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EX-31.1 - EXHIBIT 31.1 - SIGMA DESIGNS INCex31-1.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 October 31, 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 December 2, 2015, the Company had 36,451,927 shares of Common Stock outstanding.

 

 
1

 

 

SIGMA DESIGNS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED OCTOBER 31, 2015

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I.

FINANCIAL INFORMATION

  

 

 

  

Item 1.

Unaudited Condensed Consolidated Financial Statements

  

 

 

  

 

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

3

     

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended October 31, 2015 and November 1, 2014

4

 

  

  

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended October 31, 2015 and November 1, 2014

4

 

 

  

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended October 31, 2015 and November 1, 2014

5

 

 

  

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

  

Item 2.

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

23

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

 

 

  

Item 4.

Controls and Procedures

36

 

 

  

PART II.

OTHER INFORMATION

  

 

 

  

Item 1.

Legal Proceedings

37

 

 

  

Item 1A.

Risk Factors

37

 

 

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

  

Item 3.

Defaults Upon Senior Securities

37

 

 

  

Item 4.

Mine Safety Disclosures

37

 

 

  

Item 5.

Other Information

37

 

 

  

Item 6.

Exhibits

38

 

 

  

Signatures

39

 

  

Exhibit index

40

 

 
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) 

  

 

   

October 31,

2015

   

January 31,

2015

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 67,164     $ 83,502  

Short-term marketable securities

    24,528       6,347  

Restricted cash

    400       400  

Accounts receivable, net of allowances of $2,229 as of October 31, 2015 and $1,502 as of January 31, 2015

    30,971       26,415  

Inventory

    27,953       20,445  

Deferred tax assets

    3,259       3,319  

Prepaid expenses and other current assets

    11,704       8,805  

Total current assets

    165,979       149,233  
                 

Long-term marketable securities

    3,537       4,249  

Software, equipment and leasehold improvements, net

    16,638       21,594  

Intangible assets, net

    24,318       24,642  

Deferred tax assets, net of current portion

    645       687  

Long-term investments, net of current portion

    3,132       3,267  

Other non-current assets

    7,586       1,661  

Total assets

  $ 221,835     $ 205,333  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 26,664     $ 21,207  

Accrued compensation and related benefits

    8,684       6,806  

Accrued liabilities

    12,451       22,894  

Total current liabilities

    47,799       50,907  
                 

Income taxes payable

    10,475       7,573  

Long-term deferred tax liabilities

    423       741  

Other long-term liabilities

    6,439       2,822  

Total liabilities

    65,136       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; 41,016,710 issued and 36,357,567 outstanding as of October 31, 2015 and 39,973,689 issued and 35,314,546 outstanding as of January 31, 2015

    501,101       493,550  

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

    (88,198

)

    (88,198

)

Accumulated other comprehensive loss

    (1,602

)

    (1,111

)

Accumulated deficit

    (254,602

)

    (260,951

)

Total shareholders equity

    156,699       143,290  

Total liabilities and shareholders equity

  $ 221,835     $ 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

   

Nine Months Ended

 
   

October 31,

2015

   

November 1,

2014

   

October 31,

2015

   

November 1,

2014

 

Net revenue

  $ 61,581     $ 53,784     $ 175,800     $ 133,467  

Cost of revenue

    30,794       27,272       87,141       64,841  

Gross profit

    30,787       26,512       88,659       68,626  
                                 

Operating expenses

                               

Research and development

    17,339       16,603       49,754       50,158  

Sales and marketing

    5,875       5,559       16,940       16,484  

General and administrative

    5,314       4,808       16,091       14,394  

Restructuring costs

    -       (18

)

    9       1,002  

Impairment of IP, mask sets and design tools

    795       856       1,783       2,122  

Total operating expenses

    29,323       27,808       84,577       84,160  

Income (loss) from operations

    1,464       (1,296

)

    4,082       (15,534

)

Gain on sale of development project

    7,551       -       7,551       -  

Interest and other income, net

    37       188       821       508  

Income (loss) before income taxes

    9,052       (1,108

)

    12,454       (15,026

)

Provision for (benefit from) income taxes

    2,617       (551

)

    6,105       3,065  

Net income (loss)

  $ 6,435     $ (557

)

  $ 6,349     $ (18,091

)

                                 

Net income (loss) per common share:

                               

Basic

  $ 0.18     $ (0.02 )   $ 0.18     $ (0.52 )

Diluted

  $ 0.17     $ (0.02 )   $ 0.17     $ (0.52 )
                                 

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

                 

Basic

    36,046       34,790       35,670       34,578  

Diluted

    36,785       34,790       36,515       34,578  

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 31,

2015

   

