UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 29, 2013

or

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

For the transition period from to

Commission file number: 001-35520

GIGOPTIX, INC.

(Exact name of registrant as specified in its charter)

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

130 Baytech Drive

San Jose, CA  95134

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting Company	x

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

The number of shares of Common Stock outstanding as of November 1, 2013, the most recent practicable date prior to the filing of this Quarterly Report on Form 10-Q, was 22,384,709 shares.

Table of Contents

		PAGE NO
PART I FINANCIAL INFORMATION
ITEM 1	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 29, 2013 and December 31, 2012	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 29, 2013 and September 30, 2012	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 29, 2013 and September 30, 2012	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2013 and September 30, 2012	6
	Notes to Condensed Consolidated Financial Statements	7
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	29
ITEM 4	Controls and Procedures	29
PART II OTHER INFORMATION
ITEM 1	Legal Proceedings	30
ITEM 1A	Risk Factors	30
ITEM 6	Exhibits	33

2

PART I

FINANCIAL INFORMATION

GIGOPTIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	September 29,			December 31,
	2013			2012
ASSETS	(Unaudited)				(1)
Current assets:
Cash and cash equivalents	$	15,260		$	10,147
Accounts receivable, net		7,129			5,056
Inventories		4,548			4,111
Prepaid and other current assets		427			295
Total current assets		27,364			19,609
Property and equipment, net		3,292			4,579
Intangible assets, net		3,524			4,270
Goodwill		9,860			9,860
Restricted cash		282			282
Other assets		206			228
Total assets	$	44,528		$	38,828
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,544		$	3,174
Accrued compensation		1,521			846
Line of credit		6,000			3,600
Other current liabilities		2,861			3,080
Total current liabilities		13,926			10,700
Other long term liabilities		802			1,128
Total liabilities		14,728			11,828
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding as of September 29, 2013 and December 31, 2012		-			-
Common stock, $0.001 par value; 50,000,000 shares authorized as of September 29, 2013 and December 31, 2012; 22,376,609 and 22,205,746 shares issued and outstanding as of September 29, 2013 and December 31, 2012, respectively		22			22
Additional paid-in capital		126,534			123,386
Treasury stock, at cost; 701,754 shares as of September 29, 2013 and December 31, 2012, respectively		(2,209	)		(2,209	)
Accumulated other comprehensive income		374			298
Accumulated deficit		(94,921	)		(94,497	)
Total stockholders’ equity		29,800			27,000
Total liabilities and stockholders’ equity	$	44,528		$	38,828

See accompanying Notes to Condensed Consolidated Financial Statements

(1) The condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date.

3

GIGOPTIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Total revenue	$	7,336		$	10,054		$	21,088		$	28,793
Total cost of revenue		2,985			4,853			8,199			13,568
Gross profit		4,351			5,201			12,889			15,225
Research and development expense		3,984			3,395			10,397			10,223
Selling, general and administrative expense		2,483			2,816			6,877			8,775
Restructuring expense		-			-			950			93
Special litigation-related (income) expense		(5,673	)		576			(4,786	)		929
Total operating expenses		794			6,787			13,438			20,020
Income (loss) from operations		3,557			(1,586	)		(549	)		(4,795	)
Interest expense, net		(27	)		(38	)		(106	)		(231	)
Other income, net		3			183			259			240
Income (loss) before provision for income taxes		3,533			(1,441	)		(396	)		(4,786	)
Provision for income taxes		1			65			28			99
Net income (loss)	$	3,532		$	(1,506	)	$	(424	)	$	(4,885	)
Net income (loss) per share—basic	$	0.16		$	(0.07	)	$	(0.02	)	$	(0.23	)
Net income (loss) per share—diluted	$	0.16		$	(0.07	)	$	(0.02	)	$	(0.23	)
Weighted average number of shares used in basic per share calculations		21,656			21,276			21,610			21,445
Weighted average number of shares used in diluted per share calculations		22,359			21,276			21,610			21,445

See accompanying Notes to Condensed Consolidated Financial Statements

4

GIGOPTIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 29, 2013		September 30, 2012			September 29, 2013			September 30, 2012
Net income (loss)	$	3,532	$	(1,506	)	$	(424	)	$	(4,885	)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment		51		(72	)		76			(127	)
Change in pension liability in connection with actuarial gain		-		-			-			(54	)
Other comprehensive income (loss), net of tax		51		(72	)		76			(181	)
Comprehensive income (loss)	$	3,583	$	(1,578	)	$	(348	)	$	(5,066	)

See accompanying Notes to Condensed Consolidated Financial Statements

5

GIGOPTIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	September 29,			September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(424	)	$	(4,885	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		2,843			3,085
Stock-based compensation		3,255			3,776
Change in fair value of warrants		(13	)		-
Non-cash restructuring benefit		-			(114	)
Net gain on sale of property and equipment		(133	)		(163	)
Changes in operating assets and liabilities:
Accounts receivable, net		(2,073	)		(1,050	)
Inventories		(437	)		(1,559	)
Prepaid and other current assets		(521	)		(278	)
Other assets		22			41
Accounts payable		1,263			550
Accrued restructuring		(89	)		(180	)
Accrued compensation		675			191
Other current liabilities		(97	)		(631	)
Other long-term liabilities		(40	)		(86	)
Net cash provided by (used in) operating activities		4,231			(1,303	)
Cash flows from investing activities:
Proceeds from sale and maturity of investments		-			400
Purchases of property and equipment		(1,319	)		(1,831	)
Proceeds from sale of property and equipment		160			90
Net cash used in investing activities		(1,159	)		(1,341	)
Cash flows from financing activities:
Proceeds from issuance of stock		4			389
Taxes paid related to net share settlement of equity awards		(111	)		(349	)
Net borrowings on line of credit		2,400			1,911
Repayment of capital lease		(319	)		(386	)
Purchases of treasury stock, including direct issuance costs		-			(2,209	)
Net cash provided by (used in) financing activities		1,974			(644	)
Effect of exchange rates on cash and cash equivalents		67			(185	)
Net increase (decrease) in cash and cash equivalents		5,113			(3,473	)
Cash and cash equivalents at beginning of period		10,147			15,788
Cash and cash equivalents at end of period	$	15,260		$	12,315
Supplemental disclosure of cash flow information
Interest paid	$	106		$	232

See accompanying Notes to Condensed Consolidated Financial Statements

6

GIGOPTIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

Organization

GigOptix Inc.(“GigOptix” or the “Company”) is a leading fabless supplier of high speed semiconductorcomponentsthat enable end-to-end information streaming over the network and address emerging high-growth opportunities for Cloud connectivity, datacenters and high-speed optical and wireless networks, and the industrial, defense and avionics industries. The business is made up of two product lines:  High-Speed Communications product line and Industrial product line.

The High-Speed Communications product line offers a broad portfolio of high performance optical and wireless components to telecommunication (“telecom”) and data communication (“datacom”) customers, including i) mixed signal radio frequency integrated circuits (“RFIC”), such as 40G and 100G laser and optical modulator drivers and trans-impedance amplifiers (“TIA”) for telecom, datacom, and consumer electronic fiber-optic applications; ii) power amplifiers and transceivers for microwave and millimeter wave monolithic microwave integrated circuit (“MMIC”) wireless applications including 73 GHz and 83 GHz power amplifiers and transceiver chips; iii) thin film polymer on silicon (“TFPS”) optical modulators for 40G and 100G fiber-optic telecom; and iv) integrated systems in a package (“SIP”) solutions for both fiber-optic and wireless applications. The High-Speed Communications product line also partners with key customers on joint development projects that generate engineering project revenue for the Company while helping to position the Company for future product revenues with these key customers.

The Industrial product line offers a wide range of digital and mixed-signal application specific integrated circuit (“ASIC”) solutions for industrial, military, avionics, medical and communications markets. The Industrial product line partners with ASIC customers on development projects that generate engineering project revenue for the Company that directly lead to future product revenues with these ASIC customers.

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

GigOptix Gmbh

In March 2013, the Company established a German subsidiary, GigOptix GmbH. The subsidiary is engaged in research and development for the Company’s High-Speed Communications product line including electro-optical products.

