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GIGOPTIX, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes included elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2012. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2012 and this Quarterly Report on Form 10-Q. We assume no obligation to update the forward-looking statements or such risk factors. This Quarterly Report on Form 10-Q and the documents incorporated herein by reference include forward-looking statements within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are also made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Overview We are a leading fabless supplier of semiconductor components that enable high speed information streaming over network infrastructures, within data centers and in user devices. Our business is made up of two product lines, our High-Speed Communications products and our Industrial products. Through our High-Speed Communications product line we offer a broad portfolio of high performance optical and wireless components to telecommunication ("telecom") and data communication ("datacom") customers, including i) mixed signal radio frequency integrated circuits ("RFIC") such as 40G and 100G laser and optical modulator drivers and trans-impedance amplifiers ("TIA") for telecom, datacom, and consumer electronic fiber-optic applications; ii) power amplifiers and transceivers for microwave wave and millimeter monolithic microwave integrated circuit ("MMIC") wireless applications including 73 Ghz and 83 GHz power amplifiers and transceiver chips; iii) thin film polymer on silicon ("TFPS") optical modulators for 40G and 100G fiber-optic telecom; and iv) integrated systems in a package ("SIP") solutions for both fiber-optic and wireless applications. The High-Speed Communications product line also partners with key customers on joint development projects that generate engineering project revenue for us while helping to position us for future product revenues with these key customers. 20-------------------------------------------------------------------------------- Table of Contents Through our Industrial product line, we offer a wide range of digital and mixed-signal application specific integrated circuit ("ASIC") solutions for industrial, military, avionics, medical and communications markets. The Industrial product line partners with ASIC customers on development projects that generate engineering project revenue for us that directly lead to future product revenues with these ASIC customers. We focus on the specification, design, development and sale of analog semiconductor integrated circuits ("ICs"), multi-chip module ("MCM") solutions, polymer modulators, and digital and ASICs, as well as wireless communications MMICs and modules. We believe we are an industry leader in the fast growing market for electronic solutions that enable high-bandwidth optical connections found in telecom, datacom and storage systems, and, increasingly, in consumer electronics and computing systems. Since inception, we have expanded our customer base with the acquisition and integration of five businesses with complementary products and customers. In doing so, we have expanded our product line from a few leading 10 gigabit per second ("Gbps") ultra-long haul electronic modulator drivers at our inception in July 2007 to a line of over 150 products today that include: drivers, receivers and modulators for 10 to 400 Gbps optical applications; power amplifiers, filters and attenuators spanning up to 86GHz wireless applications; and custom ASICs spanning 0.6um to 65nm technology nodes. Our direct sales force is based in 3 countries and is supported by a significant number of channel representatives and distributors that are selling our products throughout North America, Europe, Japan and Asia. We have incurred negative cash flows from operations since inception. For the three months ended March 31, 2013 and the year ended December 31, 2012 we incurred net losses of $2.6 million and $7.0 million, respectively, and cash outflows from operations of $2.1 million and $2.0 million respectively. As of March 31, 2013 and December 31, 2012, we had an accumulated deficit of $97.1 million and $94.5 million, respectively. Recent Accounting Pronouncements In February 2013, the Financial Accounting Standards Board ("FASB") issued an accounting standards update requiring centralized disclosure of amounts reclassified from Accumulated Other Comprehensive Income ("AOCI") to net income. The amounts and their source reclassified out of each component of AOCI and the income statement line item affected by the reclassification should be presented either parenthetically on the face of the financial statements or in the notes. The entity does not need to show the income statement line item affected for certain components that are not required to be reclassified to net income in their entirety to net income, instead they would cross reference to the related footnote. This standard is effective for reporting periods beginning after December 15, 2012 and early adoption is permitted. We adopted the standard during the quarter ended March 31, 2013. Adoption did not have a material impact on our condensed consolidated financial statements. In February 2013, the FASB issued an accounting standards update requiring disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The entity has to disclose the following information about each obligation: the nature of the arrangement, the total outstanding amount under the arrangement, the carrying amount of a liability and the carrying amount of a receivable recognized, the nature of any recourse provisions, how liability was measured initially, and where the entry was recorded in