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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 28, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer

Accelerated filer 

Non-accelerated filer  

Smaller reporting company

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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, 2017, the Company had 38,741,034 shares of Common Stock outstanding.

 

1

 

 

SIGMA DESIGNS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED OCTOBER 28, 2017

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I.

FINANCIAL INFORMATION

  

 

 

  

Item 1.

Unaudited Condensed Consolidated Financial Statements

  

 

 

  

 

Unaudited Condensed Consolidated Balance Sheets as of October 28, 2017 and January 28, 2017

3

     

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended October 28, 2017 and October 29, 2016

4

 

  

  

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended October 28, 2017 and October 29, 2016

4

 

 

  

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended October 28, 2017 and October 29, 2016

5

 

 

  

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

  

Item 2.

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

17

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

  

Item 4.

Controls and Procedures

26

 

 

  

PART II.

OTHER INFORMATION

  

 

 

  

Item 1.

Legal Proceedings

27

 

 

  

Item 1A.

Risk Factors

27

 

 

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

  

Item 3.

Defaults Upon Senior Securities

28

 

 

  

Item 4.

Mine Safety Disclosures

28

 

 

  

Item 5.

Other Information

28

 

 

  

Item 6.

Exhibits

28

 

 

  

Signatures

29

 

  

Exhibit index

30

 

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 28,

2017

   

January 28,

2017

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 69,219     $ 66,425  

Short-term marketable securities

    -       4,781  

Restricted cash

    325       303  

Accounts receivable, net of allowances of $1,848 as of October 28, 2017 and $1,630 as of January 28, 2017

    19,628       35,860  

Inventory

    13,679       18,147  

Prepaid expenses and other current assets

    7,869       8,017  

Total current assets

    110,720       133,533  
                 

Software, equipment and leasehold improvements, net

    18,135       18,523  

Intangible assets, net

    21,957       30,744  

Goodwill

    10,594       10,594  

Deferred tax assets

    741       625  

Long-term investment

    910       2,000  

Other non-current assets

    4,138       5,755  

Total assets

  $ 167,195     $ 201,774  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 14,478     $ 14,230  

Accrued compensation and related benefits

    10,020       8,127  

Accrued liabilities

    16,147       13,607  

Total current liabilities

    40,645       35,964  
                 

Income taxes payable

    12,929       15,752  

Long-term deferred tax liabilities

    287       287  

Other long-term liabilities

    5,439       6,225  

Total liabilities

    59,300       58,228  
                 

Commitments and contingencies (Note 6)

               
                 

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; 43,401,872 issued and 38,726,123 outstanding as of October 28, 2017 and 42,806,279 issued and 38,130,530 outstanding as of January 28, 2017

    518,248       513,168  

Treasury stock, at cost, 4,675,749 shares as of October 28, 2017 and January 28, 2017

    (88,336

)

    (88,336

)

Accumulated other comprehensive loss

    (891

)

    (2,178

)

Accumulated deficit

    (321,126

)

    (279,108

)

Total shareholders equity

    107,895       143,546  

Total liabilities and shareholders equity

  $ 167,195     $ 201,774  

 

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 28,

2017

   

October 29,

2016

   

October 28,

2017

   

October 29,

2016

 

Net revenue

  $ 33,862     $ 62,729     $ 112,934     $ 177,820  

Cost of revenue

    16,746       31,734       58,374       93,242  

Gross profit

    17,116       30,995       54,560       84,578  
                                 

Operating expenses

                               

Research and development

    17,218       18,264       53,380       56,255  

Sales and marketing

    7,012       5,984       17,498       17,646  

General and administrative

    5,744       4,578       15,899       14,536  

Restructuring charges

    563       -       2,529       -  

Impairment of IP and mask sets

    5,463       -       8,469       300  

Total operating expenses

    36,000       28,826       97,775       88,737  

(Loss) income from operations

    (18,884

)

    2,169       (43,215

)

    (4,159

)

Interest and other income (expense), net

    147       179       (1,076

)

    (157

)

(Loss) income before income taxes

    (18,737

)

    2,348       (44,291

)

    (4,316

)

Provision for income taxes

    347       2,127       2,329       5,283  

Net (loss) income

  $ (19,084

)

  $ 221     $ (46,620

)

  $ (9,599

)

                                 

Net (loss) income per common share:

                               

Basic

  $ (0.49

)

  $ 0.01     $ (1.22

)

  $ (0.26

)

Diluted

  $ (0.49

)

  $ 0.01     $ (1.22

)

  $ (0.26

)

                                 

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

                 

Basic

    38,632       37,666       38,359       37,241  

Diluted

    38,632       38,001       38,359       37,241  

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 28,

2017

   

October 29,

2016

   

October 28,

2017

   

October 29,

2016

 

Net (loss) income

  $ (19,084

)

  $ 221     $ (46,620

)

  $ (9,599

)

                                 

Other comprehensive income (loss):

                               

Change in currency translation adjustments, net of tax

    102       (232

)

    1,282       (17

)

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

    (3

)

    (9

)

    5       43  

Other comprehensive income (loss)

    99       (241

)

    1,287       26  
                                 

Comprehensive loss

  $ (18,985

)

  $ (20

)

  $ (45,333

)

  $ (9,573

)

 

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 28,

2017

   

October 29,

2016

 

Cash flows from operating activities:

               

Net loss

  $ (46,620

)

  $ (9,599

)

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    10,854       16,800  

Stock-based compensation

    4,007       5,136  

Provision for excess and obsolete inventory

    1,442       1,221  

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

    218       (123

)

Deferred income taxes

    (122

)

    (363

)

(Gain on sale) impairment of long-term investment

    (110

)

    886  

Impairment of IP and mask sets

    9,669       300  

Other non-cash activities

    (390

)

    (799

)

Changes in operating assets and liabilities:

               

Accounts receivable

    16,014       (19,134

)

Inventory

    3,026       5,304  

Prepaid expenses, other current and non-current assets

    2,197       4,263  

Accounts payable

    733       (6,988

)

Other long-term liabilities, accrued liabilities, compensation and related benefits

    4,552       4,971  

Income taxes payable

    2,092       4,177  

Net cash provided by operating activities

    7,562       6,052  
                 

Cash flows from investing activities:

               

Restricted cash

    (22

)

    584  

Purchases of marketable securities

    (645

)

    -  

Sales and maturities of marketable securities

    5,431       3,582  

Sale of long-term investment

    1,200       -  

Purchases of software, equipment and leasehold improvements

    (9,558

)

    (7,847

)

Purchases of IP

    (4,838

)

    (5,670

)

Reimbursement of mask set related to collaborative arrangement

    2,500       -  

Reimbursement of costs related to purchased IP

    -       2,645  

Net cash received in connection with acquisition

    -       289  

Net cash used in investing activities

    (5,932

)

    (6,417

)

                 

Cash flows from financing activities:

               

Net share settlement of equity awards issued to employees

    (326

)

    (528

)

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

    1,399       2,133  

Net cash provided by financing activities

    1,073       1,605  
                 

Effect of foreign exchange rate changes on cash and cash equivalents

    91       (197

)

Net increase in cash and cash equivalents

    2,794       1,043  
                 

Cash and cash equivalents, beginning of period

    66,425       63,790  

Cash and cash equivalents, end of period

  $ 69,219     $ 64,833  
                 

Supplemental disclosure of cash flow information:

               
                 

Cash paid for income taxes

  $ 2,917     $ 1,329  

 

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 platforms for use in a variety of home entertainment and home control appliances. We sell our products into two primary target markets which are the Connected Smart TV Platforms and Internet of Things (“IoT”) Devices markets. Our integrated system-on-chip (“SoC”) solutions serve as the foundation for some of the world’s leading consumer products, including televisions, media connectivity, smart home, and mobile IoT products. A majority of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers (“OEMs”), and Original Design Manufacturers (“ODMs”), however, a certain amount of non-recurring engineering services, development kit sales, and licensing revenue are also derived from our target markets. Additionally, we derive a minor portion of our revenue from non-core licensing and other activities, which is reported under the License and other markets.

