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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

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

 

For the quarterly period ended August 2, 2014

or

 

       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to

 

Commission file number 001-32207

 

Sigma Designs, Inc.

(Exact name of registrant as specified in its charter)

 

 

California

94-2848099

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

1778 McCarthy Boulevard,

Milpitas, California 95035

(Address of principal executive offices including Zip Code)

(408) 262-9003

(Registrant’s telephone number, including area code)

 

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   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 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 

Smaller reporting company

  

  

(Do not check if a smaller reporting company)

  

 

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

 

As of September 8, 2014, the Company had 34,855,632 shares of Common Stock outstanding.

 

 
1

 

 

SIGMA DESIGNS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED AUGUST 2, 2014

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I.

FINANCIAL INFORMATION

  

 

 

  

Item 1.

Unaudited Condensed Consolidated Financial Statements

  

 

 

  

 

Unaudited Condensed Consolidated Balance Sheets as of August 2, 2014 and February 1, 2014

3

     

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended August 2, 2014 and August 3, 2013

4

 

  

  

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended August 2, 2014 and August 3, 2013

4

 

 

  

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three and six months ended August 2, 2014 and August 3, 2013

5

 

 

  

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

  

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

  

Item 4.

Controls and Procedures

32

 

 

  

PART II.

OTHER INFORMATION

  

 

 

  

Item 1.

Legal Proceedings

32

 

 

  

Item 1A.

Risk Factors

33

 

 

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

  

Item 3.

Defaults Upon Senior Securities

34

 

 

  

Item 4.

Mine Safety Disclosures

34

 

 

  

Item 5.

Other Information

34

 

 

  

Item 6.

Exhibits

34

 

 

  

Signatures

35

 

  

Exhibit index

35

 

 
2

 

 

PART I.                      FINANCIAL INFORMATION

 

ITEM 1.                      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)   

 

   

August 2,

2014

   

February 1,

2014

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 69,848     $ 64,326  

Short-term marketable securities

    5,828       7,791  

Restricted cash

    1,540       1,775  

Accounts receivable, net of allowances of $287 as of August 2, 2014 and $300 as of February 1, 2014

    24,792       27,647  

Inventory

    20,305       20,403  

Deferred tax assets

    4,194       4,144  

Prepaid expenses and other current assets

    6,700       8,069  

Total current assets

    133,207       134,155  
                 

Long-term marketable securities

    6,346       15,505  

Software, equipment and leasehold improvements, net

    22,283       27,089  

Intangible assets, net

    26,067       29,780  

Deferred tax assets, net of current portion

    292       439  

Long-term investments and notes receivable, net of current portion

    3,271       3,873  

Other non-current assets

    4,852       4,934  

Total assets

  $ 196,318     $ 215,775  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 16,313     $ 16,184  

Accrued compensation and related benefits

    6,236       6,288  

Accrued liabilities

    13,660       19,813  

Total current liabilities

    36,209       42,285  
                 

Income taxes payable

    7,328       7,065  

Long-term deferred tax liabilities

    744       976  

Other long-term liabilities

    6,004       7,058  

Total liabilities

    50,285       57,384  
                 

Commitments and contingencies (Note 10)

               
                 

Shareholders' equity

               

Preferred stock; no par value, authorized 2,000,000 shares, none issued and outstanding

    -       -  

Common stock and additional paid-in capital; no par value; 100,000,000 shares authorized; 39,487,768 issued and 34,828,625 outstanding as of August 2, 2014 and 39,083,961 issued and 34,424,818 outstanding as of February 1, 2014

    490,550       485,188  

Treasury stock, at cost, 4,659,143 shares as of August 2, 2014 and February 1, 2014

    (88,198

)

    (88,198

)

Accumulated other comprehensive income

    465       651  

Accumulated deficit

    (256,784

)

    (239,250

)

Total shareholders' equity

    146,033       158,391  

Total liabilities and shareholders' equity

  $ 196,318     $ 215,775  

 

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 
3

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)  

 

   

Three Months Ended

   

Six Months Ended

 
   

August 2,

2014

   

August 3,

2013

   

August 2,

2014

   

August 3,

2013

 

Net revenue

  $ 42,810     $ 53,762     $ 79,683     $ 106,302  

Cost of revenue

    20,921       25,696       37,569       51,290  

Gross profit

    21,889       28,066       42,114       55,012  
                                 

Operating expenses

                               

Research and development

    16,452       18,769       33,555       38,973  

Sales and marketing

    5,475       5,527       10,925       11,209  

General and administrative

    4,555       4,937       9,586       9,699  

Restructuring costs

    46       680       1,020       890  

Impairment of IP, mask sets and design tools

    1,156       -       1,266       188  

Total operating expenses

    27,684       29,913       56,352       60,959  

Loss from operations

    (5,795

)

    (1,847 )     (14,238

)

    (5,947 )

Gain on sale of development project

    -       -       -       1,079  

Interest and other income, net

    372       121       320        812  

Loss before income taxes

    (5,423

)

    (1,726 )     (13,918

)

    (4,056 )

Provision for income taxes

    2,197       3,065       3,616       5,268  

Net loss

  $ (7,620

)

  $ (4,791 )   $ (17,534

)

  $ (9,324 )
                                 

Net loss per common share:

                               

Basic

  $ (0.22

)

  $ (0.14 )   $ (0.51

)

  $ (0.27 )

Diluted

  $ (0.22

)

  $ (0.14 )   $ (0.51

)

  $ (0.27 )
                                 
Shares used in computing net loss per share:                                

