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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

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

 

For the quarterly period ended April 30, 2016

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 June 3, 2016, the Company had 36,998,268 shares of Common Stock outstanding.

 

 
1

 

 

SIGMA DESIGNS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED APRIL 30, 2016

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I.

FINANCIAL INFORMATION

  

 

 

  

Item 1.

Unaudited Condensed Consolidated Financial Statements

  

 

 

  

 

Unaudited Condensed Consolidated Balance Sheets as of April 30, 2016 and January 30, 2016

3

     

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended April 30, 2016 and May 2, 2015

4

 

  

  

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended April 30, 2016 and May 2, 2015

4

 

 

  

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2016 and May 2, 2015

5

 

 

  

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

  

Item 2.

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

20

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

  

Item 4.

Controls and Procedures

30

 

 

  

PART II.

OTHER INFORMATION

  

 

 

  

Item 1.

Legal Proceedings

31

 

 

  

Item 1A.

Risk Factors

31

 

 

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

  

Item 3.

Defaults Upon Senior Securities

31

 

 

  

Item 4.

Mine Safety Disclosures

31

 

 

  

Item 5.

Other Information

31

 

 

  

Item 6.

Exhibits

32

 

 

  

Signatures

33

 

  

Exhibit index

33

 

 
2

 

 

PART I.                      FINANCIAL INFORMATION

 

ITEM 1.                      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

  

   

April 30, 2016

   

January 30, 2016

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 56,328     $ 63,790  

Short-term marketable securities

    6,840       4,805  

Restricted cash

    823       900  

Accounts receivable, net of allowances of $1,600 as of April 30, 2016 and $2,002 as of January 30, 2016

    38,205       30,362  

Inventory

    24,308       26,709  

Prepaid expenses and other current assets

    15,608       14,085  

Total current assets

    142,112       140,651  
                 

Long-term marketable securities

    1,502       3,527  

Software, equipment and leasehold improvements, net

    11,520       14,086  

Intangible assets, net

    34,754       37,050  

Goodwill

    11,068       11,068  

Deferred tax assets

    902       911  

Long-term investments

    2,586       2,884  

Other non-current assets

    6,524       6,492  

Total assets

  $ 210,968     $ 216,669  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 23,552     $ 26,181  

Accrued compensation and related benefits

    8,648       7,360  

Accrued liabilities

    15,558       14,632  

Total current liabilities

    47,758       48,173  
                 

Income taxes payable

    11,939       11,351  

Long-term deferred tax liabilities

    211       317  

Other long-term liabilities

    3,988       4,023  

Total liabilities

    63,896       63,864  
                 

Commitments and contingencies (Note 8)

               
                 

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; 41,644,236 issued and 36,968,487 outstanding as of April 30, 2016 and 41,424,377 issued and 36,748,628 outstanding as of January 30, 2016

    505,573       503,809  

Treasury stock, at cost, 4,675,749 shares as of April 30, 2016 and January 30, 2016

    (88,336

)

    (88,336

)

Accumulated other comprehensive loss

    (1,274

)

    (1,875

)

Accumulated deficit

    (268,891

)

    (260,793

)

Total shareholders equity

    147,072       152,805  

Total liabilities and shareholders equity

  $ 210,968     $ 216,669  

 

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

 
   

April 30, 2016

   

May 2, 2015

 
                 

Net revenue

  $ 53,775     $ 55,912  

Cost of revenue

    29,774       26,564  

Gross profit

    24,001       29,348  

Operating expenses

               

Research and development

    19,155       16,313  

Sales and marketing

    5,723       5,811  

General and administrative

    5,138       5,781  

Impairment of IP, mask sets and design tools

    -       33  

Total operating expenses

    30,016       27,938  

(Loss) income from operations

    (6,015

)

    1,410  

Interest income and other (expense), net

    (751

)

    671  

(Loss) income before income taxes

    (6,766

)

    2,081  

Provision for income taxes

    1,332       2,463  

Net loss

  $ (8,098

)

  $ (382

)

Net loss per common share:

               

Basic

  $ (0.22

)

  $ (0.01

)

Diluted

  $ (0.22

)

  $ (0.01

)

Shares used in computing net loss per share:

               

Basic

    36,872       35,395  

Diluted

    36,872       35,395  

  

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

  

   

Three Months Ended

 
   

April 30, 2016

   

May 2, 2015

 
                 

Net loss

  $ (8,098

)

  $ (382

)

                 

Other comprehensive income (loss):

               

Currency translation adjustments, net of $0 tax during the three months ended April 30, 2016 and May 2, 2015

    580       (12

)

Unrealized gains (losses) on marketable securities, net of $0 tax during the three months ended April 30, 2016 and May 2, 2015

    21       (19

)

Other comprehensive income (loss)

    601       (31

)

                 

Comprehensive loss

  $ (7,497

)

  $ (413

)

 

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 
4

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) 

  

   

Three Months Ended

 
   

April 30, 2016

   

May 2, 2015

 

Cash flows from operating activities

               

Net loss

  $ (8,098

)

  $ (382

)

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

               

Depreciation and amortization

    6,178       5,294  

Stock-based compensation

    1,892       1,734  

Provision for excess and obsolete inventory

    101       1,071  

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

    (402

)

    187  

Deferred income taxes

    (101

)

    (73

)

Impairment of IP, mask sets and design tools

    -       33  

Tax effect related to share awards

    264       (712

)

Excess tax (expense) benefit from stock-based compensation

    (264

)

    712  

Impairment of privately-held investment

    300       -  

Other non-cash activities

    -       32  

Changes in operating assets and liabilities:

               

Accounts receivable

    (7,441

)

    (5,335

)

Inventory

    2,300       (5,071

)

Prepaid expenses and other current assets

    (1,456

)

