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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 October 29, 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 November 30, 2016, the Company had 37,821,557 shares of Common Stock outstanding.

 

 
1

 

  

SIGMA DESIGNS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED OCTOBER 29, 2016

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I.

FINANCIAL INFORMATION

  

 

 

  

Item 1.

Unaudited Condensed Consolidated Financial Statements

  

 

 

  

 

Unaudited Condensed Consolidated Balance Sheets as of October 29, 2016 and January 30, 2016

3

     

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended October 29, 2016 and October 31, 2015

4

 

  

  

 

Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended October 29, 2016 and October 31, 2015

4

 

 

  

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended October 29, 2016 and October 31, 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) 

  

   

October 29,

2016

   

January 30,

2016

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 64,833     $ 63,790  

Short-term marketable securities

    4,794       4,805  

Restricted cash

    316       900  

Accounts receivable, net of allowances of $2,098 as of October 29, 2016 and $2,002 as of January 30, 2016

    49,619       30,362  

Inventory

    20,184       26,709  

Prepaid expenses and other current assets

    8,451       14,085  

Total current assets

    148,197       140,651  
                 

Long-term marketable securities

    -       3,527  

Software, equipment and leasehold improvements, net

    19,562       14,086  

Intangible assets, net

    31,465       37,050  

Goodwill

    10,594       11,068  

Deferred tax assets

    958       911  

Long-term investments

    2,000       2,884  

Other non-current assets

    6,056       6,492  

Total assets

  $ 218,832     $ 216,669  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 20,559     $ 26,181  

Accrued compensation and related benefits

    10,287       7,360  

Accrued liabilities

    15,152       14,632  

Total current liabilities

    45,998       48,173  
                 

Income taxes payable

    14,174       11,351  

Long-term deferred tax liabilities

    -       317  

Other long-term liabilities

    8,687       4,023  

Total liabilities

    68,859       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; 42,476,455 issued and 37,800,706 outstanding as of October 29, 2016 and 41,424,377 issued and 36,748,628 outstanding as of January 30, 2016

    510,550       503,809  

Treasury stock, at cost, 4,675,749 shares as of October 29, 2016 and January 30, 2016

    (88,336

)

    (88,336

)

Accumulated other comprehensive loss

    (1,849

)

    (1,875

)

Accumulated deficit

    (270,392

)

    (260,793

)

Total shareholders equity

    149,973       152,805  

Total liabilities and shareholders equity

  $ 218,832     $ 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

   

Nine Months Ended

 
   

October 29,

2016

   

October 31,

2015

   

October 29,

2016

   

October 31,

2015

 

Net revenue

  $ 62,729     $ 61,581     $ 177,820     $ 175,800  

Cost of revenue

    31,734       30,794       93,242       87,141  

Gross profit

    30,995       30,787       84,578       88,659  
                                 

Operating expenses

                               

Research and development

    18,264       17,339       56,255       49,754  

Sales and marketing

    5,984       5,875       17,646       16,940  

General and administrative

    4,578       5,314       14,536       16,100  

Impairment of IP, mask sets and design tools

    -       795       300       1,783  

Total operating expenses

    28,826       29,323       88,737       84,577  

Income (loss) from operations

    2,169       1,464       (4,159

)

    4,082  

Gain on sale of development project

    -       7,551       -       7,551  

Interest and other income (expense), net

    179       37       (157

)

    821  

Income (loss) before income taxes

    2,348       9,052       (4,316

)

    12,454  

Provision for income taxes

    2,127       2,617       5,283       6,105  

Net income (loss)

  $ 221     $ 6,435     $ (9,599

)

  $ 6,349  
                                 

Net income (loss) per common share:

                               

Basic

  $ 0.01     $ 0.18     $ (0.26

)

  $ 0.18  

Diluted

  $ 0.01     $ 0.17     $ (0.26

)

  $ 0.17  
                                 

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

                 

Basic

    37,666       36,046       37,241       35,670  

Diluted

    38,001       36,785       37,241       36,515  

   

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

  

   

Three Months Ended

   

Nine Months Ended

 
   

October 29,

2016

   

October 31,

2015

   

October 29,

2016

   

October 31,

2015

 

Net income (loss)

  $ 221     $ 6,435     $ (9,599

)

  $ 6,349  
                                 

Other comprehensive (loss) income:

                               