Basic

    34,622       34,259       34,459       34,008  

Diluted

    34,622       34,259       34,459       34,008  

 

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 

   

Three Months Ended

   

Six Months Ended

 
   

August 2,

2014

   

August 3,

2013

   

August 2,

2014

   

August 3,

2013

 

Net loss

  $ (7,620 )   $ (4,791

)

  $ (17,534 )   $ (9,324

)

                                 

Other comprehensive (loss) income:

                               

Currency translation adjustments

    (302 )     48       (94 )     (318

)

Unrealized loss on marketable securities, net of tax

    (138 )     (153

)

    (92 )     (196

)

                                 

Other comprehensive loss

    (440 )     (105

)

    (186 )     (514

)

                                 

Comprehensive loss

  $ (8,060 )   $ (4,896

)

  $ (17,720 )   $ (9,838

)

 

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

  

 
4

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   

Six Months Ended

 
   

August 2,

2014

   

August 3,

2013

 

Cash flows from operating activities:

               

Net loss

  $ (17,534

)

  $ (9,324 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

               

Depreciation and amortization

    10,706       10,272  

Stock-based compensation

    2,873       3,719  

Provision for excess and obsolete inventory

    1,268       575  

(Release of) provision for sales returns, discounts and doubtful accounts

    (13

)

    62  

Deferred income taxes

    (29

)

    2,913  

Gain on sale of development project

    -       (1,079

)

Impairment of IP, mask sets and design tools

    1,266       188  

Tax effect related to stock options

    (620

)

    -  

Excess tax expense from stock- based compensation

    620       -  

Non-cash restructuring charges

    -       830  
   Impairment of investment     601       -  

Other non-cash activities

    5       (6

)

Changes in operating assets and liabilities:

               

Accounts receivable

    2,868       (17,448

)

Inventory

    (1,170

)

    4,325  

Prepaid expenses and other current and non-current assets

    1,134       2,331  

Accounts payable

    190       13,809  

Accrued liabilities, compensation and related benefits

    174       1,915  

Income taxes payable

    (3,823

)

    (991

)

Other long-term liabilities

    (2,425

)

    (347

)

Net cash (used in) provided by operating activities

    (3,909

)

    11,744  
                 

Cash flows from investing activities:

               

Restricted cash

    235       (2

)

Purchases of marketable securities

    -       (7,874

)

Sales and maturities of marketable securities

    11,030       7,641  

Purchases of software, equipment and leasehold improvements

    (3,012

)

    (4,995

)

Proceeds from sale of development project, net of transaction fees

    -       1,971  

Repayment of note receivable

    230       250  

Purchases of IP

    (1,553

)

    (4,099

)

Net cash provided by (used in) investing activities

    6,930       (7,108

)

                 

Cash flows from financing activities:

               

Excess tax benefit from stock-based compensation

    1,242       -  

Net proceeds from exercises of employee stock options and stock purchase rights

    1,247       1,447  

Net cash provided by financing activities

    2,489       1,447  
                 

Effect of foreign exchange rate changes on cash and cash equivalents

    12       (160 )

Net increase in cash and cash equivalents

    5,522       5,923  
                 

Cash and cash equivalents, beginning of period

    64,326       51,218  

Cash and cash equivalents, end of period

  $ 69,848     $ 57,141  
                 

Supplemental disclosure of cash flow information:

               
                 

Cash paid for income taxes

  $ 4,777     $ 3,215  

 

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

  

 
5

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.             Organization and summary of significant accounting policies

 

Organization and nature of operations:  Sigma Designs, Inc. (referred to collectively in these unaudited condensed consolidated financial statements as “Sigma,” “we,” “our”, “the Company” and “us”) is a leader in intelligent media platforms in home entertainment and control.  We focus on integrated system-on-chip, or SoC, solutions that serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes and video networking products. All of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We sell our products into four primary markets which are the Digital Television, or DTV market, the home networking market, the set-top box market, and the home control market. We derive a portion of our revenue from licensing and other markets, including licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

 

Basis of presentation:  The unaudited condensed consolidated financial statements include the accounts of Sigma Designs, Inc. and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated upon consolidation. We operate and report quarterly financial results that consist of 13 weeks and end on the last Saturday of the period. The second quarter of fiscal 2015 and fiscal 2014 ended on August 2, 2014 (91 days) and August 3, 2013 (91 days), respectively.

 

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”).  They do not include all disclosures required by US GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended February 1, 2014, included in our fiscal 2014 Annual Report on Form 10-K, as filed with the SEC on April 17, 2014, referred to as our fiscal 2014 Annual Report.

 

The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in our opinion, are necessary to present fairly our consolidated financial position at August 2, 2014 and February 1, 2014, the consolidated results of our operations for the three and six months ended August 2, 2014 and August 3, 2013, and the consolidated cash flows for the six months ended August 2, 2014 and August 3, 2013.  The results of operations for the three and six months ended August 2, 2014 are not necessarily indicative of the results to be expected for future quarters or the full year.

 

There have been no significant changes in our critical accounting policies during the six months ended August 2, 2014, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended February 1, 2014. For a complete summary of our significant accounting policies, refer to Note 1, "Organization and Summary of Significant Accounting Policies”, in Part II, Item 8 of our fiscal 2014 Annual Report. 

 

Recent accounting pronouncements

 

In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09) providing a comprehensive new revenue recognition standard. ASU 2014-09 provides revised standards of recognition predicated on when an entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for us in our first quarter of fiscal 2018. ASU 2014-09 can be applied retrospectively with a modified retrospective application permitted. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements. 