November 1,

2014

   

October 31,

2015

   

November 1,

2014

 

Net income (loss)

  $ 6,435     $ (557

)

  $ 6,349     $ (18,091

)

                                 

Other comprehensive loss:

                               

Currency translation adjustments, net of $0 tax during the three and nine months ended October 31, 2015 and November 1, 2014

    (100

)

    (606

)

    (388

)

    (701

)

Unrealized loss on marketable securities, net of $0 tax during the three and nine months ended October 31, 2015 and November 1, 2014

    (24

)

    (33

)

    (103

)

    (124

)

Other comprehensive loss

    (124

)

    (639

)

    (491

)

    (825

)

                                 

Comprehensive income (loss)

  $ 6,311     $ (1,196

)

  $ 5,858     $ (18,916

)

 

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 
4

 

  

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   

Nine Months Ended

 
   

October 31, 2015

   

November 1, 2014

 

Cash flows from operating activities:

               

Net income (loss)

  $ 6,349     $ (18,091 )

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

               

Depreciation and amortization

    15,691       16,153  

Stock-based compensation

    4,880       4,578  

Provision for excess and obsolete inventory

    2,252       2,397  

Provision for sales returns, discounts and doubtful accounts

    727       368  

Deferred income taxes

    (216

)

    (3,123

)

Impairment of IP, mask sets and design tools

    1,783       2,122  

Tax effect related to share awards

    81       (620

)

Excess tax expense from stock-based compensation

    (81

)

    620  

Impairment of investment

    132       601  

Other non-cash activities

    (267

)

    70  

Changes in operating assets and liabilities:

               

Accounts receivable

    (5,283

)

    1,313  

Inventory

    (9,760

)

    (2,103

)

Prepaid expenses and other current assets

    98

 

    1,598  

Other non-current assets

    (5,953 )     127  

Accounts payable

    4,321       4,141  

Accrued liabilities, compensation and related benefits

    (4,482

)

    5,310  

Income taxes payable

    (1,425

)

    (273

)

Other long-term liabilities

    910       (2,428

)

Net cash provided by operating activities

    9,757       12,760  
                 

Cash flows from investing activities:

               

Restricted cash

    -       275  

Purchases of marketable securities

    (22,622

)

    (3,079

)

Sales and maturities of marketable securities

    5,050       13,233  

Purchases of software, equipment and leasehold improvements

    (5,551

)

    (5,161

)

Purchases of IP

    (2,750

)

    (2,443

)

Issuance of short-term promissory notes

    (2,710

)

    -  

Repayment of note receivable

    -       230  

Net cash (used in) provided by investing activities

    (28,583

)

    3,055  
                 

Cash flows from financing activities:

               

Excess tax benefit from stock-based compensation

    (81

)

    36  

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

    2,752       1,270  

Net cash provided by financing activities

    2,671       1,306  
                 

Effect of foreign exchange rate changes on cash and cash equivalents

    (183

)

    (151

)

Net (decrease) increase in cash and cash equivalents

    (16,338

)

    16,970  
                 

Cash and cash equivalents, beginning of period

    83,502       64,326  

Cash and cash equivalents, end of period

  $ 67,164     $ 81,296  
                 

Supplemental disclosure of cash flow information:

               
                 

Cash paid for income taxes

  $ 7,335     $ 5,596  

 

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.  Our goal is to ensure integrated semiconductor solutions serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes, media connectivity and home control products. 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 Internet of Things (“IoT”) Devices markets. We 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.

 

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 third quarter of fiscal 2016 and fiscal 2015 ended on October 31, 2015 (91 days) and November 1, 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 October 31, 2015 and January 31, 2015, the consolidated results of our operations for the three and nine months ended October 31, 2015 and November 1, 2014, and the consolidated cash flows for the nine months ended October 31, 2015 and November 1, 2014.  The results of operations for the three and nine months ended October 31, 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 nine months ended October 31, 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 November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which simplifies the presentation of deferred income taxes by eliminating the need for entities to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. ASU 2015-17 is effective for us beginning in the first quarter of 2018 with early application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the timing of its application. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

In July 2015, the 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 us 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 our consolidated financial statements.

 

 
6

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 us 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 our consolidated financial statements.