 

Basis of presentation:  The unaudited condensed consolidated financial statements include the accounts of Sigma Designs, Inc. and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated upon consolidation. We operate and report quarterly financial results that consist of 13 weeks and end on the last Saturday of the period. The third quarter of fiscal 2018 and fiscal 2017 ended on October 28, 2017 (91 days) and October 29, 2016 (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 28, 2017, included in our fiscal 2017 Annual Report on Form 10-K, as filed with the SEC on March 30, 2017, referred to as our fiscal 2017 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 28, 2017 and January 28, 2017, the consolidated results of our operations for the three and nine months ended October 28, 2017 and October 29, 2016, and the consolidated cash flows for the nine months ended October 28, 2017 and October 29, 2016.  The results of operations for the three and nine months ended October 28, 2017 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 28, 2017, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended January 28, 2017. 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 2017 Annual Report.

 

Recently adopted accounting pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendment simplifies several aspects of the accounting for share-based payments, including the accounting for income taxes and forfeitures, as well as the classification on the statements of cash flows. We adopted this ASU in the first quarter of fiscal 2018 by recording the cumulative impact through an increase in retained earnings of $4.6 million. Stock-based compensation excess tax benefits or deficiencies are now reflected in the condensed consolidated statements of operations as a component of the provision for income taxes, whereas they previously were recognized in equity. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to all periods presented on our condensed consolidated statements of cash flows since such cash flows have historically been presented as a financing activity.

 

We have elected to account for forfeitures as they occur and therefore, stock-based compensation expense for the three and nine months ended October 28, 2017 has been calculated based on actual forfeitures in our condensed consolidated statements of operations, rather than our previous approach which was net of estimated forfeitures. The net cumulative effect of this change was less than $0.1 million and recognized as an increase to paid-in capital as of January 29, 2017.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. Under this ASU, the measurement principle for inventory changed from the lower of cost or market value to the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We adopted this ASU in the first quarter of fiscal 2018 with no material impact on our condensed consolidated financial statements.

 

6

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). The update provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. We will not be required to adopt ASU 2016-18 until the commencement of our first quarter of fiscal 2019, but early adoption is permitted. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

 

In October 2016, the FASB issued ASU 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. We are currently evaluating the impact that this ASU will have on our consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize all leases, including operating leases, on the balance sheet as a lease asset or lease liability, unless the lease is a short-term lease. ASU 2016-02 also requires additional disclosures regarding leasing arrangements. ASU 2016-02 is effective for us beginning in the first quarter of fiscal 2020 and early adoption is permitted. We are currently evaluating the impact, and expect the ASU will have a material impact on our consolidated financial statements, primarily to the consolidated balance sheets and related disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products or services are transferred to customers. ASU 2014-09 is effective for us beginning in the first quarter of fiscal 2019 and early adoption is permitted. 

Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”) and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). We must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”). We currently expect to adopt Topic 606 as of February 4, 2018, using the modified retrospective transition method applied to those contracts that were not completed as of that date. Upon adoption, we will recognize the cumulative effect of adopting this guidance as an adjustment to our opening balance of retained earnings. Prior periods will not be retrospectively adjusted. We expect the adoption of Topic 606 will not have a material impact to our consolidated financial statements.

 

2.

Cash, cash equivalents and marketable securities

 

As of October 28, 2017 and January 28, 2017, we had $0.3 million of restricted cash related to 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):

 

   

October 28, 2017

   

January 28, 2017

 
   

Book Value

   

Net

Unrealized

Losses

   

Fair Value

   

Book Value

   

Net

Unrealized

Losses

   

Fair Value

 

Money market funds

  $ -     $ -     $ -     $ 3,715     $ -     $ 3,715  

Corporate bonds

    -       -       -       3,506       (1

)

    3,505  

Fixed income mutual funds

    -       -       -       1,280       (4

)

    1,276  

Total cash equivalents and marketable securities

  $ -     $ -     $ -     $ 8,501     $ (5

)

  $ 8,496  
                                                 
                                                 

Cash on hand held in the United States

                    7,171                       9,378  

Cash on hand held overseas

                    62,048                       53,332  

Total cash on hand

                    69,219                       62,710  

Total cash, cash equivalents and marketable securities

                  $ 69,219                     $ 71,206  
                                                 

Reported as:

                                               

Cash and cash equivalents

                  $ 69,219                     $ 66,425  

Short-term marketable securities

                    -                       4,781  
                    $ 69,219                     $ 71,206  

 

The amortized cost and estimated fair value of cash equivalents and marketable securities have a contractual maturity of one year or less.

 

7

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.

Fair values of assets and liabilities

  

Determination of fair value

 

Our cash equivalents and marketable securities are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The types of marketable securities valued based on quoted market prices in active markets include most U.S. government and agency securities, sovereign government obligations, money market securities and certain corporate obligations with high credit ratings and an ongoing trading market.

 

As of October 28, 2017, we held $0.3 million of restricted cash, and zero cash equivalents and marketable securities. The table below present the balances of our assets and liabilities measured at fair value on a recurring basis as of January 28, 2017 (in thousands):

  

   

January 28, 2017

 
   

Fair Value

   

Quoted Prices

in Active

Markets for Identical Assets (Level 1)

   

Significant Observable

Inputs

(Level 2)

   

Significant Unobservable Inputs (Level 3)

 

Money market funds

  $ 3,715     $ 3,715     $ -     $ -  

Corporate bonds

    3,505       3,505       -       -  

Fixed income mutual funds

    1,276       1,276       -       -  

Total cash equivalents and marketable securities

    8,496       8,496       -       -  

Restricted cash

    303       303       -       -  

Total assets measured at fair value

  $ 8,799     $ 8,799     $ -     $ -  

 

 

Assets measured and recorded at fair value on a non-recurring basis

 

Our non-marketable preferred stock investments in privately-held 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 28, 2017, we held an equity investment in one privately-held company with a carrying value of $0.9 million. During the three and nine months ended October 28, 2017, we partially sold this investment for $1.0 million and $1.2 million, respectively, in cash and recognized a gain of $0.1 million for both the three and nine months ended October 28, 2017. Our President and Chief Executive Officer is a member of the Board of Directors of this company. 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 28, 2017 and October 29, 2016. Our equity investment in this privately-held company constituted less than a 20% ownership position. Furthermore, we do not believe that we have the ability to exert significant influence over this company. On November 24, 2017, we sold the remaining investment for $1.0 million in cash and recognized a gain of $0.1 million.

 

8

 

 SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.