 

 
6

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

2.             Cash, cash equivalents and marketable securities

 

As of August 2, 2014 and February 1, 2014, we had $1.5 million and $1.8 million, respectively, of restricted cash related to deposits pledged to a financial institution with regard to our foreign exchange hedging transactions and an office-space operating lease, which is not included in the amounts below. Cash, cash equivalents and marketable securities consist of the following (in thousands):

 

   

August 2, 2014

   

February 1, 2014

 
   

Book Value

   

Net Unrealized Gains (Losses)

   

Fair Value

   

Book Value

   

Net Unrealized Gains (Losses)

   

Fair Value

 

Corporate bonds

  $ 10,644     $ 224     $ 10,868     $ 21,186     $ 308     $ 21,494  

Money market funds

    17,159       -       17,159       13,521       -       13,521  

Municipal bonds and notes

    -       -       -       505       3       508  

Fixed income mutual funds

    1,283       23       1,306       1,286       8       1,294  

Total cash equivalents and marketable securities

  $ 29,086     $ 247     $ 29,333     $ 36,498     $ 319     $ 36,817  
                                                 
                                                 

Cash on hand held in the United States

                  $ 3,912                     $ 1,104  

Cash on hand held overseas

                    48,777                       49,701  

Total cash on hand

                    52,689                       50,805  

Total cash, cash equivalents and marketable securities

                  $ 82,022                     $ 87,622  
                                                 

Reported as:

                                               

Cash and cash equivalents

                  $ 69,848                     $ 64,326  

Short-term marketable securities

                    5,828                       7,791  

Long-term marketable securities

                    6,346                       15,505  
                    $ 82,022                     $ 87,622  

 

The amortized cost and estimated fair value of cash equivalents and marketable securities, by contractual maturity, are as follows (in thousands): 

 

   

August 2, 2014

   

February 1, 2014

 
   

Book Value

   

Fair Value

   

Book Value

   

Fair Value

 

Due in one year or less

  $ 22,964     $ 22,987     $ 21,284     $ 21,312  

Due in greater than one year

    6,122       6,346       15,214       15,505  

Total

  $ 29,086     $ 29,333     $ 36,498     $ 36,817  

 

 
7

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

3.             Fair values of assets and liabilities

 

Fair value is defined as, “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).” The accounting standards establish a consistent framework for measuring fair value and disclosure requirements about fair value measurements and among other things, require us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

Fair value hierarchy

 

The accounting standards discuss valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

 

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

 

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our estimate of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.

 

Determination of fair value

 

Our cash equivalents and marketable securities are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The types of marketable securities valued based on quoted market prices in active markets include most U.S. government and agency securities, sovereign government obligations, money market securities and certain corporate obligations with high credit ratings and an ongoing trading market.

 

Our foreign currency derivative instruments were classified as Level 2 because they are valued using quoted prices and other observable data of similar instruments in active markets.

 

The tables below present the balances of our assets and liabilities measured at fair value on a recurring basis as of August 2, 2014 and February 1, 2014 (in thousands):  

  

   

August 2, 2014

 
   

Fair Value

   

Quoted Prices in Active Markets for Identical Assets (Level 1)

   

Significant Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

 

Corporate bonds

  $ 10,868     $ 10,868     $ -     $ -  

Money market funds

    17,159       17,159       -       -  

Fixed income mutual funds

    1,306       1,306       -       -  

Total cash equivalents and marketable securities

    29,333       29,333       -       -  

Restricted cash

    1,540       1,540       -       -  

Total assets measured at fair value

  $ 30,873     $ 30,873     $ -     $ -  

 

 
8

 

 

 SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

   

February 1, 2014

 
   

Fair Value

   

Quoted Prices in Active Markets for Identical Assets (Level 1)

   

Significant Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

 

Corporate bonds

  $ 21,494     $ 21,494     $ -     $ -  

Money market funds

    13,521       13,521       -       -  

Municipal bonds and notes

    508       508       -       -  

Fixed income mutual funds

    1,294       1,294       -       -  

Total cash equivalents and marketable securities

    36,817       36,817       -       -  

Restricted cash

    1,775       1,775       -       -  

Derivative instruments asset

    35       -       35       -  

Total assets measured at fair value

  $ 38,627     $ 38,592     $ 35     $ -  

 

Assets measured and recorded at fair value on a non-recurring basis

 

Our non-marketable preferred stock investments in privately-held venture capital funded technology companies are recorded at cost and are adjusted to fair value only in the event that they become other-than-temporarily impaired. As of August 2, 2014, we held equity investments in three privately-held venture capital funded technology companies and an equity investment in one joint venture, with an aggregate carrying value of $3.3 million. As of August 2, 2014, we did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments. Each of these equity investments in privately-held companies constituted less than a 20% ownership position. Furthermore, we do not believe that we have the ability to exert significant influence over any of these companies.

 

4.             Derivative financial instruments

  

Foreign exchange contracts are recognized either as assets or as liabilities on the balance sheet at fair value at the end of each reporting period.

 

We have used foreign currency derivatives such as forward and option contracts as hedges against certain anticipated transactions denominated in Israeli shekels, or NIS. We do not assess derivative contracts for hedge effectiveness and thus such contracts do not qualify for hedge accounting. Therefore, we recognize all gains and losses from changes in the fair value of these derivate contracts immediately into earnings. Changes in fair value of the derivatives are recorded as interest and other (expense) income.