Basis of Presentation

The Company’s fiscal year ends on December 31. For quarterly reporting, the Company employs a five-week, four-week, four-week, reporting period. The third quarter of 2013 ended on Sunday, September 29, 2013. The third quarter of fiscal 2012 ended on Sunday, September 30, 2012. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements as of September 29, 2013 and for the three and nine months ended September 29, 2013 and September 30, 2012, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X, and include the accounts of the Company and all of its subsidiaries. Accordingly, they do not include all of the information and footnotes required by such accounting principles for annual financial statements. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position as of September 29, 2013, the results of operations for the three and nine months ended September 29, 2013 and September 30, 2012 and cash flows for the nine months ended September 29, 2013 and September 30, 2012. The condensed consolidated results of operations for the three and nine months ended September 29, 2013 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2013. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report for the year ended December 31, 2012 on Form 10-K (the “2012 Form 10-K”).

Certain prior year financial statement amounts have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on previously reported total assets, stockholders’ equity or net loss.

7

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. These judgments can be subjective and complex, and consequently, actual results could differ materially from those estimates and assumptions. Descriptions of these estimates and assumptions are included in the 2012 Form 10-K and the Company encourages you to read its 2012 Form 10-K for more information about such estimates and assumptions.

NOTE 2—BALANCE SHEET COMPONENTS

Accounts receivable, net consisted of the following (in thousands):

	September 29,			December 31,
	2013			2012
Accounts receivable	$	7,309		$	5,393
Allowance for doubtful accounts		(180	)		(337	)
	$	7,129		$	5,056

Property and equipment, net consisted of the following (in thousands, except depreciable life):

	Life		September 29,			December 31,
	(in years)		2013			2012
Network and laboratory equipment		3 – 5	$	10,883		$	10,654
Computer software and equipment		2 – 3		3,791			3,747
Furniture and fixtures		3 –10		176			176
Office equipment		3 – 5		108			106
Leasehold improvements		1 – 5		378			378
Construction-in-progress		—		236			236
				15,572			15,297
Accumulated depreciation and amortization				(12,280	)		(10,718	)
Property and equipment, net			$	3,292		$	4,579

For the three and nine months ended September 29, 2013, depreciation expense related to property and equipment was $551,000 and $1.7 million, respectively. For the three and nine months ended September 30, 2012, depreciation expense related to property and equipment was $658,000 and $2.0 million, respectively.

In addition to the property and equipment above, the Company has prepaid licenses. For the three and nine months ended September 29, 2013, amortization related to these prepaid licenses was $168,000 and $389,000, respectively. For the three and nine months ended September 30, 2012, amortization related to these prepaid licenses was $119,000 and $303,000, respectively.

Inventories consisted of the following (in thousands):

	September 29,		December 31,
	2013		2012
Raw materials	$	1,829	$	2,290
Work in process		1,395		687
Finished goods		1,324		1,134
	$	4,548	$	4,111

8

Other current liabilities consisted of the following (in thousands):

	September 29,		December 31,
	2013		2012
Amounts billed to the U.S. government in excess of approved rates	$	191	$	191
Warranty liability		354		612
Customer deposits		263		432
Capital lease obligations, current portion		366		324
Restructuring liabilities, current portion		80		168
Legal fees		362		271
Deferred revenue		423		65
Other		822		1,017
	$	2,861	$	3,080

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

Changes in the Company’s product warranty liability during the nine months ended September 29, 2013 and September 30, 2012 are as follows (in thousands):

	Nine months ended
	September 29, 2013			September 30, 2012
Beginning balance	$	612		$	296
Warranties accrued		396			1,199
Warranties settled or reversed		(654	)		(891	)
Ending balance	$	354		$	604

The warranty liability is included in other current liabilities on the condensed consolidated balance sheets.

9

NOTE 3—FAIR VALUE

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 29, 2013 and December 31, 2012 (in thousands):

			Fair Value Measurements Using
	Carrying Value		Quoted Prices in Active Markets for IdenticalAssets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 29, 2013:
Assets:
Cash equivalents:
Money market funds	$	1,356	$	1,356	$	-	$	-
	$	1,356	$	1,356	$	-	$	-
Current liabilities:
Liability warrants	$	11	$	-	$	-	$	11
December 31, 2012:
Assets:
Cash equivalents:
Money market funds	$	2,856	$	2,856	$	-	$	-
	$	2,856	$	2,856	$	-	$	-
Current liabilities:
Liability warrants	$	24	$	-	$	-	$	24

 As of September 29, 2013, the Company had cash and cash equivalents of $15.3 million, which was comprised of $13.9 million of cash and $1.4 million of money market funds. As of December 31, 2012, the Company had cash and cash equivalents of $10.1 million, which comprised of $7.2 million cash and $2.9 million of money market funds.

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

For the period ended September 29, 2013, the Company did not have any significant transfers between Level 1, Level 2 and Level 3.

The amounts reported as cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other current liabilities approximate fair value due to their short-term maturities. The carrying value of the Company’s line of credit and capital lease obligations approximates fair value based upon borrowing rates currently available to the Company for loans and capital leases with similar terms.

Liability Warrants

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

10

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

	As of September 29, 2013			As of December 31, 2012
Stock price	$	1.29		$	1.92
Strike price	$	3.32		$	3.32
Expected life	3.80 years			4.55 years
Risk-free interest rate		1.10	%		0.62	%
Volatility		85	%		85	%
Fair value per share	$	0.52		$	1.03

The following table summarizes the warrants subject to liability accounting as of September 29, 2013 and December 31, 2012 (in thousands, except share and per share amounts) (see also Note 6):

													Three Months Ended September 29, 2013					Nine Months Ended September 29, 2013
Holder	Original Warrants		Adjusted Warrants		Grant Date	Expiration Date	Exercise Price per Share		Fair Value December 31, 2012		Fair Value September 29, 2013		Exercise of Warrants		Change in Fair Value			Exercise of Warrants		Change in Fair Value			Related Agreement
Bridge Bank		20,000		22,671	4/7/2010	7/7/2017	$	3.32	$	24	$	11		-	$	(1	)		-	$	(13	)	Credit Agreement

The change in the fair value of the Level 3 liability warrants during the three and nine months ended September 29, 2013 is as follows (in thousands):

	Three Months Ended			Nine Months Ended
	September 29, 2013			September 29, 2013
Beginning fair value balance	$	12		$	24
Exercise of warrants		-			-
Change in fair value		(1	)		(13	)
Ending fair value balance	$	11		$	11

The warrant liability is included in other current liabilities on the condensed consolidated balance sheets.

NOTE 4—INTANGIBLE ASSETS AND GOODWILL

Intangible assets consist of the following (in thousands):

	September 29, 2013							December 31, 2012
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Customer relationships	$	3,277	$	(1,591	)	$	1,686	$	3,277	$	(1,274	)	$	2,003
Existing technology		3,783		(2,371	)		1,412		3,783		(2,065	)		1,718
Order backlog		732		(732	)		-		732		(732	)		-
Patents		457		(382	)		75		457		(321	)		136
Trade name		659		(308	)		351		659		(246	)		413
Total	$	8,908	$	(5,384	)	$	3,524	$	8,908	$	(4,638	)	$	4,270

For the three and nine months ended September 29, 2013 and September 30, 2012, amortization of intangible assets was as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 29, 2013		September 30, 2012		September 29, 2013		September 30, 2012
Cost of revenue	$	122	$	123	$	366	$	367
Selling, general and administrative expense		120		130		380		391
	$	242	$	253	$	746	$	758

11

Estimated future amortization expense related to intangible assets as of September 29, 2013 is as follows (in thousands):

Years ending December 31,
2013	$	237
2014		893
2015		893
2016		869
2017		632
Total	$	3,524

As of September 29, 2013, the Company had $9.9 million of goodwill in connection with the acquisitions of ChipX and Endwave. In addition to its annual review, the Company also performs a review of the carrying value of its intangible assets, including goodwill, if the Company believes that indicators of impairment exist. During the third quarter of 2013, there were no factors which indicated impairment. The Company did not record impairment on any intangible asset, including goodwill, for the three and nine months ended September 29, 2013.  In addition, the Company did not record an impairment of goodwill for the year ended December 31, 2012 and will perform its annual impairment analysis during the fourth quarter of 2013.