Change in currency translation adjustments, net of tax

    (232

)

    (100

)

    (17

)

    (388

)

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

    (9

)

    (24

)

    43       (103

)

Other comprehensive (loss) income

    (241

)

    (124

)

    26       (491

)

                                 

Comprehensive (loss) income

  $ (20

)

  $ 6,311     $ (9,573

)

  $ 5,858  

 

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 
4

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   

Nine Months Ended

 
   

October 29, 2016

   

October 31, 2015

 

Cash flows from operating activities:

               

Net (loss) income

  $ (9,599

)

  $ 6,349  

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

               

Depreciation and amortization

    16,800       15,691  

Stock-based compensation

    5,136       4,880  

Provision for excess and obsolete inventory

    1,221       2,252  

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

    (123

)

    727  

Deferred income taxes

    (363

)

    (216

)

Impairment of IP, mask sets and design tools

    300       1,783  

Impairment of investment

    886       132  

Other non-cash activities

    (799

)

    (267

)

Changes in operating assets and liabilities:

               

Accounts receivable

    (19,134

)

    (5,283

)

Inventory

    5,304       (9,760

)

Prepaid expenses and other current assets

    4,855       98  

Other non-current assets

    (592

)

    (5,953

)

Accounts payable

    (6,988

)

    4,321  

Accrued liabilities, compensation and related benefits

    5,031       (4,482

)

Income taxes payable

    4,177       (1,425

)

Other long-term liabilities

    (60

)

    910  

Net cash provided by operating activities

    6,052       9,757  
                 

Cash flows from investing activities:

               

Restricted cash

    584       -  

Purchases of marketable securities

    -       (22,622

)

Sales and maturities of marketable securities

    3,582       5,050  

Purchases of software, equipment and leasehold improvements

    (7,847

)

    (5,551

)

Purchases of IP

    (5,670

)

    (2,750

)

Reimbursement of costs related to purchased IP

    2,645       -  

Net cash received in connection with acquisition

    289       -  

Issuance of short-term promissory notes

    -       (2,710

)

Net cash used in investing activities

    (6,417

)

    (28,583

)

                 

Cash flows from financing activities:

               

Employee payroll taxes paid related to net share settlement of restricted stock units

    (528

)

    (81

)

Proceeds from exercises of employee stock options and stock purchase rights

    2,133       2,752  

Net cash provided by financing activities

    1,605       2,671  
                 

Effect of foreign exchange rate changes on cash and cash equivalents

    (197

)

    (183

)

Net increase (decrease) in cash and cash equivalents

    1,043       (16,338

)

                 

Cash and cash equivalents, beginning of period

    63,790       83,502  

Cash and cash equivalents, end of period

  $ 64,833     $ 67,164  
                 

Supplemental disclosure of cash flow information:

               
                 

Cash paid for income taxes

  $ 1,329     $ 7,335  

 

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 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 third quarter of fiscal 2017 and fiscal 2016 ended on October 29, 2016 (91 days) and October 31, 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 October 29, 2016 and January 30, 2016, the consolidated results of our operations for the three and nine months ended October 29, 2016 and October 31, 2015, and the consolidated cash flows for the nine months ended October 29, 2016 and October 31, 2015.  The results of operations for the three and nine months ended October 29, 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 nine months ended October 29, 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 October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for us beginning in the first quarter of fiscal 2019 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

In June 2016, the 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.

 

 
6

 

  

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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. ASU 2016-12 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. 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. ASU 2016-10 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. 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 October 29, 2016 and January 30, 2016, we had $0.3 million and $0.9 million, respectively, of restricted cash. As of October 29, 2016, restricted cash related to an office-space operating lease and other transactions and as of January 30, 2016, this amount also included an escrow withholding in association with our acquisition of Bretelon, which is not included in the amounts below. Cash, cash equivalents and marketable securities consist of the following (in thousands):

 

   

October 29, 2016

   

January 30, 2016

 
   

Book Value

   

Net

Unrealized Gains

(Losses)

   

Fair Value

   

Book Value

   

Net

Unrealized Gains

(Losses)

   

Fair Value

 

Corporate bonds

  $ 3,513     $ -     $ 3,513     $ 7,052     $ (7

)

