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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 May 2, 2015

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 June 2, 2015, the Company had 35,498,649 shares of Common Stock outstanding.

 

 
1

 

  

SIGMA DESIGNS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED MAY 2, 2015

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I.

FINANCIAL INFORMATION

  

 

 

  

Item 1.

Unaudited Condensed Consolidated Financial Statements

  

 

 

  

 

Unaudited Condensed Consolidated Balance Sheets as of May 2, 2015 and January 31, 2015

3

     

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended May 2, 2015 and May 3, 2014

4

 

  

  

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended May 2, 2015 and May 3, 2014

4

 

 

  

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended May 2, 2015 and May 3, 2014

5

 

 

  

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

  

Item 2.

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

20

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

  

Item 4.

Controls and Procedures

30

 

 

  

PART II.

OTHER INFORMATION

  

 

 

  

Item 1.

Legal Proceedings

31

 

 

  

Item 1A.

Risk Factors

31

 

 

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

  

Item 3.

Defaults Upon Senior Securities

31

 

 

  

Item 4.

Mine Safety Disclosures

31

 

 

  

Item 5.

Other Information

31

 

 

  

Item 6.

Exhibits

32

 

 

  

Signatures

33

 

  

Exhibit index

33

  

 
2

 

 

PART I.                      FINANCIAL INFORMATION

 

ITEM 1.                      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

   

May 2, 2015

   

January 31, 2015

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 69,334     $ 83,502  

Short-term marketable securities

    8,448       6,347  

Restricted cash

    400       400  

Accounts receivable, net of allowances of $1,689 as of May 2, 2015 and $1,502 as of January 31, 2015

    31,562       26,415  

Inventory

    24,446       20,445  

Deferred tax assets

    3,386       3,319  

Prepaid expenses and other current assets

    9,110       8,805  

Total current assets

    146,686       149,233  
                 

Long-term marketable securities

    9,176       4,249  

Software, equipment and leasehold improvements, net

    20,612       21,594  

Intangible assets, net

    23,190       24,642  

Deferred tax assets, net of current portion

    587       687  

Long-term investments, net of current portion

    3,268       3,267  

Other non-current assets

    1,656       1,661  

Total assets

  $ 205,175     $ 205,333  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 23,094     $ 21,207  

Accrued compensation and related benefits

    7,952       6,806  

Accrued liabilities

    17,460       22,894  

Total current liabilities

    48,506       50,907  
                 

Income taxes payable

    8,037       7,573  

Long-term deferred tax liabilities

    635       741  

Other long-term liabilities

    2,521       2,822  

Total liabilities

    59,699       62,043  
                 

Commitments and contingencies (Note 9)

               
                 

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; 40,093,404 issued and 35,434,261 outstanding as of May 2, 2015 and 39,973,689 issued and 35,314,546 outstanding as of January 31, 2015

    496,149       493,550  

Treasury stock, at cost, 4,659,143 shares as of May 2, 2015 and January 31, 2015

    (88,198

)

    (88,198

)

Accumulated other comprehensive loss

    (1,142

)

    (1,111

)

Accumulated deficit

    (261,333

)

    (260,951

)

Total shareholders equity

    145,476       143,290  

Total liabilities and shareholders equity

  $ 205,175     $ 205,333  

 

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

 
   

May 2, 2015

   

May 3, 2014

 
                 

Net revenue

  $ 55,912     $ 36,873  

Cost of revenue

    26,564       16,648  

Gross profit

    29,348       20,225  

Operating expenses

               

Research and development

    16,313       17,103  

Sales and marketing

    5,811       5,450  

General and administrative

    5,772       5,031  

Restructuring costs

    9       974  

Impairment of IP, mask sets and design tools

    33       110  

Total operating expenses

    27,938       28,668  

Income (loss) from operations

    1,410       (8,443

)

Interest and other income (expense), net

    671       (52

)

Income (loss) before income taxes

    2,081       (8,495

)

Provision for income taxes

    2,463       1,419  

Net loss

  $ (382

)

  $ (9,914

)

Net loss per common share:

               

Basic

  $ (0.01

)

  $ (0.29

)

Diluted

  $ (0.01

)

  $ (0.29

)

Shares used in computing net loss per share:

               

Basic

    35,395       34,367  

Diluted

    35,395       34,367  

  

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

  

   

Three Months Ended

 
   

May 2, 2015

   

May 3, 2014

 
                 

Net loss

  $ (382

)

  $ (9,914

)

                 

Other comprehensive (loss) income:

               

Currency translation adjustments, net of $0 tax during the three months ended May 2, 2015 and May 3, 2014

    (12

)

    208  

Unrealized (losses) gains on marketable securities, net of $0 tax during the three months ended May 2, 2015 and May 3, 2014

    (19

)

    46  

Other comprehensive (loss) income

    (31

)

    254  
                 

Comprehensive loss

  $ (413

)