 

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 this standard 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 October 31, 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):

 

   

October 31, 2015

   

January 31, 2015

 
   

Book Value

   

Net

Unrealized

Gains

(Losses)

   

Fair Value

   

Book Value

   

Net

Unrealized

Gains

(Losses)

   

Fair Value

 

Certificate of deposits

  $ 15,509     $ -     $ 15,509     $ -     $ -     $ -  

Corporate bonds

    11,205       66       11,271       9,130       153       9,283  

Money market funds

    5,235       -       5,235       7,650       -       7,650  

Fixed income mutual funds

    1,259       26       1,285       1,324       (11

)

    1,313  

Total cash equivalents and marketable securities

  $ 33,208     $ 92       33,300     $ 18,104     $ 142       18,246  
                                                 
                                                 

Cash on hand held in the United States

                    9,455                       12,042  

Cash on hand held overseas

                    52,474                       63,810  

Total cash on hand

                    61,929                       75,852  

Total cash, cash equivalents and marketable securities

                  $ 95,229                     $ 94,098  
                                                 

Reported as:

                                               

Cash and cash equivalents

                  $ 67,164                     $ 83,502  

Short-term marketable securities

                    24,528                       6,347  

Long-term marketable securities

                    3,537                       4,249  
                    $ 95,229                     $ 94,098  

 

 
7

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

   

October 31, 2015

   

January 31, 2015

 
   

Book Value

   

Fair Value

   

Book Value

   

Fair Value

 

Due in one year or less

  $ 29,669     $ 29,763     $ 13,995     $ 13,997  

Due in greater than one year

    3,539       3,537       4,109       4,249  

Total

  $ 33,208     $ 33,300     $ 18,104     $ 18,246  

 

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 October 31, 2015 and January 31, 2015 (in thousands):

  

   

October 31, 2015

 
   

Fair Value

   

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

   

Significant Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

 

Certificate of deposits

  $ 15,509     $ 15,509     $ -     $ -  

Corporate bonds

    11,271       11,271       -       -  

Money market funds

    5,235       5,235       -       -  

Fixed income mutual funds

    1,285       1,285       -       -  

Total cash equivalents and marketable securities

    33,300       33,300       -       -  

Restricted cash

    400       400       -       -  

Total assets measured at fair value

  $ 33,700     $ 33,700     $ -     $ -  

 

 
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 October 31, 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 October 31, 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 nine months ended October 31, 2015 and November 1, 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 privately held companies

 

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

 

Equity investments:

 

October 31,

2015

   

January 31, 2015

 

Issuer A

  $ 2,000     $ 2,000  

Issuer B

    1,000       1,000  

Issuer C

    -       129  

Issuer D

    132       138  

Total equity investments

  $ 3,132     $ 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 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 October 31, 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): 

 

   

October 31,

2015

   

January 31, 2015

 

Wafers and other purchased materials

  $ 16,417     $ 8,420  

Work-in-process

    1,950       3,045  

Finished goods

    9,586       8,980  

Total inventory

  $ 27,953     $ 20,445  

 

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

 

   

October 31,

2015

   

January 31, 2015

 

Deposits

  $ 3,221     $ 3,124  

Short-term promissory notes

    2,710       -  

Prepayments for inventory

    1,685       1,670  

Prepayments for royalties

    741       659  

R&D credit receivable

    576       583  

Other current assets

    2,771       2,769  

Total prepaid expenses and other current assets

  $ 11,704     $ 8,805  

 

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

 

   

Estimated

Useful Lives

(years)

   

October 31,

2015

   

January 31,

2015

 

Software

    2       $ 40,271     $ 41,069  

Equipment

   1 - 5       22,698       22,168  

Office equipment and furniture

    2         7,934       8,693  

Leasehold improvements

   1 - 6       1,800       2,874  

Total

              72,703       74,804  

Less: Accumulated depreciation and amortization

              (56,065

)

    (53,210

)

Total software, equipment and leasehold improvements, net

            $ 16,638     $ 21,594  

 

Software, equipment and leasehold improvement depreciation and amortization expense was $3.3 million and $3.1 million for the three months ended October 31, 2015 and November 1, 2014, respectively, and was $9.2 million for both the nine months ended October 31, 2015 and November 1, 2014. We recorded impairment charges for mask sets and design tools associated with discontinued products for the three and nine months ended October 31, 2015 of $0.4 million and $1.4 million, respectively, and for the three and nine months ended November 1, 2014 of $0.7 million and $1.5 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):

   

October 31,

2015

   

January 31, 2015

 

License fees

  $ 4,795     $ 4,286  

Rebates

    2,287       9,599  

Royalties

    1,804       880  

Income taxes payable, current portion

    998       5,326  

Warranties

    983       864  

Deferred revenue

    492       372  

Other accrued liabilities

    1,092       1,567  

Total accrued liabilities

  $ 12,451     $ 22,894  

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 31,

2015

   

November 1,

2014

   