  $ 7,045  

Fixed income mutual funds

    1,276       5       1,281       1,255       32       1,287  

Money market funds

    3,704       -       3,704       88       -       88  

Total cash equivalents and marketable securities

  $ 8,493     $ 5     $ 8,498     $ 8,395     $ 25     $ 8,420  
                                                 
                                                 

Cash on hand held in the United States

                    11,782                       4,141  

Cash on hand held overseas

                    49,347                       59,561  

Total cash on hand

                    61,129                       63,702  

Total cash, cash equivalents and marketable securities

                  $ 69,627                     $ 72,122  
                                                 

Reported as:

                                               

Cash and cash equivalents

                  $ 64,833                     $ 63,790  

Short-term marketable securities

                    4,794                       4,805  

Long-term marketable securities

                    -                       3,527  
                    $ 69,627                     $ 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):

 

   

October 29, 2016

   

January 30, 2016

 
   

Book Value

   

Fair Value

   

Book Value

   

Fair Value

 

Due in one year or less

  $ 8,493     $ 8,498     $ 4,863     $ 4,893  

Due in greater than one year

    -       -       3,532       3,527  

Total

  $ 8,493     $ 8,498     $ 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 October 29, 2016 and January 30, 2016 (in thousands):

  

   

October 29, 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

  $ 3,513     $ 3,513     $ -     $ -  

Fixed income mutual funds

    1,281       1,281       -       -  

Money market funds

    3,704       3,704       -       -  

Total cash equivalents and marketable securities

    8,498       8,498       -       -  

Restricted cash

    316       316       -       -  

Total assets measured at fair value

  $ 8,814     $ 8,814     $ -     $ -  

 

   

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 October 29, 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 events or changes in circumstances that may have had a significant adverse effect on the fair value of this investment during the three and nine months ended October 29, 2016 and October 31, 2015. During the nine months ending October 29, 2016, we recorded impairment charges of $0.8 million 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 October 29, 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:

 

October 29, 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 October 29, 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 October 29, 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): 

 

   

October 29, 2016

   

January 30, 2016

 

Wafers and other purchased materials

  $ 11,043     $ 15,440  

Work-in-process

    3,712       2,885  

Finished goods

    5,429       8,384  

Total inventory

  $ 20,184     $ 26,709  

 

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

 

   

October 29, 2016

   

January 30, 2016

 

Prepayments for taxes

  $ 3,410     $ 3,357  

Deposits

    205       3,200  

Non-operating receivable

    645       -  

Prepayments for inventory

    964       3,725  

Prepayments for royalties

    596       741  

Other current assets

    2,631       3,062  

Total prepaid expenses and other current assets

  $ 8,451     $ 14,085  

 

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

 

 

 

Estimated Useful Lives

(years)

   

October 29,

2016

   

January 30,

2016

 

Software

 

 

2

   

 

$

49,765

 

 

$

40,411

 

Mask sets

 

1

 -

5

     

17,821

     

14,130

 

Equipment

 

1

 -

5

 

 

 

8,724

 

 

 

8,088

 

Office equipment and furniture

 

 

2

   

 

 

8,039

 

 

 

7,705

 

Leasehold improvements

 

1

 -

6

 

 

 

2,126

 

 

 

2,089

 

Total

 

 

 

 

 

 

 

86,475

 

 

 

72,423

 

Less: Accumulated depreciation and amortization

 

 

 

 

 

 

 

(66,913

)

 

 

(58,337

)

Total software, equipment and leasehold improvements, net

 

 

 

 

 

 

$

19,562

 

 

$

14,086

 

 

Software, equipment and leasehold improvement depreciation and amortization expense was $2.5 million and $3.3 million for the three months ended October 29, 2016 and October 31, 2015, respectively, and was $8.6 million and $9.2 million for the nine months ended October 29, 2016 and October 31, 2015, respectively. We recorded impairment charges for mask sets and software related to design tools associated with discontinued products for the three and nine months ended October 29, 2016 of zero and $0.3 million, respectively, and for the three and nine months ended October 31, 2015 of $0.8 million and $1.8 million, respectively, which was recorded in operating expenses in the accompanying condensed consolidated statements of operations.