 

As of August 2, 2014, we had no foreign exchange contracts.  As of February 1, 2014, we had foreign exchange contracts to sell up to approximately $0.9 million for a total amount of approximately NIS 3.3 million, that matured on April 28, 2014. We did not recognize any gains or losses as a result of foreign exchange contracts for the three months ended August 2, 2014 and recognized losses of $0.1 million for the six months ended August 2, 2014; and for the three and six months ended August 3, 2013, we recognized losses of approximately $0.3 million and $0.2 million, respectively, in interest and other income, net as a result of foreign exchange contracts.

 

The following table presents the fair value of our outstanding derivative instruments as of August 2, 2014 and February 1, 2014 (in thousands):

Derivative Assets

 

Balance Sheet Location

 

August 2,

2014

   

February 1,

2014

 

Foreign exchange contracts not designated as cash flow hedges

 

Prepaid expenses and other current assets

 

$

-

 

 

$

35

 

Total fair value of derivative instruments

   

 

$

-

 

 

$

35

 

 

 
9

 

 

SIGMA DESIGNS, INC.  

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  

5.             Investments in and notes receivable from privately held companies

 

The following table sets forth the value of investments in and notes receivable from privately-held companies (in thousands): 

 

Equity investments:

 

August 2, 2014

   

February 1, 2014

 

Issuer A

  $ 2,000     $ 2,000  

Issuer B

    1,000       1,000  

Issuer C

    129       730  

Issuer D

    142       143  

Total equity investments

    3,271       3,873  

Notes receivable:

               

Issuer A

    -       230  

Total notes receivable

    -       230  

Total equity investments and notes receivable

  $ 3,271     $ 4,103  

 

Equity investments

  

During fiscal 2009, we purchased shares of preferred stock in a privately-held venture capital funded technology company (“Issuer A”) at a total investment cost of $1.0 million. In the fourth quarter of fiscal 2010, we purchased additional shares of preferred stock in Issuer A at a cost of $1.0 million. During the quarter ended August 2, 2014, the remaining balance of the note receivable from Issuer A was fully repaid.

 

In the third quarter of fiscal 2011, we purchased shares of preferred stock in another privately-held technology company (“Issuer B”) at a total investment cost of $1.0 million.

 

In the fourth quarter of fiscal 2011, we purchased shares of preferred stock in another privately-held technology company (“Issuer C”) at a total investment cost of $1.0 million. In the fourth quarter of fiscal 2014 and the second quarter of fiscal 2015, we recorded impairment charges of $0.3 million and $0.6 million, respectively, on this investment as we concluded the impairment to be other-than-temporary.

  

In the third quarter of fiscal 2012, we made an equity investment of $0.1 million in a privately-held joint venture (“Issuer D”).

 

We made the above-described investments because we viewed the issuer as either having strategic technology or a business that would complement our technological capabilities or help create an opportunity for us to sell our chipset solutions. We analyze each investment quarterly for evidence of impairment.

 

Our President and Chief Executive Officer is a member of the Board of Directors of both our Issuer A and Issuer B investments. In the case of Issuer B, the investment transaction was negotiated without the personal involvement of the executive officer who had a personal interest in the transaction. 

 

 

 
10

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

6.             Composition of certain financial statement captions

 

The following tables summarize the main items comprising certain financial statement captions as of August 2, 2014 and February 1, 2014 (in thousands):  

 

Inventory

 

August 2,

2014

   

February 1,

2014

 

Wafers and other purchased materials

  $ 9,783     $ 10,079  

Work-in-process

    4,116       1,527  

Finished goods

    6,406       8,797  

Total inventory

  $ 20,305     $ 20,403  

 

 

Prepaid expenses and other current assets

 

August 2,

2014

   

February 1,

2014

 

Prepayments for inventory

  $ 1,680     $ 1,670  

Note receivable

    -       230  

Amounts due from seller related to DTV acquisition

    -       1,439  

Other current assets

    5,020       4,730  

Total prepaid expenses and other current assets

  $ 6,700     $ 8,069  

 

 

Software, equipment and leasehold improvements

 

 

Estimated Useful Lives

(years)

   

August 2, 2014

   

February 1, 2014

 

Software

 

 

2

   

 

$

38,613

 

 

$

38,563

 

Equipment

 

1

 to

5

 

 

 

21,883

 

 

 

21,147

 

Office equipment and furniture

 

 

2

   

 

 

8,831

 

 

 

8,806

 

Leasehold improvements

 

1

 to

6

 

 

 

3,150

 

 

 

3,149

 

Total

 

 

 

 

 

 

 

72,477

 

 

 

71,665

 

Less: Accumulated depreciation and amortization

 

 

 

 

 

 

 

(50,194

)

 

 

(44,576

)

Total software, equipment and leasehold improvements, net

 

 

 

 

 

 

$

22,283

 

 

$

27,089

 

 

Software, equipment and leasehold improvement depreciation and amortization expense for the three months ended August 2, 2014 and August 3, 2013 was $3.0 million and $2.1 million, respectively, and for the six months ended August 2, 2014 and August 3, 2013 was $6.1 million and $5.0 million, respectively.