Supplemental financial information

 

Inventory consists of the following (in thousands): 

 

   

October 28,

2017

   

January 28,

2017

 

Wafers and other purchased materials

  $ 6,896     $ 8,595  

Work-in-process

    3,440       2,780  

Finished goods

    3,343       6,772  

Total inventory

  $ 13,679     $ 18,147  

 

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

 

   

October 28,

2017

   

January 28,

2017

 

Prepayments for taxes

  $ 3,417     $ 3,421  

Prepayments for royalties

    739       776  

Non-operating receivable

    490       955  

Other current assets

    3,223       2,865  

Total prepaid expenses and other current assets

  $ 7,869     $ 8,017  

 

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

 

   

Estimated

Useful Lives

(years)

   

October 28,

2017

   

January 28,

2017

 

Software

   3 - 5     $ 54,154     $ 49,915  

Mask sets

    3         18,841       18,209  

Equipment

    3         8,676       7,719  

Office equipment and furniture

   3 - 5       8,158       7,857  

Leasehold improvements

   1 - 5       2,163       2,108  

Total

              91,992       85,808  

Less: Accumulated depreciation and amortization

              (73,857

)

    (67,285

)

Total software, equipment and leasehold improvements, net

            $ 18,135     $ 18,523  

 

Software, equipment and leasehold improvement depreciation and amortization expense was $1.2 million and $2.5 million for the three months ended October 28, 2017 and October 29, 2016, respectively, and was $6.4 million and $8.6 million for the nine months ended October 28, 2017 and October 29, 2016, respectively.

 

As part of our restructuring plan as discussed in Note 7, we recorded an impairment charge for mask sets of $1.7 million, which includes $0.1 million of prepaid mask set, for both the three and nine months ended October 28, 2017.

 

Accrued liabilities consist of the following (in thousands):

 

   

October 28,

2017

   

January 28,

2017

 

License fees

  $ 5,588     $ 5,578  

Income taxes payable, current portion

    2,407       2,094  

Restructuring charges

    1,587       -  

Rebates

    1,666       1,585  

Compliance audit settlement

    1,500       -  

Royalties

    1,274       1,378  

Warranty

    668       783  

Deferred revenue

    382       350  

Other accrued liabilities

    1,075       1,839  

Total accrued liabilities

  $ 16,147     $ 13,607  

 

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

 

   

Nine Months Ended October 28,

2017

 

Beginning balance

  $ 1,585  

Charged as a reduction of revenue

    1,891  

Payments

    (1,810

)

Ending balance

  $ 1,666  

 

9

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.

Intangible assets

 

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

 

   

October 28, 2017

 
   

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

)

  $ (54,087

)

  $ 6,726       7.1  

Customer relationships

    54,505       (30,486

)

    (21,305

)

    2,714       5.0  

Trademarks and other

    4,078       -       (3,948

)

    130       1.1  

Purchased IP - amortizing

    35,233       (6,716

)

    (25,036

)

    3,481       1.8  

Total amortizing

    179,243       (61,816

)

    (104,376

)

    13,051       5.2  

Purchased IP - not yet deployed

    20,137       (11,231

)

    -       8,906          

Total intangibles

  $ 199,380     $ (73,047

)

  $ (104,376

)

  $ 21,957          

  

   

January 28, 2017

 
   

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

)

  $ (52,854

)

  $ 7,959       7.4  

Customer relationships

    54,505       (30,486

)

    (20,897

)

    3,122       5.8  

Trademarks and other

    4,078       -       (3,858

)

    220       1.9  

Purchased IP - amortizing

    36,007       (5,516

)

    (23,057

)

    7,434       2.3  

Total amortizing

    180,017       (60,616

)

    (100,666

)

    18,735       5.0  

Purchased IP - not yet deployed

    16,449       (4,440

)

    -       12,009          

Total intangibles

  $ 196,466     $ (65,056

)

  $ (100,666

)

  $ 30,744          

 

Acquired intangible assets represent intangible assets acquired through business combinations. Purchased intellectual property (“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 IP 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 IP is incorporated.

 

As part of our restructuring plan as discussed in Note 7, we recorded an impairment charge for purchased IP of $5.0 million and $8.0 million for the three and nine months ended October 28, 2017, respectively.

 

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 28,

2017

   

October 29,

2016

   

October 28,

2017

   

October 29,

2016

 

Cost of revenue

  $ 845     $ 2,025     $ 3,138     $ 6,053  

Operating expenses

    444       709       1,339       2,139  

Total intangibles amortization expense

  $ 1,289     $ 2,734     $ 4,477     $ 8,192  

 

As of October 28, 2017, we expect amortization expense in future periods to be as follows (in thousands):

 

Fiscal year

 

Total

 

2018 (remaining three months)

  $ 1,038  

2019

    3,718  

2020

    2,432  

2021

    1,588  

2022

    1,243  

Thereafter

    3,032  

Total

  $ 13,051  

 

10

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6.

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 28, 2017, the total amount of outstanding non-cancelable purchase orders was approximately $15.6 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 28, 2017, remaining payments under this agreement totaled $3.0 million.  In addition to this agreement, we have entered into other purchase arrangements for certain licensed technology; remaining payments under these agreements totaled $2.6 million as of October 28, 2017. Payments under these arrangements are being made through fiscal 2019. We have fully accrued these amounts as of October 28, 2017.

 

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 28, 2017, remaining payments under this agreement totaled $4.6 million. In addition to this agreement, we have entered into other purchase arrangements for certain design tools; remaining payments under these agreements totaled $3.5 million as of October 28, 2017. Payments under these arrangements are being made through fiscal 2021. We have fully accrued these amounts as of October 28, 2017.

 

Royalties

 

We pay royalties for the right to sell certain products under various license agreements. During the three and nine months ended October 28, 2017, we recorded gross royalty expense of $0.5 million and $1.9 million, respectively, and $1.3 million and $4.2 million for the three and nine months ended October 29, 2016, respectively, in cost of revenue in the accompanying 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 28, 2017, 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 28, 2017, our remaining potential obligation under these programs was approximately $1.2 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 28, 2017 and October 29, 2016 are as follows (in thousands):

 

Three Months Ended

 

Balance

Beginning of

Period

   

Additions

and

Adjustments

   

Deductions

   

Balance End

of Period

 

October 28, 2017

  $ 696     $ 116     $ (144

)

  $ 668  

October 29, 2016

  $ 952     $ (18

)

  $ (142

)

  $ 792  

 

Nine Months Ended

 

Balance

Beginning of

Period

   

Additions

and

Adjustments

   

Deductions

   

Balance End

of Period

 

October 28, 2017

  $ 783     $ 312     $ (427

)

  $ 668  

October 29, 2016

  $ 959     $ 264     $ (431

)

  $ 792  

  

11

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Litigation

 

From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. We expect that the number and significance of these matters will increase as our business expands. In particular, we could face an increasing number of patent and other intellectual property claims as the number of products and competitors in our industry grows. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources or cause us to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to us. If an unfavorable outcome were to occur against us, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs and, potentially, in future periods.

 

Advanced Micro Device, Inc. Litigation: On January 23, 2017, Advanced Micro Devices, Inc. and ATI Technologies ULC (collectively “AMD”), filed suit against us and many other named defendants, including VIZIO, Mediatek and LG in the United States District Court for the District of Delaware asserting infringement of U.S. Patent Nos. 7,633,506 and 7,796,133. On January 24, 2017, AMD instituted proceedings in the United States International Trade Commission (“ITC”) asserting infringement of U.S. Patent Nos. 7,633,506 and 7,796,133. The Delaware and ITC complaint seek unspecified monetary damages and injunctive relief.  At this time, we are unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on our business, operating results, cash flows or financial position.