  $ (9,660

)

 

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

  

 
4

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) 

  

   

Three Months Ended

 
   

May 2, 2015

   

May 3, 2014

 

Cash flows from operating activities

               

Net loss

  $ (382

)

  $ (9,914

)

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    5,294       5,412  

Stock-based compensation

    1,734       1,488  

Provision for excess and obsolete inventory

    1,071       364  

Provision for (recovery of) sales returns, discounts and doubtful accounts

    187       (105

)

Deferred income taxes

    (73

)

    57  

Impairment of IP, mask sets and design tools

    33       110  

Tax effect related to share awards

    (712

)

    (620

)

Excess tax expense from stock-based compensation

    712       620  

Other non-cash activities

    32       -  

Changes in operating assets and liabilities:

               

Accounts receivable

    (5,335

)

    3,976  

Inventory

    (5,071

)

    566  

Prepaid expenses and other current assets

    (315

)

    838  

Other non-current assets

    4       3  

Accounts payable

    2,201       (4,389

)

Accrued liabilities, compensation and related benefits

    (807

)

    662  

Income taxes payable

    (3,363

)

    (2,939

)

Other long-term liabilities

    114       (2,414

)

Net cash used in operating activities

    (4,676

)

    (6,285

)

Cash flows from investing activities

               

Restricted cash

    -       235  

Purchases of marketable securities

    (7,113

)

    -  

Sales and maturities of marketable securities

    66       6,558  

Purchases of software, equipment and leasehold improvements

    (1,673

)

    (818

)

Purchases of IP

    (1,576

)

    (1,319

)

Repayment of note receivable

    -       60  

Net cash (used in) provided by investing activities

    (10,296

)

    4,716  

Cash flows from financing activities

               

Excess tax benefit from stock-based compensation

    712       620  

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

    153       1  

Net cash provided by financing activities

    865       621  

Effect of foreign exchange rate changes on cash and cash equivalents

    (61

)

    53  

Net decrease in cash and cash equivalents

    (14,168

)

    (895

)

Cash and cash equivalents, beginning of period

    83,502       64,326  

Cash and cash equivalents, end of period

  $ 69,334     $ 63,431  
                 

Supplemental disclosure of cash flow information

               

Cash paid for income taxes

  $ 5,120     $ 3,694  

   

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 provider of intelligent media platforms for use in the home entertainment and control markets.  We focus on integrated semiconductor solutions that serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes, and consumer electronics sold in the Internet of Things Devices (“IoT Devices”) and Media Connectivity markets. A majority 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 target markets which are the Smart TV, Set-top Box, Media Connectivity and IoT Devices markets. 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 first quarter of fiscal 2016 and fiscal 2015 ended on May 2, 2015 (91 days) and May 3, 2014 (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 January 31, 2015, included in our fiscal 2015 Annual Report on Form 10-K, as filed with the SEC on April 15, 2015, referred to as our fiscal 2015 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 May 2, 2015 and January 31, 2015, the consolidated results of our operations for the three months ended May 2, 2015 and May 3, 2014, and the consolidated cash flows for the three months ended May 2, 2015 and May 3, 2014.  The results of operations for the three months ended May 2, 2015 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 three months ended May 3, 2015, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended January 31, 2015. 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 2015 Annual Report.

 

Recent accounting pronouncements

 

Recent accounting pronouncements expected to impact our operations that are not yet effective are summarized as follows:

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the Company beginning in the first quarter of 2016 with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. The FASB recently announced plans to defer the effective adoption date by one year. Based on the aforementioned deferral, ASU 2014-09 will be effective for us beginning in its first quarter of fiscal 2019. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.

 

 

 
6

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.             Cash, cash equivalents and marketable securities

 

As of May 2, 2015 and January 31, 2015, we had $0.4 million of restricted cash related to an office-space operating lease and other transactions, which is not included in the amounts below. Cash, cash equivalents and marketable securities consist of the following (in thousands):

 

   

May 2, 2015

   

January 31, 2015

 
   

Book Value

   

Net

Unrealized

Gains

(Losses)

   

Fair Value

   

Book Value

   

Net

Unrealized

Gains

(Losses)

   

Fair Value

 

Corporate bonds

  $ 16,203     $ 134     $ 16,337     $ 9,130     $ 153     $ 9,283  

Money market funds

    215       -       215       7,650       -       7,650  

Fixed income mutual funds

    1,281       6       1,287       1,324       (11

)

    1,313  

Total cash equivalents and marketable securities

  $ 17,699     $ 140     $ 17,839     $ 18,104     $ 142     $ 18,246  
                                                 
                                                 

Cash on hand held in the United States

                    16,339                       12,042  

Cash on hand held overseas

                    52,780                       63,810  

Total cash on hand

                    69,119                       75,852  

Total cash, cash equivalents and marketable securities

                  $ 86,958                     $ 94,098  
                                                 

Reported as:

                                               

Cash and cash equivalents

                  $ 69,334                     $ 83,502  

Short-term marketable securities

                    8,448                       6,347  

Long-term marketable securities

                    9,176                       4,249  
                    $ 86,958                     $ 94,098  

 

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

 

   

May 2, 2015

   

January 31, 2015

 
   

Book Value

   

Fair Value

   

Book Value

   

Fair Value

 

Due in one year or less

  $ 8,600     $ 8,663     $ 13,995     $ 13,997  

Due in greater than one year

    9,099       9,176       4,109       4,249  

Total

  $ 17,699     $ 17,839     $ 18,104     $ 18,246  

 

 

 
7

 

 

  SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 the 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.

  

The tables below present the balances of our assets and liabilities measured at fair value on a recurring basis as of May 2, 2015 and January 31, 2015 (in thousands):

  

   

May 2, 2015

 
   

Fair Value

   

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

   

Significant

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

Corporate bonds

  $ 16,337     $ 16,337     $ -     $ -  

Money market funds

    215       215       -       -  

Fixed income mutual funds

    1,287       1,287       -       -  

Total cash equivalents and marketable securities

    17,839       17,839       -       -  

Restricted cash

    400       400       -       -  

Total assets measured at fair value

  $ 18,239     $ 18,239     $ -     $ -  

 

  

 
8

 

 

  SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

   

January 31, 2015

 
   

Fair Value

   

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

   

Significant

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

 (Level 3)

 

Corporate bonds

  $ 9,283     $ 9,283     $ -     $ -  

Money market funds

    7,650       7,650       -       -  

Fixed income mutual funds

    1,313       1,313       -       -  

Total cash equivalents and marketable securities

    18,246       18,246       -       -  

Restricted cash

    400       400       -       -  

Total assets measured at fair value

  $ 18,646     $ 18,646     $ -     $ -  

 

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 May 2, 2015, 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. 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 during the three months ended May 2, 2015 and May 3, 2014. 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.             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:

 

May 2, 2015

   

January 31, 2015

 

Issuer A

  $ 2,000     $ 2,000  

Issuer B

    1,000       1,000  

Issuer C

    129       129  

Issuer D

    139       138  

Total equity investments

  $ 3,268     $ 3,267  

 

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. In November 2010, we loaned $1.0 million to Issuer A and received a secured promissory note. During the second quarter of fiscal 2015, 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”).

  

 

 
9

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

  

We made the aforementioned 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 Issuer A and Issuer B. 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. 

 

5.             Supplemental financial information

 

Inventory consists of the following (in thousands):

 

   

May 2, 2015

   

January 31, 2015

 

Wafers and other purchased materials

  $ 11,034     $ 8,420  

Work-in-process

    5,483       3,045  

Finished goods

    7,929       8,980  

Total inventory

  $ 24,446     $ 20,445  

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

   

May 2, 2015

   

January 31, 2015

 

Deposits

  $ 3,224     $ 3,124  

Prepayments for inventory

    1,585       1,670  

Prepayments for royalties

    762       659  

R&D credit receivable

    618       583  

Other current assets

    2,921       2,769  

Total prepaid expenses and other current assets

  $ 9,110     $ 8,805  

 

Software, equipment and leasehold improvements consist of the following (in thousands):

 

   

Estimated Useful Lives

(years)

   

May 2, 2015

   

January 31, 2015

 

Software

            2             $ 41,064     $ 41,069  

Equipment

    1       -       5       23,547       22,168  

Office equipment and furniture

            2               8,944       8,693  

Leasehold improvements

    1       -       6       2,957       2,874  

Total

                            76,512       74,804  

Less: Accumulated depreciation and amortization

                            (55,900

)

    (53,210

)

Total software, equipment and leasehold improvements, net

                          $ 20,612     $ 21,594  

 

Software, equipment and leasehold improvement depreciation and amortization expense for the three months ended May 2, 2015 and May 3, 2014 was $2.9 million and $3.1 million, respectively. We recorded an impairment charge for design tools associated with discontinued products for the three months ended May 2, 2015 and May 3, 2014 of less than $0.1 million and $0.1 million, respectively, which was recorded in operating expenses in the accompanying condensed consolidated statement of operations.