    (315

)

Other non-current assets

    19       4  

Accounts payable

    (2,043

)

    2,201  

Accrued liabilities, compensation and related benefits

    2,900       (807

)

Income taxes payable

    1,008       (3,363

)

Other long-term liabilities

    (19

)

    114  

Net cash used in operating activities

    (4,862

)

    (4,676

)

Cash flows from investing activities

               

Restricted cash

    77       -  

Purchases of marketable securities

    -       (7,113

)

Sales and maturities of marketable securities

    11       66  

Purchases of software, equipment and leasehold improvements

    (810

)

    (1,673

)

Purchases of IP

    (1,838

)

    (1,576

)

Net cash used in investing activities

    (2,560

)

    (10,296

)

Cash flows from financing activities

               

Excess tax (expense) benefit from stock-based compensation

    (264

)

    712  

Proceeds from exercise of employee stock options and stock purchase rights

    136       153  

Net cash (used in) provided by financing activities

    (128

)

    865  

Effect of foreign exchange rate changes on cash and cash equivalents

    88       (61

)

Net decrease in cash and cash equivalents

    (7,462

)

    (14,168

)

Cash and cash equivalents, beginning of period

    63,790       83,502  

Cash and cash equivalents, end of period

  $ 56,328     $ 69,334  
                 

Supplemental disclosure of cash flow information

               

Cash paid for income taxes

  $ 383     $ 5,120  

 

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 a variety of ever-growing devices from home entertainment and security systems to energy management appliances. We sell our products into two primary target markets which are the Internet of Things Devices (“IoT Devices”) and Connected Smart TV Platforms markets. Our integrated semiconductor solutions serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes and wired connectivity solutions which are primarily targeted for the Connected Smart TV Platforms market, and consumer electronics sold in the Internet of Things Devices (“IoT Devices”) market. 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 derive a portion of our revenue from licensing and other activities, including licensing of our 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. In November 2015, we completed our acquisition of Bretelon, Inc. (referred to as “Bretelon”). The unaudited condensed consolidated financial statements include the results of operations of Bretelon commencing as of the acquisition date. See Note 6 for further discussion. We operate and report quarterly financial results that consist of 13 weeks and end on the last Saturday of the period. The first quarter of fiscal 2017 and fiscal 2016 ended on April 30, 2016 (91 days) and May 2, 2015 (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 30, 2016, included in our fiscal 2016 Annual Report on Form 10-K, as filed with the SEC on April 4, 2016, referred to as our fiscal 2016 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 April 30, 2016 and January 30, 2016, the consolidated results of our operations for the three months ended April 30, 2016 and May 2, 2015, and the consolidated cash flows for the three months ended April 30, 2016 and May 2, 2015.  The results of operations for the three months ended April 30, 2016 are not necessarily indicative of the results to be expected for future quarters or the full year.

 

There have been no significant changes in our critical accounting policies during the three months ended April 30, 2016, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended January 30, 2016. 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 2016 Annual Report.

 

Recent accounting pronouncements

 

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

 

In May 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”).  The update clarifies certain issues related to transitioning to the new revenue guidance, as well as, assessing collectability, recognition of noncash consideration and presentation of sales and other similar taxes in revenue transactions. The effective date for this ASU is the same as the effective date for ASU 2014-09, Revenue from Contracts with Customers. We are currently evaluating the impact that this standard update will have on our consolidated financial statements.

 

In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”).  The update provides guidance on accounting for licenses of intellectual property (“IP”) and identifying performance obligations.  The amendments clarify how an entity should evaluate its promise when granting a license of IP. They also clarify when a promised good or service is separately identifiable and allow entities to disregard items that are immaterial in the context of the contract.  The effective date for this ASU is the same as the effective date for ASU 2014-09, Revenue from Contracts with Customers. We are currently evaluating the impact that this standard update will have on our consolidated financial statements.

 

 
6

 

 

SIGMA DESIGNS, INC.  

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The amendment simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees’ maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. We are currently evaluating the impact that this standard update will have on our consolidated financial statements. 

 

2.             Cash, cash equivalents and marketable securities

 

As of April 30, 2016 and January 30, 2016, we had $0.8 million and $0.9 million, respectively, of restricted cash related to an escrow withholding in association with our acquisition of Bretelon, an office-space operating lease and other transactions which are not included in the amounts below. Cash, cash equivalents and marketable securities consist of the following (in thousands):

 

   

April 30, 2016

   

January 30, 2016

 
   

Book Value

   

Net

Unrealized

Gains

(Losses)

   

Fair Value

   

Book Value

   

Net

Unrealized

Gains

(Losses)

   

Fair Value

 

Corporate bonds

  $ 7,035     $ 5     $ 7,040     $ 7,052     $ (7

)

  $ 7,045  

Fixed income mutual funds

    1,279       23       1,302       1,255       32       1,287  

Money market funds

    109       -       109       88       -       88  

Total cash equivalents and marketable securities

  $ 8,423     $ 28       8,451     $ 8,395     $ 25       8,420  
                                                 
                                                 

Cash on hand held in the United States

                    3,884                       4,141  

Cash on hand held overseas

                    52,335                       59,561  

Total cash on hand

                    56,219                       63,702  

Total cash, cash equivalents and marketable securities

                  $ 64,670                     $ 72,122  
                                                 

Reported as:

                                               

Cash and cash equivalents

                  $ 56,328                     $ 63,790  

Short-term marketable securities

                    6,840                       4,805  

Long-term marketable securities

                    1,502                       3,527  
                    $ 64,670                     $ 72,122  

 

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

 

   

April 30, 2016

   

January 30, 2016

 
   

Book Value

   

Fair Value

   

Book Value

   

Fair Value

 

