Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - SIGMA DESIGNS INCex31-1.htm
EX-32.2 - EXHIBIT 32.2 - SIGMA DESIGNS INCex32-2.htm
EX-32.1 - EXHIBIT 32.1 - SIGMA DESIGNS INCex32-1.htm
EX-31.2 - EXHIBIT 31.2 - SIGMA DESIGNS INCex31-2.htm

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 1, 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.)

 

47467 Fremont Boulevard,

Fremont, California 94538

(Address of principal executive offices including Zip Code)

(510) 897-0200

(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 1, 2015, the Company had 35,846,282 shares of Common Stock outstanding.

 

 
1

 

 

SIGMA DESIGNS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED AUGUST 1, 2015

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I.

FINANCIAL INFORMATION

  

 

 

  

Item 1.

Unaudited Condensed Consolidated Financial Statements

  

 

 

  

 

Unaudited Condensed Consolidated Balance Sheets as of August 1, 2015 and January 31, 2015

3

     

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended August 1, 2015 and August 2, 2014

4

 

  

  

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended August 1, 2015 and August 2, 2014

4

 

 

  

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended August 1, 2015 and August 2, 2014

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

34

 

 

  

Item 4.

Controls and Procedures

34

 

 

  

PART II.

OTHER INFORMATION

  

 

 

  

Item 1.

Legal Proceedings

35

 

 

  

Item 1A.

Risk Factors

35

 

 

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

  

Item 3.

Defaults Upon Senior Securities

35

 

 

  

Item 4.

Mine Safety Disclosures

35

 

 

  

Item 5.

Other Information

35

 

 

  

Item 6.

Exhibits

36

 

 

  

Signatures

37

 

  

Exhibit index

38

 

 
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 1, 2015

   

January 31, 2015

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 65,239     $ 83,502  

Short-term marketable securities

    11,928       6,347  

Restricted cash

    400       400  

Accounts receivable, net of allowances of $2,096 as of August 1, 2015 and $1,502 as of January 31, 2015

    38,449       26,415  

Inventory

    30,694       20,445  

Deferred tax assets

    3,288       3,319  

Prepaid expenses and other current assets

    8,566       8,805  

Total current assets

    158,564       149,233  
                 

Long-term marketable securities

    5,591       4,249  

Software, equipment and leasehold improvements, net

    18,439       21,594  

Intangible assets, net

    22,299       24,642  

Deferred tax assets, net of current portion

    609       687  

Long-term investments, net of current portion

    3,135       3,267  

Other non-current assets

    1,624       1,661  

Total assets

  $ 210,261     $ 205,333  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 27,441     $ 21,207  

Accrued compensation and related benefits

    7,179       6,806  

Accrued liabilities

    15,135       22,894  

Total current liabilities

    49,755       50,907  
                 

Income taxes payable

    8,816       7,573  

Long-term deferred tax liabilities

    529       741  

Other long-term liabilities

    2,552       2,822  

Total liabilities

    61,652       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; 40,490,298 issued and 35,831,155 outstanding as of August 1, 2015 and 39,973,689 issued and 35,314,546 outstanding as of January 31, 2015

    499,322       493,550  

Treasury stock, at cost, 4,659,143 shares as of August 1, 2015 and January 31, 2015

    (88,198

)

    (88,198

)

Accumulated other comprehensive loss

    (1,478

)

    (1,111

)

Accumulated deficit

    (261,037

)

    (260,951

)

Total shareholders equity

    148,609       143,290  

Total liabilities and shareholders equity

  $ 210,261     $ 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

   

Six Months Ended

 
   

August 1, 2015

   

August 2, 2014

   

August 1, 2015

   

August 2, 2014

 

Net revenue

  $ 58,307     $ 42,810     $ 114,219     $ 79,683  

Cost of revenue

    29,783       20,921       56,347       37,569  

Gross profit

    28,524       21,889       57,872       42,114  
                                 

Operating expenses

                               