 

Accrued liabilities consist of the following (in thousands):

 

   

October 29, 2016

   

January 30, 2016

 

License fees

  $ 5,537     $ 5,181  

Rebates

    1,796       2,864  

Income taxes payable, current portion

    3,659       2,305  

Royalties

    2,225       1,469  

Warranties

    792       959  

Deferred revenue

    590       407  

Other accrued liabilities

    553       1,447  

Total accrued liabilities

  $ 15,152     $ 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):

 

   

Nine months ended October 29, 2016

 

Beginning balance

  $ 2,864  

Charged as a reduction of revenue

    3,499  

Reversal of unclaimed rebates

    (3

)

Payments

    (4,564

)

Ending balance

  $ 1,796  

 

6.      Business combinations    

  

During the fourth quarter of fiscal 2016, we completed the acquisition of Bretelon, Inc. (“Bretelon”), which was 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”). The Acquisition was consummated on November 12, 2015. We retained a portion of the consideration following the closing for the satisfaction of any indemnification claims made within a specified period of time. During the three months ended October 29, 2016, we reached a resolution on the holdback merger consideration.

 

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 results of operations of Bretelon are included in our condensed consolidated financial statements beginning on November 4, 2015, which was the closing date of Acquisition. During the three and nine months ended October 29, 2016, we recognized a gain of $0.3 million and a loss of $1.7 million, respectively, related to the operations of Bretelon 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. During the three months ended October 29, 2016, we recorded a $0.5 million decrease in goodwill.

 

 
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 Bretelon are included in our condensed consolidated financial statements beginning on November 4, 2015, which was the closing date of the Acquisition. 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

   

Nine Months Ended

 
   

October 31, 2015

   

October 31, 2015

 

Net revenue

  $ 61,701     $ 177,163  

Net loss

  $ (546

)

  $ (2,584

)

Basic and diluted net loss per share

  $ (0.02

)

  $ (0.07

)

 

7.     Intangible assets

 

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

 

   

October 29, 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

)

  $ (52,444

)

  $ 8,369       7.5  

Customer relationships

    54,505       (30,486

)

    (20,762

)

    3,257       6.0  

Trademarks and other

    4,078       -       (3,828

)

    250       2.2  

Purchased IP - amortizing

    36,013       (5,516

)

    (21,974

)

    8,523       2.5  

Total amortizing

    180,023       (60,616

)

    (99,008

)

    20,399       5.1  

Purchased IP - not yet deployed

    15,506       (4,440

)

    -       11,066          

Total intangibles

  $ 195,529     $ (65,056

)

  $ (99,008

)

  $ 31,465          

  

   

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

   

Nine Months Ended

 
   

October 29,

2016

   

October 31, 2015

   

October 29, 2016

   

October 31, 2015

 

Cost of revenue

  $ 2,025     $ 1,585     $ 6,053     $ 5,467  

Operating expenses

    709       349       2,139       1,049  

Total intangibles amortization expense

  $ 2,734     $ 1,934     $ 8,192     $ 6,516  

 

As of October 29, 2016, we expect amortization expense in future periods to be as follows (in thousands):

 

Fiscal year

 

Total

 

2017 (remaining three months)

  $ 1,660  

2018

    5,724  

2019

    4,319  

2020

    2,833  

2021

    1,588  

Thereafter

    4,275  

Total

  $ 20,399  

 

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 October 29, 2016, the total amount of outstanding non-cancelable purchase orders was approximately $16.8 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 October 29, 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 $6.9 million as of October 29, 2016. Payments under these arrangements are being made through fiscal 2018. We have fully accrued these amounts as of October 29, 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. As of October 29, 2016, remaining payments under this agreement totaled $7.2 million. In addition to this agreement, we have entered into other purchase arrangements for certain design tools; remaining payments under these agreements totaled $1.8 million as of October 29, 2016. Payments under these arrangements are being made through fiscal 2019. We have fully accrued these amounts as of October 29, 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 nine months ended October 29, 2016, we recorded a gross royalty expense of $1.3 million and $4.2 million, respectively, and $1.2 million and $3.3 million for the three and nine months ended October 31, 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 October 29, 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 October 29, 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 material and workmanship.  Warranty cost is estimated at the time revenue is recognized based on historical activity, and additionally, for any specific known product warranty issues.  Accrued warranty cost includes hardware repair and/or replacement, and is included in accrued liabilities in the accompanying condensed consolidated balance sheets.