Due in one year or less

  $ 6,922     $ 6,949     $ 4,863     $ 4,893  

Due in greater than one year

    1,501       1,502       3,532       3,527  

Total

  $ 8,423     $ 8,451     $ 8,395     $ 8,420  

 

 
7

 

 

  SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.             Fair values of assets and liabilities

  

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 April 30, 2016 and January 30, 2016 (in thousands):

  

   

April 30, 2016

 
   

Fair Value

   

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

   

Significant

Observable

Inputs (Level 2)

   

Significant

Unobservable

Inputs (Level 3)

 
                                 

Corporate bonds

  $ 7,040     $ 7,040     $ -     $ -  

Fixed income mutual funds

    1,302       1,302       -       -  

Money market funds

    109       109       -       -  

Total cash equivalents and marketable securities

    8,451       8,451       -       -  

Restricted cash

    823       823       -       -  

Total assets measured at fair value

  $ 9,274     $ 9,274     $ -     $ -  

 

   

January 30, 2016

 
   

Fair Value

   

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

   

Significant

Observable

Inputs (Level 2)

   

Significant

Unobservable

Inputs (Level 3)

 
                                 

Corporate bonds

  $ 7,045     $ 7,045     $ -     $ -  

Fixed income mutual funds

    1,287       1,287       -       -  

Money market funds

    88       88       -       -  

Total cash equivalents and marketable securities

    8,420       8,420       -       -  

Restricted cash

    900       900       -       -  

Total assets measured at fair value

  $ 9,320     $ 9,320     $ -     $ -  

 

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 April 30, 2016, we held equity investments in two privately-held venture capital funded technology companies and an equity investment in one joint venture, with an aggregate carrying value of $2.6 million. During the three months ending April 30, 2016, we recorded an impairment charge of $0.3 million in connection with one of our privately-held investments as we concluded the impairment to be other-than-temporary. 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 months ended April 30, 2016 and May 2, 2015. 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.

 

 

 
8

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 

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): 

 

Investments

 

April 30, 2016

   

January 30, 2016

 

Issuer A

  $ 2,000     $ 2,000  

Issuer B

    450       750  

Issuer C

    136       134  

Total investments

  $ 2,586     $ 2,884  

  

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 2016 and the first quarter of fiscal 2017, we recorded impairment charges each of $0.3 million on this investment as we concluded the impairment to be other-than-temporary.

  

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

 

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

 

Our President and Chief Executive Officer is a member of the Board of Directors of both 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):

 

   

April 30, 2016

   

January 30, 2016

 

Wafers and other purchased materials

  $ 12,517     $ 15,440  

Work-in-process

    4,110       2,885  

Finished goods

    7,681       8,384  

Total inventory

  $ 24,308     $ 26,709  

 

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

   

April 30, 2016

   

January 30, 2016

 

Prepayments for taxes

  $ 3,369     $ 3,357  

Deposits

    3,210       3,200  

Non-operating receivable

    2,731       -  

Prepayments for inventory

    2,664       3,725  

Prepayments for royalties

    692       741  

Other current assets

    2,942       3,062  

Total prepaid expenses and other current assets

  $ 15,608     $ 14,085  

  

 
9

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

 

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

 

   

Estimated Useful Lives

(years)

   

April 30, 2016

   

January 30, 2016

 

Software

    2       $ 40,697     $ 40,411  
Mask sets   1 - 5       14,460       14,130  

Equipment

   1 - 5       8,261       8,088  

Office equipment and furniture

    2         7,875       7,705  

Leasehold improvements

   1 - 6       2,115       2,089  

Total

              73,408       72,423  

Less: Accumulated depreciation and amortization

              (61,888

)

    (58,337

)

Total software, equipment and leasehold improvements, net

            $ 11,520     $ 14,086  

 

Software, equipment and leasehold improvement depreciation and amortization expense for the three months ended April 30, 2016 and May 2, 2015 was $3.4 million and $2.9 million, respectively. We recorded an impairment charge of software related to design tools associated with discontinued products for the three months ended May 2, 2015 of less than $0.1 million which was recorded in operating expenses in the accompanying condensed consolidated statement of operations.

 

 Accrued liabilities consist of the following (in thousands):

 

   

April 30, 2016

   

January 30, 2016

 

License fees

  $ 4,135     $ 5,181  

Rebates

    3,925       2,864  

Income taxes payable, current portion

    2,725       2,305  

Royalties

    2,156       1,469  

Warranties

    960       959  

Deferred revenue

    416       407  

Other accrued liabilities

    1,241       1,447  

Total accrued liabilities

  $ 15,558     $ 14,632  

  

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

 

   

Three Months Ended

 
   

April 30, 2016

   

May 2, 2015

 
                 

Beginning balance

  $ 2,864     $ 9,599  

Charged as a reduction of revenue

    2,444       4,120  

Reversal of unclaimed rebates

    -       (807

)

Payments

    (1,383

)

    (5,770

)

Ending balance

  $ 3,925     $ 7,142  

 

6.            Business combinations

 

During the fourth quarter of fiscal 2016, we completed the acquisition of Bretelon, Inc. (“Bretelon”), which is engaged in developing an advanced form of mobile IoT technology (“Acquisition”). In accordance with the related Agreement and Plan of Merger (the “Merger Agreement”), all of the outstanding equity interests of Bretelon were exchanged for aggregate consideration of approximately $15.7 million in cash subject to certain adjustments, the forgiveness of $2.7 million in debt and the assumption of certain liabilities (the “Merger Consideration”). We retained a portion of the consideration following the closing for the satisfaction of any indemnification claims made within a specified period of time. The Acquisition was consummated on November 12, 2015.