 

Accrued liabilities:

 

August 2,

2014

   

February 1,

2014

 

Income taxes payable, current portion

  $ 3,988     $ 7,968  

Rebates

    3,903       3,587  

License fees

    2,174       1,929  

Warranties

    640       620  

Royalties

    629       985  

Deferred revenue

    270       3,001  

Settlements

    -       150  

Other accrued liabilities

    2,056       1,573  

Total accrued liabilities

  $ 13,660     $ 19,813  

 

 
11

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

7.             Intangible assets

 

The tables below present the balances of our intangible assets (in thousands, except for years):

 

   

August 2, 2014

 
   

Gross Value

   

Accumulated Impairment

Charges

   

Accumulated Amortization and Effect of Currency Translation

   

Net Value

   

Weighted Average Remaining Amortization Period (Years)

 

Acquired intangible assets:

                                       

Developed technology

  $ 76,639     $ (24,614

)

  $ (42,490

)

  $ 9,535       2.4  

Customer relationships

    50,704       (30,486

)

    (17,680

)

    2,538       2.2  

Trademarks and other

    4,078       -       (3,561

)

    517       4.4  

Purchased IP - amortizing

    22,998       (5,516

)

    (13,249

)

    4,233       1.3  

Total amortizing

    154,419       (60,616

)

    (76,980

)

    16,823       2.2  

Purchased IP - not yet deployed

    12,713       (3,469

)

    -       9,244          

Total intangibles

  $ 167,132     $ (64,085

)

  $ (76,980

)

  $ 26,067          

  

  

   

February 1, 2014

 
   

Gross Value

   

Accumulated Impairment

Charges

   

Accumulated Amortization and Effect of Currency Translation

   

Net Value

   

Weighted Average Remaining Amortization Period (Years)

 

Acquired intangible assets:

                                       

Developed technology

  $ 76,639     $ (24,614

)

  $ (40,334

)

  $ 11,691       2.9  

Customer relationships

    50,704       (30,486

)

    (17,048

)

    3,170       2.7  

Trademarks and other

    4,078       -       (3,502

)

    576       4.9  

Purchased IP - amortizing

    21,569       (5,516

)

    (11,464

)

    4,589       1.5  

Total amortizing

    152,990       (60,616

)

    (72,348

)

    20,026       2.6  

Purchased IP - not yet deployed

    12,770       (3,016

)

    -       9,754          

Total intangibles

  $ 165,760     $ (63,632

)

  $ (72,348

)

  $ 29,780          

  

Acquired intangible assets represent intangible assets acquired through business combinations. Purchased intellectual property (“Purchased IP”) represents intangible assets acquired through direct purchases of licensed technology from vendors which is incorporated into our products.

 

Purchased IP – not yet deployed relates to Purchased IP from third parties for our products that are currently in development. We begin amortizing such intellectual property upon the earlier of the beginning of the term of the license agreement, as appropriate, or at the time we begin shipment of the associated products into which such intellectual property is incorporated.

 

 
12

 

 

 SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table presents the amortization of intangible assets in the accompanying condensed consolidated statements of operations (in thousands):

   

Three Months Ended

   

Six Months Ended

 
   

August 2,

2014

   

August 3,

2013

   

August 2,

2014

   

August 3,

2013

 

Cost of sales

  $ 1,979     $ 2,264     $ 3,925     $ 4,591  

Operating expenses

    374       388       747       782  

Total intangibles amortization expense

  $ 2,353     $ 2,652     $ 4,672     $ 5,373  

  

As of August 2, 2014, we expect amortization expense in future periods to be as follows (in thousands):

 

Fiscal year

 

Total

 

2015 (remaining six months)

  $ 4,672  

2016

    7,289  

2017

    4,122  

2018

    636  

2019

    104  

Total

  $ 16,823  

 

 

8.          Restructuring costs

 

In fiscal 2013, as a result of significant expansion in our infrastructure and operational activities in connection with purchases and acquisitions that took place between fiscal years 2008 and 2013, and in response to certain redundancies, underperforming operations and delays in programs and product releases, we implemented a restructuring program to realign our global operating expenses with our new business conditions, and to improve efficiency, competitiveness and profitability. Costs relating to facilities closure or lease commitment are recognized when the facility has been exited. Terminations costs are recognized when the costs are deemed both probable and estimable.

 

In the first quarter of fiscal 2015, we incurred restructuring charges of $1.0 million, all of which was related to workforce reductions of 29 employees across several geographic regions, the majority of which were in our operations in Israel. Of the total restructuring charges recorded in the first fiscal quarter, approximately $0.1 million was reflected in cost of revenue and $0.9 million was reflected in operating expenses. During the second quarter of fiscal 2015, we incurred less than $0.1 million of restructuring charges.

 

In the first quarter of fiscal 2014, we incurred restructuring charges of $0.3 million, all of which was related to workforce reductions of 17 employees across several geographic regions. During the second quarter of fiscal 2014, we incurred net restructuring charges of approximately $0.5 million related to a contingent liability under our lease obligation in Canada and $0.2 million in severance-related charges that resulted from a workforce reduction of eight employees. The aforementioned charges were substantially all reflected in operating expenses for their respective periods.

 

Expenses recognized for restructuring activities impacting our operating expenses are included in “Restructuring costs” in the condensed consolidated statements of operations. Our restructuring measures could negatively impact our revenue and results of operations in the future as a result of less employees developing future products and working to sell existing products.