 

Broadcom Corporation Litigation: On March 7, 2017, Broadcom Corporation (“Broadcom”), filed suit against us in the United States District Court for the Central District of California asserting infringement of U.S. Patent No. 7,310,104. On March 8, 2017, Broadcom instituted proceedings in the United States ITC asserting infringement of U.S. Patent No. 7,310,104 and has subsequently amended its complaint to assert infringement of U.S. Patent Nos. 8,284,844 and 7,590,059. The California and ITC complaint seek unspecified monetary damages and injunctive relief.  At this time, we are unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on our business, operating results, cash flows or financial position. 

 

Advanced Silicon Technologies S.a.r.l. Litigation: On June 21, 2017, Advanced Silicon Technologies S.a.r.l. (“AST”), filed suit against Sigma Designs Technology Denmark ApS and Sigma Designs Technology Germany GmbH in the District Court of Düsseldorf, Germany asserting alleged infringement of Patent No. EP 1424653. The complaint seeks certain monetary damages, while the Düsseldorf court is empowered to grant injunctive relief.  At this time, we are unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on our business, operating results, cash flows or financial position. 

 

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.

 

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 of these 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. On February 10, 2017, we received a letter from one of our licensors notifying us of their intent to audit our compliance with the terms of the license agreements. On May 15, 2017, we started the audit proceedings and intend to cooperate with the licensor to bring the audit process to a resolution. As of October 28, 2017, we have accrued an estimated liability of $1.5 million in connection with this compliance audit, which was included in sales and marketing expense in the accompanying condensed consolidated statements of operations. However, we have not reached an agreement with this licensor and the terms of any settlement, if reached, may require us to pay an amount that is different from what we have accrued.

 

We may 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-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.

 

12

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

  

7.

Restructuring charges

 

On March 24, 2017, we initiated restructuring activities (the “Fiscal 2018 Plan”) in order to realign resources with our core target markets, such as the IoT market. We expect the Fiscal 2018 Plan to be completed by the end of fiscal 2018. Our restructuring activities include targeted reductions in labor costs through headcount reductions, facilities closure, and impairment of mask sets and certain purchased IP. We expect to reduce our workforce by between 200 and 250 employees by the end of fiscal 2018, a majority of which are from our research and development group for the Connected Smart TV Platforms market. The changes to our workforce may vary by country based on local legal requirements, as appropriate. Restructuring liabilities are reported within accrued liabilities in the accompanying condensed consolidated balance sheets.

 

During the three and nine months ended October 28, 2017, we communicated a plan of termination to several employees, which consisted of headcount reductions in our worldwide operations. A summary of the recent activities of our restructuring plan is as follows (in thousands):

 

   

Severance

 

Charges for the three months ended April 29, 2017

  $ 243  

Cash payments

    (5

)

Accrued balance as of April 29, 2017

    238  

Charges for the three months ended July 29, 2017

    1,723  

Cash payments

    (364

)

Accrued balance as of July 29, 2017

    1,597  

Charges for the three months ended October 28, 2017

    563  

Cash payments

    (573

)

Accrued balance as of October 28, 2017

  $ 1,587  

Total cost incurred to date as of October 28, 2017

  $ 2,529  

 

In addition, we recorded impairment charges for purchased IP and mask sets of $6.7 million and $9.7 million for the three and nine months ended October 28, 2017, respectively, as we no longer intend to use these IP and mask sets. The following table presents the impairment charges in the accompanying condensed consolidated statements of operations (in thousands):

 

   

Three Months Ended October 28,

2017

   

Nine Months Ended October 28,

2017

 

Cost of revenue

  $ 1,200     $ 1,200  

Operating expenses

    5,463       8,469  

Total

  $ 6,663     $ 9,669  

 

Our restructuring measures could negatively impact our revenue and results of operations in the future as a result of less employees developing future products and working to sell our products.

 

8.

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 nine months ended October 28, 2017 and October 29, 2016 (in thousands, except per share amounts):

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 28,

2017

   

October 29,

2016

   

October 28,

2017

   

October 29,

2016

 

Numerator:

                               

Net (loss) income, as reported

  $ (19,084

)

  $ 221     $ (46,620

)

  $ (9,599

)

Denominator:

                               

Weighted-average common shares outstanding - basic

    38,632       37,666       38,359       37,241  

Dilutive effect of employee stock plans

    -       335       -       -  

Weighted-average common shares outstanding - diluted

    38,632       38,001       38,359       37,241  

Net (loss) income per share - basic

  $ (0.49

)

  $ 0.01     $ (1.22

)

  $ (0.26

)

Net (loss) income per share - diluted

  $ (0.49

)

  $ 0.01     $ (1.22

)

  $ (0.26

)

 

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

   

Nine Months Ended

 
   

October 28,

2017

   

October 29,

2016

   

October 28,

2017

   

October 29,

2016

 

Stock options

    2,286       2,205       2,360       2,421  

Restricted stock units and awards

    423       114       403       442  

 

13

 

 

SIGMA DESIGNS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9.

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 2017.  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 28, 2017 of $0.1 million and $0.5 million, respectively, and $0.2 million and $0.5 million for the three and nine months ended October 29, 2016, respectively.

 

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 and from April 2017 to March 2018, the annual base is capped at RMB 19,512 per employee. For the three and nine months ended October 28, 2017, we made matching contributions of $0.6 million and $1.7 million, respectively, and $0.6 million and $1.8 million for the three and nine months ended October 29, 2016, 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 28, 2017 and October 29, 2016, and $0.6 million for each of the nine months ended October 28, 2017 and October 29, 2016.

 

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 28, 2017, we have an accrued severance liability of $0.9 million partially offset by $0.8 million of severance employee funds. We made contributions of less than $0.1 million for each of the three and nine months ended October 28, 2017 and October 29, 2016.

 

Employee termination benefits

 

Termination benefits are payable when an employee is involuntarily terminated, or whenever an employee accepts voluntary termination in exchange for termination benefits. For the accounting treatment and timing recognition of involuntarily termination benefits, the Company distinguishes between one-time termination benefit arrangements and ongoing termination benefit arrangements. A one-time termination benefit arrangement is established by a termination plan and applies to a specified termination event. One-time involuntary termination benefits are recognized as a liability when the termination plan meets certain criteria and has been communicated to employees. If employees are required to render future service in order to receive these one-time termination benefits, the liability is recognized ratably over the future service period. Termination benefits other than one-time termination benefits are termination benefits for which the communication criterion is not met but that are committed to by management, or termination obligations that are not specifically determined in a new and single plan. These termination benefits include all legal, contractual and past practice termination obligations to be paid to employees in case of involuntary termination. These termination benefits are accrued for when commitment creates a present obligation to our employees for the benefits expected to be paid, when it is probable that employees will be entitled to the benefits and the amount can be reasonably estimated.  As discussed in Note 7, we recorded termination benefits of $0.6 million and $2.5 million for the three and nine months ended October 28, 2017, respectively.

 

14

 

 

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 Employee Stock Purchase Plan (“2010 ESPP”). 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.

 

As of October 28, 2017, there were approximately 36,458 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. 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 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 on behalf of our employees for issuing shares in excess of the number of shares reserved under our 2010 ESPP and in March 2017, we settled with the relevant state tax authorities.

 

10.

Income taxes

 

We recorded a provision for income taxes of $0.3 million and $2.2 million for the three months ended October 28, 2017 and October 29, 2016, respectively.  The provision for income taxes was $2.3 million and $5.3 million for the nine months ended October 28, 2017 and October 29, 2016, respectively. The decrease in tax expense for the three and nine months ended October 28, 2017 is primarily attributable to lower profitability in taxable jurisdictions as compared to the same period in fiscal year 2017 and changes in tax reserves. During the three and nine months ended October 28, 2017 and October 29, 2016, 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.