Research and development

    16,102       16,452       32,415       33,555  

Sales and marketing

    5,254       5,475       11,065       10,925  

General and administrative

    5,005       4,555       10,777       9,586  

Restructuring costs

    -       46       9       1,020  

Impairment of IP, mask sets and design tools

    955       1,156       988       1,266  

Total operating expenses

    27,316       27,684       55,254       56,352  

Income (loss) from operations

    1,208       (5,795

)

    2,618       (14,238

)

Interest and other income, net

    113       372       784       320  

Income (loss) before income taxes

    1,321       (5,423

)

    3,402       (13,918

)

Provision for income taxes

    1,025       2,197       3,488       3,616  

Net income (loss)

  $ 296     $ (7,620

)

  $ (86

)

  $ (17,534

)

                                 

Net income (loss) per common share:

                               

Basic

  $ 0.01     $ (0.22 )   $ (0.00

)

  $ (0.51 )

Diluted

  $ 0.01     $ (0.22 )   $ (0.00

)

  $ (0.51 )
                                 
Shares used in computing net income (loss) per share:                                

Basic

    35,604       34,622       35,473       34,459  

Diluted

    36,602       34,622       35,473       34,459  

 

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 

 

   

Three Months Ended

   

Six Months Ended

 
   

August 1, 2015

   

August 2, 2014

   

August 1, 2015

   

August 2, 2014

 

Net income (loss)

  $ 296     $ (7,620

)

  $ (86

)

  $ (17,534

)

                                 

Other comprehensive loss:

                               

Currency translation adjustments, net of $0 tax during the three and six months ended August 1, 2015 and August 2, 2014

    (276

)

    (302

)

    (288

)

    (94

)

Unrealized loss on marketable securities, net of $0 tax during the three and six months ended August 1, 2015 and August 2, 2014

    (60

)

    (138

)

    (79

)

    (92

)

Other comprehensive loss

    (336

)

    (440

)

    (367

)

    (186

)

                                 

Comprehensive loss

  $ (40

)

  $ (8,060

)

  $ (453

)

  $ (17,720

)

 

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 1, 2015

   

August 2, 2014

 

Cash flows from operating activities:

               

Net loss

  $ (86

)

  $ (17,534 )

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

               

Depreciation and amortization

    10,496       10,706  

Stock-based compensation

    2,989       2,873  

Provision for excess and obsolete inventory

    1,619       1,268  

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

    594       (13

)

Deferred income taxes

    (104

    (29

)

Impairment of IP, mask sets and design tools

    988       1,266  

Tax effect related to share awards

    (39

)

    (620

)

Excess tax expense from stock-based compensation

    39       620  

Impairment of investment

    132       601  

Other non-cash activities

    16       5  

Changes in operating assets and liabilities:

               

Accounts receivable

    (12,628

)

    2,868  

Inventory

    (11,867

)

    (1,170

)

Prepaid expenses and other current assets

    199       1,066  

Other non-current assets

    16       68  

Accounts payable

    6,151       190  

Accrued liabilities, compensation and related benefits

    (3,729

)

    174  

Income taxes payable

    (3,080

)

    (3,823

)

Other long-term liabilities

    256       (2,425

)

Net cash used in operating activities

    (8,038

)

    (3,909

)

                 

Cash flows from investing activities:

               

Restricted cash

    -       235  

Purchases of marketable securities

    (7,113

)

    -  

Sales and maturities of marketable securities

    111       11,030  

Purchases of software, equipment and leasehold improvements

    (3,474

)

    (3,012

)

Purchases of IP

    (2,404

)

    (1,553

)

Repayment of note receivable

    -       230  

Net cash (used in) provided by investing activities

    (12,880

)

    6,930  
                 

Cash flows from financing activities:

               

Excess tax benefit from stock-based compensation

    39       1,242  

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

    2,744       1,247  

Net cash provided by financing activities

    2,783       2,489  
                 

Effect of foreign exchange rate changes on cash and cash equivalents

    (128

)

    12  

Net (decrease) increase in cash and cash equivalents

    (18,263

)