 

We believe that our acquisition of Bretelon assists us in expanding our overall IoT offering. This Acquisition should expand our total addressable market to include outdoor applications, which we believe will complement our Z-Wave product line which currently covers primarily indoor applications. Additionally, we intend to take advantage of the synergy between these two product lines to service smart city and commercial opportunities that make outdoor use of the Z-Wave mesh network and mobile IoT connectivity.

 

 
10

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Certain members of our board of directors held an interest in Bretelon prior to the consummation of the Acquisition. For further discussion, refer to Note 16, “Related parties” of the consolidated financial statements included in our fiscal 2016 Annual Report on Form 10-K, as filed with the SEC on April 4, 2016.  

 

The operations of Bretelon are included in our condensed consolidated financial statements from the date of Acquisition, which, during the first quarter of fiscal 2017, contributed approximately $0.2 million to our net loss in the accompanying condensed consolidated statement of operations.

 

We recognized the Bretelon assets acquired and the liabilities assumed based upon their fair value measured as of the date of the Acquisition. The aggregate purchase price for Bretelon has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of Acquisition. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and is allocated to goodwill, none of which is expected to be tax deductible. Refer to Note 7, “Business combinations” of the consolidated financial statements included in our fiscal 2016 Annual Report on Form 10-K, as filed with the SEC on April 4, 2016 for the allocation of purchase price which is expected to be finalized within 12 months from the effective date of the acquisition.

 

The following unaudited pro forma condensed consolidated results of operations give effect to the acquisition of Bretelon as if it had occurred as of the beginning of the fiscal period presented. The unaudited pro forma condensed consolidated results of operations are provided for informational purposes only and do not purport to represent actual consolidated results of operations had the acquisition occurred on the date assumed, nor are these financial statements necessarily indicative of future consolidated results of operations.  We expect to incur costs and realize benefits associated with integrating the operations of the Bretelon business.  The results of operations of the Bretelon business have been included in the condensed consolidated results of operations from November 4, 2015 inception to date. The unaudited pro forma consolidated results of operations do not reflect the cost of any integration activities or any benefits that may result from operating efficiencies or revenue synergies (in thousands, except per share data).

 

   

Three Months Ended

 
   

May 2, 2015

 
         

Net revenue

  $ 56,487  

Net loss

  $ (2,177

)

Basic and diluted net loss per share

  $ (0.06

)

 

 
11

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.             Intangible assets

 

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

 

   

April 30, 2016

 
   

Gross

Value

   

Impairment

   

Accumulated

Amortization

and Effect of

Currency

Translation

   

Net Value

   

Weighted

Average

Remaining

Amortization

Period

(Years)

 

 

Acquired intangible assets:

                                       

Developed technology

  $ 85,429     $ (24,614

)

  $ (50,041

)

  $ 10,774       6.8  

Customer relationships

    54,505       (30,486

)

    (19,962

)

    4,057       5.7  

Trademarks and other

    4,078       -       (3,769

)

    309       2.7  

Purchased IP - amortizing

    34,067       (5,516

)

    (19,823

)

    8,728       2.7  

Total amortizing

    178,079       (60,616

)

    (93,595

)

    23,868       5.0  

Purchased IP - not yet deployed

    15,026       (4,140

)

    -       10,886          

Total intangibles

  $ 193,105     $ (64,756

)

  $ (93,595

)

  $ 34,754          

   

   

January 30, 2016

 
   

Gross

Value

   

Impairment

   

Accumulated

 Amortization

and Effect of

Currency

Translation

   

Net Value

   

Weighted

Average

Remaining

Amortization

Period

(Years)

 

 

Acquired intangible assets:

                                       

Developed technology

  $ 85,427     $ (24,614

)

  $ (48,824

)

  $ 11,989       6.5  

Customer relationships

    54,505       (30,486

)

    (19,557

)

    4,462       5.7  

Trademarks and other

    4,078       -       (3,739

)

    339       2.9  

Purchased IP - amortizing

    32,838       (5,516

)

    (18,696

)

    8,626       2.9  

Total amortizing

    176,848       (60,616

)

    (90,816

)

    25,416       5.1  

Purchased IP - not yet deployed

    15,774       (4,140

)

    -       11,634          

Total intangibles

  $ 192,622     $ (64,756

)

  $ (90,816

)

  $ 37,050          

  

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

 
   

April 30, 2016

   

May 2, 2015

 

Cost of revenue

  $ 2,053     $ 2,006  

Operating expenses

    717       353  

Total intangibles amortization expense

  $ 2,770     $ 2,359  

 

 
12

 

 

 SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

As of April 30, 2016, we expect amortization expense in future periods to be as follows (in thousands):

 

Fiscal year

 

Total

 

2017 (remaining nine months)

  $ 6,729  

2018

    5,131  

2019

    3,213  

2020

    2,931  

2021

    1,588  

Thereafter

    4,276  

Total

  $ 23,868  

  

8.          Commitments and contingencies

  

Commitments

 

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 April 30, 2016, the total amount of outstanding non-cancelable purchase orders was approximately $29.0 million.

 

Third-party licensed technology

 

In October 2015, we entered into an agreement with a vendor to purchase $6.1 million of licensed technology for integration into future iterations of our products. Payments under this agreement are being made on an annual basis from December 2015 through December 2018. As of April 30, 2016, remaining payments under this agreement totaled $4.5 million.  In addition to this agreement, we have entered into other purchase arrangements for certain licensed technology; remaining payments under these agreements totaled $5.1 million as of April 30, 2016. Payments under these arrangements are being made through fiscal 2018. We have fully accrued these amounts as of April 30, 2016.

 

Design Tools

 

We have entered into purchase arrangements with various vendors for certain design tools; remaining payments under these agreements totaled $1.6 million as of April 30, 2016. Payments under these arrangements are being made through fiscal 2018. We have fully accrued these amounts as of April 30, 2016.

