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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 July 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 August 31, 2016, the Company had 37,456,506 shares of Common Stock outstanding.

 

 
1

 

SIGMA DESIGNS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED JULY 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 July 30, 2016 and January 30, 2016

3

     

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended July 30, 2016 and August 1, 2015

4

 

  

  

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended July 30, 2016 and August 1, 2015

4

 

 

  

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 30, 2016 and August 1, 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

31

 

 

  

Item 4.

Controls and Procedures

31

 

 

  

PART II.

OTHER INFORMATION

  

 

 

  

Item 1.

Legal Proceedings

32

 

 

  

Item 1A.

Risk Factors

32

 

 

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

  

Item 3.

Defaults Upon Senior Securities

32

 

 

  

Item 4.

Mine Safety Disclosures

32

 

 

  

Item 5.

Other Information

32

 

 

  

Item 6.

Exhibits

32

 

 

  

Signatures

33

 

  

Exhibit index

34

  

 
2

 

 

PART I.                      FINANCIAL INFORMATION

 

ITEM 1.                      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data) 

  

 

   

July 30,

2016

   

January 30,

2016

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 68,353     $ 63,790  

Short-term marketable securities

    4,807       4,805  

Restricted cash

    818       900  

Accounts receivable, net of allowances of $1,989 as of July 30, 2016 and $2,002 as of January 30, 2016

    45,911       30,362  

Inventory

    21,453       26,709  

Prepaid expenses and other current assets

    9,055       14,085  

Total current assets

    150,397       140,651  
                 

Long-term marketable securities

    -       3,527  

Software, equipment and leasehold improvements, net

    17,659       14,086  

Intangible assets, net

    33,988       37,050  

Goodwill

    11,145       11,068  

Deferred tax assets

    936       911  

Long-term investments

    2,000       2,884  

Other non-current assets

    6,067       6,492  

Total assets

  $ 222,192     $ 216,669  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 23,090     $ 26,181  

Accrued compensation and related benefits

    8,145       7,360  

Accrued liabilities

    21,377       14,632  

Total current liabilities

    52,612       48,173  
                 

Income taxes payable

    12,924       11,351  

Long-term deferred tax liabilities

    105       317  

Other long-term liabilities

    8,516       4,023  

Total liabilities

    74,157       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; 42,059,113 issued and 37,383,364 outstanding as of July 30, 2016 and 41,424,377 issued and 36,748,628 outstanding as of January 30, 2016

    508,592       503,809  

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

    (88,336

)

    (88,336

)

Accumulated other comprehensive loss

    (1,608

)

    (1,875

)

Accumulated deficit

    (270,613

)

    (260,793

)

Total shareholders equity

    148,035       152,805  

Total liabilities and shareholders equity

  $ 222,192     $ 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

   

Six Months Ended

 
   

July 30,

2016

   

August 1,

2015

   

July 30,

2016

   

August 1,

2015

 

Net revenue

  $ 61,316     $ 58,307     $ 115,091     $ 114,219  

Cost of revenue

    31,734       29,783       61,508       56,347  

Gross profit

    29,582       28,524       53,583       57,872  
                                 

Operating expenses

                               

Research and development

    18,836       16,102       37,991       32,415  

Sales and marketing

    5,939       5,254       11,662       11,065  

General and administrative

    4,820       5,005       9,958       10,786  

Impairment of IP, mask sets and design tools

    300       955       300       988  

Total operating expenses

    29,895       27,316       59,911       55,254  

(Loss) income from operations

    (313

)

    1,208       (6,328

)

    2,618  

Interest and other income (expense), net

    415       113       (336

)

    784  

Income (loss) before income taxes

    102       1,321       (6,664

)

    3,402  

Provision for income taxes

    1,824       1,025       3,156       3,488  

Net (loss) income

  $ (1,722

)

  $ 296     $ (9,820

)

  $ (86

)

                                 

Net (loss) income per common share:

                               

Basic

  $ (0.05

)

  $ 0.01     $ (0.27

)

  $ (0.00

)