 

 Accrued liabilities consist of the following (in thousands):

 

   

May 2, 2015

   

January 31, 2015

 

Rebates

  $ 7,142     $ 9,599  

License fees

    4,702       4,286  

Income taxes payable, current portion

    1,499       5,326  

Royalties

    1,235       880  

Warranties

    861       864  

Deferred revenue

    366       372  

Other accrued liabilities

    1,655       1,567  

Total accrued liabilities

  $ 17,460     $ 22,894  

 

 

 
10

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

  

The following table summarizes activity related to accrued rebates (in thousands):

 

   

Three Months Ended

 
   

May 2, 2015

   

May 3, 2014

 
                 

Beginning balance

  $ 9,599     $ 3,587  

Charged as a reduction of revenue

    4,120       2,733  

Reversal of unclaimed rebates

    (807

)

    -  

Payments

    (5,770

)

    (3,479

)

Ending balance

  $ 7,142     $ 2,841  

 

6.             Intangible assets

 

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

 

   

May 2, 2015

 
   

Gross Value

   

Impairment

   

Accumulated

Amortization

and Effect of

Currency

Translation

   

Net Value

   

Weighted

Average

Remaining

Amortization

Period

(Years)

 

Acquired intangible assets:

                                       

Developed technology

  $ 76,628     $ (24,614

)

  $ (45,666

)

  $ 6,348       1.8  

Customer relationships

    50,704       (30,486

)

    (18,593

)

    1,625       1.5  

Trademarks and other

    5,478       -       (5,051

)

    427       3.7  

Purchased IP - amortizing

    23,442       (5,516

)

    (16,125

)

    1,801       1.0  

Total amortizing

    156,252       (60,616

)

    (85,435

)

    10,201       1.7  

Purchased IP - not yet deployed

    16,716       (3,727

)

    -       12,989          

Total intangibles

  $ 172,968     $ (64,343

)

  $ (85,435

)

  $ 23,190          

   

   

January 31, 2015

 
   

Gross Value

   

Impairment

   

Accumulated

Amortization

and Effect of

Currency

Translation

   

Net Value

   

Weighted

Average

Remaining

Amortization

Period

(Years)

 

Acquired intangible assets:

                                       

Developed technology

  $ 76,628     $ (24,614

)

  $ (44,604

)

  $ 7,410       2.0  

Customer relationships

    50,704       (30,486

)

    (18,313

)

    1,905       1.7  

Trademarks and other

    4,078       -       (3,621

)

    457       3.9  

Purchased IP - amortizing

    23,398       (5,516

)

    (15,162

)

    2,720       1.0  

Total amortizing

    154,808       (60,616

)

    (81,700

)

    12,492       1.8  

Purchased IP - not yet deployed

    15,877       (3,727

)

    -       12,150          

Total intangibles

  $ 170,685     $ (64,343

)

  $ (81,700

)

  $ 24,642          

  

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.

 

 

 
11

 

 

 SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

   

Three Months Ended

 
   

May 2, 2015

   

May 3, 2014

 

Cost of revenue

  $ 2,006     $ 1,946  

Operating expenses

    353       354  

Total intangibles amortization expense

  $ 2,359     $ 2,300  

  

As of May 2, 2015, we expect amortization expense in future periods to be as follows (in thousands):

 

Fiscal year

 

Total

 

2016 (remaining nine months)

  $ 5,135  

2017

    4,253  

2018

    710  

2019

    103  

Total

  $ 10,201  

  

7.          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. Termination costs are recognized when the costs are deemed both probable and estimable and after notification to impacted employees has occurred.

 

During the quarter ended May 2, 2015, we incurred restructuring charges of less than $0.1 million, substantially all of which was related to facility exit cost adjustments, which was reflected in operating expenses.

 

During the quarter ended May 3, 2014, as part of our continuing efforts to reduce expenses, 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 ended May 3, 2014, less than $0.1 million was reflected in cost of revenue and $1.0 million was reflected in operating expenses.

 

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 our products.

 

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

 

   

Workforce

Reduction

   

Asset

Impairment

   

Facility

Exit

Costs

   

Total

   

Cumulative

Restructuring

Costs

 

Liability, February 1, 2014

  $ 363     $ -     $ 2     $ 365     $ 5,570  

Charges in fiscal 2015

    1,083       -       (20

)

    1,063       1,063  

Cash payments

    (1,382

)

    -       8       (1,374

)

    -  

Non-cash items

    38       -       10       48       -  

Liability, January 31, 2015

    102       -       -       102       6,633  

Charges for the three months ended May 2, 2015

    3       -       6       9       9  

Cash payments

    (3

)

    -       (7

)

    (10

)

    -  

Non-cash items

    -               1       1       -  

Balance at May 2, 2015

  $ 102     $ -     $ -     $ 102     $ 6,642  

 

 

 
12

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.          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 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 consolidated statements of operations for fiscal 2014. 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 finally determined that the milestones were met, will be recorded as other income in our consolidated statements of operations in its entirety.

 

The Buyer advised us that it does not believe the milestones had been met by the deadline of September 30, 2013. On May 19, 2014, the parties amended the Asset Purchase Agreement to require the use of Judicial Arbitration and Mediations Services (“JAMS”) for arbitration to settle the dispute between the parties. We are currently pursuing our rights to the milestone consideration payment through the alternative dispute resolution provisions set forth in the amendment. 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. A tentative date for an arbitration hearing has been set. We intend to contest these counterclaims vigorously and believe they are without merit.