 

Royalties

 

We pay royalties for the right to sell certain products under various license agreements. During the three months ended April 30, 2016 and May 2, 2015, we recorded gross royalty expense of $1.3 million and $0.8 million, respectively, in cost of revenue in the condensed consolidated statements of operations.

 

Our wholly owned subsidiary, Sigma Designs Israel SDI Ltd. (formerly Coppergate Communications, Ltd.), participated in programs sponsored by the Office of the Chief Scientist of Israel's Ministry of Industry, Trade and Labor, or the OCS, for the support of research and development activities that we conducted in Israel. Through April 30, 2016, 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 April 30, 2016, our remaining potential obligation under these programs was approximately $1.1 million.

 

 
13

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

Contingencies

 

Product warranty

 

In general, we sell products with 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 April 30, 2016 and May 2, 2015 are as follows (in thousands):

 

Three Months Ended

 

Balance

Beginning

of

Period

   

Additions

and

Adjustments

   

Deductions

   

Balance

End

of Period

 

April 30, 2016

  $ 959     $ 139     $ (138

)

  $ 960  

May 2, 2015

  $ 864     $ 140     $ (143

)

  $ 861  

 

 

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. As of April 30, 2016, we were not aware of any claims against us, asserted or otherwise.

 

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 render 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, if any, the overall maximum amount of the obligations cannot be reasonably estimated.

 

 
14

 

 

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. As of April 30, 2016, we are not aware of any audit by these licensors, intended or otherwise.

 

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. We believe we are substantially in compliance with the terms of our licensing arrangements.

 

9.           Earnings per share

 

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the fiscal period.

 

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

 

   

Three Months Ended

 
   

April 30, 2016

   

May 2, 2015

 

Stock options

    2,388       2,963  

Restricted stock units and awards

    736       743  

 

 
15

 

 

 SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10.           Shareholders’ equity and employee benefits

 

The following table sets forth our 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 30, 2016

    41,424,377     $ 503,809       (4,675,749

)

  $ (88,336

)

  $ (208

)

  $ (1,667

)

  $ (260,793

)

  $ 152,805  

Unrealized gain on marketable securities

    -       -       -       -       21       -       -       21  

Currency translation adjustments

    -       -       -       -       -       580       -       580  

Stock-based compensation expense

    -       1,892       -       -       -       -       -       1,892  

Tax effect related to share awards

    -       (264

)

    -       -       -       -       -       (264

)

Net proceeds from common stock issued under share plans

    219,859       136       -       -       -       -       -       136  

Net loss

    -       -       -       -       -       -       (8,098

)

    (8,098

)

Balance, April 30, 2016

    41,644,236     $ 505,573       (4,675,749

)

  $ (88,336

)

  $ (187

)

  $ (1,087

)

  $ (268,891

)

  $ 147,072  

 

401(k) tax deferred savings plan

 

We maintain a 401(k) tax deferred savings plan for the benefit of qualified employees who are based in the United States.  Under the 401(k) tax deferred savings plan, U.S. based employees may elect to reduce their current annual taxable compensation up to the statutorily prescribed limit, which is $18,000 in calendar year 2016.  Employees age 50 or over may elect to contribute an additional $6,000. We made matching contributions to the 401(k) tax deferred savings plan during the three months ended April 30, 2016 of $0.2 million and made no matching contributions during the three months ended May 2, 2015.

 

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, an employee will contribute 8.0% of the annual base to the plan and the employer will match 21% of the annual base.  For calendar year 2015, the annual base is capped at RMB 16,353 per employee. We made matching contributions of $0.6 million and $0.5 million for the three months ended April 30, 2016 and May 2, 2015, 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 under these plans of $0.2 million for each of the three months ended April 30, 2016 and May 2, 2015.

 

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 April 30, 2016, we have an accrued severance liability of $0.7 million fully offset by an asset of $0.7 million of severance employee funds. We made contributions of less than $0.1 million for each of the three months ended April 30, 2016 and May 2, 2015.

 

 
16

 

   

 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 the federal securities law. Certain purchasers of the shares that were issued in excess of the shares authorized under our 2010 ESPP 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 in fiscal 2017 to eligible participants who purchased shares during the impacted offering periods in fiscal 2015.

 

As of May 31, 2016, there were approximately 59,480 shares issued to participants in the 2010 ESPP during the impacted offering periods 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 based on initial estimates, 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. We reclassified the aforementioned amount out of additional-paid-in-capital into accrued compensation and related benefits during fiscal 2015. We continue to carry the resulting liability on the accompanying condensed consolidated balance sheets as of April 30, 2016 and January 30, 2016 and will continue to do so until such rescission rights have expired subsequent to the aforementioned offering during fiscal 2017. We have not classified the shares themselves outside of permanent equity 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 in the process of settling the potential tax consequences on behalf of our employees for issuing shares in excess of the number of shares reserved under our 2010 ESPP with relevant tax authorities. We may incur additional costs associated with any potential tax consequences and have included $0.4 million of expense associated with these additional costs which were recorded in accrued compensation and related benefits during fiscal 2015. We continue to carry the resulting liability on the accompanying condensed consolidated balance sheets as of April 30, 2016 and January 30, 2016 and will continue to do so until such settlement has been reached with the aforementioned authorities.

 

11.           Income taxes

 

We recorded a provision for income taxes of $1.3 million and $2.5 million for the three months ended April 30, 2016 and May 2, 2015, respectively.  The decrease in tax expense is primarily attributable to lower profitability in taxable jurisdictions in the first quarter of fiscal year 2017 as compared to the same period in fiscal year 2016 and changes in tax reserves. During the three months ended April 30, 2016 and May 2, 2015, we were unable to reasonably project our annual effective tax rate, and therefore computed our provision for income taxes based on year-to-date actual financial results. Included in our provision for income taxes are foreign exchange gains or losses on unsettled income tax liabilities. 