Diluted

  $ (0.05

)

  $ 0.01     $ (0.27

)

  $ (0.00

)

                                 

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

                 

Basic

    37,182       35,604       37,028       35,473  

Diluted

    37,182       36,602       37,028       35,473  

  

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands) 

 

   

Three Months Ended

   

Six Months Ended

 
   

July 30,

2016

   

August 1,

2015

   

July 30,

2016

   

August 1,

2015

 

Net (loss) income

  $ (1,722

)

  $ 296     $ (9,820

)

  $ (86 )
                                 

Other comprehensive (loss) income:

                               

Change in currency translation adjustments, net of tax

    (365

)

    (276

)

    215       (288 )

Change in unrealized gains (losses) on marketable securities, net of tax

    31       (60

)

    52       (79 )

Other comprehensive (loss) income

    (334

)

    (336

)

    267       (367 )
                                 

Comprehensive loss

  $ (2,056

)

  $ (40

)

  $ (9,553

)

  $ (453 )

 

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 
4

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) 

 

   

Six Months Ended

 
   

July 30, 2016

   

August 1, 2015

 

Cash flows from operating activities:

               

Net loss

  $ (9,820

)

  $ (86

)

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

               

Depreciation and amortization

    11,579       10,496  

Stock-based compensation

    3,643       2,989  

Provision for excess and obsolete inventory

    683       1,619  

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

    (13

)

    594  

Deferred income taxes

    (238

)

    (104

)

Impairment of IP, mask sets and design tools

    300       988  

Tax effect related to share awards

    375       (39

)

Excess tax benefit from stock-based compensation

    (375

)

    39  

Impairment of investment

    886       132  

Other non-cash activities

    (472

)

    16  

Changes in operating assets and liabilities:

               

Accounts receivable

    (15,536

)

    (12,628

)

Inventory

    4,573       (11,867

)

Prepaid expenses and other current assets

    4,377       199  

Other non-current assets

    (599

)

    16  

Accounts payable

    (3,766

)

    6,151  

Accrued liabilities, compensation and related benefits

    4,478       (3,729

)

Income taxes payable

    2,699       (3,080

)

Other long-term liabilities

    (41

)

    256  

Net cash provided by (used in) operating activities

    2,733       (8,038

)

                 

Cash flows from investing activities:

               

Restricted cash

    82       -  

Purchases of marketable securities

    -       (7,113

)

Sales and maturities of marketable securities

    3,577       111  

Purchases of software, equipment and leasehold improvements

    (2,685

)

    (3,474

)

Purchases of IP

    (2,431

)

    (2,404

)

Reimbursement of costs related to purchased IP

    2,212       -  

Net cash provided by (used in) investing activities

    755       (12,880

)

                 

Cash flows from financing activities:

               

Excess tax (expense) benefit from stock-based compensation

    (375

)

    39  

Proceeds from exercises of employee stock options and stock purchase rights

    1,515       2,744  

Net cash provided by financing activities

    1,140       2,783  
                 

Effect of foreign exchange rate changes on cash and cash equivalents

    (65

)

    (128

)

Net increase (decrease) in cash and cash equivalents

    4,563       (18,263

)

                 

Cash and cash equivalents, beginning of period

    63,790       83,502  

Cash and cash equivalents, end of period

  $ 68,353     $ 65,239  
                 

Supplemental disclosure of cash flow information:

               
                 

Cash paid for income taxes

  $ 654     $ 6,226  

 

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 second quarter of fiscal 2017 and fiscal 2016 ended on July 30, 2016 (91 days) and August 1, 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 July 30, 2016 and January 30, 2016, the consolidated results of our operations for the three and six months ended July 30, 2016 and August 1, 2015, and the consolidated cash flows for the six months ended July 30, 2016 and August 1, 2015.  The results of operations for the three and six months ended July 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 six months ended July 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 June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses for financial assets held. ASU 2016-13 is effective for us beginning in the first quarter of fiscal 2021 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

In May 2016, the 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.

 

 
6

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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.