 

11.

Collaborative arrangement

 

In September 2016, we entered into a joint collaboration agreement (“JCA”) with Telechips Inc. (“Telechips”) to develop and commercialize a set-top box microprocessor SoC solution. Martin Manniche, a member of our board of directors, also serves on the board of directors of Telechips. Telechips is responsible for the manufacture of the products and is also the principal in the end customer product sales. Telechips’ wholly-owned subsidiary has the primary responsibility for order fulfillment, collection of receivables and handling of sales returns in all territories. We receive a marketing service fee in an amount equal to 50% of the net profit from the JCA, which is included in net revenue. The marketing service fee is recognized when products are shipped and all risks and rewards of ownership have been transferred to third-party customers, minus the cost of production and related operating expenses incurred by Telechips. Research and development costs are shared equally and cost reimbursement to Telechips is recognized as incurred and included in research and development expenses.

 

On August 14, 2017, we entered into an agreement to license certain set-top box semiconductor technology to Telechips for an aggregate payment of $4.7 million. The payment includes reimbursement of $2.5 million paid by us for a mask set which was capitalized with a corresponding accumulated amortization of $0.6 million. For the three months ended October 28, 2017, we recorded $1.1 million license revenue with the remaining payment of $1.1 million to be recorded upon satisfaction of certain milestones. Both parties mutually agreed to terminate the JCA and released each party’s obligation to pay any invoices that may be due and payable under this JCA. As a result, we reversed the cumulative amortization expense recorded to cost of revenue of $0.6 million, our cumulative share of research and development expense of $0.7 million and our cumulative net losses recorded in net revenue of $0.2 million for both the three and nine months ended October 28, 2017.

 

15

 

 

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 SoC 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 both smart home applications (including gateways and automated consumer devices) and mobile IoT applications (primarily tracking tags). Our smart home product line is marketed under our Z-Wave brand of wireless chips, modules and Z-Wave mesh networking protocol.

 

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, and engineering support services for hardware and software; that revenue is not significant as it represented zero of our total net revenue for the three and nine months ended October 28, 2017, respectively; and zero and 0.2% of our total net revenue for the three and nine months ended October 29, 2016, respectively.

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 28,

2017

   

October 29,

2016

   

October 28,

2017

   

October 29,

2016

 

Connected Smart TV Platforms

  $ 19,435     $ 50,014     $ 73,436     $ 145,400  

IoT Devices

    14,427       12,715       39,498       32,120  

License and other

    -       -       -       300  

Net revenue

  $ 33,862     $ 62,729     $ 112,934     $ 177,820  

 

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 28,

2017

   

October 29,

2016

   

October 28,

2017

   

October 29,

2016

 

Asia

  $ 29,245     $ 50,569     $ 95,740     $ 144,483  

North America

    2,406       9,861       10,752       27,867  

Europe

    2,211       2,297       6,442       5,454  

Other regions

    -       2       -       16  

Net revenue

  $ 33,862     $ 62,729     $ 112,934     $ 177,820  

 

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 28,

2017

   

October 29,

2016

   

October 28,

2017

   

October 29,

2016

 

China, including Hong Kong

  $ 15,363     $ 26,218     $ 55,818     $ 86,785  

Taiwan

    10,442       19,662       29,199       43,617  

United States

    2,096       9,775       9,748       27,633  

Republic of Korea

    2,057       1,923       5,844       5,040  

Poland

    1,436       1,087       4,383       2,718  

Thailand

    -       1,884       1,852       7,621  

Rest of the world

    2,468       2,180       6,090       4,406  

Net revenue

  $ 33,862     $ 62,729     $ 112,934     $ 177,820  

 

During the three months ended October 28, 2017, Sunjet Components Corporation accounted for 24% of our net revenue. During the nine months ended October 28, 2017, Sunjet Components Corporation, Silicon Application and Arris Global accounted for 22%, 13% and 11% of our net revenue, respectively. 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.

 

16

 

 

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," “anticipate” 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; our ability to successfully execute our restructuring activities in fiscal 2018; 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 system-on-chip, or SoC, solutions provider offering intelligent platforms for use in a variety of home entertainment and home control appliances. Our goal is to ensure that our integrated SoC solutions serve as the foundation for some of the world’s leading consumer products, including televisions, media connectivity, smart home, and mobile Internet of Things, or IoT, products. A majority of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers or ODMs, however, a certain amount of non-recurring engineering services, development kit sales, and licensing revenue are also derived from our target markets. Additionally, we derive a minor portion of our revenue from non-core licensing and other activities, which is reported under the License and other markets.

 

 Our chipset products and target markets

 

We consider our semiconductor products primarily 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 IoT Devices.

 

Connected Smart TV Platforms Market

 

The Connected Smart TV Platforms market 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.

 

IoT Devices Market

 

The IoT Devices market consists of both smart home applications (including gateways and automated consumer devices) and mobile IoT applications (primarily tracking tags). Our smart home product line is marketed under our Z-Wave brand of wireless chips, modules and Z-Wave mesh networking protocol.

 

License and Other Markets

 

License and other markets includes other products and services, including technology licenses, software development kits, and engineering support services for hardware and software.

 

17

 

 

Critical accounting policies and estimates

 

There have been no significant changes in our critical accounting policies during the nine months ended October 28, 2017, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended January 28, 2017. 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 2017 Annual Report.

 

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 28, 2017

   

% of Net Revenue

   

October 29, 2016

   

% of Net Revenue

   

October 28,

2017

   

% of Net Revenue

   

October 29, 2016

   

% of Net Revenue

 

Net revenue

  $ 33,862       100 %   $ 62,729       100 %   $ 112,934       100 %   $ 177,820       100 %

Cost of revenue

    16,746       49 %     31,734       51 %     58,374       52 %     93,242       52 %

Gross profit

    17,116       51 %     30,995       49 %     54,560       48 %     84,578       48 %

Operating expenses

                                                               

Research and development

    17,218       51 %     18,264       29 %     53,380       47 %     56,255       32 %

Sales and marketing

    7,012       21 %     5,984       10 %     17,498       15 %     17,646       10 %

General and administrative

    5,744       17 %     4,578       7 %     15,899       14 %     14,536       8 %

Restructuring charges

    563       1 %     -       - %     2,529       2 %     -       - %

Impairment of IP and mask sets

    5,463       16 %     -       - %     8,469       8 %     300       - %

Total operating expenses

    36,000       106 %     28,826       46 %     97,775       86 %     88,737       50 %

(Loss) income from operations

    (18,884

)

    (55

%)

    2,169       3 %     (43,215

)

    (38

%)

    (4,159

)

    (2

%)

Interest and other income (expense), net

    147       - %     179       - %     (1,076

)

    (1

%)

    (157

)

    - %

(Loss) income before income taxes

    (18,737

)

    (55

%)

    2,348       3 %     (44,291

)

    (39

%)

    (4,316

)

    (2

%)

Provision for income taxes

    347       1 %     2,127       3 %     2,329       2 %     5,283       3 %

Net (loss) income

  $ (19,084

)

    (56

%)

  $ 221       - %   $ (46,620

)

    (41

%)

  $ (9,599

)

    (5

%)

 

Net revenue

 

Our net revenue for the three months ended October 28, 2017 decreased by $28.9 million, or 46%, as compared to the corresponding period in the prior fiscal year due to decreases within the Connected Smart TV Platforms market, partially offset by an increase within the IoT Devices market.