 

 
17

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12.           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 both of our target markets. Connected Smart TV Platforms consist of all products that are sold into digital televisions as well as other adjacent markets using chipset products that are designed for video post-processing, products delivering IP streaming video, including hybrid versions of these products, and communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP, or data through wired or wireless connectivity. IoT Devices consist of all interconnected Z-Wave enabled gateways, appliances and devices that provide monitoring and control capabilities for the management of any consumer ecosystem. Our IoT Devices product line consists of our wireless Z-Wave chips, modules and Z-Wave mesh networking protocol. During the three months ended April 30, 2016, we derived a portion of our IoT Devices revenue from the achievement of a milestone under a development agreement in connection with our acquisition of Bretelon in the amount of $1.6 million.

 

Our License and other markets include revenue derived from the licensing of our technology to third parties and other sources. Revenue derived from other sources includes software development kits, engineering support services for hardware and software, and engineering development for customization of chipsets and other accessories; revenue from this product group represented 0.4% and 0.5% of our total net revenue for the three months ended April 30, 2016 and May 2, 2015, respectively.

 

Starting with the first quarter of fiscal 2017, we have combined certain previously reported target markets commensurate with changes taking effect in our industry as a whole. Specifically, we combined the Smart TV, Media Connectivity and Set-top Box markets into one target market, henceforth referred to as the Connected Smart TV Platforms target market. The aforementioned target market is intended to include all of our products sold into or supporting the digital television experience including products designed for video-post processing, delivering of IP streaming video, audio, VoIP, or data and the equipment intended to connect these various home entertainment products. We have historically and continue to operate under the belief that the Smart TV, Set-top Box and Media Connectivity products complement their respective value propositions to the markets into which we sell. This combination is intended to present this value proposition as a holistic solution or platform for the anticipated convergence of IP-video, audio and data delivery across any device within the connected home. All previously reported amounts in prior periods have been adjusted retrospectively to reflect our target market changes. Our IoT Devices market product categorizations remain unchanged, and beginning in the fourth quarter of fiscal 2016 includes amounts from our acquisition of Bretelon.

 

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

 

   

Three Months Ended

 
   

April 30, 2016

   

May 2, 2015

 
                 

Connected Smart TV Platforms

  $ 43,247     $ 43,149  

IoT Devices

    10,337       12,457  

License and other

    191       306  

Net revenue

  $ 53,775     $ 55,912  

 

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

  

   

Three Months Ended

 
   

April 30, 2016

   

May 2, 2015

 

Asia

  $ 46,041     $ 39,669  

North America

    6,615       12,153  

Europe

    1,119       2,765  

Other Regions

    -       1,325  

Net revenue

  $ 53,775     $ 55,912  

 

 
18

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

   

Three Months Ended

 
   

April 30, 2016

   

May 2, 2015

 
                 

China, including Hong Kong

  $ 27,457     $ 22,177  

Taiwan

    13,964       8,919  

United States

    6,589       12,146  

Thailand

    2,821       4,985  

Rest of the world

    2,944       7,685  

Net revenue

  $ 53,775     $ 55,912  

 

During the three months ended April 30, 2016, Sunjet Components Corporation and Silicon Application accounted for 22% and 11% of our net revenue, respectively. During the three months ended May 2, 2015, Sunjet Components Corporation accounted for 12% of our net revenue.

 

 
19

 

 

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

 

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

 

Overview

 

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

  

Our chipset products and target markets

 

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

 

We sell our products into two target markets: Connected Smart TV Platforms and Internet of Things (“IoT”) Devices. Connected Smart TV Platforms products consist of a range of platforms that are based on highly integrated chips, embedded software, and hardware reference designs. These products include all of our products that are sold into digital televisions, connected media processors and players delivering IP streaming video, including hybrid versions of these products, and wired home networking controller chipsets that are designed to provide connectivity solutions between various home entertainment products and incoming video streams. IoT Devices consist of our wireless Z-Wave chipsets and modules. During the three months ended April 30, 2016, we derived a portion of our IoT Devices revenue from the achievement of a milestone under a development agreement in connection with our acquisition of Bretelon in the amount of $1.6 million.

 

Starting with the first quarter of fiscal 2017, we have combined certain previously reported target markets commensurate with changes taking effect in our industry as a whole. Specifically, we combined the Smart TV, Media Connectivity and Set-top Box markets into one target market, henceforth referred to as the Connected Smart TV Platforms target market. The aforementioned target market is intended to include all of our products sold into or supporting the digital television experience including products designed for video-post processing, delivering of IP streaming video, audio, VoIP, or data and the equipment intended to connect these various home entertainment products. We have historically and continue to operate under the belief that the Smart TV, Set-top Box and Media Connectivity products complement their respective value propositions to the markets into which we sell. This combination is intended to present this value proposition as a holistic solution or platform for the anticipated convergence of IP-video, audio and data delivery across any device within the connected home. All previously reported amounts in prior periods have been adjusted retrospectively to reflect our target market changes. Our IoT Devices market product categorizations remain unchanged, and beginning in the fourth quarter of fiscal 2016 includes amounts from our acquisition of Bretelon.

 

 
20

 

 

Connected Smart TV Platforms Market

 

The Connected Smart TV Platforms market (previously reported as three separate target markets of Smart TV, Media Connectivity and Set-top Box) consists of all products that are sold into digital televisions as well as other adjacent markets using chipset products that are designed for video post-processing, products delivering IP streaming video, including hybrid versions of these products and communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP, or data through wired or wireless connectivity. We serve this market with our media processor chips, dedicated post-processing products and home networking controllers.