NOTE 5—CREDIT FACILITIES

On March 25, 2013, the Company entered into a second amended and restated loan and security agreement (“Loan Agreement”) with Silicon Valley Bank (“SVB”) to replace the amended and restated loan and security agreement entered on December 9, 2011. Pursuant to the Loan Agreement, the total aggregate amount that the Company is entitled to borrow from SVB has increased to $7 million, which is now split into two different credit facilities, comprised of (i) the existing Revolving Loan facility which was amended to provide that the Company is entitled to borrow from SVB up to $3.5 million, based on net eligible accounts receivable after an 80% advance rate and subject to limits based on the Company’s eligible accounts as determined by SVB and (ii) a new facility under which the Company is entitled to borrow from SVB up to $3.5 million without reference to accounts receivable under which the principal balance and accrued interest must be repaid within 3 business days after the date of any advance under the facility. In addition, the Loan Agreement eliminates the financial covenants contained in the previous loan agreement.

The Loan Agreement with SVB is collateralized by all of the Company’s assets, including all accounts, equipment, inventory, receivables, and general intangibles. The Loan Agreement contains certain restrictive covenants that will impose significant operating and financial restrictions on its operations, including, but not limited to restrictions that limit its ability to:

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

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

· Create, incur, assume or be liable for any indebtedness, other than certain indebtedness permitted under the amended and restated loan and security agreement;

· Pay any dividends or make any distribution or payment on, or redeem, retire, or repurchase, any capital stock; and

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

The amount outstanding on the line of credit as of September 29, 2013 was $6.0 million. On September 30, 2013, the Company repaid the entire $6.0 million to SVB.

12

NOTE 6—STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Modified Dutch Auction Tender Offer

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

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

Common and Preferred Stock

In December 2008, the Company’s stockholders approved an amendment to the Certificate of Incorporation to authorize 50,000,000 shares of common stock of par value $0.001. In addition, the Company is authorized to issue 1,000,000 shares of preferred stock of $0.001 par value of which 300,000 shares have been designated Series A Junior Preferred Stock with powers, preferences and rights as set forth in the certificate of designation dated December 16, 2011; the remainder of the shares of preferred stock are undesignated, for which the Board of Directors is authorized to fix the designation, powers, preferences and rights. As of September 29, 2013 and December 31, 2012, there were no shares of preferred stock issued or outstanding.

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

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

2008 Equity Incentive Plan

In December 2008, the Company adopted the 2008 Equity Incentive Plan (the “2008 Plan”) for directors, employees, consultants and advisors to the Company or its affiliates. Under the 2008 Plan, 2,500,000 shares of common stock were reserved for issuance upon the completion of a merger with Lumera Corporation (“Lumera”) on December 9, 2008. On January 1 of each year, starting in 2009, the aggregate number of shares reserved for issuance under the 2008 Plan increase automatically by the lesser of (i) 5% of the number of shares of common stock outstanding as of the Company’s immediately preceding fiscal year, or (ii) a number of shares determined by the Board of Directors. The maximum number of shares of common stock to be granted is up to 21,000,000 shares. Forfeited options or awards generally become available for future awards.As of December 31, 2012, the stockholders had approved 13,910,965 shares for future issuance. On January 1, 2013, there was an automatic increase of 1,110,287 shares. As of September 29, 2013, 11,352,985 options to purchase common stock and restricted stock were outstanding and 2,384,555 shares are authorized for future issuance under the 2008 equity incentive plan.

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

2007 Equity Incentive Plan

In August 2007, GigOptix LLC adopted the GigOptix LLC Equity Incentive Plan (the "2007 Plan"). The 2007 Plan provided for grants of options to purchase membership units, membership awards and restricted membership units to employees, officers and non-employee directors, and upon the completion of the merger with Lumera were converted into grants of up to 632,500 shares of stock. Vesting periods are determined by the Board of Directors and generally provide for stock options to vest over a four-year period and expire ten years from date of grant. Vesting for certain shares of restricted stock is contingent upon both service and performance criteria. The 2007 Plan was terminated upon the completion of merger with Lumera on December 9, 2008 and the remaining 864 stock options not granted under the 2007 Plan were cancelled. No shares of the Company’s common stock remain available for issuance of new grants under the 2007 Plan other than for satisfying exercises of stock options granted under this plan prior to its termination. As of September 29, 2013, no shares of common stock have been reserved for issuance for new grants under the 2007 Plan and options to purchase a total of 414,936 shares of common stock and 4,125 warrants to purchase common stock were outstanding.

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Lumera 2000 and 2004 Stock Option Plan

In December 2008, in connection with the merger with Lumera, the Company assumed the existing Lumera 2000 Equity Incentive Plan and the Lumera 2004 Stock Option Plan (the “Lumera Plan”). All unvested options granted under the Lumera Plan were assumed by the Company as part of the merger. All contractual terms of the assumed options remain the same, except for the converted number of shares and exercise price based on merger conversion ratio of 0.125. As of September 29, 2013, no additional options can be granted under the Lumera Plan, and options to purchase a total of 75,852 shares of common stock were outstanding.

Warrants

As of December 31, 2012, the Company had a total of 1,810,595 warrants to purchase common stock outstanding under all warrant arrangements. During 2012, 137,500 warrants were exercised that resulted in 14,158 shares of common stock issued. During the nine months ended September 29, 2013, no warrants were exercised, and 102,300 warrants expired. As a result, as of September 29, 2013 the Company had 1,708,295 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 in April 2011, the Company issued two warrants for a total of 1.0 million shares of its common stock, and DBSI surrendered to the Company for cancellation all of DBSI’s previously outstanding warrants to purchase 660,473 shares of the Company’s common stock.  These new warrants became exercisable on October 8, 2011.  One of the two new warrants, for 500,000 shares of common stock, has a term of three years and an exercise price of $2.60 per share, and the other warrant, also for 500,000 shares of common stock, has a term of four years and an exercise price of $3.00 per share. The new warrants may be exercised on a cashless exercise basis. As of September 29, 2013, a total of 1,000,000 warrants to purchase common stock were outstanding related to the DBSI settlement.

The Company issued warrants to both Bridge Bank and Agility Capital in connection with the November 2009 loan and security agreement with Bridge Bank and the January 2010 secured line of credit facility with Agility Capital (see Note 3). On February 25, 2011, Agility Capital exercised both of the warrants issued to it. On March 23, 2011, Bridge Bank exercised 114,286 warrants. At September 29, 2013, Bridge Bank holds warrants to purchase 22,671 shares of common stock.

Stock-based Compensation Expense

The following table summarizes the Company’s stock-based compensation expense for the three and nine months ended September 29, 2013 and September 30, 2012 (in thousands):

	Three Months Ended				Nine Months Ended
	September 29, 2013		September 30, 2012		September 29, 2013		September 30, 2012
Cost of revenue	$	57	$	85	$	196	$	143
Research and development expense		224		324		778		1,225
Selling, general and administrative expense		466		831		1,619		2,276
Restructuring expense		-		-		662		132
	$	747	$	1,240	$	3,255	$	3,776

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For the nine months ended September 29, 2013, included in the $3.3 million of stock-based compensation expense is $662,000 in restructuring expense to modify the exercise period and accelerate the vesting of stock options and restricted stock units (see Note 7).

For the nine months ended September 30, 2012, included in the $3.8 million of stock-based compensation expense is $132,000 in restructuring expense to accelerate the vesting of stock options (see Note 7).

During the three months ended September 29, 2013 and September 30, 2012, the Company granted options to purchase 35,000 and 140,000 of common stock, respectively, with an estimated total grant-date fair value of $32,000 and $227,000, respectively.

During the three months ended September 29, 2013, the Company granted 1,008,527 restricted stock units with a grant-date fair value of $1.3 million or $1.33 per share. The Company did not grant any restricted stock units during the three months ended September 30, 2012.

During the nine months ended September 29, 2013 and September 30, 2012, the Company granted options to purchase 645,010 and 2,2681,533 of common stock, respectively, with an estimated total grant-date fair value of $391,000 and $4.7 million, respectively.