 

For the nine months ended October 28, 2017, our net revenue decreased by $64.9 million, or 36%, as compared to the corresponding period in the prior fiscal year due to decreases within the Connected Smart TV Platforms market, partially offset by an increase within the IoT Devices market.

 

Net revenue by target market

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 28, 2017

   

% of Net Revenue

   

October 29, 2016

   

% of Net Revenue

   

October 28, 2017

   

% of Net Revenue

   

October 29, 2016

   

% of Net Revenue

 

Connected Smart TV Platforms

  $ 19,435       57 %   $ 50,014       80 %   $ 73,436       65 %   $ 145,400       82 %

IoT Devices

    14,427       43 %     12,715       20 %     39,498       35 %     32,120       18 %

License and other

    -       - %     -       - %     -       - %     300       - %

Net revenue

  $ 33,862       100 %   $ 62,729       100 %   $ 112,934       100 %   $ 177,820       100 %

 

18

 

 

Connected Smart TV Platforms: For the three months ended October 28, 2017, net revenue from sales of our products into the Connected Smart TV Platforms market decreased by $30.6 million, or 61%, as compared to the corresponding period in the prior fiscal year. For the nine months ended October 28, 2017, net revenue decreased by $72.0 million, or 49%, as compared to the corresponding period in the prior fiscal year. We experienced a decrease of 56% and 36% in units shipped during the three and nine months ended October 28, 2017, respectively, as compared to the corresponding periods in the prior fiscal year. The volume decline in our Connected Smart TV Platforms market resulted primarily from the lower demand for our chipsets used in ultra-high definition televisions, also known as Ultra-HD televisions, and the continued decline of demand for our older legacy products, many of which are now approaching end-of-life. In addition, our wired home networking controller chipsets contributed to this volume decline primarily due to reduced demand due to the continued expansion of wireless technologies in the market impacting our existing product offerings.

 

In September 2016, we entered into a joint collaboration agreement (“JCA”) with Telechips Inc. (“Telechips”) to develop and commercialize a set-top box microprocessor SoC solution. Martin Manniche, a member of our board of directors, also serves on the board of directors of Telechips. We receive a marketing service fee in an amount equal to 50% of the net profit from the JCA, which is included in net revenue. On August 14, 2017, we entered into an agreement to license certain set-top box semiconductor technology to Telechips for an aggregate payment of $4.7 million. The payment includes reimbursement of $2.5 million paid by us for a mask set which was capitalized with a corresponding accumulated amortization of $0.6 million. For the three months ended October 28, 2017, we recorded $1.1 million license revenue with the remaining payment of $1.1 million to be recorded upon satisfaction of certain milestones. Both parties mutually agreed to terminate the JCA and released each party’s obligation to pay any invoices that may be due and payable under this JCA. As a result, we reversed our cumulative net losses recorded in net revenue of $0.2 million for both the three and nine months ended October 28, 2017.

 

Our Connected Smart TV Platforms revenue was derived mainly from the Asia region. We expect our net revenue from the Connected Smart TV Platforms market to continue to be a significant percentage of net revenue but will fluctuate in future periods based primarily on demand for our products.

 

IoT Devices:  For the three months ended October 28, 2017, net revenue from sales of our products into the IoT Devices market increased by $1.7 million, or 13%, compared to the corresponding period in the prior fiscal year.  For the nine months ended October 28, 2017, net revenue increased by $7.4 million, or 23%, as compared to the corresponding period in the prior fiscal year. In both cases, the increase was primarily the result of higher demand, mainly in the Asia region. This was evidenced by an increase of 52% and 55% in units shipped during the three and nine months ended October 28, 2017, respectively, as compared to the corresponding periods in the prior fiscal year. In addition, we derive a portion of our IoT Devices revenues in the form of fees from members of a wholly-owned entity dedicated to the marketing, development and proliferation of the Z-Wave brand. During the three and nine months ended October 28, 2017, membership revenue was $0.5 million and $1.3 million, respectively, as compared to the corresponding periods in the prior fiscal year of $0.4 million and $1.3 million, respectively.

 

We have compelling products for our IoT Devices market and we continue to target large operators who are introducing home control and automation products primarily in the North America region. We expect our revenue from the IoT Devices market to increase in the foreseeable future.

 

License and other markets:  Our license and other markets consist primarily of technology license revenue and revenue from other ancillary markets. For the three and nine months ended October 28, 2017 and October 29, 2016, net revenue was nominal as we had no significant source of license or other revenue in either period. We do not expect our license and other revenue to be a significant source of revenue, but this may fluctuate in future periods if we enter into a license agreement in the future. We do not have a sales program based around licensing our technology. However, we continue to evaluate opportunities as they arise in the future.

 

19

 

 

Net revenue by geographic region

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 28, 2017

   

% of Net Revenue

   

October 29, 2016

   

% of Net Revenue

   

October 28, 2017

   

% of Net Revenue

   

October 29, 2016

   

% of Net Revenue

 

Asia

  $ 29,245       86 %   $ 50,569       81 %   $ 95,740       85 %   $ 144,483       81 %

North America

    2,406       7 %     9,861       16 %     10,752       9 %     27,867       16 %

Europe

    2,211       7 %     2,297       3 %     6,442       6 %     5,454       3 %

Other regions

    -       - %     2       - %     -       - %     16       - %

Net revenue

  $ 33,862       100 %   $ 62,729       100 %   $ 112,934       100 %   $ 177,820       100 %

 

Asia: Our net revenue from Asia decreased by $21.3 million, or 42%, for the three months ended October 28, 2017, compared to the corresponding period in the prior fiscal year. Our net revenue for the nine months ended October 28, 2017 decreased by $48.7 million, or 34%, as compared to the corresponding period in the prior fiscal year. In both cases, the decreases were largely attributable to the decreasing deployments of new generation products by our customers within the Connected Smart TV Platforms market. This decrease was compounded by reduced demand of our wired home networking controller chipsets due to the continued expansion of wireless technologies in the market impacting our existing product offerings. These decreases were partially offset by an increase in demand within the IoT Devices market. Net revenue from customers in Asia as a percentage of our total net revenue for the three and nine months ended October 28, 2017 increased by 5 and 4 percentage points, respectively, as compared to the corresponding periods in the prior fiscal year. The increase for both periods was primarily due to the significant decrease in revenue in North America.

 

North America: Our net revenue from North America decreased by $7.5 million, or 76%, for the three months ended October 28, 2017, as compared to the corresponding period in the prior fiscal year. Our net revenue for the nine months ended October 28, 2017 decreased by $17.1 million, or 61%, as compared to the corresponding period in the prior fiscal year. In both cases, the decreases were mainly attributable to the decreasing deployments of new generation products by our customers within the Connected Smart TV Platforms market. The decrease was compounded by lower IoT revenue derived from non-recurring engineering contracts. Net revenue from North American customers as a percentage of our total net revenue for the three and nine months ended October 28, 2017 decreased by 9 and 7 percentage points, respectively, as compared to the corresponding periods in the prior fiscal year primarily due to the decrease experienced within our Connected Smart TV Platforms.