 

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 July 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):

 

   

July 30, 2016

   

January 30, 2016

 
   

Book Value

   

Net

Unrealized

Gains

(Losses)

   

Fair Value

   

Book Value

   

Net

Unrealized

Gains

(Losses)

   

Fair Value

 

Corporate bonds

  $ 3,519     $ 4     $ 3,523     $ 7,052     $ (7

)

  $ 7,045  

Fixed income mutual funds

    1,274       10       1,284       1,255       32       1,287  

Money market funds

    3,680       -       3,680       88       -       88  

Total cash equivalents and marketable securities

  $ 8,473     $ 14     $ 8,487     $ 8,395     $ 25     $ 8,420  
                                                 
                                                 

Cash on hand held in the United States

                    16,733                       4,141  

Cash on hand held overseas

                    47,940                       59,561  

Total cash on hand

                    64,673                       63,702  

Total cash, cash equivalents and marketable securities

                  $ 73,160                     $ 72,122  
                                                 

Reported as:

                                               

Cash and cash equivalents

                  $ 68,353                     $ 63,790  

Short-term marketable securities

                    4,807                       4,805  

Long-term marketable securities

                    -                       3,527  
                    $ 73,160                     $ 72,122  

 

 
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):

 

   

July 30, 2016

   

January 30, 2016

 
   

Book Value

   

Fair Value

   

Book Value

   

Fair Value

 

Due in one year or less

  $ 8,473     $ 8,487     $ 4,863     $ 4,893  

Due in greater than one year

    -       -       3,532       3,527  

Total

  $ 8,473     $ 8,487     $ 8,395     $ 8,420  

 

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

  

   

July 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

  $ 3,523     $ 3,523     $ -     $ -  

Fixed income mutual funds

    1,284       1,284       -       -  

Money market funds

    3,680       3,680       -       -  

Total cash equivalents and marketable securities

    8,487       8,487       -       -  

Restricted cash

    818       818       -       -  

Total assets measured at fair value

  $ 9,305     $ 9,305     $ -     $ -  

 

   

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     $ -     $ -  

 

 
8

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 July 30, 2016, we held equity investment in one privately-held venture capital funded technology company with a carrying value of $2.0 million. We did not identify any other events or changes in circumstances that may have had a significant adverse effect on the fair value of this investment during the three and six months ended July 30, 2016 and August 1, 2015. During the three and six months ending July 30, 2016, we recorded impairment charges of $0.5 million and $0.8 million, respectively, in connection with two of our privately-held investments as we concluded the impairment to be other-than-temporary, effectively nullifying any value from these investments as of July 30, 2016. 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 privately-held companies (in thousands): 

 

Investments:

 

July 30, 2016

   

January 30, 2016

 

Issuer A

  $ 2,000     $ 2,000  

Issuer B

    -       750  

Issuer C

    -       134  

Total investments

  $ 2,000     $ 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 and second quarter of fiscal 2017, we recorded impairment charges of $0.3 million, $0.3 million and $0.4 million, respectively, on this investment as we concluded the impairment to be other-than-temporary, effectively nullifying any value from this investment as of July 30, 2016.

  

In the third quarter of fiscal 2012, we made an equity investment of $0.1 million in a privately-held joint venture (“Issuer C”). In the second quarter of fiscal 2017, we recorded impairment charges of $0.1 million on this investment as we concluded the impairment to be other-than-temporary, effectively nullifying any value from this investment as of July 30, 2016.

 

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. 

 

 
9

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.             Supplemental financial information

 

Inventory consists of the following (in thousands): 

   

July 30, 2016

   

January 30, 2016

 

Wafers and other purchased materials

  $ 11,012     $ 15,440  

Work-in-process

    4,770       2,885  

Finished goods

    5,671       8,384  

Total inventory

  $ 21,453     $ 26,709  

 

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

 

   

July 30, 2016

   

January 30, 2016

 

Prepayments for taxes

  $ 3,408     $ 3,357  

Deposits

    208       3,200  

Non-operating receivable

    905       -  

Prepayments for inventory

    965       3,725  

Prepayments for royalties

    636       741  

Other current assets

    2,933       3,062  

Total prepaid expenses and other current assets

  $ 9,055     $ 14,085  

 