 

Internet of Things (“IoT”) Devices Market

 

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

 

We expect our acquisition of Bretelon will allow us to expand our overall IoT footprint. This acquisition expands our total addressable market to include products with outdoor applications, which are an ideal complement to our Z-Wave product line that covers indoor applications. We intend to take advantage of the synergy between these two product lines to service smart city and commercial opportunities that make outdoor use of the Z-Wave mesh network and mobile IoT connectivity.

 

License and Other Markets

 

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

 

Critical accounting policies and estimates

 

There have been no significant changes in our critical accounting policies during the three months ended April 30, 2016, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended January 30, 2016. 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 2016 Annual Report.

 

 
21

 

 

Results of operations

 

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

 

   

Three Months Ended

 
   

April 30,

2016

   

% of Net

Revenue

   

May 2,

2015

   

% of Net

Revenue

 

Net revenue

  $ 53,775       100 %   $ 55,912       100 %

Cost of revenue

    29,774       55 %     26,564       47 %

Gross profit

    24,001       45 %     29,348       53 %

Operating expenses

                               

Research and development

    19,155       36 %     16,313       29 %

Sales and marketing

    5,723       11 %     5,811       11 %

General and administrative

    5,138       9 %     5,781       10 %

Impairment of IP, mask sets and design tools

    -       - %     33       - %

Total operating expenses

    30,016       56 %     27,938       50 %

(Loss) income from operations

    (6,015

)

    (11

%)

    1,410       3 %

Interest and other (expense) income, net

    (751

)

    (2

% )

    671       1 %

(Loss) income before income taxes

    (6,766

)

    (13

%)

    2,081       4 %

Provision for income taxes

    1,332       2 %     2,463       4 %

Net loss

  $ (8,098

)

    (15

%)

  $ (382

)

    - %

 
Net revenue

 

Our net revenue for the three months ended April 30, 2016 decreased $2.1 million, or 4%, compared to the corresponding period in the prior fiscal year due to decreases within the IoT Devices market.

 

 
22

 

 

Net revenue by target market

 

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

 

   

Three Months Ended

 
   

April 30,

2016

   

% of Net

Revenue

   

May 2,

2015

   

% of Net

Revenue

 

Connected Smart TV Platforms

  $ 43,247       80 %   $ 43,149       77 %

IoT Devices

    10,337       19 %     12,457       22 %

License and other

    191       1 %     306       1 %

Net revenue

  $ 53,775       100 %   $ 55,912       100 %

  

Connected Smart TV Platforms: For the three months ended April 30, 2016, net revenue from sales of our products into the Connected Smart TV Platforms market remained flat compared to the corresponding period in the prior fiscal year. We experienced an increase of 7% in average selling price, or ASP, partially offset by a decrease of 6% in units shipped. The increase in ASP is primarily the result of continued penetration by our new product offerings in the market, which have higher ASPs for chipsets used in ultra-high definition, also known as Ultra-HD televisions. The Smart TV market transition, and consequently, anticipated demand of Ultra-HD is bolstering the demand for our new generation products. The volume decline in our Connected Smart TV Platforms market resulted primarily from the continued decline of demand for our older legacy products, many of which are now approaching end-of-life.

 

Our wired home networking controller chipsets contributed significantly to this volume decline primarily due to reduced demand due to the continued expansion of wireless technologies in the market impacting our existing product offerings. Our connected media processors and players experienced declines in ASP as IPTV service providers are pending transition to new generations of set-top box products.

 

Our Connected Smart TV Platforms revenue was derived mainly from our Asia region. We typically expect our strongest Connected Smart TV Platforms sales in the third calendar quarter and declining Connected Smart TV Platforms sales in the first and fourth quarter of each calendar year. We expect our net revenue from the Connected Smart TV Platforms market to continue to be a significant percentage of net revenue but will fluctuate in future periods as we continue to develop and introduce new products for this market and as a result of seasonality typically experienced in the consumer electronics market.

 

IoT Devices:  For the three months ended April 30, 2016, net revenue from sales of our products into the IoT Devices market decreased $2.1 million, or 17%, compared to the corresponding period in the prior fiscal year, which was primarily the result of decreased demand due to inventory adjustments undergone by our security and protection services and telecommunication customers, evidenced by a decrease of 23% in units shipped primarily to the Asia region.  During the three months ended April 30, 2016, we derived a portion of our IoT Devices revenue from the achievement of a milestone under a development agreement in connection with our acquisition of Bretelon in the amount of $1.6 million. We have compelling products for our IoT Devices market and we continue to target large operators who are introducing home control and automation products primarily in these regions. We expect our acquisition of Bretelon to bolster our existing IoT product offerings in the near future by expanding the total addressable market to include products with outdoor applications, which are an ideal complement to our Z-Wave product line that covers indoor applications. We expect our revenue from the IoT Devices market to increase in the foreseeable future.

 

License and other:  Our license and other markets consist primarily of technology license revenue and revenue from other ancillary markets. Net revenue for both the three months ended April 30, 2016 and May 2, 2015 was nominal as we had no significant source of license or other revenue in either period. We do not expect our license and other revenue to be a significant source of revenue, but this may fluctuate in future periods if we enter into a license agreement in the future. We do not have a sales program based around licensing our technology. However, we continue to evaluate opportunities as they arise in the future.