  

Europe:  Our net revenue from Europe decreased by less than $0.1 million, or 4%, for the three months ended October 28, 2017, as compared to the corresponding period in the prior fiscal year, primarily due to a decrease in shipments within our IoT Devices market and primarily in the United Kingdom. Our net revenue for the nine months ended October 28, 2017 increased by $0.1 million, or 18%, as compared to the corresponding period in the prior fiscal year, primarily due to an increase in shipments within our IoT Devices market and primarily in Poland. Net revenue from European customers as a percentage of our total net revenue for the three and nine months ended October 28, 2017 increased by 4 and 3 percentage points, respectively, compared to the corresponding periods in the prior fiscal year. The increase for both periods was mainly due to the significant decrease in revenue in North America.

 

Other regions: Our net revenue from other regions was nominal for both the three and nine months ended October 28, 2017 and October 29, 2016. 

 

Major customers

 

During the three months ended October 28, 2017, Sunjet Components Corporation accounted for 24% of our net revenue. During the nine months ended October 28, 2017, Sunjet Components Corporation, Silicon Application and Arris Global accounted for 22%, 13% and 11% of our net revenue, respectively. 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.

 

20

 

 

Gross profit and gross margin

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 28,

2017

   

% Change

   

October 29,

2016

   

October 28,

2017

   

% Change

   

October 29,

2016

 

Gross profit

  $ 17,116       (45 %)   $ 30,995     $ 54,560       (35 %)   $ 84,578  

Gross margin %

    50.5

%

    1.1 %     49.4

%

    48.3

%

    0.7 %     47.6

%

 

Gross profit decreased by $13.9 million, or 45%, for the three months ended October 28, 2017, as compared to the corresponding period in the prior fiscal year. Gross profit decreased by $30.0 million, or 35%, for the nine months ended October 28, 2017, as compared to the corresponding period in the prior fiscal year. The decrease for both periods was primarily due to lower sales volumes within the Connected Smart TV Platforms market. Our gross margin increased 1.1 and 0.7 percentage points, respectively, for the three and nine months ended October 28, 2017, as compared to the corresponding periods in the prior fiscal year, primarily due to favorable shifts in the product mix within our Connected Smart TV Platforms market.

 

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

 

Research and development expense

 

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

 

   

Three Months Ended

                 
   

October 28,

2017

   

October 29,

2016

   

$ Change

   

% Change

 

Research and development expense

  $ 17,218     $ 18,264     $ (1,046

)

    (6

%)

Percent of net revenue

    50.8

%

    29.1

%

               

 

   

Nine Months Ended

                 
   

October 28,

2017

   

October 29,

2016

   

$ Change

   

% Change

 

Research and development expense

  $ 53,380     $ 56,255     $ (2,875

)

    (5

%)

Percent of net revenue

    47.3

%

    31.6

%

               

 

Research and development expense decreased during the three and nine months ended October 28, 2017, as compared to the corresponding periods in the prior fiscal year. The decrease for both periods was primarily due to lower amortization of design tools, compensation and benefits. In addition, we recorded a reversal of our cumulative share of research and development expense of $0.7 million resulting from the termination of our collaboration arrangement with Telechips. For further discussion, refer to Note 11, “Collaborative arrangement” of the Notes to the unaudited condensed consolidated financial statements of this Form 10-Q included in Item 1 of this report. We had 462 employees in research and development as of October 28, 2017, compared to 517 employees as of October 29, 2016.

 

21

 

 

Sales and marketing expense

 

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

 

   

Three Months Ended

                 
   

October 28,

2017

   

October 29,

2016

   

$ Change

   

% Change

 

Sales and marketing expense

  $ 7,012     $ 5,984     $ 1,028       17

%

Percent of net revenue

    20.7 %     9.5

%

               

 

   

Nine Months Ended

                 
   

October 28,

2017

   

October 29,

2016

   

$ Change

   

% Change

 

Sales and marketing expense

  $ 17,498     $ 17,646     $ (148

)

    (1

%)

Percent of net revenue

    15.4

%

    9.9

%

               

 

Sales and marketing expense increased during the three months ended October 28, 2017, as compared to the corresponding period in the prior fiscal year, primarily due to an accrual of $1.5 million related to a license compliance dispute, partially offset by lower amortization of acquired intangibles related to customer relationships, compensation and benefits.

 

Sales and marketing expense decreased during the nine months ended October 28, 2017, as compared to the corresponding period in the prior fiscal year, primarily due to lower amortization of acquired intangibles related to customer relationships, marketing programs, compensation and benefits. These decreases were partially offset by the aforementioned accrual of $1.5 million related to a license compliance dispute. We had 87 employees in sales and marketing as of October 28, 2017, compared to 101 employees as of October 29, 2016.

 

General and administrative expense

 

General and administrative expense consists primarily of compensation and benefits costs, stock-based compensation expense, legal, accounting and other professional fees and facilities expenses. Our general and administrative expense is summarized as follows (in thousands, except percentages):

 

 

   

Three Months Ended

                 
   

October 28,

2017

   

October 29,

2016

   

$ Change

   

% Change

 

General and administrative expense

  $ 5,744     $ 4,578     $ 1,166       25 %

Percent of net revenue

    17.0

%

    7.3

%

               

 

   

Nine Months Ended

                 
   

October 28,

2017

   

October 29,

2016

   

$ Change

   

% Change

 

General and administrative expense

  $ 15,899     $ 14,536     $ 1,363       9 %

Percent of net revenue

    14.1

%

    8.2

%

               

 

General and administrative expense increased during the three and nine months ended October 28, 2017, as compared to the corresponding periods in the prior fiscal year. The increase for both periods was primarily due to increased legal services associated with the restructuring plan and litigation matters, partially offset by lower personnel related compensation costs. We had 69 employees in general and administrative as of October 28, 2017, compared to 77 employees as of October 29, 2016.

 

22

 

 

Restructuring charges

 

On March 24, 2017, we initiated restructuring activities (the “Fiscal 2018 Plan”) in order to realign resources with our core target markets, such as the IoT market. We expect our Fiscal 2018 Plan to be completed by the end of fiscal 2018. Our restructuring activities include targeted reductions in labor costs through headcount reductions, facilities closure, and impairment of mask sets and certain purchased intellectual property, or IP.  We expect to reduce our workforce by between 200 and 250 employees by the end of fiscal 2018, a majority of which are from our research and development group for the Connected Smart TV Platforms market. The changes to the workforce may vary by country based on local legal requirements, as appropriate. We expect to incur charges between $8.0 million to $10.0 million relating to severance and lease termination and between $5.0 million to $7.0 million for the remaining restructuring-related charges, which includes estimated asset impairment charges and other costs. The restructuring plan is currently expected to result in approximately $8.0 million of cost savings per quarter, starting in fiscal 2019. Restructuring liabilities are reported within accrued liabilities in the accompanying condensed consolidated balance sheets.

 

During the three and nine months ended October 28, 2017, we communicated a plan of termination to several employees, which consisted of headcount reductions in our worldwide operations. A summary of the recent activities of our restructuring plan is as follows (in thousands):

 

   

Severance

 

Charges for the three months ended April 29, 2017

  $ 243  

Cash payments

    (5

)

Accrued balance as of April 29, 2017

    238  

Charges for the three months ended July 29, 2017

    1,723  

Cash payments

    (364

)

Accrued balance as of July 29, 2017

    1,597  

Charges for the three months ended October 28, 2017

    563  

Cash payments

    (573

)

Accrued balance as of October 28, 2017

  $ 1,587  

Total cost incurred to date as of October 28, 2017

  $ 2,529  

 

In addition, we recorded impairment charges for purchased IP and mask sets of $6.7 million and $9.7 million for the three and nine months ended October 28, 2017, respectively, as we no longer intend to use these IP and mask sets. The following table presents the impairment charges in the accompanying condensed consolidated statements of operations (in thousands):

 

   

Three Months Ended October 28,

2017

   

Nine Months Ended October 28,

2017

 

Cost of revenue

  $ 1,200     $ 1,200  

Operating expenses

    5,463       8,469  

Total

  $ 6,663     $ 9,669  

 

Our restructuring measures could negatively impact our revenue and results of operations in the future as a result of less employees developing future products and working to sell our products.