During the nine months ended September 29, 2013 and September 30, 2012, the Company granted 1,578,373 and 829,269 restricted stock units, respectively, with a grant-date fair value of $1.8 million and $2.3 million or $1.16 and $2.78 per share, respectively.

As of September 29, 2013, the total compensation cost not yet recognized in connection with unvested stock options under the Company’s equity compensation plans was approximately $4.5 million. As of September 29, 2013, the total compensation cost not yet recognized in connection with unvested restricted stock units under the Company’s equity compensation plans was approximately $1.6 million. Unrecognized compensation will be amortized on a straight-line basis over a weighted-average period of approximately 2.17 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						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Valuation model	Black-Scholes			Black-Scholes			Black-Scholes			Black-Scholes
Expected term	6.08 years			6.03 years			6.08 years			6.03 to 6.08 years
Expected volatility		80	%		73	%		80	%	73% to 75%
Expected dividends		0	%		0	%		0	%		0	%
Risk-free interest rate		1.71	%		0.74	%	0.88% to 1.71%			0.74% to 1.34%
Weighted-average fair value	$	0.90		$	1.62		$	0.59 to $0.90		$	1.74

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

Expected Volatility—Expected volatility used in the Black-Scholes option-pricing model is derived from a combination of historical volatility of the Company’s common stock and guideline companies selected based on similar industry and product focus.

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

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

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Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Stock Options with Market Conditions Granted March 17, 2010

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

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

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

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

236,200 shares, less the shares cancelled for terminated employees, were cancelled on April 1, 2013.  Although the average share price during March 2013 was below the specified price of $5.00, the Company recognized the expense because there was a market condition. The fair value per share of these options was $1.01, at the grant date, and the total expense associated with these options was $239,000.  These options were amortized over three years.

Stock Option and Restricted Stock Unit Activity

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

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term, in Years
Outstanding, December 31, 2012		10,100,429		$	2.42		7.81
Granted		645,010			0.88
Exercised		(4,121	)		1.08
Forfeited/Expired		(392,404	)		2.08
Ending balance, September 29, 2013		10,348,914		$	2.34		7.21
Vested and exercisable and expected to vest, September 29, 2013		10,069,080		$	2.34		7.18
Vested and exercisable, September 29, 2013		6,922,187		$	2.39		6.66

The aggregate intrinsic value of options vested, exercisable and expected to vest, based on the fair value of the underlying stock options as of September 29, 2013 was approximately $780,000. The aggregate intrinsic value reflects the difference between the exercise price of the underlying stock options and the Company’s closing share price of $1.29 as of September 27, 2013.

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The total intrinsic value of options exercised during the nine months ended September 29, 2013 and September 30, 2012 was approximately $1,000 and $184,000, respectively.

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		AggregateIntrinsic Value
								(in thousands)
Outstanding, December 31, 2012		199,005		$	2.78		0.16	$	382
Granted		1,578,373			1.16
Released		(262,467	)		2.27
Forfeited/expired		(20,052	)		1.48
Outstanding, September 29, 2013		1,494,859		$	1.18		2.04	$	1,928

NOTE 7—RESTRUCTURING

During the first quarter of 2013, the Company undertook restructuring activities to reduce its expenses.  The components of the restructuring charge included $662,000 of non-cash expenses associated with the acceleration of stock options and restricted stock units, $288,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations.  The net charge for these restructuring activities was $950,000.

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

For the nine months endedSeptember 30, 2012, the Company recorded restructuring expense of $93,000 that was the result of a $207,000 restructuring charge incurred during the three months ended April 1, 2012 to reduce its expenses offset by a benefit of $114,000 incurred during the three months ended July 1, 2012. 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 components of the restructuring income included a $74,000 benefit from the sublet of the Palo Alto facility, as the Company was able to sublet the property at a higher lease rate than it originally estimated, and a $40,000 benefit due to lower than anticipated restructuring charges related to the Endwave merger.

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

	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Beginning balance	$	128		$	307		$	168		$	696
Charges		-			-			950			207
Uses and adjustments		(48	)		(105	)		(1,038	)		(701	)
Ending balance	$	80		$	202		$	80		$	202

As of September 29, 2013, the $80,000 in accrued restructuring includes $62,000 for the Palo Alto facilities restructuring which is expected to be paid out by the fourth quarter of 2013, and $18,000 for restructuring activities the Company undertook during the first quarter of 2013, which is expected to be paid out by the first quarter of 2014.

As of September 29, 2013, all accrued restructuring is recorded in other current liabilities.

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NOTE 8—INCOME TAXES

The Company recorded a provision for income taxes of $1,000 and $28,000 for the three and nine months ended September 29, 2013, respectively, and $65,000 and $99,000 for the three and nine months ended September 30, 2012, respectively. The Company's effective tax rate was less than 1% for the three and nine months ended September 29, 2013 and September 30, 2012.

The income tax provision for the three and nine months ended September 29, 2013 and September 30, 2012 was due primarily to state taxes and foreign taxes due. The Company has incurred book losses in all tax jurisdictions and has a full valuation allowance against such losses.

In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. In order to support a conclusion that a valuation allowance is not needed, positive evidence of sufficient quantity and quality is necessary to overcome negative evidence. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding realization of the asset including lack of profitability through September 29, 2013 and the uncertainty over future operating profitability and taxable income. The Company will continue to evaluate the potential realization of the deferred tax assets on a quarterly basis.

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

NOTE 9—BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

Basic net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding using the treasury stock method. Dilutive potential common shares outstanding include outstanding stock options, restricted stock units and warrants.

The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income per share (in thousands, except share and per share data):

	Three Months Ended					Nine Months Ended
(in thousands, except per share data)	September 29, 2013		September 30, 2012			September 29, 2013			September 30, 2012
Net income (loss)	$	3,532	$	(1,506	)	$	(424	)	$	(4,885	)
Computation of common shares outstading - basic earnings per share:
Weighted average shares of common stock		21,656		21,276			21,610			21,445
Basic earnings (loss) per share	$	0.16	$	(0.07	)	$	(0.02	)	$	(0.23	)
Computation of common shares outstading - diluted earnings per share:
Weighted average shares of common stock		21,656		21,276			21,610			21,445
Dilutive shares using the treasury stock method		703		-			-			-
Shares used in computing diluted earnings per share		22,359		21,276			21,610			21,445
Diluted earnings (loss) per share	$	0.16	$	(0.07	)	$	(0.02	)	$	(0.23	)

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The following table summarizes total securities outstanding which were not included in the calculation of diluted net loss per share because to do so would have been anti-dilutive:

	Three Months Ended				Nine Months Ended
	September 29, 2013		September 30, 2012		September 29, 2013		September 30, 2012
Stock options and restricted stock units		8,700,461		10,590,465		11,843,773		10,590,465
Common stock warrants		1,704,170		1,810,595		1,708,295		1,810,595
Total		10,404,631		12,401,060		13,552,068		12,401,060

NOTE 10—SEGMENT AND GEOGRAPHIC INFORMATION

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

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

	Three Months Ended								Nine Months Ended
	September 29, 2013				September 30, 2012				September 29, 2013				September 30, 2012
North America	$	2,210	30	%	$	2,797	28	%	$	6,283	30	%	$	7,783	27	%
Asia		1,588	22	%		2,765	28	%		5,763	27	%		8,263	29	%
Europe		3,385	46	%		4,448	44	%		8,081	38	%		12,629	44	%
Other		153	2	%		44	0	%		961	5	%		118	0	%
	$	7,336	100	%	$	10,054	100	%	$	21,088	100	%	$	28,793	100	%

The Company determines geographic location of its revenue based upon the destination of shipments of its products.

For the three months ended September 29, 2013, one customer accounted for 42% of total revenue. For the three months ended September 30, 2012, two customers accounted for greater than 10% of total revenue and combined they accounted for 38% of total revenue, of which the largest accounted for 25% of the Company’s total revenue.

For the nine months ended September 29, 2013, one customer accounted for 33% of total revenue. For the nine months ended September 30, 2012, two customers accounted for greater than 10% of total revenue and combined they accounted for 36% of total revenue, of which the largest accounted for 21% of the Company’s total revenue.