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

 

 

Estimated

Useful Lives

(years)

   

July 30, 2016

   

January 30, 2016

 

Software

  2       $ 48,894     $ 40,411  

Mask sets

 1 - 5       14,710       14,130  

Equipment

 1 - 5       8,458       8,088  

Office equipment and furniture

  2         7,975       7,705  

Leasehold improvements

 1 - 6       2,112       2,089  

Total

            82,149       72,423  

Less: Accumulated depreciation and amortization

            (64,490

)

    (58,337

)

Total software, equipment and leasehold improvements, net

          $ 17,659     $ 14,086  

 

Software, equipment and leasehold improvement depreciation and amortization expense was $2.7 million and $3.0 million for the three months ended July 30, 2016 and August 1, 2015, respectively, and was $6.1 million and $5.9 million for the six months ended July 30, 2016 and August 1, 2015, respectively. We recorded impairment charges for mask sets and software related to design tools associated with discontinued products for both the three and six months ended July 30, 2016 of $0.3 million, and for both the three and six months ended August 1, 2015 of $1.0 million, which was recorded in operating expenses in the accompanying condensed consolidated statements of operations.

 

Accrued liabilities consist of the following (in thousands):

   

July 30, 2016

   

January 30, 2016

 

License fees

  $ 10,374     $ 5,181  

Rebates

    2,401       2,864  

Income taxes payable, current portion

    3,431       2,305  

Royalties

    2,717       1,469  

Warranties

    952       959  

Deferred revenue

    501       407  

Other accrued liabilities

    1,001       1,447  

Total accrued liabilities

  $ 21,377     $ 14,632  

 

 
10

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

July 30,

2016

   

August 1,

2015

   

July 30,

2016

   

August 1,

2015

 

Beginning balance

  $ 3,925     $ 7,142     $ 2,864     $ 9,599  

Charged as a reduction of revenue

    629       2,430       3,073       6,551  

Reversal of unclaimed rebates

    (3

)

    (221

)

    (3

)

    (1,028

)

Payments

    (2,150

)

    (4,433

)

    (3,533

)

    (10,204

)

Ending balance

  $ 2,401     $ 4,918     $ 2,401     $ 4,918  

 

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.

 

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 three and six months ended July 30, 2016, contributed approximately $1.8 million and $2.0 million, respectively, to our net loss in the accompanying condensed consolidated statements 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.

 

 
11

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

   

Six Months Ended

 
   

August 1, 2015

   

August 1, 2015

 

Net revenue

  $ 58,975     $ 115,462  

Net income (loss)

  $ 140     $ (2,037

)

Basic and diluted net income (loss) per share

  $ 0.00     $ (0.06

)

 

7.              Intangible assets

 

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

 

   

July 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

)

  $ (51,244

)

  $ 9,569       7.1  

Customer relationships

    54,505       (30,486

)

    (20,363

)

    3,656       5.8  

Trademarks and other

    4,078       -       (3,798

)

    280       2.4  

Purchased IP - amortizing

    36,017       (5,516

)

    (20,873

)

    9,628       2.7  

Total amortizing

    180,027       (60,616

)

    (96,278

)

    23,133       5.0  

Purchased IP - not yet deployed

    15,295       (4,440

)

    -       10,855          

Total intangibles

  $ 195,322     $ (65,056

)

  $ (96,278

)

  $ 33,988          

  

   

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          

 

 
12

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

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

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

July 30,

2016

   

August 1,

2015

   

July 30,

2016

   

August 1,

2015

 

Cost of revenue

  $ 1,975     $ 1,876     $ 4,028     $ 3,882  

Operating expenses

    713       347       1,430       700  

Total intangibles amortization expense

  $ 2,688     $ 2,223     $ 5,458     $ 4,582  

  

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

 

Fiscal year

 

Total

 

2017 (remaining six months)

  $ 4,394  

2018

    5,744  

2019

    4,299  

2020

    2,833  

2021

    1,588  

Thereafter

    4,275  

Total

  $ 23,133  

 

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 July 30, 2016, the total amount of outstanding non-cancelable purchase orders was approximately $30.9 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 July 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 $7.5 million as of July 30, 2016. Payments under these arrangements are being made through fiscal 2018. We have fully accrued these amounts as of July 30, 2016.