 

 
13

 

 

SIGMA DESIGNS, INC. 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

A combined summary of the recent activity of the restructuring plans initiated by us is as follows (in thousands):

 

   

Workforce

Reduction

   

Facility Exit

Costs

   

Total

   

Cumulative

Restructuring

Costs

 

Liability, February 2, 2013

  $ 1,014     $ 8     $ 1,022     $ 3,264  

Charges in fiscal 2014

    1,696       610       2,306       2,306  

Cash payments

    (2,347

)

    (616

)

    (2,963

)

    -  

Liability, February 1, 2014

    363       2       365       5,570  

Charges for the three months ended May 3, 2014

    1,025       -       1,025       1,025  

Cash payments

    (802

)

    (2

)

    (804

)

    -  

Liability, May 3, 2014

    586       -       586       6,595  

Charges for the three months ended August 2, 2014

    46       -       46       46  

Cash payments

    (386

)

    -       (386

)

    -  

Liability, August 2, 2014

  $ 246     $ -     $ 246     $ 6,641  

 

9.          Sale of development project

 

On March 8, 2013, we entered into an Asset Purchase Agreement with a third party (the “Buyer”) to sell certain development projects (intellectual property) and long-lived assets (the “Connectivity Assets”) related to the connectivity technology over coaxial cable market, including the transfer of 21 employees (the “Connectivity Employees”) to the Buyer. The aggregate carrying amount of the Connectivity Assets ultimately transferred was approximately $0.6 million and were classified as assets held for sale in prepaid expenses and other current assets in the condensed consolidated balance sheet at February 2, 2013. We received an initial payment of $2.0 million in cash at the closing of the transaction and a payroll expense reimbursement payment of $0.6 million (as described more fully below). Under the terms of the Asset Purchase Agreement, if certain technical milestones were met by September 30, 2013 as a result of further development of the transferred technology by the Buyer, we were to be paid an additional $5.0 million in cash.

 

In April 2013, upon receiving the closing consideration of $2.0 million, we recorded a gain of $1.1 million, net of the carrying value of the Connectivity Assets and fees for legal and bank services of approximately $0.4 million. The gain is included in “Gain on sale of development project” in the accompanying condensed consolidated statements of operations for the six months ended August 3, 2013. Additionally, in April 2013, in connection with the Asset Purchase Agreement, the Buyer reimbursed us for payroll expenses related to the employees transferred to the Buyer for the period from February 1, 2013 through the actual payroll transfer, totaling $0.6 million.

 

As the contingent consideration was uncertain at the time of the initial sale, we did not recognize the contingent payment. Accordingly, payment consideration, if and when it is determined that the milestone was met, will be recorded as other income in our consolidated statements of operations in its entirety. The technical milestones were due by September 30, 2013.

 

The Buyer advised us that it does not believe the milestones had been met by September 30, 2013. We are currently pursuing our rights through the dispute resolution provisions set forth in the Asset Purchase Agreement. To the extent we recognize any payment in regard to the milestone completion, we will recognize income upon receipt of any such proceeds from the Buyer. On September 5, 2014, the Buyer filed counterclaims in response to our claims arising from the Asset Purchase Agreement. We intend to contest these counterclaims vigorously and believe they are without merit.

 

 
14

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

10.          Commitments and contingencies

 

Commitments

 

Product warranty

 

In general, we sell products with up to a one-year limited warranty that our products will be free from defects in materials and workmanship.  Warranty cost is estimated at the time revenue is recognized based on historical activity, and additionally, for any specific known product warranty issues.  Accrued warranty cost includes hardware repair and/or replacement and is included in accrued liabilities on the accompanying condensed consolidated balance sheets.

 

Details of the change in accrued warranty as of August 2, 2014 and August 3, 2013 are as follows (in thousands):

 

Three Months Ended

 

Balance

Beginning of

Period

   

Additions and Adjustments

   

Deductions

   

Balance End

of Period

 

August 2, 2014

  $ 630     $ 117     $ (107

)

  $ 640  

August 3, 2013

  $ 1,050     $ 192     $ (202

)

  $ 1,040  

 

Six Months Ended

 

Balance

Beginning of

Period

   

Additions and Adjustments

   

Deductions

   

Balance End

of Period

 

August 2, 2014

  $ 620     $ 241     $ (221

)

  $ 640  

August 3, 2013

  $ 1,447     $ 38     $ (445

)

  $ 1,040  

 

Purchase commitments

 

We place non-cancelable orders to purchase semiconductor products from our suppliers on an eight to twelve week lead-time basis.  As of August 2, 2014, the total amount of outstanding non-cancelable purchase orders was approximately $39.3 million.

 

Design Tools

 

We entered into an agreement with a vendor to purchase $12.9 million of design tools. Payments under this agreement are being made on a quarterly basis from June 2013 through March 2016. As of August 2, 2014, remaining payments under this agreement totaled $9.5 million. We have fully accrued this amount as of August 2, 2014.

 

Indemnifications

 

In certain limited circumstances, we have agreed and may agree in the future to indemnify certain customers against patent infringement claims from third parties related to our intellectual property. In these limited circumstances, the terms and conditions of sale generally limit the scope of the available remedies to a variety of industry-standard methods including, but not limited to, a right to control the defense or settlement of any claim, procure the right for continued usage, and a right to replace or modify the infringing products to make them non-infringing. To date, we have not incurred or accrued any significant costs related to any claims under such indemnification provisions.

 

Our articles of incorporation and bylaws require that we indemnify our officers and directors against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to us. In addition, we have entered into separate indemnification agreements with each of our directors and executive officers, which provide for indemnification of these individuals under similar circumstances and under additional circumstances. The indemnification obligations are more fully described in our charter documents and the form of indemnification agreement filed with our SEC reports. We purchase insurance to cover claims or a portion of the claims made against our directors and officers. Since a maximum obligation is not explicitly stated in our charter documents or in our indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. The fair value of these obligations was zero on our consolidated balance sheet as of August 2, 2014. 