  

9.          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 in the accompanying condensed consolidated balance sheets.

 

Details of the change in accrued warranty as of May 2, 2015 and May 3, 2014 are as follows (in thousands):

 

Three Months Ended

 

Balance

Beginning of

Period

   

Additions

and

Adjustments

   

Deductions

   

Balance

End

of Period

 

May 2, 2015

  $ 864     $ 140     $ (143

)

  $ 861  

May 3, 2014

  $ 620     $ 125     $ (115

)

  $ 630  

 

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 May 2, 2015, the total amount of outstanding non-cancelable purchase orders was approximately $29.1 million.

 

 

 
13

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 May 2, 2015, the remaining payments under this agreement totaled $5.4 million. In addition to this agreement, we have entered into other purchase arrangements for certain design tools which totaled $2.9 million. Payments under these arrangements are being made through fiscal 2017. We have fully accrued these amounts as of May 2, 2015.

 

Royalties

 

We pay royalties for the right to sell certain products under various license agreements. During the three months ended May 2, 2015 and May 3, 2014, we recorded gross royalty expense of $0.8 million and $0.6 million, 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 May 2, 2015, 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 May 2, 2015, 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.

 

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. 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. The Buyer advised us that it does not believe the milestones had been met by September 30, 2013. On May 19, 2014, the parties amended the Asset Purchase Agreement to require the use of JAMS for arbitration to settle the dispute between the parties. We are currently pursuing our rights to the milestone consideration payment through the alternative dispute resolution provisions set forth in the amendment. On September 5, 2014, the Buyer filed counterclaims in response to our claims arising from the Asset Purchase Agreement. A tentative date for an arbitration hearing has been set. We intend to contest these counterclaims vigorously and believe they are without merit. For further discussion, refer to Note 8 to the accompanying condensed consolidated financial statements.

 

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.

 

 

 
14

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 condensed consolidated balance sheet as of May 2, 2015. 

 

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 first quarter of fiscal 2015, we settled an audit through binding arbitration relating to a license agreement used in our Set-top Box business for $0.2 million, $0.1 million of which was incurred during the three months ending May 3, 2014 and was included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.

 

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 second quarter of fiscal 2015, we were notified by one of our licensors of their intent to audit for compliance with the terms of the license. As of May 22, 2015, the audit process has been completed for which the licensor subsequently remitted preliminary information to us indicating the potential for additional payments may be required. We are currently assessing the audit findings along with the licensor pending any affirmative conclusions reached from either party. We believe we are substantially in compliance with the terms of our licensing arrangements.

 

10.           Earnings per share

 

Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the fiscal period. Diluted loss per share for the three months ended May 2, 2015 and May 3, 2014 is the same as basic loss per share as there is a net loss in both periods and inclusion of potentially issuable shares is anti-dilutive.

 

The following table sets forth the basic and diluted net loss per share computed for the three months ended May 2, 2015 and May 3, 2014 (in thousands, except per share amounts):

  

   

Three Months Ended

 
   

May 2, 2015

   

May 3, 2014

 

Numerator:

               

Net loss, as reported

  $ (382

)

  $ (9,914

)

Denominator:

               

Weighted-average common shares outstanding - basic

    35,395       34,367  

Dilutive effect of employee stock plans

    -       -  

Weighted-average common shares outstanding - diluted

    35,395       34,367  

Net loss per share - basic

  $ (0.01

)

  $ (0.29

)

Net loss per share - diluted

  $ (0.01

)

  $ (0.29

)

 

 

 
15

 

 

 SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The weighted-average number of shares outstanding used in the computation of basic and diluted loss per share does not include the effect of the following potential outstanding shares of common stock. The effects of these potentially outstanding shares were not included in the calculation of basic and diluted loss per share because the effect would have been anti-dilutive (in thousands):

 

   

Three Months Ended

 
   

May 2, 2015

   

May 3, 2014

 

Stock options

    2,963       4,019  

Restricted stock units and awards

    743       385  

 

11.           Shareholders’ equity and employee benefits

 

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

   

Common Stock

   

Treasury Stock

   

Accumulated Other

Comprehensive Loss

                   
   

Shares

   

Amount

   

Shares

   

Amount

   

Unrealized

Loss

   

Accumulated

Translation

Adjustment

   

Accumulated

Deficit

   

Total

Shareholders’

Equity

   

Balance, January 31, 2015

    39,973,689     $ 493,550       (4,659,143

)

  $ (88,198

)

  $ (27

)

  $ (1,084

)

  $ (260,951

)

  $ 143,290    

Unrealized loss on marketable securities

    -       -       -       -       (19

)

    -       -       (19

)

Currency translation adjustments

    -       -       -       -       -       (12

)

    -       (12

)

Stock-based compensation expense

    -       1,734       -       -       -       -       -       1,734    

Tax effect related to share awards

    -       712       -       -       -       -       -       712    

Net proceeds from common stock issued under share plans

    119,715       153       -       -       -       -       -       153    

Net loss

    -       -       -       -       -       -       (382

)

    (382

)

Balance, May 2, 2015

    40,093,404     $ 496,149       (4,659,143

)

  $ (88,198

)

  $ (46

)

  $ (1,096

)

  $ (261,333

)

  $ 145,476    

 

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 mandatory plan is managed by the local authority.  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 calendar year 2015, the annual base is capped at RMB 16,353 per employee. We made matching contributions of $0.5 million for each of the three months ended May 2, 2015 and May 3, 2014.