During the three months ended September 29, 2013, Italy, the United States, and Japan accounted for 44%, 25%, and 11% of total revenue, respectively. During the three months ended September 30, 2012, the United States, Italy, Hungary, and Hong Kong accounted for 26%, 22%, 13%, and 10% of total revenue, respectively. No other countries accounted for more than 10% of the Company’s total revenue during the periods presented.

During the nine months ended September 29, 2013, Italy, the United States, and Japan accounted for 35%, 26%, and 13% of total revenue, respectively. During the nine months ended September 30, 2012, the United States, Italy, Hungary, Hong Kong, and Japan accounted for 25%, 21%, 15%, 11%, and 11% of total revenue, respectively. No other countries accounted for more than 10% of the Company’s total revenue during the periods presented.

The following table summarizes revenue by product line (in thousands):

	Three Months Ended				Nine Months Ended
	September 29, 2013		September 30, 2012		September 29, 2013		September 30, 2012
High-Speed Communications	$	5,225	$	6,747	$	14,353	$	17,086
Industrial  (ASIC)		2,111		3,307		6,735		11,707
Total revenue	$	7,336	$	10,054	$	21,088	$	28,793

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The following table summarizes long-lived assets by country (in thousands):

	September 29, 2013		December 31, 2012
United States	$	2,091	$	2,595
Switzerland		1,201		1,984
	$	3,292	$	4,579

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

NOTE 11—COMMITMENTS AND CONTINGENCIES

Commitments

Leases

The Company leases its domestic and foreign sales offices under non-cancelable operating leases. These leases contain various expiration dates and renewal options.  The Company also leases certain software licenses under operating leases. Total facilities rent expense for the three and nine months ended September 29, 2013 was $139,000 and $419,000, respectively, and for the three and nine months ended September 30, 2012 was $145,000 and $444,000, respectively.

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

	Capital Leases			Operating Leases
Years ending December 31,	Minimum lease payments			Minimum lease payments		Sublease payments			Net lease payments
2013	$	100		$	458	$	(60	)	$	398
2014		306			641		-			641
2015		-			350		-			350
2016		-			339		-			339
2017		-			57		-			57
Total minimum lease payments		406		$	1,845	$	(60	)	$	1,785
Less: Amount representing interest		(40	)
Total capital lease obligations		366
Less: current portion		(366	)
Long-term portion of capital lease obligations	$	-

Legal Contingencies

From time to time, the Company may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When the Company believes a loss is probable and can be reasonably estimated, the Company accrues the estimated loss in the consolidated financial statements. Where the outcome of these matters is not determinable, the Company does not make a provision in the financial statements until the loss, if any, is probable and can be reasonably estimated or the outcome becomes known. There are no known losses at this time.

NOTE 12—LEGAL SETTLEMENTS

On September 24, 2013, pursuant to the terms of a settlement agreement with M/A-COM Technology Solutions, Inc. ("MACOM"), Optomai, Inc., and three former employees of GigOptix, the Company received a payment of $7.25 million. The $7.25 million has been recorded as special litigation-related income, net of legal fees in the operating section of the condensed consolidated statements of operations.
 

NOTE 13—RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update requiring centralized disclosure of amounts reclassified from accumulated other comprehensive income (“AOCI”) to net income. The amounts and the source reclassified out of each component of AOCI and the income statement line item affected by the reclassification should be presented either parenthetically on the face of the financial statements or in the notes. The entity does not need to show the income statement line item affected for certain components that are not required to be reclassified to net income in their entirety to net income, instead they would cross reference to the related footnote. This standard is effective for reporting periods beginning after December 15, 2012 and early adoption is permitted. The Company adopted this standard and this adoption did not have a material impact on the Company’s condensed consolidated financial statements.

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In February 2013, the FASB issued an accounting standards update requiring disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The entity has to disclose the following information about each obligation: the nature of the arrangement, the total outstanding amount under the arrangement, the carrying amount of a liability and the carrying amount of a receivable recognized, the nature of any recourse provisions, how liability was measured initially, and where the entry was recorded in the financial statements. This standard is effective for fiscal years beginning after December 15, 2013 and early adoption is permitted. The Company does not expect the adoption will have a material impact on the Company’s condensed consolidated financial statements.

In March 2013, the FASB issued an accounting standards update requiring derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. For transactions occurring within a foreign entity, cumulative translation adjustment (“CTA”) would be released only upon complete or substantially complete liquidation of the foreign entity. Transactions within a foreign entity involve a component of a foreign entity, such as a subsidiary, a group of assets, or an equity investment. For transactions occurring in a foreign entity, CTA will be released based on the type of transaction. Transactions in a foreign entity involve a direct ownership interest of a foreign entity. This standard is effective for fiscal years beginning after December 15, 2013 and early adoption is permitted. The Company does not expect the adoption will have a material impact on the Company’s condensed consolidated financial statements.

In July 2013, the FASB issued an accounting standards update requiring disclosure of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The entity has to disclose an unrecognized tax benefit, or a portion of an unrecognized tax benefit that should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The standard is effective for fiscal years beginning after December 15, 2013. The Company does not expect the adoption will have a material impact on the Company’s condensed consolidated financial statements.

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 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, 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 high speed semiconductorcomponentsthat enable end-to-end information streaming over the network and address emerging high-growth opportunities for Cloud connectivity, datacenters and high-speed optical and wireless networks, and the industrial, defense and avionics industries. The business is made up of two product lines:  High-Speed Communications product line and Industrial product line.

Through our High-Speed Communications product line we offer a broad portfolio of high performance optical and wireless components to telecommunication (“telecom”) and data communication (“datacom”) customers, including i) mixed signal radio frequency integrated circuits (“RFIC”) such as 40G and 100G laser and optical modulator drivers and trans-impedance amplifiers (“TIA”) for telecom, datacom, and consumer electronic fiber-optic applications; ii) power amplifiers and transceivers for microwave wave and millimeter monolithic microwave integrated circuit (“MMIC”) wireless applications including 73 GHz and 83 GHz power amplifiers and transceiver chips; iii) thin film polymer on silicon (“TFPS”) optical modulators for 40G and 100G fiber-optic telecom; and iv) integrated systems in a package (“SIP”) solutions for both fiber-optic and wireless applications. The High-Speed Communications product line also partners with key customers on joint development projects that generate engineering project revenue for us while helping to position us for future product revenues with these key customers.

Our Industrial product line offers a wide range of digital and mixed-signal application specific integrated circuit (“ASIC”) solutions for industrial, military, avionics, medical and communications markets. The Industrial product line partners with ASIC customers on development projects that generate engineering project revenue for us that directly lead to future product revenues with these ASIC customers.

We focus on the specification, design, development and sale of analog semiconductor integrated circuits (”ICs”), multi-chip module (“MCM”) solutions, polymer modulators, and digital and analog ASICs, as well as wireless communications MMICs and modules. We believe we are an industry leader in the fast growing market for electronic solutions that enable high-bandwidth optical connections found in telecom, datacom and storage systems, and, increasingly, in consumer electronics and computing systems.

Since inception, we have expanded our customer base with the acquisition and integration of five businesses with complementary products and customers. In doing so, we have expanded our product line from a few leading 10 gigabit per second (“Gbps”) ultra-long haul electronic modulator drivers at our inception in July 2007 to a line of over 150 products today that include: drivers, receivers and modulators for 10 to 400 Gbps optical applications; power amplifiers, filters and attenuators spanning up to 86GHz wireless applications; and custom ASICs spanning 0.6um to 65nm technology nodes. Our direct sales force is based in 3 countries and is supported by a significant number of channel representatives and distributors that are selling our products throughout North America, Europe, Japan and Asia.

Historically, we have incurred net losses. For the nine months ended September 29, 2013 and the year ended December 31, 2012 we incurred net losses of $424,000 and $7.0 million, respectively, and cash provided by operations of $4.2 million and cash used in operations of $2.0 million, respectively. As of September 29, 2013 and December 31, 2012, we had an accumulated deficit of $94.9 million and $94.5 million, respectively.