the financial statements. This standard is effective for fiscal years beginning after December 15, 2013 and early adoption is permitted. We do not expect the adoption will have a material impact on our condensed consolidated financial statements. In March 2013, the FASB issued an accounting standards update requiring derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. For transactions occurring within a foreign entity, cumulative translation adjustment ("CTA") would be released only upon complete or substantially complete liquidation of the foreign entity. Transactions within a foreign entity involve a component of a foreign entity, such as a subsidiary, a group of assets, or an equity investment. For transactions occurring in a foreign entity, CTA will be released based on the type of transaction. Transactions in a foreign entity involve a direct ownership interest of a foreign entity. This standard is effective for fiscal years beginning after December 15, 2013 and early adoption is permitted. We do not expect the adoption will have a material impact on our condensed consolidated financial statements. Results of Operations Revenue Revenue for the periods reported was as follows (in thousands, except percentages): Three Months Ended March 31, 2013 April 1, 2012 Total revenue $ 6,921 $ 9,151 Decrease, period over period $ (2,230 ) Percentage decrease, period over period -24 % 21-------------------------------------------------------------------------------- Table of Contents Total revenue for the three months ended March 31, 2013 was $6.9 million, a decrease of $2.2 million or 24%, compared with $9.1 million for the three months ended April 1, 2012. The decrease in total revenue was primarily due to decreased revenue from our ASIC and RF products. The decreases from our ASIC and RF products were partially offset by increased revenue from joint development projects and increased sales of our optical components. Cost of Revenue and Gross Profit Cost of revenue and gross profit for the periods presented was as follows (in thousands, except percentages): Three Months Ended March 31, 2013 April 1, 2012 Total cost of revenue $ 2,636 $ 4,178 Gross profit $ 4,285 $ 4,973 Gross margin 62 % 54 % Decrease, period over period (688 ) Percentage decrease, period over period -14 % 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 March 31, 2013 was $4.3 million, or a gross margin of 62%, compared to a gross profit of $5.0 million, or a gross margin of 54%, for the three months ended April 1, 2012. The increase in gross margin is primarily due to a change in product mix towards certain higher margin products including revenue from joint development projects, and away from certain low margin RF transceivers and ASIC products. The costs associated with joint development project revenue are expensed as incurred and generally included in research and development expenses. Research and Development Expense Research and development expense for the periods presented was as follows (in thousands, except percentages): Three Months Ended March 31, 2013 April 1, 2012 Research and development expense $ 3,236 $ 3,383 Percentage of revenue 47 % 37 % Decrease, period over period $ (147 ) Percentage decrease, period over period -4 % Research and development expenses are expensed as incurred. Research and development expense consists primarily of salaries and related expenses for research and development personnel, consulting and engineering design, non-capitalized tools and equipment, engineering related semiconductor masks, depreciation for equipment, engineering expenses paid to outside technology development suppliers, allocated facilities costs and expenses related to stock based compensation. Research and development expense for the three months ended March 31, 2013 was $3.2 million compared to $3.4 million for the three months ended April 1, 2012, a decrease of $147,000 or 4%. Research and development costs decreased as compared to the first quarter of 2012 primarily due to a $125,000 decrease in outside project-related services. We expect research and development expense to be relatively flat from the first quarter of 2013 to the second quarter of 2013. 22-------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expense Selling, general and administrative expense for the periods presented was as follows (in thousands, except percentages): Three Months Ended March 31, 2013 April 1, 2012 Selling, general and administrative expense $ 2,353 $ 2,807 Percentage of revenue 34 % 31 % Decrease, period over period $ (454 ) Percentage decrease, period over period -16 % Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, accounting, finance, sales, marketing and administration personnel, professional fees, allocated facilities costs, promotional activities and expenses related to stock-based compensation. Selling, general and administrative expense for the three months ended March 31, 2013 was $2.4 million compared to $2.8 million for the three months ended April 1, 2012, a decrease of $454,000 or 16%. Selling, general and administrative expense decreased as compared to the first quarter of 2012 primarily due to a $504,000 decrease in professional services, a $91,000 decrease in personnel related expenses, an $80,000 decrease in bad debt expense costs, which were partially offset by a $277,000 increase in stock-based compensation. We expect selling, general and administrative expense to be consistent in absolute dollars from the first quarter of 2013 to the second quarter of 2013. Restructuring Expense, Net Three Months Ended March 31, 2013 April 1, 2012 Restructuring expense $ 950 $ 207 Percentage of revenue 14 % 2 % Increase, period over period $ 743 Percentage increase, period over period 359 % During the three months ended March 31, 2013, we recorded a restructuring expense of $950,000 to reduce our expenses. The components of the restructuring charge included $662,000 of non-cash expenses associated with the acceleration of stock options and restricted stock units and $288,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations. 