclosure controls and procedures. Our CEO and CFO have evaluated the effectiveness of our disclosure controls and procedures as of July 1, 2012. In light of the material weaknesses set forth below, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of that date. Notwithstanding the material weaknesses described below, our management performed additional analyses, reconciliations and other post-closing procedures and has concluded that our condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States.

As of December 31, 2011, our CEO and CFO determined that we had the following material weaknesses in our internal control over financial reporting:
 
 
We did not maintain effective procedures and controls surrounding the accounting for business combinations.  Specifically, we incorrectly accounted for certain restructuring expenses associated with our acquisition of Endwave Corporation which led to the restatement of our second and third quarter quarterly reports on Form 10-Q.  Accordingly, we have determined this control deficiency constitutes a material weakness.

 
We did not maintain experienced personnel with an appropriate level of accounting knowledge and training in the application of generally accepted accounting principles associated with inventory and cost of revenue. This deficiency resulted in several audit adjustments.  Accordingly, we have determined this control deficiency constitutes a material weakness.
 
Implemented or Planned Remedial Actions in response to the Material Weakness
 
In response to the material weaknesses discussed above, we have implemented the remediation measures discussed below and plan to continue to review and make necessary changes to improve our internal control over financial reporting, including the roles and responsibilities of each functional group within the organization and reporting structure, as well as the appropriate policies and procedures to improve the overall internal control over financial reporting.
 
We have summarized below the remediation measures that we have implemented in response to the material weaknesses discussed above:
 
 
As part of future acquisitions and significant transactions, we will review our accounting of the transactions internally based on generally accepted accounting principles as well as the most recent authoritative guidance.  In addition, we will seek external advisors with a full understanding of the appropriate accounting treatment for any significant and infrequent transactions we experience in the future; and
 
 
We have hired another senior accountant with a CPA certification.  Our staff, including those recently hired, are continuing to gain knowledge of GigOptix products and to work with our operations and finance team to institute, maintain and adhere to appropriate policies and procedures associated with inventory and cost of revenue.
 
In an effort to remediate our material weaknesses as discussed above and to improve our internal control over financial reporting, we continue to devote significant resources which will be reviewed and periodically updated as appropriate to ensure they are sufficient.
 
 
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, except as described above in the section, “Implemented or Planned Remedial Actions in Response to the Material Weakness”.
 
PART II
 
OTHER INFORMATION
 
 
ITEM 1.
LEGAL PROCEEDINGS
 
From time to time, we may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When we believe a loss is probable and can be reasonably estimated, we accrue the estimated loss in our consolidated financial statements. Where the outcome of these matters is not determinable, we do not make a provision in our financial statements until the loss, if any, is probable and can be reasonably estimated or the outcome becomes known.
 
Advantech Advanced Microwave Technologies Inc. (“Advantech”)
 
On October 31, 2008, Endwave filed a complaint with the Canadian Superior Court in Montreal, Quebec alleging that Advantech , the parent company of Allgon Microwave Corporation AB, or Allgon, had breached its contractual obligations with Endwave and owes it $994,500 for amounts outstanding under a note receivable and for purchased inventory and authorized finished goods purchase orders. By virtue of the acquisition of Endwave, we have assumed this litigation. The litigation is at an early stage, and a trial date has been set for February 2013; we cannot predict the outcome of these proceedings.
 
Optomai, Inc. and M/A-COM Technology Solutions, Inc.
 
On April 25, 2011, GigOptix initiated a lawsuit in the Superior Court of Santa Clara County, California, against five former employees of GigOptix who left in 2009 and 2010 to launch a competing company, Optomai, Inc., which was formed in October 2009 while four of the five were still employed by GigOptix.   The former employees were responsible for the development and promotion of products for 40G and 100G fiber optic networks, among other products, and their new company, Optomai, Inc., began marketing such products only a few months after four of the five employees had left the company, in April 2010.  On the day that GigOptix filed the lawsuit, M/A-COM Technology Solutions, Inc. (MACOM) announced that it had acquired Optomai and M/A-COM has since been added to the suit as a defendant.  In the lawsuit, GigOptix’ seeks damages and injunctive relief for misappropriation of confidential information and trade secrets and breach of the contractual and legal obligations to GigOptix of the five former employees including while still employed by GigOptix.  GigOptix has been engaged in discovery, which includes forensic work. This has led to GigOptix filing on July 30, 2012 a motion for a preliminary injunction against M/A-Com, Optomai, and two of the former employees who were designers.  The motion for a preliminary injunction is tentatively scheduled for September 13, 2012.  No trial date has been set.
 