October 31,

2015

   

November

1, 2014

 

Beginning balance

  $ 4,918     $ 3,903     $ 9,599     $ 3,587  

Charged as a reduction of revenue

    2,596       6,399       9,147       12,463  

Reversal of unclaimed rebates

    -       -       (1,028     -  

Payments

    (5,227     (3,526     (15,431     (9,274

Ending balance

  $ 2,287     $ 6,776     $ 2,287     $ 6,776  

 

6.             Intangible assets

 

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

 

   

October 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

)

  $ (47,595

)

  $ 4,419       1.3  

Customer relationships

    50,704       (30,486

)

    (19,145

)

    1,073       1.0  

Trademarks and other

    5,478       -       (5,110

)

    368       3.2  

Purchased IP - amortizing

    32,002       (5,516

)

    (17,567

)

    8,919       2.9  

Total amortizing

    164,812       (60,616

)

    (89,417

)

    14,779       2.3  

Purchased IP - not yet deployed

    13,677       (4,138

)

    -       9,539          

Total intangibles

  $ 178,489     $ (64,754

)

  $ (89,417

)

  $ 24,318          

 

 
11

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

   

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.

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 31,

2015

   

November 1,

2014

   

October 31,

2015

   

November 1,

2014

 

Cost of revenue

  $ 1,585     $ 2,000     $ 5,467     $ 5,924  

Operating expenses

    349       354       1,049       1,064  

Total intangibles amortization expense

  $ 1,934     $ 2,354     $ 6,516     $ 6,988  

  

As of October 31, 2015, we expect amortization expense in future periods to be as follows (in thousands):

 

Fiscal year

 

Total

 

2016 (remaining three months)

  $ 2,255  

2017

    7,252  

2018

    2,972  

2019

    1,621  

2020

    679  

Total

  $ 14,779  

 

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.

 

 
12

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 and third quarters 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 and third quarters 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.

 

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 nine months ended October 31, 2015

    3       -       6       9       9  

Cash payments

    (3

)

    -       (7

)

    (10

)

    -  

Non-cash items

    -               1       1       -  

Liability, October 31, 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.

  

 
13

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 and other associated costs and interest. We have recovered $2.6 million in legal costs, interest and other associated expenses to date from the Buyer, for a total recovery of $7.6 million, which was recorded as other income in our condensed consolidated statements of operations in its entirety.

 

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 October 31, 2015 and November 1, 2014 are as follows (in thousands):

 

Three Months Ended

 

Balance

Beginning of

Period

   

Additions and Adjustments

   

Deductions

   

Balance End

of Period

 

October 31, 2015

  $ 874     $ 321     $ (212

)

  $ 983  

November 1, 2014

  $ 640     $ 342     $ (128

)

  $ 854  

 

Nine Months Ended

 

Balance

Beginning of

Period

   

Additions and Adjustments

   

Deductions

   

Balance End

of Period

 

October 31, 2015

  $ 864     $ 610     $ (491

)

  $ 983  

November 1, 2014

  $ 620     $ 584     $ (350

)

  $ 854  

 

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 October 31, 2015, the total amount of outstanding non-cancelable purchase orders was approximately $28.2 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 October 31, 2015, the remaining payments under this agreement totaled $2.7 million. In addition to this agreement, we have entered into other purchase arrangements for certain design tools which totaled $3.1 million. Payments under these arrangements are being made through fiscal 2017. We have fully accrued these amounts as of October 31, 2015.

 

Royalties

 

We pay royalties for the right to sell certain products under various license agreements. During the three and nine months ended October 31, 2015, we recorded gross royalty expense of $1.2 million and $3.3 million, respectively, and $0.8 million and $1.9 million for the three and nine months ended November1, 2014, respectively, in cost of revenue in the condensed consolidated statements of operations.

  

 
14

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 October 31, 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 October 31, 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 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, interest and other associated expenses. We have recovered $2.6 million in legal costs, interest and other associated expenses to date from the Buyer, for a total recovery of $7.6 million, which was recorded as other income in our condensed 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 October 31, 2015. 