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Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update requiring centralized disclosure of amounts reclassified from accumulated other comprehensive income (“AOCI”) to net income. The amounts and their source reclassified out of each component of AOCI and the income statement line item affected by the reclassification should be presented either parenthetically on the face of the financial statements or in the notes. The entity does not need to show the income statement line item affected for certain components that are not required to be reclassified to net income in their entirety to net income, instead they would cross reference to the related footnote. This standard is effective for reporting periods beginning after December 15, 2012 and early adoption is permitted. We adopted the standard and this adoption did not have a material impact on our condensed consolidated financial statements.

In February 2013, the FASB issued an accounting standards update requiring disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The entity has to disclose the following information about each obligation: the nature of the arrangement, the total outstanding amount under the arrangement, the carrying amount of a liability and the carrying amount of a receivable recognized, the nature of any recourse provisions, how liability was measured initially, and where the entry was recorded in the financial statements. This standard is effective for fiscal years beginning after December 15, 2013 and early adoption is permitted. We do not expect the adoption will have a material impact on our condensed consolidated financial statements.

In March 2013, the FASB issued an accounting standards update requiring derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. For transactions occurring within a foreign entity, cumulative translation adjustment (“CTA”) would be released only upon complete or substantially complete liquidation of the foreign entity. Transactions within a foreign entity involve a component of a foreign entity, such as a subsidiary, a group of assets, or an equity investment. For transactions occurring in a foreign entity, CTA will be released based on the type of transaction. Transactions in a foreign entity involve a direct ownership interest of a foreign entity. This standard is effective for fiscal years beginning after December 15, 2013 and early adoption is permitted. We do not expect the adoption will have a material impact on our condensed consolidated financial statements.

In July 2013, the FASB issued an accounting standards update requiring disclosure of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The entity has to disclose an unrecognized tax benefit, or a portion of an unrecognized tax benefit that should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The standard is effective for fiscal years beginning after December 15, 2013. 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					Nine Months Ended
	September 29, 2013			September 30, 2012		September 29, 2013			September 30, 2012
Total revenue	$	7,336		$	10,054	$	21,088		$	28,793
Decrease, period over period	$	(2,718	)			$	(7,705	)
Percentage decrease, period over period		-27	%				-27	%

Total revenue for the three months ended September 29, 2013 was $7.3 million, a decrease of $2.7 million or 27%, compared with $10.1 million for the three months ended September 30, 2012. The decrease in total revenue was primarily due to decreased revenue from both our Industrial and High-Speed Communications product lines. In addition, we have had 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.

Total revenue for the nine months ended September 29, 2013 was $21.1 million, a decrease of $7.7 million or 27%, compared with $28.8 million for the nine months ended September 30, 2012. The decrease in total revenue was primarily due to decreased revenue from both our Industrial and High-Speed Communications product lines. In addition, we have had 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.

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Cost of Revenue and Gross Profit

Cost of revenue and gross profit for the periods presented was as follows (in thousands, except percentages):

	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Total cost of revenue	$	2,985		$	4,853		$	8,199		$	13,568
Gross profit	$	4,351		$	5,201		$	12,889		$	15,225
Gross margin		59	%		52	%		61	%		53	%
Decrease, period over period		(850	)					(2,336	)
Percentage decrease, period over period		-16	%					-15	%

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

Gross profit for the three months ended September 29, 2013 was $4.4 million, or a gross margin of 59%, compared to a gross profit of $5.2 million, or a gross margin of 52%, for the three months ended September 30, 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. Joint development project revenue and other non-product revenue for the three months ended September 29, 2013 was $831,000 compared with $885,000 for the three months ended September 30, 2012. In general, the joint development projects are associated with complex technology development, and as such we do not have certainty about our ability to achieve the program milestones. Therefore, we take the expenses related to these projects in the periods incurred and recognize revenue only when we have earned the revenue and achieved the development milestones. Excluding the revenue and gross profit associated with joint development programs and other non-product revenue, gross margin would have been 54% and 47% for the three months ended September 29, 2013 and September 30, 2012, respectively.

Gross profit for the nine months ended September 29, 2013 was $12.9 million, or a gross margin of 61%, compared to a gross profit of $15.2 million, or a gross margin of 53%, for the nine months ended September 30, 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. Joint development project revenue and other non-product revenue for the nine months ended September 29, 2013 was $3.3 million compared with $2.1 million for the nine months ended September 30, 2012. In general, the joint development projects are associated with complex technology development, and as such we do not have certainty about our ability to achieve the program milestones. Therefore, we take the expenses related to these projects in the periods incurred and recognize revenue only when we have earned the revenue and achieved the development milestones. Excluding the revenue and gross profit associated with joint development programs and other non-product revenue, gross margin would have been 54% and 49% for the nine months ended September 29, 2013 and September 30, 2012, respectively.

Research and Development Expense

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

	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Research and development expense	$	3,984		$	3,395		$	10,397		$	10,223
Percentage of revenue		54	%		34	%		49	%		36	%
Increase, period over period	$	589					$	174
Percentage increase, period over period		17	%					2	%

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, expenses associated with our joint development projects, depreciation for equipment, engineering expenses paid to outside technology development suppliers, allocated facilities costs and expenses related to stock based compensation.

Research and development expense for the three months ended September 29, 2013 was $4.0 million compared to $3.4 million for the three months ended September 30, 2012, an increase of $589,000 or 17%. Research and development costs increased as compared to the third quarter of 2012 primarily due to a $640,000 increase in research and development wafer tape-out related expenses associated with our joint development projects which was partially offset by a $100,000 decrease in stock-based compensation.

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Research and development expense for the nine months ended September 29, 2013 was $10.4 million compared to $10.2 million for the nine months ended September 30, 2012, an increase of $174,000 or 2%. Research and development costs increased as compared to the nine months ended September 30, 2012 primarily due to a $640,000 increase in research and development wafer tape-out related expenses associated with our joint development projects which was partially offset by a $447,000 decrease in stock-based compensation.

We expect research and development expense to decrease from the third quarter of 2013 to the fourth quarter of 2013 as we do not anticipate incurring the same level of engineering wafer tape-out expenses as in the third quarter of 2013.

Selling, General and Administrative Expense

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

	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Selling, general and administrative expense	$	2,483		$	2,816		$	6,877		$	8,775
Percentage of revenue		34	%		28	%		33	%		30	%
Decrease, period over period	$	(333	)				$	(1,898	)
Percentage decrease, period over period		-12	%					-22	%

Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, accounting, finance, sales, marketing and administration personnel, professional fees, allocated facilities costs, promotional activities and expenses related to stock-based compensation.

Selling, general and administrative expense for the three months ended September 29, 2013 was $2.5 million compared to $2.8 million for the three months ended September 30, 2012, a decrease of $333,000 or 12%. Selling, general and administrative expense decreased as compared to the third quarter of 2012 primarily due to a $365,000 decrease in stock based compensation, and a $56,000 decrease in professional fees which were partially offset by a $203,000 increase in personnel related expenses.

Selling, general and administrative expense for the nine months ended September 29, 2013 was $6.9 million compared to $8.8 million for the nine months ended September 30, 2012, a decrease of $1.9 million or 22%. Selling, general and administrative expense decreased as compared to the third quarter of 2012 primarily due to a $657,000 decrease in stock-based compensation, a $479,000 decrease in professional fees, a $321,000 decrease in outside services, a $77,000 decrease in marketing and promotional activities and a $49,000 decrease in bad debt expense.

We expect selling, general and administrative expense to be relatively flat from the third quarter of 2013 to the fourth quarter of 2013.

Restructuring Expense, Net

	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Restructuring expense	$	-		$	-		$	950		$	93
Percentage of revenue		0	%		0	%		5	%		0	%

During the nine months ended September 29, 2013, we recorded $950,000 in restructuring expenses. The components of the restructuring charge included $662,000 of non-cash expenses associated with the acceleration of stock options and restricted stock units and $288,000 of cash expenses for severance, benefits and payroll taxes and other costs associated with employee terminations. No restructuring expenses were incurred in the three months ended September 29, 2013.

For the nine months endedSeptember 30, 2012, we recorded restructuring expense of $93,000 that was the result of a $207,000 restructuring charge incurred during the three months ended April 1, 2012 to reduce our expenses offset by a benefit of $114,000 incurred during the three months ended July 1, 2012. 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 components of the restructuring income included a $74,000 benefit from the sublet of our Palo Alto facility, as we were able to sublet the property at a higher lease rate than we originally estimated, and a $40,000 benefit due to lower than anticipated restructuring charges related to the Endwave merger.