    5,522  
                 

Cash and cash equivalents, beginning of period

    83,502       64,326  

Cash and cash equivalents, end of period

  $ 65,239     $ 69,848  
                 

Supplemental disclosure of cash flow information:

               
                 

Cash paid for income taxes

  $ 6,226     $ 4,777  

 

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 second quarter of fiscal 2016 and fiscal 2015 ended on August 1, 2015 (91 days) and August 2, 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 August 1, 2015 and January 31, 2015, the consolidated results of our operations for the three and six months ended August 1, 2015 and August 2, 2014, and the consolidated cash flows for the six months ended August 1, 2015 and August 2, 2014.  The results of operations for the three and six months ended August 1, 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 six months ended August 1, 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 July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which changes guidance for subsequent measurement of inventory within the scope of the Update from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 is effective for the Company beginning in the first quarter of 2018 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 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.

 

 
6

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

In May 2014, the FASB 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 original effective date for ASU 2014-09 would have required us to adopt beginning in our first quarter of 2018. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, we may adopt the standard in either our first quarter of 2018 or 2019. 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. We are currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on our consolidated financial statements.

 

2.             Cash, cash equivalents and marketable securities

 

As of August 1, 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):

 

   

August 1, 2015

   

January 31, 2015

 
   

Book Value

   

Net

Unrealized

Gains

(Losses)

   

Fair Value

   

Book Value

   

Net

Unrealized

Gains

(Losses)

   

Fair Value

 

Corporate bonds

  $ 16,154     $ 82     $ 16,236     $ 9,130     $ 153     $ 9,283  

Money market funds

    261       -       261       7,650       -       7,650  

Fixed income mutual funds

    1,275       8       1,283       1,324       (11

)

    1,313  

Total cash equivalents and marketable securities

  $ 17,690     $ 90       17,780     $ 18,104     $ 142       18,246  
                                                 
                                                 

Cash on hand held in the United States

                    8,468                       12,042  

Cash on hand held overseas

                    56,510                       63,810  

Total cash on hand

                    64,978                       75,852  

Total cash, cash equivalents and marketable securities

                  $ 82,758                     $ 94,098  
                                                 

Reported as:

                                               

Cash and cash equivalents

                  $ 65,239                     $ 83,502  

Short-term marketable securities

                    11,928                       6,347  

Long-term marketable securities

                    5,591                       4,249  
                    $ 82,758                     $ 94,098  

 

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

 

   

August 1, 2015

   

January 31, 2015

 
   

Book Value

   

Fair Value

   

Book Value

   

Fair Value

 

Due in one year or less

  $ 12,150     $ 12,189     $ 13,995     $ 13,997  

Due in greater than one year

    5,540       5,591       4,109       4,249  

Total

  $ 17,690     $ 17,780     $ 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 August 1, 2015 and January 31, 2015 (in thousands):

  

   

August 1, 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

  $ 16,236     $ 16,236     $ -     $ -  

Money market funds

    261       261       -       -  

Fixed income mutual funds

    1,283       1,283       -       -  

Total cash equivalents and marketable securities

    17,780       17,780       -       -  

Restricted cash

    400       400       -       -  

Total assets measured at fair value

  $ 18,180     $ 18,180     $ -     $ -  

 

 
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 August 1, 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 $3.1 million. In the fourth quarter of fiscal 2014, the second quarter of fiscal 2015 and the second quarter of fiscal 2016, we recorded impairment charges of $0.3 million, $0.6 million and $0.1 million, respectively, on an investment as we concluded the impairment to be other-than-temporary, effectively nullifying any value from this investment as of August 1, 2015. We did not identify any other events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments during the three and six months ended August 1, 2015 and August 2, 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:

 

August 1, 2015

   

January 31, 2015

 

Issuer A

  $ 2,000     $ 2,000  

Issuer B

    1,000       1,000  

Issuer C

    -       129  

Issuer D

    135       138  

Total equity investments

  $ 3,135     $ 3,267  

 

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, the second quarter of fiscal 2015 and the second quarter of fiscal 2016, we recorded impairment charges of $0.3 million, $0.6 million and $0.1 million, respectively, on this investment as we concluded the impairment to be other-than-temporary, effectively nullifying any value from this investment as of August 1, 2015.