 

Retirement pension plans

 

We maintain retirement pension plans for the benefit of qualified employees in Denmark, Taiwan, the Netherlands, and Germany. We made matching contributions of $0.2 million for each of the three months ended May 2, 2015 and May 3, 2014.

 

 

 
16

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 a portion thereof.  As of May 2, 2015, we have an accrued severance liability of $0.7 million offset by $0.7 million of severance employee funds.

 

Employee Stock Purchase Plan

 

During the first quarter of fiscal 2016, we discovered that we inadvertently sold shares of our common stock to our employees during fiscal 2015 in excess of the shares of common stock authorized to be issued under our 2010 Purchase Plan. As a result, we may have failed to comply with the registration or qualification requirements of federal securities laws. Certain purchasers of the shares that were issued in excess of the shares authorized under our 2010 Purchase Plan may have the right to rescind their purchases from us for an amount equal to the purchase price paid for shares, plus interest from the date of purchase. These shares were treated as issued and outstanding for financial reporting purposes as of the original date of issuance. We intend to make a registered rescission offer during fiscal 2016 to eligible participants who purchased shares in the last twelve months.

 

As of March 24, 2015, there were approximately 102,078 shares issued to participants in the 2010 Purchase Plan in the past twelve months that continued to be held by the original purchasers of such shares which may be subject to the rescission rights referenced above. All of these shares were originally purchased for $3.89 per share. If holders of all these shares seek to rescind their purchases, we could be required to make aggregate payments of up to approximately $0.4 million, which does not include statutory interest. However, the actual impact to our cash position may be lower depending on the number of holders who accept the rescission offer and tender their shares. Pursuant to the authoritative accounting guidance, the shares are considered mandatorily redeemable as the redemption may be outside of our control. The aforementioned amount is included in accrued compensation and related benefits in the accompanying condensed consolidated balance sheets. The shares subject to repurchase are included in permanent equity as of January 31, 2015 as these shares are legally outstanding with all rights and privileges therein. We also may be subject to civil and other penalties by regulatory authorities as a result of the failure to register these shares with the Securities and Exchange Commission. We do not believe that the failure to register the shares or the planned rescission offer will have a material impact on our condensed consolidated financial statements.

 

We are also evaluating the potential impact to our employees, including potential tax consequences, for issuing shares in excess of the number of shares reserved under our 2010 Purchase Plan. We may incur additional costs associated with any potential tax consequences and during the fourth quarter of fiscal 2015, we accrued $0.4 million of expense associated with these additional costs which were recorded in accrued compensation and related benefits in the accompanying condensed consolidated balance sheets.

 

12.           Income taxes

 

We recorded a provision for income taxes of $2.5 million and $1.4 million for the three months ended May 2, 2015 and May 3, 2014, respectively.  The increase in tax expense is primarily attributable to higher profitability in taxable jurisdictions in the first quarter of fiscal year 2016 as compared to the same period in fiscal year 2015 and changes in tax reserves. During the three months ended May 2, 2015 and May 3, 2014, 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.

 

 

 
17

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

13.           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.

 

Our net revenue is derived principally from the sales of integrated semiconductor solutions, which we sell across all of our target markets. Smart TV products consist of a range of platforms that are based on highly integrated chips, embedded software, and hardware reference designs. Media Connectivity products consist of wired home networking controller chipsets that are designed to provide connectivity solutions between various home entertainment products and incoming video streams. Set-top Box products consist of connected media processors and players delivering IP streaming video, including hybrid versions of these products. IoT Devices consist of our wireless Z-Wave chipsets and modules.

 

Our License and other markets include revenue derived from the licensing of our technology to third parties and other sources. Revenue derived from other sources includes software development kits, engineering support services for hardware and software, and engineering development for customization of chipsets and other accessories. Revenue derived from licensing of our technology represented zero and 6.5% of our total net revenue for the three months ended May 2, 2015 and May 3, 2014, respectively.

 

Historically, we disclosed information encompassing product groupings by target markets with certain naming conventions, consisting of Digital Television (“DTV”), Set-top Box, Home Networking, Home Control, and License and other. Effective in the fourth quarter of fiscal 2015, we changed the naming conventions of some of our target markets, commensurate with changes taking effect in our industry as a whole. We renamed our “DTV” target market to “Smart TV,” “Home Networking” to “Media Connectivity,” and “Home Control” to “IoT Devices.” These changes did not affect the products or related services categorization, or previously reported amounts related to the aforementioned historical target markets.