 

 
15

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Royalties

 

We pay royalties for the right to sell certain products under various license agreements. During the three and six months ended August 2, 2014, we recorded gross royalty expense of $0.5 million and $1.1 million, respectively, and $0.6 million and $1.1 million for the three and six months ended August 3, 2013, respectively, in cost of revenue in the condensed consolidated statements of operations.

 

Our wholly owned subsidiary, Sigma Designs Israel SDI Ltd. (formerly Coppergate Communications, Ltd.), participated in programs sponsored by the Office of the Chief Scientist of Israel's Ministry of Industry, Trade and Labor, or the OCS, for the support of research and development activities that we conducted in Israel. Through August 2, 2014, we had obtained grants from the OCS aggregating to $5.2 million of our research and development projects in Israel. We completed the most recent of these projects in 2013. We are obligated to pay royalties to the OCS, amounting up to 4.5% of the sales of certain products up to an amount equal to the grants received, plus LIBOR-based interest. As of August 2, 2014, our remaining potential obligation under these programs was approximately $1.1 million.

 

Contingencies

 

Litigation

 

From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. We expect that the number and significance of these matters will increase as our business expands. In particular, we could face an increasing number of patent and other intellectual property claims as the number of products and competitors in our industry grows. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources or cause us to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to us. If an unfavorable outcome were to occur against us, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs and, potentially, in future periods.

 

In March 2013, we filed a motion to intervene in (and become a party to) U.S. Ethernet Innovations, LLC (USEI) v. AT&T Mobility, LLC (“AT&T”) and others, Case No. 5-10-cv-05254 CW, currently pending in the U.S. District Court for the Northern District of California, or the Litigation. In this Litigation, USEI filed a patent infringement complaint alleging that various AT&T products infringe USEI patents that have now expired, including alleging that set-top boxes deployed by AT&T that contain our SoCs infringe a USEI patent. USEI has made similar allegations that other defendants infringe this and other now expired USEI patents in this Litigation and other related cases. Further, other interveners have already been added to this Litigation and other related cases. USEI seeks monetary damages, attorney’s fees, and an injunction against AT&T, other defendants and other interveners. AT&T, other defendants and other interveners have denied the allegations of infringement made by USEI and asserted that USEI’s patents are invalid, unenforceable, and not infringed. The Court granted our motion to intervene. As a result, we filed a declaratory judgment complaint. USEI answered this complaint and asserted counter-claims against us, for which we have responded. The parties have now completed fact discovery and have moved on to expert discovery. USEI attempted to expand the scope of claims to cover all of our semiconductors; however, the court approved our motion to limit the case to only those devices initially claimed in the original USEI filing. Case management hearings for this multi-party suit have resulted in the court entertaining separate sequential trials for the various interveners remaining in the case. Intel Corporation, as one intervener, has requested that it proceed first, which would set a precedent for all subsequent trials. The trial date currently set by the court for the first trial is January 5, 2015.

 

In February 2014, Mentor Graphics Corporation (“Mentor”) filed a complaint against us, Case No. 3-14-cv00742, in the U.S. District Court for the Northern District of California, for unspecified damages alleging copyright infringement, breach of contract, unjust enrichment, and a request for audit and accounting relating to a certain Reference Platform License Agreement for Embedded Software, dated March 28, 2008 (the “Mentor Agreement”) by and between Trident Microsystems, Inc. (“Trident”) and Mentor. The Mentor Agreement was assigned to us in connection with our acquisition of assets related to the DTV business of Trident. We have filed our answer to this complaint, denying the substantive allegations. No trial date has been set.

 

 
16

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Third-party licensed technology

 

We license technologies from various third parties and incorporate that technology into our products. Some of these licenses require us to pay royalties and others require us to report sales activities so that royalties may be collected from our customers. From time to time, we are audited by licensors of these technologies for compliance with the terms of these licenses. In the third quarter of fiscal 2013, we settled an audit for $0.3 million payable in four quarterly equal installments commencing in September 2012. Concurrently, we negotiated a license agreement for this technology for a period of three years for an amount of $3.5 million, also payable in four quarterly equal installments commencing in September 2012. The full amount of the license fees was recorded as purchased IP in fiscal 2013 and will be amortized over the license term. On February 28, 2013, we received a letter from another technology licensor notifying us of their intent to audit our compliance with the terms of a license agreement that we use in our set-top box business. In the first quarter of 2015, we resolved this audit through binding arbitration for $0.2 million in penalties, $0.1 million of which was included in the condensed consolidated statement of operations for the six months ended August 2, 2014.

 

We could be required to make additional payments as a result of pending or future compliance audits. For license agreements where we have royalty obligations, we charge any settlement payments that we make in connection with audits to cost of revenue. For license agreements where we simply have reporting obligations, we treat any settlement payments as penalties and charge the amounts to operating expenses in sales and marketing. During the quarter ended August 2, 2014, we have been notified by one of our licensors of their intent to audit for compliance with the terms of the license, for which the audit process has yet to commence. As of August 2, 2014, we believe we are in compliance with this and our other license agreements.