  

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): 

 

   

August 1, 2015

   

January 31, 2015

 

Wafers and other purchased materials

  $ 13,366     $ 8,420  

Work-in-process

    8,022       3,045  

Finished goods

    9,306       8,980  

Total inventory

  $ 30,694     $ 20,445  

 

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

 

   

August 1, 2015

   

January 31, 2015

 

Deposits

  $ 3,221     $ 3,124  

Prepayments for inventory

    1,572       1,670  

Prepayments for royalties

    703       659  

R&D credit receivable

    533       583  

Other current assets

    2,537       2,769  

Total prepaid expenses and other current assets

  $ 8,566     $ 8,805  

 

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

 

 

 

Estimated Useful Lives

(years)

   

August 1, 2015

   

January 31, 2015

 

Software

 

 

2

   

 

$

41,455

 

 

$

41,069

 

Equipment

 

1

 -

5

 

 

 

23,213

 

 

 

22,168

 

Office equipment and furniture

 

 

2

   

 

 

9,308

 

 

 

8,693

 

Leasehold improvements

 

1

 -

6

 

 

 

3,149

 

 

 

2,874

 

Total

 

 

 

 

 

 

 

77,125

 

 

 

74,804

 

Less: Accumulated depreciation and amortization

 

 

 

 

 

 

 

(58,686

)

 

 

(53,210

)

Total software, equipment and leasehold improvements, net

 

 

 

 

 

 

$

18,439

 

 

$

21,594

 

 

Software, equipment and leasehold improvement depreciation and amortization expense was $3.0 million for each of the three months ended August 1, 2015 and August 2, 2014, and was $5.9 million and $6.1 million for the six months ended August 1, 2015 and August 2, 2014, respectively. We recorded impairment charges for mask sets and design tools associated with discontinued products for both the three and six months ended August 1, 2015 of $1.0 million, and for the three and six months ended August 2, 2014 of $0.7 million and $0.8 million, respectively, which was recorded in operating expenses in the accompanying condensed consolidated statement of operations.

  

 
10

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Accrued liabilities consist of the following (in thousands):

 

   

August 1, 2015

   

January 31, 2015

 

License fees

  $ 5,119     $ 4,286  

Rebates

    4,918       9,599  

Royalties

    1,641       880  

Income taxes payable, current portion

    1,003       5,326  

Warranties

    874       864  

Deferred revenue

    505       372  

Other accrued liabilities

    1,075       1,567  

Total accrued liabilities

  $ 15,135     $ 22,894  

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

August 1, 2015

   

August 2, 2014

   

August 1, 2015

   

August 2, 2014

 

Beginning balance

  $ 7,142     $ 2,841     $ 9,599     $ 3,587  

Charged as a reduction of revenue

    2,430       3,331       6,551       6,064  

Reversal of unclaimed rebates

    (221

)

    -       (1,028

)

    -  

Payments

    (4,433

)

    (2,269

)

    (10,204

)

    (5,748

)

Ending balance

  $ 4,918     $ 3,903     $ 4,918     $ 3,903  

 

6.             Intangible assets

 

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

 

   

August 1, 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

)

  $ (46,632

)

  $ 5,382       1.5  

Customer relationships

    50,704       (30,486

)

    (18,868

)

    1,350       1.2  

Trademarks and other

    5,478       -       (5,080

)

    398       3.4  

Purchased IP - amortizing

    24,706       (5,516

)

    (17,065

)

    2,125       1.7  

Total amortizing

    157,516       (60,616

)

    (87,645

)

    9,255       1.6  

Purchased IP - not yet deployed

    16,771       (3,727

)

    -       13,044          

Total intangibles

  $ 174,287     $ (64,343

)

  $ (87,645

)

  $ 22,299          

  

   

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          

 

 
11

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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.