 

Details of the change in accrued warranty as of October 29, 2016 and October 31, 2015 are as follows (in thousands):

 

Three Months Ended

 

Balance

Beginning of

Period

   

Additions and Adjustments

   

Deductions

   

Balance End

of Period

 

October 29, 2016

  $ 952     $ (18

)

  $ (142

)

  $ 792  

October 31, 2015

  $ 874     $ 321     $ (212

)

  $ 983  

 

Nine Months Ended

 

Balance

Beginning of

Period

   

Additions and Adjustments

   

Deductions

   

Balance End

of Period

 

October 29, 2016

  $ 959     $ 264     $ (431

)

  $ 792  

October 31, 2015

  $ 864     $ 610     $ (491

)

  $ 983  

 

Litigation

 

On July 1, 2016, non-practicing entity Blue Spike, LLC filed a lawsuit in the Eastern District of Texas 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. We were served on August 24, 2016. On October 19, 2016, Blue Spike filed a Notice of Voluntary Dismissal; and as a result, the case against us was dismissed without prejudice.

 

Indemnifications

 

In certain limited circumstances, we have agreed and may agree in the future to indemnify certain customers against intellectual property infringement claims from third parties related to the use of our technology. In these limited circumstances, the terms and conditions of sale or our standing agreement with such customers 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 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 regularly license technology from various third party licensors and incorporate that technology into our product offerings. Some technology licenses require us to pay royalties directly to the licensor, while others require us to report sales activities to our licensors so that royalties may be collected from our customers. From time to time, we are audited by our licensors for compliance with the terms of our license agreements. As of October 29, 2016, we are not aware of any audits or audit-related activities by these licensors, intended or otherwise.

 

We may be required to make additional payments as a result of future compliance audits. For license agreements where we have royalty obligations, we charge any settlement-related payments that we make in connection with compliance audits to cost of revenue. For license agreements where we have reporting obligations, we treat any settlement-related payments as penalties, and charge the amounts to operating expenses in sales and marketing. As of the date of this filing, we believe we are substantially in compliance with the terms of our license agreements.

 

9.           Earnings per share

 

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

 

The following table sets forth the basic and diluted net income (loss) per share computed for the three and nine months ended October 29, 2016 and October 31, 2015 (in thousands, except per share amounts):

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 29,

2016

   

October 31,

2015

   

October 29,

2016

   

October 31,

2015

 

Numerator:

                               

Net income (loss), as reported

  $ 221     $ 6,435     $ (9,599

)

  $ 6,349  

Denominator:

                               

Weighted-average common shares outstanding - basic

    37,666       36,046       37,241       35,670  

Dilutive effect of employee stock plans

    335       739       -       845  

Weighted-average common shares outstanding - diluted

    38,001       36,785       37,241       36,515  

Net income (loss) per share - basic

  $ 0.01     $ 0.18     $ (0.26

)

  $ 0.18  

Net income (loss) per share - diluted

  $ 0.01     $ 0.17     $ (0.26

)

  $ 0.17  

  

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 29,

2016

   

October 31,

2015

   

October 29,

2016

   

October 31,

2015

 

Stock options

    2,205       2,380       2,421       2,415  

Restricted stock units and awards

    114       412       442       151  

 

10.           Employee benefits

 

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 nine months ended October 29, 2016 of $0.2 million and $0.5 million, respectively; and $0.1 million for each of the three and nine months ended October 31, 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 nine months ended October 29, 2016, we made matching contributions of $0.6 million and $1.8 million, respectively, and $0.6 million and $1.7 million for the three and nine months ended October 31, 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 October 29, 2016 and October 31, 2015; and $0.6 million and $0.5 million for the nine months ended October 29, 2016 and October 31, 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 October 29, 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 nine months ended October 29, 2016 and October 31, 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 October 29, 2016, there were approximately 49,385 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 October 29, 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 October 29, 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.

 

11.           Income taxes

 

We recorded a provision for income taxes of $2.2 million and $2.6 million for the three months ended October 29, 2016 and October 31, 2015, respectively.  The provision for income taxes was $5.3 million and $6.1 million for the nine months ended October 29, 2016 and October 31, 2015, respectively. The decrease in tax expense for the three and nine months ended October 29, 2016 is primarily attributable to lower profitability in taxable jurisdictions as compared to the same period in fiscal year 2016 and changes in tax reserves. During the three and nine months ended October 29, 2016 and October 31, 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.