 

Design Tools

 

In June 2016, we entered into an agreement with a vendor to purchase $7.8 million of design tools. Payments under this agreement are being made on a quarterly basis from August 2016 through May 2019. In addition to this agreement, we have entered into other purchase arrangements for certain design tools; remaining payments under these agreements totaled $1.6 million as of July 30, 2016. Payments under these arrangements are being made through fiscal 2018. We have fully accrued these amounts as of July 30, 2016.

 

 
13

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

  

Royalties

 

We pay royalties for the right to sell certain products under various license agreements. During the three and six months ended July 30, 2016, we recorded gross royalty expense of $1.6 million and $2.9 million, respectively, and $1.3 million and $2.1 million for the three and six months ended August 1, 2015, 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 July 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 July 30, 2016, our remaining potential obligation under these programs was approximately $1.1 million.

 

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 July 30, 2016 and August 1, 2015 are as follows (in thousands):

 

Three Months Ended

 

Balance

Beginning of

Period

   

Additions

and

Adjustments

   

Deductions

   

Balance End

of Period

 

July 30, 2016

  $ 960     $ 143     $ (151

)

  $ 952  

August 1, 2015

  $ 861     $ 150     $ (137

)

  $ 874  

 

Six Months Ended

 

Balance

Beginning of

Period

   

Additions

and

Adjustments

   

Deductions

   

Balance End

of Period

 

July 30, 2016

  $ 959     $ 282     $ (289

)

  $ 952  

August 1, 2015

  $ 864     $ 290     $ (280

)

  $ 874  

 

Litigation

 

On July 1, 2016, non-practicing entity Blue Spike, LLC filed a lawsuit against Sigma Designs, Inc. and other semiconductor chip companies in a patent infringement case Blue Spike, LLC. V. Verance Corporation, et al. 2:16-cv-00703-RWS. Sigma was served on August 24, 2016. We believe the asserted claims against us are without merit and we will defend ourselves vigorously. While the outcome is currently not determinable, we do not expect that the ultimate costs to resolve this matter will have a material adverse effect on our consolidated financial position, results of operations, or cash flows. 

 

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.

 

 
14

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

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 July 30, 2016, we are not aware of any audits or audit-related activities 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 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 agreements.

 

9.             Earnings per share

 

Basic net (loss) income per share is computed by dividing net (loss) income 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 (loss) income per share computed for the three and six months ended July 30, 2016 and August 1, 2015 (in thousands, except per share amounts):

 

   

Three Months Ended

   

Six Months Ended

 
   

July 30,

2016

   

August 1,

2015

   

July 30,

2016

   

August 1,

2015

 

Numerator:

                               

Net (loss) income, as reported

  $ (1,722

)

  $ 296     $ (9,820

)

  $ (86

)

Denominator:

                               

Weighted-average common shares outstanding - basic

    37,182       35,604       37,028       35,473  

Dilutive effect of employee stock plans

    -       998       -       -  

Weighted-average common shares outstanding - diluted

    37,182       36,602       37,028       35,473  

Net (loss) income per share - basic

  $ (0.05

)

  $ 0.01     $ (0.27

)

  $ (0.00

)

Net (loss) income per share - diluted

  $ (0.05

)

  $ 0.01     $ (0.27

)

  $ (0.00

)

  

 
15

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

July 30,

2016

   

August 1,

2015

   

July 30,

2016

   

August 1,

2015

 

Stock options

    2,477       2,336       2,465       2,738  

Restricted stock units and awards

    422       68       564       630  

 

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) Gain

   

Cumulative 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

    -       -       -       -       52       -       -       52  

Currency translation adjustments

    -       -       -       -       -       215       -       215  

Stock-based compensation expense

    -       3,643       -       -       -       -       -       3,643  

Tax effect related to share awards

    -       (375

)