 

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 1,

2015

   

August 2,

2014

   

August 1,

2015

   

August 2,

2014

 

Cost of revenue

  $ 1,876     $ 1,979     $ 3,882     $ 3,925  

Operating expenses

    347       374       700       747  

Total intangibles amortization expense

  $ 2,223     $ 2,353     $ 4,582     $ 4,672  

  

As of August 1, 2015, we expect amortization expense in future periods to be as follows (in thousands):

 

Fiscal year

 

Total

 

2016 (remaining six months)

  $ 3,324  

2017

    4,862  

2018

    925  

2019

    144  

Total

  $ 9,255  

 

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 first quarter of fiscal 2016, 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 second quarter of fiscal 2016, we incurred no restructuring charges.

 

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.

 

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.

 

 
12

 

  

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 six months ended August 1, 2015

    3       -       6       9       9  

Cash payments

    (3

)

    -       (7

)

    (10

)

    -  

Non-cash items

    -               1       1       -  

Liability, August 1, 2015

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

 

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.

 

The Buyer advised us that it did 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 pursued 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. Arbitration regarding this dispute took place on June 1, 2015. In August 2015, we prevailed on all of the claims we asserted against the Buyer, and all of the Buyer’s counterclaims against us were denied. We were awarded $5.0 million plus reimbursement of reasonable legal costs and interest. We are in the process of determining the amount of legal fees we are entitled to recover. Upon receipt of the rewarded amount from the Buyer, we will recognize the amount as other income in our consolidated statements of operations in its entirety.

 

 
13

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 August 1, 2015 and August 2, 2014 are as follows (in thousands):

 

Three Months Ended

 

Balance

Beginning of

Period

   

Additions

and

Adjustments

   

Deductions

   

Balance End

of Period

 

August 1, 2015

  $ 861     $ 150     $ (137

)

  $ 874  

August 2, 2014

  $ 630     $ 117     $ (107

)

  $ 640  

 

Six Months Ended

 

Balance

Beginning of

Period

   

Additions

and

Adjustments

   

Deductions

   

Balance End

of Period

 

August 1, 2015

  $ 864     $ 290     $ (280

)

  $ 874  

August 2, 2014

  $ 620     $ 241     $ (221

)

  $ 640  

 

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 1, 2015, the total amount of outstanding non-cancelable purchase orders was approximately $35.3 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 1, 2015, the remaining payments under this agreement totaled $4.1 million. In addition to this agreement, we have entered into other purchase arrangements for certain design tools which totaled $3.0 million. Payments under these arrangements are being made through fiscal 2017. We have fully accrued these amounts as of August 1, 2015.

 

Royalties

 

We pay royalties for the right to sell certain products under various license agreements. During the three and six months ended August 1, 2015, we recorded gross royalty expense of $1.3 million and $2.1 million, respectively, and $0.5 million and $1.1 million for the three and six months ended August 2, 2014, 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 1, 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 August 1, 2015, our remaining potential obligation under these programs was approximately $1.1 million.

 

 
14

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 did 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 pursued 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. Arbitration regarding this dispute took place on June 1, 2015. In August 2015, we prevailed on all of the claims we asserted against the Buyer, and all of the Buyer’s counterclaims against us were denied. We were awarded $5.0 million plus reimbursement of reasonable legal costs and interest. We are in the process of determining the amount of legal fees we are entitled to recover. Upon receipt of the rewarded amount from the Buyer, we will recognize the amount as other income in our consolidated statements of operations in its entirety.

 

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 condensed consolidated balance sheet as of August 1, 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.

 

 
15

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 August 1, 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 still in the process of assessing the audit findings along with the licensor. However, based on the preliminary information, we have accrued $0.1 million of additional expenditures in our condensed consolidated statement of operations for the three and six months ended August 1, 2015. We believe we are substantially in compliance with the terms of our licensing arrangements.

 

10.           Earnings per share

 

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the fiscal period. Diluted net loss per share is the same as basic net loss per share as the inclusion of potentially issuable shares is anti-dilutive. Diluted net income per share is computed by adjusting outstanding shares, assuming any dilutive effects of stock incentive awards calculated using the treasury stock method. Under the treasury stock method, an increase in the fair market value of our common stock results in a greater dilutive effect from outstanding stock options, restricted stock units and stock purchase rights. Additionally, the exercise of employee stock options and stock purchase rights and the vesting of restricted stock units results in a further dilutive effect on net income per share.