National Instruments Corporation (“National Instruments”)
 
On October 4, 2011, National Instruments filed a complaint against ChipX and GigOptix in the District Court of Travis County, state of Texas, pertaining to two sales contracts to which National Instruments was a purchaser of products sold by ChipX.  GigOptix is not a party to either contract.  Prior to the filing of the complaint, the parties had been in discussions regarding the pricing of the products sold under these contracts, the number of products to be sold, and the length of time during which the products would be sold.  National Instruments’ complaint sought a declaration that it was not in material breach of one of the contracts, as ChipX had asserted, that ChipX could not modify the prices in the contracts, that National Instruments could purchase products sold under one of the contracts directly from a supplier, and that GigOptix was not entitled to any damages from National Instruments as it is not a party to the contracts.  The complaint also sought unspecified damages for alleged breach of contract by ChipX.  ChipX and GigOptix never responded to the complaint, or filed a cross-complaint against National Instruments.  The parties have now settled the matter.  Pursuant to the terms of the settlement, National Instruments has paid ChipX $500,000 to license rights from ChipX which will enable National Instruments to manufacture the products sold under one of the contracts, National Instruments will make one last purchase in the amount of $3,500,000 of such products from ChipX to be fulfilled during 2012, and National Instruments shall have the right to purchase products sold under the other contract directly from the supplier in exchange for a royalty which the supplier will pay to ChipX.
 
 
ITEM 1A.
RISK FACTORS
 
We have revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede any similar the risks previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2011 and otherwise supplement those risks. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K, as well as those contained in Part 1, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.
 
We have incurred substantial operating losses in the past and we may not be able to achieve profitability in the future.
 
We have incurred negative cash flows from operations since inception. For the six months ended July 1, 2012 and the years ended December 31, 2011 and 2010, we incurred net losses of $3.4 million, $14.1 million and $4.4 million, respectively, and cash outflows from operations of $2.3 million, $4.9 million and $3.8 million, respectively. As of July 1, 2012, we had an accumulated deficit of $90.9 million. We expect development, sales and other operating expenses to increase in the future as we expand our business. If our revenue does not grow to offset these expected increased expenses, we may not be profitable. In fact, in future quarters we may not have any revenue growth and our revenues could decline. Furthermore, if our operating expenses exceed expectations, financial performance will be adversely affected and we may continue to incur significant losses in the future.
 
We may require additional capital to continue to fund our operations. If we need but do not obtain additional capital, we may be required to substantially limit operations.
 
We may not generate sufficient cash from our operations to finance our anticipated operations for the foreseeable future from such operations.  We could require additional financing sooner than expected if we have poor financial results, including unanticipated expenses, or an unanticipated drop in projected revenues. Such financing may be unavailable when needed or may not be available on acceptable terms. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our current stockholders will be reduced, and these securities may have rights superior to those of its common stock. If adequate funds are not available to satisfy either short-term or long-term capital requirements, or if planned revenues are not generated, we may be required to limit our operations substantially. These limitations of operations may include a possible sale or shutdown of portions of our business, reductions in capital expenditures and reductions in staff and discretionary costs.
 