 

 
15

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 for that period 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 October 31, 2015, the audit process has been completed for which the licensor concluded no further payments are required. Consequently, we reversed the previously accrued estimate of additional expenditures of $0.1 million in our condensed consolidated statement of operations during the three months ended October 31, 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 nine months ended October 31, 2015 and November 1, 2014 (in thousands, except per share amounts):

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 31, 2015

   

November 1, 2014

   

October 31, 2015

   

November 1, 2014

 

Numerator:

                               

Net income (loss), as reported

  $ 6,435     $ (557   $ 6,349     $ (18,091

Denominator:

                               

Weighted-average common shares outstanding - basic

    36,046       34,790       35,670       34,578  

Dilutive effect of employee stock plans

    739       -       845       -  

Weighted-average common shares outstanding - diluted

    36,785       34,790       36,515       34,578  

Net income (loss) per share - basic

  $ 0.18     $ (0.02   $ 0.18     $ (0.52

Net income (loss) per share - diluted

  $ 0.17     $ (0.02   $ 0.17     $ (0.52

 

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

   

Nine Months Ended

 
   

October 31,

2015

   

November 1,

2014

   

October 31,

2015

   

November 1,

2014

 

Stock options

    2,380       3,933       2,415       3,947  

Restricted stock units and awards

    412       738       151       463  

  

 
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

    -       -       -       -       (103

)

    -       -       (103

)

Currency translation adjustments

    -       -       -       -       -       (388

)

    -       (388

)

Stock-based compensation expense

    -       4,880       -       -       -       -       -       4,880  

Tax effect related to share awards

    -       (81

)

    -       -       -       -       -       (81

)

Net proceeds from common stock issued under share plans

    1,043,021       2,752       -       -       -       -       -       2,752  

Net income

    -       -       -       -       -       -       6,349       6,349  

Balance, October 31, 2015

    41,016,710     $ 501,101       (4,659,143

)

  $ (88,198

)

  $ (130

)

  $ (1,472

)

  $ (254,602

)

  $ 156,699  

 

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 nine months ended October 31, 2015, we made matching contributions of $0.6 million and $1.7 million, respectively, and $0.5 million and $1.5 million for the three and nine months ended November 1, 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 and $0.5 million for each of the three and nine months ended October 31, 2015 and November 1, 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 October 31, 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)

 

Equity Incentive Plan

 

On July 10, 2015, the Board of Directors of the Company approved, subject to shareholder approval, the Company’s 2015 Stock Incentive Plan (the “2015 Plan”), which was approved by the Company’s shareholders at the 2015 annual meeting of shareholders held on August 20, 2015. The 2015 Plan is the successor to and continuation of the Company’s 2001 Stock Plan (the “2001 Plan”), and the Amended and Restated 2009 Stock Incentive Plan (the “2009 Plan” and together with the 2001 Plan, the “Prior Plans”). Our 2015 Plan provides for the grant of stock options, restricted stock, restricted stock units, and other stock-related and performance awards that may be settled in cash, stock or other property. The total number of shares of the Company’s common stock reserved for issuance under the 2015 Plan consists of 3,000,000 shares plus the number of shares subject to stock awards outstanding under the Prior Plans that terminate prior to exercise and would otherwise be returned to the share reserves under the Prior Plans up to a maximum of 5,000,000 shares.

 

Employee Stock Purchase Plan

 

On July 10, 2015, the Board of Directors of the Company approved, subject to shareholder approval, the Company’s 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which was approved by the Company’s shareholders at the 2015 annual meeting of shareholders held on August 20, 2015. The 2015 ESPP has replaced the Company’s 2010 Employee Stock Purchase Plan, which was terminated. There are 3,500,000 shares of common stock reserved for issuance under the 2015 ESPP. The 2015 ESPP is implemented by offerings of rights to eligible employees.  Each offering will be in such form and will contain such terms and conditions as our Board or a committee thereof will deem appropriate, subject to compliance with applicable regulations.  The provisions of separate offerings need not be identical.  Under the terms of the offerings that have commenced to date under the 2015 ESPP, eligible employees may authorize payroll deductions of up to 15% of their regular base salaries to purchase common stock at 85% of the fair market value of our common stock at the beginning or end of the six-month offering period, whichever is lower. The maximum number of shares that can be purchased in any single offering period is limited under the terms of the offering. These terms will automatically apply to future offerings under the 2015 ESPP unless modified by the Board or a committee thereof.

 

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 2017 to eligible participants who purchased shares in the last twelve months.

 

As of October 31, 2015, there were approximately 92,072 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.

 

 
18

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12.           Income taxes

 

We recorded a provision for and benefit from income taxes of $2.6 million and $0.6 million for the three months ended October 31, 2015 and November 1, 2014, respectively.  The provision for income taxes was $6.1 million and $3.1 million for the nine months ended October 31, 2015 and November 1, 2014, respectively. The increase in tax expense is primarily attributable to the increase in profitability in taxable jurisdictions in the third quarter of fiscal year 2016 as compared to the same period in fiscal year 2015 and changes in tax reserves. During the three and nine months ended October 31, 2015 and November 1, 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.

 

13.