 

The following table sets forth the basic and diluted net income (loss) per share computed for the three and six months ended August 1, 2015 and August 2, 2014 (in thousands, except per share amounts):

 

   

Three Months Ended

   

Six Months Ended

 
   

August 1, 2015

   

August 2, 2014

   

August 1, 2015

   

August 2, 2014

 

Numerator:

                               

Net income (loss), as reported

  $ 296     $ (7,620

)

  $ (86

)

  $ (17,534

)

Denominator:

                               

Weighted-average common shares outstanding - basic

    35,604       34,622       35,473       34,459  

Dilutive effect of employee stock plans

    998       -       -       -  

Weighted-average common shares outstanding - diluted

    36,602       34,622       35,473       34,459  

Net income (loss) per share - basic

  $ 0.01     $ (0.22

)

  $ (0.00

)

  $ (0.51

)

Net income (loss) per share - diluted

  $ 0.01     $ (0.22

)

  $ (0.00

)

  $ (0.51

)

  

The weighted-average number of shares outstanding used in the computation of basic and diluted net income (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 net income (loss) per share because the effect would have been anti-dilutive (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

August 1, 2015

   

August 2, 2014

   

August 1, 2015

   

August 2, 2014

 

Stock options

    2,336       3,911       2,738       3,964  

Restricted stock units and awards

    68       422       630       366  

 
16

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

    -       -       -       -       (79

)

    -       -       (79

)

Currency translation adjustments

    -       -       -       -       -       (288

)

    -       (288

)

Stock-based compensation expense

    -       2,989       -       -       -       -       -       2,989  

Tax effect related to share awards

    -       39       -       -       -       -       -       39  

Net proceeds from common stock issued under share plans

    516,609       2,744       -       -       -       -       -       2,744  

Net loss

    -       -       -       -       -       -       (86

)

    (86

)

Balance, August 1, 2015

    40,490,298     $ 499,322       (4,659,143

)

  $ (88,198

)

  $ (106

)

  $ (1,372

)

  $ (261,037

)

  $ 148,609  

 

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. For the three and six months ended August 1, 2015, we made matching contributions of $0.6 million and $1.1 million, respectively, and $0.5 million and $1.0 million for the three and six months ended August 2, 2014, respectively.

 

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 August 1, 2015 and August 2, 2014; and $0.3 million and $0.4 million for the six months ended August 1, 2015 and August 2, 2014, 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 a portion thereof.  As of August 1, 2015, we have an accrued severance liability of $0.8 million primarily offset by $0.7 million of severance employee funds.

 

 
17

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 August 11, 2015, there were approximately 94,436 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 $1.0 million and $2.2 million for the three months ended August 1, 2015 and August 2, 2014, respectively.  The provision for income taxes was $3.5 million and $3.6 million for the six months ended August 1, 2015 and August 2, 2014, respectively. The decrease in tax expense is primarily attributable to the decrease in profitability in taxable jurisdictions in the second quarter of fiscal year 2016 as compared to the same period in fiscal year 2015 and changes in tax reserves. During the three and six months ended August 1, 2015 and August 2, 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.

 

 
18

 

 

 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. No revenue was derived from the licensing of our technology during the three and six months ended August 1, 2015, whereas 5.8% and 6.1% of our total net revenue for the three and six months ended August 2, 2014, respectively, was derived from licensing arrangements.

 

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 table sets forth net revenue attributable to each target market (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

August 1, 2015

   

August 2, 2014

   

August 1, 2015

   

August 2, 2014

 

Smart TV

  $ 24,658     $ 10,033     $ 46,134     $ 16,097  

Media Connectivity

    14,029       17,827       29,146       33,946  

IoT Devices

    12,971       6,576       25,428       12,716  

Set-top Box

    6,281       5,528       12,838       11,217  

License and other

    368       2,846