 

 

11.           Net loss per share

 

Basic and diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. The following table sets forth the excluded anti-dilutive and excluded potentially dilutive securities for the three and six months ended August 2, 2014 and August 3, 2013 (in thousands): 

 

 

   

Three Months Ended

   

Six Months Ended

 
   

August 2,

2014

   

August 3,

2013

   

August 2,

2014

   

August 3,

2013

 

Stock options excluded because exercise price is in excess of average stock price

    3,904       4,513       3,956       4,677  
                                 

Stock options excluded because the effect of including would be anti-dilutive

    7       18       8       21  
                                 

Restricted stock awards and units excluded because potential buyback shares exceed weighted average restricted stock units and awards outstanding

    375       457       316       501  
                                 

Restricted stock awards and units excluded because the effect of including would be anti-dilutive

    47       32       50       29  

 

 

 
17

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12.           Shareholders’ equity and employee benefits

 

Condensed consolidated statement of shareholders’ equity (amounts in thousands, except shares)

   

Common Stock

   

Treasury Stock

   

Accumulated Other

Comprehensive Income

                 
   

Shares

   

Amount

   

Shares

   

Amount

   

Unrealized Gain (Loss)

   

Accumulated Translation Adjustment

   

Retained Earnings (Accumulated Deficit)

   

Total Shareholders’ Equity

 

Balance, February 1, 2014

    39,083,961     $ 485,188       (4,659,143

)

  $ (88,198

)

  $ 149     $ 502     $ (239,250

)

  $ 158,391  

Unrealized loss on marketable securities

    -       -       -       -       (92

)

    -       -       (92

)

Currency translation adjustments

    -       -       -       -       -       (94

)

    -       (94

)

Stock-based compensation expense

    -       2,873       -       -       -       -       -       2,873  

Tax effect related to stock options

    (12,680

)

    1,242       -       -       -       -       -       1,242  

Net proceeds from common stock issued under share plans

    416,487       1,247       -       -       -       -       -       1,247  

Net loss

    -       -       -       -       -       -       (17,534

)

    (17,534

)

Balance, August 2, 2014

    39,487,768     $ 490,550       (4,659,143

)

  $ (88,198

)

  $ 57     $ 408     $ (256,784

)

  $ 146,033  

 

Endowment insurance pension plan

 

Related to our acquisition of our DTV business in May 2012, we added operations in Shanghai, China. It is required by the “Procedures of Shanghai Municipality on Endowment Insurance for Town Employees” to provide pension insurance for Shanghai employees. The plan is managed by the local authority and it is a mandatory plan. Under the current plan, the employee will contribute 8.0% of the annual base to the plan and the employer will match 21% of the annual base. For the three and six months ended August 2, 2014, we made matching contributions of $0.5 million and $1.0 million, respectively, and $0.4 million and $1.1 million for the three and six months ended August 3, 2013, respectively.

 

Retirement pension plans

 

We maintain retirement pension plans for the benefit of qualified employees in Denmark, Taiwan, the Netherlands, and Germany. For the three and six months ended August 2, 2014, we made matching contributions of $0.2 million and $0.5 million, respectively, and $0.2 million and $0.5 million for the three and six months ended August 3, 2013, respectively.

 

Severance plan

 

We maintain a severance plan for several Israeli employees pursuant to Israel's Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment. Upon termination of employment, employees are entitled to one month salary for each year of employment or portion thereof. As of August 2, 2014, we have an accrued severance liability of $1.4 million offset by $1.3 million of severance employee funds. 

 

 
18

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

13.           Income taxes

 
We recorded a provision for income taxes of $2.2 million and $3.1 million for the three months ended August 2, 2014 and August 3, 2013, respectively.  The provision for income taxes was $3.6 million and $5.3 million for the six months ended August 2, 2014 and August 3, 2013, respectively. The decrease in tax expense is primarily attributable to lower profitability in taxable jurisdictions in the first and second quarters of fiscal year 2015 as compared to the same periods in fiscal year 2014. During the three and six months ended August 2, 2014 and August 3, 2013, we were unable to reasonably project our annual effective tax rate, and therefore computed our provision for income taxes based on year-to-date actual financial results. Included in our provision for income taxes are foreign exchange gains or losses on unsettled income tax liabilities.

 

 

14.           Segment and geographical information

 

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.  We are organized as, and operate in, one reportable segment.  Our operating segment consists of our geographically based entities in the United States, Israel, and Singapore.  Our chief operating decision-maker reviews consolidated financial information, accompanied by information about revenue by product group, target market, and geographic region.  We do not assess the performance of our geographic regions on other measures of income, expense or net income.

 

We sell our products into four primary target markets, which are the DTV market, home networking market, set-top box market, and home control market. We also have license revenue, included in the license and other market, which we receive from the license of our technology to third parties.

 

The following tables set forth net revenue and gross profit attributable to each target market (in thousands): 

 

Three Months Ended

 

DTV

   

Home networking

   

Set-top box

   

Home control

   

License and other

   

Total

 

August 2, 2014

                                               

Revenue from external customers

  $ 10,033     $ 17,827     $ 5,528     $ 6,576     $ 2,846     $ 42,810  

Gross profit

  $ 3,652     $ 10,105     $ 2,406     $ 3,275     $ 2,451     $ 21,889  

August 3, 2013

                                               

Revenue from external customers

  $ 14,438     $ 19,557     $ 11,480     $ 5,849     $ 2,438     $ 53,762  

Gross profit

  $ 5,364     $ 11,107     $ 6,265     $ 3,059     $ 2,271     $ 28,066  

 

Six Months Ended

 

DTV

   

Home networking

   

Set-top box

   

Home control

   

License and other

   

Total

 

August 2, 2014

                                               

Revenue from external customers

  $ 16,097     $ 33,946     $ 11,217     $ 12,716     $ 5,707     $ 79,683  

Gross profit

  $ 6,523     $ 19,027     $ 5,121     $ 6,498     $ 4,945     $ 42,114  

August 3, 2013