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. Special Litigation-Related Expense During the three months ended March 31, 2013, we incurred special litigation-related expenses of $415,000, which was primarily due to $298,000 of legal fees associated with the Optomai case and $108,000 of legal fees associated with the Advantech case. During the three months ended April 1, 2012, we recorded special litigation-related expense of $141,000, which was related to costs associated with the Optomai, National Instruments and Telekenex matters. Interest Expense, Net and Other Income (Expense), Net Three Months Ended March 31, 2013 April 1, 2012 Interest expense, net $ (54 ) $ (152 ) Other income (expense), net 168 (15 ) Total $ 114 $ (167 ) 23-------------------------------------------------------------------------------- Table of Contents Interest expense, net and other income (expense), net consist primarily of gains and losses related to foreign currency transactions, gains and losses related to property and equipment disposals, interest on line of credit, interest on capital leases and amortization of loan fees in connection with our Silicon Valley Bank line of credit and loan. Interest expense, net for the three months ended March 31, 2013 was $54,000 compared to $152,000 for the three months ended April 1, 2012. Interest expense, net decreased as compared to the first quarter of 2012 primarily due to a $46,000 decrease in interest on capital leases and $31,000 decrease in loan fees. Other income (expense), net for the three months ended March 31, 2013 was income of $168,000, which primarily consisted of $131,000 gain on the sale of property and equipment. Other income (expense), net for the three months ended April 1, 2012 was an expense of $15,000, primarily due to $16,000 of liability warrants expense. Provision for Income Taxes Three Months Ended March 31, 2013 April 1, 2012 Provision for income taxes $ 13 $ 16 Percentage of revenue 0 % 0 % Decrease, period over period $ (3 ) Percentage decrease, period over period -19 % Income tax expense was $13,000 and $16,000 for three months ended March 31, 2013 and April 1, 2012, respectively, and our effective tax rate was less than 1% for those periods. The income tax provision for the three months ended March 31, 2013 and April 1, 2012 were due primarily to state taxes and foreign taxes due. We have incurred book losses in all tax jurisdictions and have a full valuation allowance against such losses. Liquidity and Capital Resources On March 25, 2013, we entered into a second amended and restated loan and security agreement ("Loan Agreement") with Silicon Valley Bank ("SVB") to replace the amended and restated loan and security agreement entered on December 9, 2011. Pursuant to the Loan Agreement, the total aggregate amount that we are entitled to borrow from SVB has increased to $7 million, which is now split into two different credit facilities, comprised of (i) the existing Revolving Loan facility which was amended to provide that we are entitled to borrow from SVB up to $3.5 million, based on net eligible accounts receivable after an 80% advance rate and subject to limits based on our eligible accounts as determined by SVB and (ii) a new facility under which we are entitled to borrow from SVB up to $3.5 million without reference to accounts receivable under which the principal balance and accrued interest must be repaid within 3 business days after the date of any advance under the facility. In addition, the Loan Agreement eliminates the financial covenants contained in the previous loan agreement. The Loan Agreement with SVB is secured by all of our assets, including all accounts, equipment, inventory, receivables, and general intangibles. The Loan Agreement contains certain restrictive covenants that will impose significant operating and financial restrictions on our operations, including, but not limited to restrictions that limit our ability to: Sell, lease, or otherwise transfer, or permit any of our subsidiaries to sell, lease or otherwise transfer, all or any part of our business or property, except in the ordinary course of business or in connection with certain indebtedness or investments permitted under the amended and restated loan agreement; Merge or consolidate, or permit any of our subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of our subsidiaries to acquire, all or substantially all of the capital stock or property of another person; Create, incur, assume or be liable for any indebtedness, other than certain indebtedness permitted under the amended and restated loan and security agreement; Pay any dividends or make any distribution or payment on, or redeem, retire, or repurchase, any capital stock; and Make any investment, other than certain investments permitted under the amended and restated loan and security agreement. The amount outstanding on the line of credit as of March 31, 2013 was $5.9 million. On April 1, 2013, the Company repaid the entire $5.9 million to SVB. 24-------------------------------------------------------------------------------- Table of Contents Cash and cash equivalents and cash flow data for the periods presented were as follows (in thousands): March 31, 2013 December 31, 2012 Cash and cash equivalents $ 9,453 $ 10,147 Three Months Ended March 31, 2013 April 1, 2012Net cash used in operating activities $ (2,108 ) $ (1,294 ) Net