 

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

 

   

Three Months Ended

 
   

May 2, 2015

   

May 3, 2014

 
                 

Smart TV

  $ 21,476     $ 6,063  

Media Connectivity

    15,117       16,120  

IoT Devices

    12,457       6,140  

Set-top Box

    6,556       5,689  

License and other

    306       2,861  

Net revenue

  $ 55,912     $ 36,873  

 

The following table sets forth net revenue for each geographic region based on the ship-to location of customers (in thousands):

  

   

Three Months Ended

 
   

May 2, 2015

   

May 3, 2014

 

Asia

  $ 39,669     $ 29,246  

North America

    12,153       4,336  

Europe

    2,765       2,302  

Other Regions

    1,325       989  

Net revenue

  $ 55,912     $ 36,873  

 

 

 
18

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following table sets forth net revenue to each significant country based on the ship-to location of customers (in thousands):

 

   

Three Months Ended

 
   

May 2, 2015

   

May 3, 2014

 
                 

China, including Hong Kong

  $ 22,177     $ 15,889  

United States

    12,146       4,276  

Taiwan

    8,919       4,248  

Thailand

    4,985       6,018  

Rest of the world

    7,685       6,442  

Net revenue

  $ 55,912     $ 36,873  

 

During the three months ended May 2, 2015, Sunjet Components Corporation accounted for 12% of our net revenue. During the three months ended May 3, 2014, Benchmark Electronics accounted for 11% of our net revenue.

 

As of May 2, 2015, Nanning Fugui Precision and Digi-Key Corporation accounted for approximately 15% and 10% of net accounts receivable, respectively. As of May 3, 2014, Benchmark Electronics and Nanning Fugui Precision accounted for approximately 19% and 13% of net accounts receivable, respectively. 

 

 

 
19

 

 

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

  

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes in this Form 10-Q.  Except for historical information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "predict," "potential," "plan," or the negative of these terms, and similar expressions intended to identify forward-looking statements.  These forward-looking statements, include, but are not limited to, statements about our capital resources and needs, including the adequacy of our current cash reserves, the expectation that our revenue from the IoT Devices market will continue to increase in the foreseeable future, anticipated deployments and design wins in the Set-top Box market, anticipated seasonality associated with our Smart TV market, our expectations that our gross margin will vary from period to period and anticipated payments or expectations related to possible share rescissions.  These forward-looking statements involve risks and uncertainties.  Our actual results may differ significantly from those projected in the forward-looking statements.  Factors that might cause future results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those discussed under Part II, Item 1A “Risk Factors” in this Form 10-Q as well as other information found in the documents we file from time to time with the Securities and Exchange Commission.  Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q.  Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

 

Overview

 

We are a global integrated semiconductor solutions provider offering intelligent media platforms for use in the home entertainment and home control markets. Our goal is to ensure that our chipsets serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes, media connectivity and home control products. Our business generates revenue primarily by delivery of relevant, cost-effective semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We also derive a portion of our revenue from other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

 

Our chipset products and target markets

 

We consider all of our semiconductor products to be chipsets because each of our products is comprised of multiple semiconductors.  We believe our chipsets enable our customers to efficiently bring consumer multimedia devices to market.  We design our highly integrated products to significantly improve performance, lower power consumption and reduce cost.

 

We sell our products into four primary or target markets: (i) Smart TV, (ii) Media Connectivity, (iii) Set-top Box and (iv) Internet of Things (“IoT”) Devices. Smart TV products consist of a range of platforms that are based on highly integrated chips, embedded software, and hardware reference designs. Media Connectivity products consist of wired home networking controller chipsets that are designed to provide connectivity solutions between various home entertainment products and incoming video streams. Set-top Box products consist of connected media processors and players delivering IP streaming video, including hybrid versions of these products. IoT Devices consist of our wireless Z-Wave chipsets and modules.

 

Historically, we disclosed information encompassing product groupings by target markets with certain naming conventions, consisting of Digital Television (“DTV”), Set-top Box, Home Networking, Home Control, and License and other. Effective in the fourth quarter of fiscal 2015, we changed the naming conventions of some of our target markets, commensurate with changes taking effect in our industry as a whole. We renamed our “DTV” target market to “Smart TV,” “Home Networking” to “Media Connectivity,” and “Home Control” to “IoT Devices.” These changes did not affect the products or related services categorization, or previously reported amounts related to the aforementioned historical target markets.