Special Litigation-Related Expense (Income)

During the three months ended September 29, 2013, we incurred a special litigation-related benefit of $5.7 million, which was due to a $7.3 million one-time litigation settlement for the settlement of the lawsuit against M/A-Com Technology Solution, Inc., its subsidiary, Optomai, and three former GigOptix employees (the Optomai case) partially offset by $1.6 million of legal fees associated with the Optomai case.

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During the nine months ended September 29, 2013, we incurred a special litigation-related benefit of $4.8 million, which was due to a $7.3 million one-time litigation settlement for the Optomai case, partially offset by $2.5 million of legal fees associated with the Optomai case and $108,000 of legal fees associated with the Advantech case.

During the three and nine months ended September 30, 2012, we recorded special litigation-related expense of $576,000 and $929,000, respectively, which was related to costs associated with the Optomai case and litigation involving both National Instruments and Telekenex matters.

Interest Expense, Net and Other Income, Net

	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Interest expense, net	$	(27	)	$	(38	)	$	(106	)	$	(231	)
Other income, net		3			183			259			240
Total	$	(24	)	$	145		$	153		$	9

Interest expense, net and other income, net consist primarily of gains and losses related to foreign currency transactions, gains and losses related to property and equipment disposals, interest on line of credit, interest on capital leases and amortization of loan fees in connection with our Silicon Valley Bank line of credit and loan.

Interest expense, net for the three months ended September 29, 2013 was $27,000 compared to $38,000 for the three months ended September 30, 2012. Interest expense, net decreased as compared to the third quarter of 2012 due to an $11,000 decrease in interest on capital leases.

Interest expense, net for the nine months ended September 29, 2013 was $106,000 compared to $231,000 for the nine months ended September 30, 2012. Interest expense, net decreased as compared to the third quarter of 2012, primarily due to a $67,000 decrease in interest on capital leases and $36,000 decrease in loan fees.

Other income, net for the three months ended September 29, 2013 was income of $3,000 which primarily consisted of $7,000 gain on sale of materials and $5,000 loss of foreign currency transactions. Other income, net for the three months ended September 30, 2012 was an income of $183,000, which primarily consisted of $163,000 gain on sale of property and equipment.

Other income, net for the nine months ended September 29, 2013 was income of $259,000 which primarily consisted of $160,000 gain on sale of property and equipment, $95,000 gain on sale of materials and $13,000 of liability warrants income. Other income, net for the nine months ended September 30, 2012 was income of $240,000 which primarily consisted of $163,000 gain on the sale of property and equipment and $43,000 for foreign exchange transaction gains.

Provision for Income Taxes

	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Provision for income taxes	$	1		$	65		$	28		$	99
Percentage of revenue		0	%		1	%		0	%		0	%
Decrease, period over period	$	(64	)				$	(71	)
Percentage decrease, period over period		-98	%					-72	%

Income tax expense was $1,000 and $65,000 for three months ended September 29, 2013 and September 30, 2012, respectively, and our effective tax rate was less than 1% for those periods. The income tax provision for the three months ended September 29, 2013 and September 30, 2012 were due primarily to state taxes and foreign taxes due. We have incurred book losses in all tax jurisdictions and have a full valuation allowance against such losses.

Income tax expense was $28,000 and $99,000 for nine months ended September 29, 2013 and September 30, 2012, respectively, and our effective tax rate was less than 1% for those periods. The income tax provision for the nine months ended September 29, 2013 and September 30, 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.

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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 collateralized 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 September 29, 2013 was $6.0 million. On September 30, 2013, we repaid the entire $6.0 million to SVB.

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

	September 29, 2013			December 31, 2012
Cash and cash equivalents	$	15,260		$	10,147
	Nine Months Ended
	September 29, 2013			September 30, 2012
Net cash provided by (used in) operating activities	$	4,231		$	(1,303	)
Net cash used in investing activities	$	(1,159	)	$	(1,341	)
Net cash provided by (used in) by financing activities	$	1,974		$	(644	)

Operating Activities

Operating activities provided cash of $4.2 million in the nine months ended September 29, 2013. This resulted from a net loss of $424,000 and non-cash gain on sale of property and equipment of $133,000, and we experienced cash usage for working capital for an increase in accounts receivable, net of $2.1 million, an increase in inventories of $437,000, an increase in prepaid and other current assets of $521,000, a decrease in accrued restructuring of $89,000, and a decrease in other current and long-term liabilities of $137,000. These decreases were offset by an increase in accounts payable of $1.3 million, an increase in accrued compensation of $675,000 and non-cash expenses for stock-based compensation of $3.3 million and depreciation and amortization of $2.8 million. In addition, we incurred a special litigation-related benefit of $4.8 million, which was due to a $7.3 million one-time litigation settlement for the Optomai case, partially offset by $2.5 million of legal fees associated with the Optomai case.

Operating activities used cash of $1.3 million during the nine months ended September 30, 2012 and consisted of a net loss of $4.9 million, adjusted for certain non-cash items, including non-cash restructuring benefits of $114,000 and a gain on sale of property and equipment of $163,000, offset by depreciation and amortization of $3.1 million and stock-based compensation expense of $3.8 million, as well as the effect of changes in working capital. We experienced cash usage for working capital for an increase in accounts receivable, net of $1.1 million due to timing of collections, an increase in inventories of $1.6 million due to purchasing, an increase in prepaid and other assets of $278,000, a decrease in accrued restructuring of $180,000, and a decrease in other current and long-term liabilities of $717,000. These decreases were partially offset by an increase in accounts payable of $550,000, an increase in accrued compensation of $191,000, and a decrease in other assets of $41,000.

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Investing Activities

Net cash used in investing activities for the nine months ended September 29, 2013 was $1.2 million and consisted of $1.3 million of purchases of fixed assets partially offset by $160,000 of proceeds from sale of property and equipment.

Net cash used in investing activities for the nine months ended September 30, 2012 was $1.3 million and consisted of $1.8 million of purchases of property and equipment which was partially offset by $400,000 proceeds from sale and maturity of investments and $90,000 of proceeds from sale of property and equipment.

Financing Activities

Net cash provided by financing activities for the nine months ended September 29, 2013 was $2.0 million and consisted primarily of $2.4 million of net proceeds from our line of credit facilities with Silicon Valley Bank, partially offset by $319,000 for capital lease payments and $111,000 for taxes paid related to net share settlement of equity awards.

Net cash used by financing activities during the nine months ended September 30, 2012 was $644,000 and consisted primarily of $2.2 million of treasury stock repurchase from our modified Dutch auction tender offer, $386,000 of payments on our capital lease obligations, and $349,000 of taxes paid related to net share settlement of equity awards, which were partially offset by $1.9 million of net proceeds from our line of credit facilities with Silicon Valley Bank and $389,000 of proceeds from issuance of stock.

Material Commitments

The following table summarizes our future net cash obligations for current debt, operating leases, and capital leases, in thousands of dollars, as of September 29, 2013:

Contractual Obligations at September 29, 2013:	Total		Less than One Year		One to Three Years		Three to Five Years
Current debt obligation	$	6,000	$	6,000	$	-	$	-
Operating lease obligations (net of sublease)		1,785		398		991		396
Capital lease obligations (including interest)		406		100		306		-
Total	$	8,191	$	6,498	$	1,297	$	396

Except for the future cash obligations above, GigOptix did not have any material commitments for capital expenditures as of September 29, 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.

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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.

ITEM 3. QUANTITATIVE AND QUALTATIVE 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 and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management is responsible for establishing and maintaining our disclosure controls and procedures. Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated the effectiveness of our disclosure controls and procedures as of September 29, 2013. Our CEO and CFO have concluded that our disclosure controls and procedures were effective as of that date and have also concluded that our consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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.

Optomai, Inc. and M/A-COM Technology Solutions, Inc.