cash used in investing activities $ (752 ) $ (257 ) Net cash provided by financing activities $ 2,108 $ 1,601 Operating Activities Operating activities used cash of $2.1 million in the three months ended March 31, 2013. This resulted from a net loss of $2.6 million and we experienced cash usage for working capital for an increase in accounts receivable, net of $1.6 million, an increase in inventories of $226,000, an increase in prepaid and other current assets of $280,000, and a decrease in other current liabilities of $101,000. These decreases were partially offset by an increase in accrued compensation of $129,000. In addition, these uses were partially offset by non-cash expenses of stock based compensation of $1.8 million and depreciation and amortization of $914,000. Cash used in operating activities for the three months ended April 1, 2012 consisted of net loss adjusted for certain non-cash items, including amortization, depreciation, non-cash restructuring expense, and stock-based compensation expense, as well as the effect of changes in working capital. Operating activities used cash of $1.3 million during the three months ended April 1, 2012. This resulted from a net loss of $1.7 million and we experienced cash usage for working capital for a decrease in other current liabilities of $488,000, a decrease in accrued restructuring of $55,000, a decrease in other long-term liabilities of $38,000, an increase in inventories of $311,000, an increase in prepaid and other current assets of $222,000, and an increase in accounts receivable of $1.4 million due to timing of collections. These uses of cash were partially offset by an increase in accounts payable of $395,000 and an increase of $674,000 in accrued compensation. In addition, these uses were partially offset by non-cash expenses of depreciation and amortization of $994,000, and stock based compensation of $870,000. Investing Activities Net cash used in investing activities for the three months ended March 31, 2013 was $752,000 and consisted of $883,000 of purchases of fixed assets partially offset by $131,000 proceeds from sale of property and equipment. Net cash used in investing activities for the three months ended April 1, 2012 was $257,000 and consisted of $400,000 proceeds from sale and maturity of investments, offset by $657,000 of purchases of property and equipment. Financing Activities Net cash provided by financing activities for the three months ended March 31, 2013 was $2.1 million and consisted primarily of $5.9 million of proceeds from our line of credit facilities with Silicon Valley Bank, partially offset by a $3.6 million repayment of the line of credit and $117,000 for capital lease payments. Net cash provided by financing activities during the three months ended April 1, 2012 was $1.6 million and consisted primarily of $4.7 million proceeds less a $3.0 million repayment from line of credit facilities with Silicon Valley Bank and $81,000 of proceeds from issuance of stock. 25-------------------------------------------------------------------------------- Table of Contents Material Commitments The following table summarizes our future net cash obligations for current debt, operating leases, and capital leases, in thousands of dollars, as of March 31, 2013: Contractual Obligations at March 31, Less than One to More than 2013: Total One Year Three Years Three Years Current debt obligation $ 5,900 $ 5,900 $ - $ - Operating lease obligations (net of sublease) 2,516 1,193 927 396 Capital lease obligations (including interest) 645 339 306 - Total $ 9,061 $ 7,432 $ 1,233 $ 396 In addition to the future cash obligations above, GigOptix did not have any material commitments for capital expenditures as of March 31, 2013. Impact of Inflation and Changing Prices on Net Sales, Revenue and Income Inflation and changing prices have not had a material impact on the materials used in our production process during the periods and at balance sheet dates presented in this report. Off-Balance Sheet Arrangements GigOptix does not use off-balance-sheet arrangements with unconsolidated entities, nor does it use other forms of off-balance-sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, GigOptix is not exposed to any financing or other risks that could arise if it had such relationships. WHERE YOU CAN FIND MORE INFORMATION Our filings with the Securities and Exchange Commission (the "SEC"), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended are available on our website at http://www.gigoptix.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the SEC. The information contained on our website is not a part of this Quarterly Report on Form 10-Q. Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to also use the following social media channels as a means of disclosing information about the company, our services and other matters and for complying with our disclosure obligations under Regulation FD: GigOptix Twitter Account (https://twitter.com/GigOptix) The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q. Further, the references to the URLs for these websites are intended to be inactive textual references only. You can also read and copy any document that we file, including this Annual Report on Form 10-K, at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Call the SEC at 1-800-SEC-0330 for information on the operation of the Public Reference Room. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You can electronically access our SEC filings there. Additionally, the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, by our predecessor registrant Lumera are also available at http://www.sec.gov. 26-------------------------------------------------------------------------------- Table of Contents |