 

Impairment of IP, mask sets and design tools

 

We test long-lived assets, including our purchased intangible assets, for impairment whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets may not be recoverable. If indicators of impairment exist, we determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows that the assets are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long-lived assets and purchased intangible assets. We also periodically review our current assets for other-than-temporary declines in fair-value based on the specific identification method and write-down the carrying value when an other-than temporary decline has occurred.

 

Our business requires investment in purchased IP, mask sets and design tools that are technologically advanced but can quickly become significantly underutilized or rendered obsolete by rapid changes in demand in the semiconductor industry. We periodically review our purchased IP, mask sets and design tools for possible impairment or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We recorded $6.7 million and $9.7 million of impairment charges related to purchased IP and mask sets during the three and nine months ended October 28, 2017, respectively. We recorded zero and $0.3 million of impairment charges during the three and nine months ended October 29, 2016.

 

23

 

 

Interest and other income (expense), net

 

The following table sets forth net interest and other income (expense) and the related change (in thousands, except percentages):

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 28,

2017

   

% change

   

October 29,

2016

   

October 28,

2017

   

% change

   

October 29,

2016

 

Interest and other income (expense), net

  $ 147       (18% )   $ 179     $ (1,076 )     585 %   $ (157 )

 

Interest and other income (expense) primarily consist of interest income from marketable securities, income from refundable research and development credits, gains or losses on foreign exchange transactions, gains or losses on sales of marketable securities, and gains or losses on disposals of software, equipment and leasehold improvements. Interest and other, net income decreased by less than $0.1 million for the three months ended October 28, 2017, as compared to the corresponding period in the prior fiscal year. Interest and other, net expense increased by $0.9 million during the nine months ended October 28, 2017, as compared to the corresponding period in the prior fiscal year. The changes for both periods was primarily due to unfavorable fluctuations in foreign currency.

 

Provision for income taxes

 

We recorded a provision for income taxes of $0.3 million and $2.2 million for the three months ended October 28, 2017 and October 29, 2016, respectively.  The provision for income taxes was $2.3 million and $5.3 million for the nine months ended October 28, 2017 and October 29, 2016, respectively. The decrease in tax expense for the three and nine months ended October 28, 2017 is primarily attributable to lower profitability in taxable jurisdictions as compared to the same period in fiscal year 2017 and changes in tax reserves. During the three and nine months ended October 28, 2017 and October 29, 2016, 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.

 

Liquidity and Capital Resources

 

As of October 28, 2017, our principal sources of liquidity consisted of cash of $69.2 million, which represents approximately $1.79 per share of outstanding common stock as compared to $1.87 as of January 28, 2017. Working capital as of October 28, 2017 was $70.1 million. Total cash increased by $2.8 million compared to January 28, 2017, primarily due to favorable changes in operating assets and liabilities of $28.6 million, sales and maturities of marketable securities and long-term investment of $6.6 million and reimbursement of mask set related to collaborative arrangement of $2.5 million, partially offset by $21.1 million of net loss after non-cash adjustments of $25.6 million and purchases of tangible and intangible assets of $14.4 million.

 

We believe our existing balance of cash will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with existing operations over the next 12 months.

 

The following table sets forth the primary net cash inflows and outflows (in thousands):

 

   

Nine Months Ended

 
   

October 28,

2017

   

October 29,

2016

 

Net cash provided by (used in):

               

Operating activities

  $ 7,562     $ 6,052  

Investing activities

    (5,932

)

    (6,417

)

Financing activities

    1,073       1,605  

Effect of foreign exchange rate changes on cash and cash equivalents

    91       (197

)

Net increase in cash and cash equivalents

  $ 2,794     $ 1,043  

 

24

 

 

Cash flows from operating activities

 

Net cash provided by operating activities of $7.6 million for the nine months ended October 28, 2017 was primarily due to a favorable net change of $28.6 million in operating assets and liabilities, partially offset by $21.1 million of net loss after non-cash adjustments of $25.6 million, such as stock-based compensation expense, impairment of IP, depreciation and amortization. The increase in cash flow from operating activities during the nine months ended October 28, 2017 as compared to the corresponding period in fiscal 2017, was primarily due to an increase in the net change in operating assets and liabilities of $36.0 million and non-cash adjustments of $2.5 million. This was partially offset by an increase in net loss of $37.0 million. The favorable changes in operating assets and liabilities were primarily driven by the timing of collections and payments.

 

Cash flows from our operating activities will continue to fluctuate based upon our ability to grow net revenues while reducing our costs and managing the timing of payments to us from customers and to vendors from us, the timing of inventory purchases and subsequent manufacture and sale of our products.

 

Cash flows from investing activities

 

Net cash used in investing activities was $5.9 million for the nine months ended October 28, 2017, which was primarily due to purchases of IP and software, equipment and leasehold improvements of $4.8 million and $9.6 million, respectively, partially offset by net sales and maturities of marketable securities and long-term investment of $6.0 million and reimbursement of mask set related to collaborative arrangement of $2.5 million. Purchases of intangible and tangible property were primarily to support the development and advancement of emerging technologies within our target markets.

 

Net cash used in investing activities of $5.9 million for the nine months ended October 28, 2017 represents a $0.5 million decrease from the amount of cash used by investing activities during the corresponding period in fiscal 2017. The decrease was primarily due to higher proceeds from the net sales and maturities of marketable securities and long-term investment, partially offset by higher purchases of tangible property and equipment.

 

Cash flows from financing activities

 

Net cash provided by financing activities was $1.1 million for the nine months ended October 28, 2017, which was due to the proceeds from the exercise of employee stock options and stock purchase rights, partially offset by employee payroll taxes paid related to net share settlement of restricted stock units. The decrease of $0.5 million from the corresponding period in fiscal 2017 was primarily the result of lower exercise activity related to stock options.

 

Off-Balance Sheet Arrangements

 

As of October 28, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Contractual obligations and commitments

 

We generally do not have guaranteed price or quantity commitments from any of our suppliers.  Additionally, we generally acquire products for sale to our customers based on purchase orders received as well as forecasts from such customers.  Purchase orders with delivery dates greater than twelve weeks are typically cancelable without penalty to our customers.  We currently place non-cancelable orders to purchase semiconductor wafers, other materials and finished goods from our suppliers on an eight to twelve week lead-time basis. For further discussion, refer to Note 6, “Commitments and contingencies” of the Notes to the unaudited condensed consolidated financial statements of this Form 10-Q included in Item 1 of this report.

 

The following table sets forth the amounts of payments due under specified contractual obligations as of October 28, 2017 (in thousands):

 

   

Payments due by Period

 
   

Fiscal 2018 (Remaining

three months)

   

Fiscal 2019 -

2020

   

Fiscal 2021 -

2022

   

Thereafter

   

Total

 
                                         

Operating leases

  $ 1,009     $ 5,593     $ 2,281     $ -     $ 8,883  

Third-party licensed IP

    3,118       2,442       -       -       5,560  

Design tools

    1,220       6,692       198       -       8,110  

Non-cancelable purchase obligations

    15,623       -       -       -