    -       -       -       -       -       (375

)

Net proceeds from common stock issued under share plans

    634,736       1,515       -       -       -       -       -       1,515  

Net loss

    -       -       -       -       -       -       (9,820 )     (9,820

)

Balance, July 30, 2016

    42,059,113     $ 508,592       (4,675,749 )   $ (88,336 )   $ (156 )   $ (1,452

)

  $ (270,613 )   $ 148,035  

 

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 and six months ended July 30, 2016 of $0.1 million and $0.3 million, respectively, and made no matching contributions during the three and six months ended August 1, 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 20% of the annual base.  From April 2016 to March 2017, the annual base is capped at RMB 17,817 per employee. For the three and six months ended July 30, 2016, we made matching contributions of $0.6 million and $1.2 million, respectively, and $0.6 million and $1.1 million for the three and six months ended August 1, 2015, respectively.

 

 
16

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 July 30, 2016 and August 1, 2015; and $0.4 million and $0.3 million for the six months ended July 30, 2016 and August 1, 2015, 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 July 30, 2016, we have an accrued severance liability of $0.8 million partially offset by $0.7 million of severance employee funds. We made contributions of less than $0.1 million for each of the three and six months ended July 30, 2016 and August 1, 2015.

 

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 August 31, 2016, there were approximately 54,955 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 July 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.

 

On August 22, 2016, we reached a closing agreement with the Internal Revenue Service. 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 state tax authorities. We continue to carry the remaining liability of $0.3 million on the accompanying condensed consolidated balance sheets as of July 30, 2016 and will continue to do so until such settlement has been reached with the aforementioned authorities. We believe the remaining liability recorded in accrued compensation and related benefits is sufficient to cover all the expenses.

 

 
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 SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11.           Income taxes

 

We recorded a provision for income taxes of $1.8 million and $1.0 million for the three months ended July 30, 2016 and August 1, 2015, respectively.  The provision for income taxes was $3.1 million and $3.5 million for the six months ended July 30, 2016 and August 1, 2015, respectively. The increase in tax expense for the three months ended July 30, 2016 is primarily attributable to increasing profitability in taxable jurisdictions. The decrease in tax expense for the six months ended July 30, 2016 is primarily attributable to lower profitability in taxable jurisdictions in the first quarter of fiscal year 2017 and changes in tax reserves. During the three and six months ended July 30, 2016 and August 1, 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.

 

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 and six months ended July 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 zero and $1.6 million, respectively.

 

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 0.2% and 0.3% of our total net revenue for the three and six months ended July 30, 2016, respectively; and 0.1% of our total net revenue for each of the three and six months ended August 1, 2015.

 

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. 

 

 
18

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

July 30, 2016

   

August 1, 2015

   

July 30, 2016

   

August 1, 2015

 

Connected Smart TV Platforms

  $ 51,678     $ 45,280     $ 95,386     $ 88,826  

IoT Devices

    9,488       12,985       19,405       25,295  

License and other

    150       42       300       98  

Net revenue

  $ 61,316     $ 58,307     $ 115,091     $ 114,219  

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

July 30, 2016

   

August 1, 2015

   

July 30, 2016

   

August 1, 2015

 

Asia

  $ 47,873     $ 44,684     $ 93,914     $ 84,354  

North America

    11,391       10,081       18,006       22,234  

Europe

    2,038       3,017       3,157       5,781  

Other Regions

    14       525       14       1,850  

Net revenue

  $ 61,316     $ 58,307     $ 115,091     $ 114,219  

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

July 30, 2016

   

August 1, 2015

   

July 30, 2016

   

August 1, 2015

 

China, including Hong Kong

  $ 33,110     $ 21,127     $ 60,567     $ 43,305  

Taiwan

    9,991       15,246       23,955       24,165  

United States

    11,269       9,950       17,858       22,095  

Thailand

    2,916       4,608       5,737       9,593  

Rest of the world

    4,030       7,376