 

 
23

 

 

Net revenue by geographic region

 

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

 

   

Three Months Ended

 
   

April 30,

2016

   

% of Net

Revenue

   

May 2,

2015

   

% of Net

Revenue

 

Asia

  $ 46,041       86 %   $ 39,669       71 %

North America

    6,615       12 %     12,153       22 %

Europe

    1,119       2 %     2,765       5 %

Other Regions

    -       - %     1,325       2 %

Net revenue

  $ 53,775       100 %   $ 55,912       100 %

 

Asia:  Our net revenue from customers in Asia increased $6.4 million, or 16%, for the three months ended April 30, 2016, compared to the corresponding period in the prior fiscal year. The increase was largely attributable to the increasing deployments of new generation products by our customers within the Connected Smart TV Platforms market. This increase was partially offset by a decrease in the IoT Devices market resulting from inventory adjustments undergone by our security and protection services and telecommunication customers. Net revenue from customers in Asia as a percentage of our total net revenue for the three months ended April 30, 2016 increased fifteen percentage points compared to the corresponding period in the prior fiscal year. This increase is primarily due to the significant decrease in revenue in North America.

  

North America:  Our net revenue from North American customers decreased $5.5 million, or 46%, for the three months ended April 30, 2016 compared to the corresponding period in the prior fiscal year. The decrease was mainly attributable to the fluctuating deployments of newer generation products used in digital televisions by our customers within the Connected Smart TV Platforms market, due in part to seasonality. This decrease was compounded by reduced demand of our wired home networking controller chipsets due to the continued expansion of wireless technologies in the market impacting our existing product offerings. Net revenue from North American customers as a percentage of our total net revenue for the three months ended April 30, 2016 decreased ten percentage points compared to the corresponding period in the prior fiscal year primarily due to decreases experienced within our Connected Smart TV Platforms target market.

  

Europe:  Our net revenue from European customers decreased $1.6 million, or 60%, for the three months ended April 30, 2016, compared to the corresponding period in the prior fiscal year. Net revenue from European customers as a percentage of our total net revenue for the three months ended April 30, 2016 decreased three percentage points compared to the corresponding period in the prior fiscal year. These decreases were primarily the result of a decrease in shipments to our Connected Smart TV Platforms market, primarily in Germany, as we continue to experience a shift away from legacy products with no corresponding adoption of newer generation Connected Smart TV Platforms products within this region.

 

Other regions: Our net revenue from other regions decreased $1.3 million, or 100%, for the three months ended April 30, 2016 compared to the corresponding period in the prior fiscal year. The decrease was primarily the result of a decrease in demand for our wired home networking controller chipsets in Brazil.

  

Major customers

 

During the three months ended April 30, 2016, Sunjet Components Corporation and Silicon Application accounted for 22% and 11% of our net revenue, respectively. During the three months ended May 2, 2015, Sunjet Components Corporation accounted for 12% of our net revenue.

 

 
24

 

 

Gross profit and gross margin

 

The following table sets forth our gross profit and gross margin (in thousands, except percentages):

 

   

Three Months Ended

 
   

April 30, 2016

   

% Change

   

May 2, 2015

 

Gross profit

  $ 24,001       (18%)     $ 29,348  

Gross margin %

    44.6

%

    (8%)       52.5

%

 

Gross profit decreased $5.3 million, or 18%, for the three months ended April 30, 2016, compared to the corresponding period in the prior fiscal year. The decrease was primarily due to higher cost per unit, or CPUs, within the Connected Smart TV Platforms market resulting from continued penetration of our new product offerings with a related impact of $6.4 million compounded by a decrease in sales volumes with a related impact of $1.4 million. These decreases were partially offset by increases in average selling prices, or ASPs, within the Connected Smart TV Platforms market with a related impact of $2.8 million. Our gross margin declined 7.9 percentage points for the three months ended April 30, 2016, compared to the corresponding period in the prior fiscal year primarily due to the aforementioned increase in CPUs related to our newer product offerings within the Connected Smart TV Platforms market.

 

Our future gross margin could be impacted by our product mix and could be adversely affected by further growth in sales of products that have lower gross margins. Our gross margin may also be impacted by the geographic mix of our revenue and may be adversely affected by increased sales discounts, rebates, royalties, and product pricing attributable to competitive factors. Additionally, our manufacturing-related costs may be negatively impacted by constraints in our supply chain, which in turn could negatively affect gross margin. If any of the preceding factors that in the past have negatively impacted our gross margin arises in the future, our gross margin could decline.

 

Research and development expense

 

Research and development expense consists of compensation and benefits costs including variable compensation expense, development and design costs such as mask, prototyping, testing and subcontracting costs, depreciation of our equipment costs, amortization of our engineering design tools and third-party licensed technology, stock-based compensation expense, and other expenses such as costs for facilities and travel. During certain periods, research and development expense may fluctuate relative to product development phases and project timing. The following table sets forth our research and development expense and the related change (in thousands, except percentages):

  

   

Three Months Ended

                 
   

April 30, 2016

   

May 2, 2015

   

$ Change

   

% Change

 

Research and development expense

  $ 19,155     $ 16,313     $ 2,842       17

%

Percent of net revenue

    35.6

%

    29.2

%

               

 

Research and development expense increased $2.8 million, or 17%, during the three months ended April 30, 2016 compared to the corresponding period in the prior fiscal year. The increase was partially due to increases of $1.2 million in compensation and benefits. We hired additional employees during the latter half of fiscal 2016 to contribute to the development of emerging technologies within the Connected Smart TV Platforms market and during the fourth quarter of fiscal 2016, assumed additional employees in connection with our acquisition of Bretelon. Our third-party engineering services contributing to certain research and development activities increased $1.3 million primarily due to continuing efforts resulting from our acquisition of Bretelon. We had 516 employees in research and development as of April 30, 2016 compared to 508 employees as of May 2, 2015.

 

 
25

 

 

Sales and marketing expense

 

Sales and marketing expense consists primarily of compensation and benefits costs, including commissions to our direct sales force, stock-based compensation expense, trade shows, travel and entertainment expenses and external commissions. Our sales and marketing expense is summarized as follows (in thousands, except percentages):

  

   

Three Months Ended