 

 

 
20

 

 

Smart TV Market

 

The Smart TV market (previously referred to as our DTV market) consists of all products that are sold into digital televisions as well as other adjacent markets using chipset products that are designed for video post-processing. We believe Smart TV products complement our existing Set-top Box products, which will provide substantial research and development leverage and improved operating scale to augment our ability to develop innovative solutions for the anticipated convergence of IP-video delivery across any device within the connected home. Furthermore, our early entry into the emerging ultra-high definition (“UHD,” “Ultra-HD” or “4K”) television market has provided a differential opportunity for us to penetrate key customers for high-end products, which will eventually become mainstream over time. We serve this market with our media processor chips and dedicated post-processing products.

 

Set-top Box Market

 

The Set-top Box target market consists of all Set-top Box products delivering IP streaming video, including hybrid versions of these products.  We serve this market primarily with our media processor products.

 

Media Connectivity Market

 

The Media Connectivity market consists of communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP, or data through wired or wireless connectivity. We serve the Media Connectivity market with our wired home networking controllers that are designed to provide the most reliable connectivity solutions between various home entertainment products and incoming video streams.

 

Internet of Things (“IoT”) Devices Market

 

The IoT Devices market consists of all interconnected Z-Wave enabled gateways, appliances and devices that provide monitoring and control capabilities for the management of any consumer ecosystem. Our IoT Devices product line consists of our wireless Z-Wave chips, modules and Z-Wave mesh networking protocol.

 

License and Other Markets

 

The license and other markets includes other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

 

Restructuring program

 

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. Termination costs are recognized when the costs are deemed both probable and estimable and after notification to impacted employees has occurred.

 

During the quarter ended May 2, 2015, we incurred restructuring charges of less than $0.1 million, substantially all of which was related to facility exit cost adjustments, which was reflected in operating expenses.

 

During the quarter ended May 3, 2014, as part of our continuing efforts to reduce expenses, 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 ended May 3, 2014, less than $0.1 million was reflected in cost of revenue and $1.0 million was reflected in operating expenses.

 

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 our products.

 

 

 
21

 

 

Critical accounting policies and estimates

 

There have been no significant changes in our critical accounting policies during the three months ended May 2, 2015, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended January 31, 2015. 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 2015 Annual Report.

 

Results of operations

 

The following table is derived from our unaudited condensed consolidated financial statements and sets forth our historical operating results as a percentage of net revenue for each of the periods indicated (in thousands, except percentages):

 

   

Three Months Ended

 
   

May 2, 2015

   

% of Net Revenue

   

May 3, 2014

   

% of Net Revenue

 

Net revenue

  $ 55,912       100 %   $ 36,873       100 %

Cost of revenue

    26,564       47 %     16,648       45 %

Gross profit

    29,348       53 %     20,225       55 %

Operating expenses

                               

Research and development

    16,313       29 %     17,103       46 %

Sales and marketing

    5,811       11 %     5,450       15 %

General and administrative

    5,772       10 %     5,031       14 %

Restructuring costs

    9       0 %     974       3 %

Impairment of IP, mask sets and design tools

    33       0 %     110       0 %

Total operating expenses

    27,938       50 %     28,668       78 %

Income (loss) from operations

    1,410       3 %     (8,443

)

    (23

%)

Interest and other income (expense), net

    671       1 %     (52

)

    0 %

Income (loss) before income taxes

    2,081       4 %     (8,495

)

    (23

%)

Provision for income taxes

    2,463       4 %     1,419       4 %

Net loss

  $ (382

)

    0 %   $ (9,914

)

    (27

%)

 
Net revenue

 

Our net revenue for the three months ended May 2, 2015 increased $19.0 million, or 52%, compared to the corresponding period in the prior fiscal year. Net revenue increased primarily due to a $15.4 million increase within the Smart TV market, an increase in the IoT Devices market of $6.3 million, and an increase of $0.9 million in the Set-top Box market, partially offset by a decrease in sales into the Media Connectivity market of $1.0 million and decreases from revenue related to the licensing of our technology to third parties of $2.6 million.

 

Net revenue by target market

 

We sell our products into four primary target markets, which are the Smart TV market, Media Connectivity market, Set-top Box market, and the Internet of Things, or “IoT,” Devices market. We also have license revenue, included in license and other markets, which we receive from the license of our technology to third parties. Historically, we disclosed information encompassing product groupings by target markets with certain naming conventions, consisting of Digital Television (“DTV”), Set-top Box, Home Networking, Home Control, and License and other. Effective in the fourth quarter of fiscal 2015, we changed the naming conventions of some of our target markets, commensurate with changes taking effect in our industry as a whole. We renamed our “DTV” target market to “Smart TV,” “Home Networking” to “Media Connectivity,” and “Home Control” to “IoT Devices.” These changes did not affect the products or related services categorization, or previously reported amounts related to the aforementioned historical target markets.

 

 

 
22

 

 

The following table sets forth our net revenue by target market and the percentage of net revenue represented by our product sales to each of those markets (in thousands, except percentages):