  

 
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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, which are the Connected Smart TV Platforms and IoT Devices 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. In September 2016, we entered into a collaboration agreement with Telechips Inc. to develop and commercialize a set-top box microprocessor system-on-chip solution. Martin Manniche, a member of our board of directors, also serves on the board of directors of Telechips. We expect our first volume shipment resulting from this collaboration to occur in the first quarter of fiscal 2018.

 

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 nine months ended October 29, 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 $2.0 million and $3.6 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; revenue from this product group represented zero of our total net revenue for each of the three months ended October 29, 2016 and October 31, 2015; and 0.2% and 0.1% of our total net revenue for the nine months ended October 29, 2016 and October 31, 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. We combined our Smart TV, Media Connectivity and Set-top Box markets into one target market, which we now refer to as the Connected Smart TV Platforms target market. This 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 products and services we now sell as a result of our acquisition of Bretelon.

  

 
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 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

   

Nine Months Ended

 
   

October 29,

2016

   

October 31,

2015

   

October 29,

2016

   

October 31,

2015

 

Connected Smart TV Platforms

  $ 50,014     $ 51,375     $ 145,400     $ 140,201  

IoT Devices

    12,715       10,206       32,120       35,501  

License and other

    -       -       300       98  

Net revenue

  $ 62,729     $ 61,581     $ 177,820     $ 175,800  

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 29,

2016

   

October 31,

2015

   

October 29,

2016

   

October 31,

2015

 

Asia

  $ 50,569     $ 47,691     $ 144,483     $ 132,045  

North America

    9,861       11,464       27,867       33,698  

Europe

    2,297       2,426       5,454       8,207  

Other Regions

    2       -       16       1,850  

Net revenue

  $ 62,729     $ 61,581     $ 177,820     $ 175,800  

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 29,

2016

   

October 31,

2015

   

October 29,

2016

   

October 31,

2015

 

China, including Hong Kong

  $ 26,218     $ 26,556     $ 86,785     $ 69,861  

Taiwan

    19,662       15,355       43,617       39,520  

United States

    9,775       11,300       27,633       33,395  

Thailand

    1,884       1,428       7,621       11,021  

Rest of the world

    5,190       6,942       12,164       22,003  

Net revenue

  $ 62,729     $ 61,581     $ 177,820     $ 175,800  

 

During the three months ended October 29, 2016, Sunjet Components Corporation and Arris Global accounted for 29%, and 18% of our net revenue, respectively; during the nine months ended October 29, 2016, Sunjet Components Corporation, Arris Global, Silicon Application and Arrow Electronics accounted for 21%, 13%, 12% and 10% of our net revenue, respectively. During the three and nine months ended October 31, 2015, Sunjet Components Corporation accounted for 18% and 16% of our net revenue, respectively.

  

 
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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. In September 2016, we entered into a collaboration agreement with Telechips Inc. to develop and commercialize a set-top box microprocessor system-on-chip solution. Martin Manniche, a member of our board of directors, also serves on the board of directors of Telechips. We expect our first volume shipment resulting from this collaboration to occur in the first quarter of fiscal 2018. IoT Devices consist of our wireless Z-Wave chipsets and modules. During the three and nine months ended October 29, 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 $2.0 million and $3.6 million, respectively.

 

 
20

 

 

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. We combined our Smart TV, Media Connectivity and Set-top Box markets into one target market, which we now refer to as the Connected Smart TV Platforms target market. This 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 products and services we now sell as a result of our acquisition of Bretelon.

 

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.

  

Critical accounting policies and estimates

 

There have been no significant changes in our critical accounting policies during the nine months ended October 29, 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.

   

 
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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

   

Nine Months Ended

 
   

October 29,

2016

   

% of Net

Revenue

   

October 31,

2015

   

% of Net

Revenue

   

October 29,

2016

   

% of Net

Revenue

   

October 31,

2015

   

% of Net

Revenue

 

Net revenue

  $ 62,729       100 %   $ 61,581       100 %   $ 177,820       100 %   $ 175,800       100 %

Cost of revenue

    31,734       51 %     30,794       50 %     93,242       52 %     87,141       50 %

Gross profit

    30,995       49 %     30,787       50 %     84,578       48 %     88,659       50 %

Operating expenses

                                                               

Research and development

    18,264       29 %     17,339       28 %     56,255       32 %     49,754       28 %

Sales and marketing

    5,984       10 %     5,875       10 %     17,646       10