As previously disclosed by the Company, on April 25, 2011, we initiated a lawsuit in the Superior Court of Santa Clara County, California, against five former employees of GigOptix, including our former Vice President of Sales and two design engineers, who left in 2009 and 2010 to launch a competing company, Optomai, Inc. (“Optomai”), which was formed in October 2009 while four of the five were still employed by GigOptix.  At GigOptix, the former employees were responsible for the development and promotion of products for 40G and 100G fiber optic networks, among other GigOptix products. Only a few months after four of the five employees had left our company, in April 2010, their new company, Optomai, Inc., began marketing such products which we alleged were developed using GigOptix files which were copied.  On the day in April 2011 that GigOptix filed the lawsuit, M/A-COM Technology Solutions, Inc. (“MACOM”) announced that it had acquired Optomai and we subsequently added MACOM to the suit as a defendant. In January 2013, we dismissed from the lawsuit without prejudice two of the employees, and we maintained the claims against the former Vice President of Sales and two design engineers, as well as the two corporate defendants. In the civil court lawsuit, GigOptix sought damages and injunctive relief for misappropriation of confidential information and trade secrets and breach of the contractual and legal obligations to GigOptix of the former employees including while still employed by GigOptix.  On August 22, 2013 MACOM filed a lawsuit in the United States District Court for the Northern District of California against GigOptix alleging that GigOptix’ polymer technology is infringing on two patents in which MACOM claimed rights.  On September 13, 2013, GigOptix filed both an answer to the complaint for patent infringement filed against it by MACOM and counterclaims against MACOM with the United States District Court for the Northern District of California. GigOptix denied the allegations of MACOM and stated affirmative defenses, including for non-infringement, patent invalidity, laches and equitable estoppel. In addition, GigOptix filed counterclaims seeking a declaratory judgment in its favor of patent invalidity and non-infringement.

As disclosed by the Company in its Current Report on Form 8-K filed with the SEC on September 19, 2013, on September 17, 2013, GigOptix, Inc. and MACOM, Optomai, and the three former employees of GigOptix who founded Optomai, Vivek Rajgarhia, Vikas Manan and Stefano D’Agostino, as a result of a mediation, entered into a global confidential settlement of all pending lawsuits between them.  These included: (1) the state court case filed by GigOptix against Optomai, Inc., Vivek Rajgarhia, Vikas Manan, Stefano D’Agostino, and MACOM, in Santa Clara County, for alleged misappropriation of trade secrets and breach of contract, and (2) the federal court case filed by MACOM against GigOptix in the Northern District of California, for alleged patent infringement. The parties subsequently filed requests with the relevant courts to fully and finally dismiss both cases, with prejudice. Neither party admitted liability to the other, and each side was satisfied with the confidential settlement reached between the parties, which included the payment by MACOM, concurrently with the filing of the dismissals, of $7.25 million to GigOptix, which was received by the Company on September 24, 2013.

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, 2012 and otherwise supplement those risks. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K, as well as those contained in Part 1, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.

We have incurred substantial operating losses in the past and we may not be able to achieve profitability in the future.

Historically, we have incurred net losses. For the nine months ended September 29, 2013 and the years ended December 31, 2012 and 2011, we incurred net losses of $424,000, $7.0 million, and $14.1 million, respectively, and cash provided by operations of $4.2 million and cash used in operations of $2.0 million, and $4.9 million, respectively. As of September 29, 2013, we had an accumulated deficit of $94.9 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.

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We may require additional capital to continue to fund our operations. If we need but do not obtain additional capital, we may be required to substantially limit operations.

We may not generate sufficient cash from our operations to finance our anticipated operations for the foreseeable future from such operations. We could require additional financing sooner than expected if we have poor financial results, including unanticipated expenses, or an unanticipated drop in projected revenues. Such financing may be unavailable when needed or may not be available on acceptable terms. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our current stockholders will be reduced, and these securities may have rights superior to those of its common stock. If adequate funds are not available to satisfy either short-term or long-term capital requirements, or if planned revenues are not generated, we may be required to limit our operations substantially. These limitations of operations may include a possible sale or shutdown of portions of our business, reductions in capital expenditures and reductions in staff and discretionary costs.

We have incurred net losses since inception. As of September 29, 2013, we had an accumulated deficit of $94.9 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. We had $15.3 million in cash and cash equivalents as of September 29, 2013. However, while we have additional cash available, our ability to continue as a going concern may be dependent on many events outside of our direct control, including, among other things, obtaining additional financing either privately or through public markets, should this be necessary, and customers purchasing our products in substantially higher volumes.

We could suffer unrecoverable losses on accounts receivable from our customers, which would adversely affect our financial results.

Our operating cash flows are dependent on the continued collection of receivables. Our accounts receivable as of September 29, 2013 increased by $2.1 million or 41% compared to the balance at December 31, 2012.  We could suffer additional accounting losses as well as a reduction in liquidity if a customer is unable or refuses to pay. A significant increase in uncollectible accounts would have an adverse impact on our business, liquidity and financial results.

Our business is subject to foreign currency risk.

Sales to customers located outside North America comprised 70% and 73% of our revenue for the nine months ended September 29, 2013 and September 30, 2012, respectively. In addition, we have two subsidiaries overseas (Switzerland and Germany) that record their operating expenses in a foreign currency.  Since sales of our products have been denominated to date primarily in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in GigOptix’ results of operations. We currently do not have hedging or other programs in place to protect against adverse changes in the value of the U.S. dollar as compared to other currencies to minimize potential adverse effects.

We derive a significant portion of our revenue from a small number of customers and the loss of one or more of these key customers, the diminished demand for our products from a key customer, or the failure to obtain certifications from a key customer or its distribution channel could significantly reduce our revenue and profits.

A relatively small number of customers account for a significant portion of our revenue in any particular period. One or more of our key customers may discontinue operations as a result of consolidation, liquidation or otherwise, or reduce significantly its business with us due to the current economic conditions or their current situation. Reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers could significantly further reduce our revenue and profits. There is no assurance that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers.

For the nine months ended September 29, 2013, one customer accounted for 33% of total revenue. For the nine months ended September 30, 2012, two customers accounted for greater than 10% of total revenue and combined they accounted for 36% of total revenue, of which the largest accounted for 21% of total revenue.

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Our data and information systems and network infrastructure may be subject to hacking or other cyber security threats.  If our security measures are breached and an unauthorized party obtains access to our customer data or our proprietary business information, our information systems may be perceived as being unsecure, which could harm our business and reputation, and our proprietary business information could be misappropriated which could have an adverse effect on our business and results of operations.

In our operations, we store and transmit our proprietary information and that of our customers. We have offices, research and development, and production facilities throughout the world, including key research and development facilities outside of the United States. Our operations are dependent upon the connectivity and continuity of our facilities and operations throughout the world. Despite our security measures, our information systems and network infrastructure may be vulnerable to cyber attacks or could be breached due to an employee error or other disruption that could result in unauthorized disclosure of sensitive information which has the potential to significantly interfere with our business operations. Breaches of our security measures could expose us to a risk of loss or misuse of this information, litigation and potential liability. Since techniques used to obtain unauthorized access or to sabotage information systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures in advance of such an attack on our systems. In addition, if we select a vendor that uses cyber or “cloud” storage of information as part of their service or product offerings, despite our attempts to validate the security of such services, our proprietary information may be misappropriated by third parties. In the event of an actual or perceived breach of our security, or the security of one of our vendors, the market perception of the effectiveness of our security measures could be harmed and we could suffer damage to our reputation or our business, or lose existing customers and lose our ability to obtain new customers. Additionally, misappropriation of our proprietary business information could prove competitively harmful to our business.

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ITEM 6. EXHIBITS

(a) Exhibits

Exhibit Number	Description
31.1*	Chief Executive Officer certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Chief Financial Officer certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Chief Executive Officer certification pursuant to Rule 13a-14(b) or Rule 13d-14(b) and Section 1350, Chapter 63 of Title 18 United States Code (18 U.S.C. 1350) as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2*	Chief Financial Officer certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350, Chapter 63 of Title 18 United States Code (18 U.S.C. 1350) as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
101.INS*	Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

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SIGNATURES

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

GIGOPTIX, INC.

Date: November 12, 2013	/S/    AVI S. KATZ
	Dr. Avi S. Katz
	Chief Executive Officer and Chairman of the Board
Date: November 12, 2013	/S/ CURT P. SACKS
	Curt P. Sacks
	Chief Financial Officer

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