We have incurred negative cash flows from operations since inception.  As of July 1, 2012, we had an accumulated deficit of $90.9 million. We have incurred significant losses since inception, attributable to our efforts to design and commercialize our products. We have managed our liquidity during this time through a series of cost reduction initiatives and through increasing our line of credit with our bank.   Following the acquisition of Endwave, we had $16.2 million in cash and short-term investments as of December 31, 2011.  However, while we have additional cash available, our ability to continue as a going concern may be dependent on many events outside of our direct control, including, among other things, obtaining additional financing either privately or through public markets, should this be necessary, and customers purchasing our products in substantially higher volumes.
 
We could suffer unrecoverable losses on accounts receivable from our customers, which would adversely affect our financial results.
 
Our operating cash flows are dependent on the continued collection of receivables. Our accounts receivable as of July 1, 2012 increased by $2.1 million or 37% compared to the balance at December 31, 2011.  We could suffer additional accounting losses as well as a reduction in liquidity if a customer is unable or refuses to pay. A significant increase in uncollectible accounts would have an adverse impact on our business, liquidity and financial results.
 
Our business is subject to foreign currency risk.
 
Sales to customers located outside of the United States comprised 75% and 50% of GigOptix’ revenue for the six months ended July 1, 2012 and July 3, 2011, respectively. In addition, we have a subsidiary overseas (Switzerland) that records its operating expenses in a foreign currency.  Since sales of our products have been denominated to date primarily in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in GigOptix’ results of operations. We currently do not have hedging or other programs in place to protect against adverse changes in the value of the U.S. dollar as compared to other currencies to minimize potential adverse effects.
 
 
We derive a significant portion of our revenue from a small number of customers and the loss of one or more of these key customers, the diminished demand for our products from a key customer, or the failure to obtain certifications from a key customer or its distribution channel could significantly reduce our revenue and profits.
 
A relatively small number of customers account for a significant portion of our revenue in any particular period.  One or more of our key customers may discontinue operations as a result of consolidation, liquidation or otherwise, or reduce significantly its business with us due to the current economic conditions. Reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers could significantly further reduce our revenue and profits. There is no assurance that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers.
 
For the six months ended July 1, 2012, two customers each accounted for greater than 10% of total revenue and combined they accounted for 35% of our total revenue, the largest which accounted for 19% of our total revenue. For the six months ended July 3, 2011, only one customer accounted for greater than 10% of total revenue, which accounted for 10% of our total revenue.
 
The proposed spending cuts imposed by the Budget Control Act of 2011 (“BCA”) could impact our operating results and profit.
 
The United States government continues to focus on developing and implementing spending, tax, and other initiatives to stimulate the economy, create jobs, and reduce the deficit. One of these initiatives, the BCA, imposed greater constraints around government spending. In an attempt to balance decisions regarding defense, homeland security, and other federal spending priorities, the BCA immediately imposed spending caps that contain approximately $487 billion in reductions to the Department of Defense (“DoD”) base budgets over the next ten years (2012 to 2021). Additionally, the BCA triggers an automatic sequestration process, effective January 3, 2013, unless modified by the enactment of new law. The sequestration process imposes additional cuts of approximately $50 billion per year to the currently proposed DoD budgets for each fiscal year beginning with 2013 and continuing through 2021.
 
Although we cannot predict where these cuts will be made, we believe our portfolio of product offerings are well positioned and will not be materially impacted by the DoD budget cuts. However, the possibility remains that any DoD budget cuts could have an impact on sales of our products which can be used downstream in military applications, and thus, the revenues which we derive from such sales.
 
 
ITEM 6.
EXHIBITS
 
(a) Exhibits
 
Exhibit
Number
 
Description
 
 
 
 
Chief Executive Officer certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Chief Financial Officer certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Chief Executive Officer certification pursuant to Rule 13a-14(b) or Rule 13d-14(b) and Section 1350, Chapter 63 of Title 18 United States Code (18 U.S.C. 1350) as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 
 
 
 
Chief Financial Officer certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350, Chapter 63 of Title 18 United States Code (18 U.S.C. 1350) as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
 
101.INS*
 
Instance Document
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document

*           Filed herewith

 
SIGNATURES

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

Date: August 15, 2012
/S/    Avi S. Katz
 
Dr. Avi S. Katz