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 May 4, 2013

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.)

 

 

1778 McCarthy Boulevard,

Milpitas, California 95035

(Address of principal executive offices including Zip Code)

(408) 262-9003

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer ☐	Accelerated filer ☑	Non-accelerated filer ☐	Smaller reporting company ☐
		(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☑

 

As of June 6, 2013, the Company had 34,170,457 shares of Common Stock outstanding.

 

 

 

SIGMA DESIGNS, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED MAY 4, 2013

 

TABLE OF CONTENTS

 

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of May 4, 2013 and February 2, 2013	3
	Unaudited Condensed Consolidated Statements of Operations for the three months ended May 4, 2013 and April 28, 2012	4
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended May 4, 2013 and April 28, 2012	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended May 4, 2013 and April 28, 2012	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	47
Signatures		48
Exhibit index		48

 

 

 

 

 

PART I.                      FINANCIAL INFORMATION

 

ITEM 1.                      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

		May 4, 2013				February 2, 2013
ASSETS
Current assets
Cash and cash equivalents		$	54,447			$	51,218
Short-term marketable securities			16,690				17,455
Restricted cash			1,771				1,769
Accounts receivable, net			26,260				21,648
Inventory			19,027				24,929
Deferred tax assets			5,583				5,868
Prepaid expenses and other current assets			10,429				13,578
Total current assets			134,207				136,465
Long-term marketable securities			14,119				14,253
Software, equipment and leasehold improvements, net			16,425				17,106
Intangible assets, net			33,865				36,573
Deferred tax assets, net of current portion			1,085				2,681
Long-term investments and notes receivable, net of current portion			8,943				8,943
Other non-current assets			4,860				4,810
Total assets		$	213,504			$	220,831
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable		$	12,498			$	11,046
Accrued compensation and related benefits			8,460				10,070
Accrued liabilities			14,121				18,721
Total current liabilities			35,079				39,837
Income taxes payable			18,272				17,723
Long-term deferred tax liabilities			607				804
Other long-term liabilities			405				449
Total liabilities			54,363				58,813
Commitments and contingencies (Note 13)
Shareholders' equity
Preferred stock			-				-
Common stock and additional paid-in capital			477,135				475,070
Treasury stock			(85,941	)			(85,941	)
Accumulated other comprehensive income			681				1,090
Accumulated deficit			(232,734	)			(228,201	)
Total shareholders' equity			159,141				162,018
Total liabilities and shareholders' equity		$	213,504			$	220,831

 

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Net revenue		$	52,540			$	40,258
Cost of revenue			25,594				19,163
Gross profit			26,946				21,095
Operating expenses
Research and development			20,204				21,789
Sales and marketing			5,682				6,888
General and administrative			4,762				6,379
Restructuring costs			210				-
Impairment of IP, mask sets and design tools			188				-
Total operating expenses			31,046				35,056
Loss from operations			(4,100	)			(13,961	)
Gain on sale of development project			1,079				-
Interest and other income, net			691				491
Loss before income taxes			(2,330	)			(13,470	)
Provision for income taxes			2,203				232
Net loss		$	(4,533	)		$	(13,702	)
Net loss per common share:
Basic		$	(0.13	)		$	(0.42	)
Diluted		$	(0.13	)		$	(0.42	)
Shares used in computing net loss per share:
Basic			33,912				32,661
Diluted			33,912				32,661

  

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Net loss		$	(4,533	)		$	(13,702	)
Other comprehensive income (loss):
Currency translation adjustments			(366	)			71
Unrealized gains (losses) on marketable securities, net of tax			(43	)			267
Other comprehensive income (loss)			(409	)			338
Comprehensive loss		$	(4,942	)		$	(13,364	)

 

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 

SIGMA DESIGNS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) 

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Cash flows from operating activities
Net loss		$	(4,533	)		$	(13,702	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			5,568				5,117
Stock-based compensation			2,033				2,826
Provision for excess and obsolete inventory			561				303
Provision for sales returns, discounts and doubtful accounts			71				149
Deferred income taxes			1,669				-
(Gain) loss on disposal of software, equipment and leasehold improvements			(3	)			34
Gain on sale of development project			(1,079	)			-
Non-cash restructuring costs			81				-
Accretion of contributed leasehold improvements			(13	)			(69	)
Impairment of IP, mask sets and design tools			188				-
Changes in operating assets and liabilities:
Accounts receivable			(4,683	)			(2,544	)
Inventory			5,341				3,123
Prepaid expenses and other current assets			2,140				(113	)
Other non-current assets			(80	)			182
Accounts payable			3,117				(1,605	)
Accrued compensation and related benefits and other liabilities			(5,265	)			392
Income taxes payable and other long-term liabilities			523				(1,019	)
Net cash provided by (used in) operating activities			5,636				(6,926	)
Cash flows from investing activities
Restricted cash			(2	)			-
Purchases of marketable securities			(2,535	)			(10,393	)
Sales and maturities of marketable securities			3,390				54,662
Purchases of software, equipment and leasehold improvements			(2,594	)			(1,928	)
Purchases of IP			(2,750	)			(739	)
Proceeds from sale of development project, net of transaction fees			1,971				-
Repayment of note receivable			250				-
Net cash provided by (used in) investing activities			(2,270	)			41,602
Cash flows from financing activities
Net proceeds from exercise of employee stock options and stock purchase rights			32				55
Net cash provided by financing activities			32				55
Effect of foreign exchange rate changes on cash and cash equivalents			(169	)			36
Net increase in cash and cash equivalents			3,229				34,767
Cash and cash equivalents, beginning of period			51,218				44,283
Cash and cash equivalents, end of period		$	54,447			$	79,050
Supplemental disclosure of cash flow information
Cash paid for income taxes		$	1,969			$	468

  

See the accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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 interim condensed consolidated financial statements as “Sigma,” “we,” “our”, “the Company” and “us”) is a leader in connected media platforms.  We specialize in digital television, or DTV, media processors and chipset solutions that serve as the foundation for some of the world’s leading internet protocol television, or IPTV, set-top-boxes, connected media players, residential gateways and home control systems.  We sell our products to manufacturers, designers and, to a lesser extent, to distributors who, in turn, sell to manufacturers.

 

Basis of presentation:  The interim condensed consolidated financial statements include Sigma Designs, Inc. and its wholly-owned subsidiaries.  All intercompany balances and transactions are 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 first quarter of fiscal 2014 and fiscal 2013 ended on May 4, 2013 (91 days) and April 28, 2012 (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, or US GAAP, for interim financial information and the rules and regulations of the Securities and Exchange Commission, or 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 February 2, 2013, included in our fiscal 2013 Annual Report on Form 10-K, as filed with the SEC on April 12, 2013, referred to as our fiscal 2013 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 May 4, 2013 and February 2, 2013, the consolidated results of our operations for the three months ended May 4, 2013 and April 28, 2012, and the consolidated cash flows for the three months ended May 4, 2013 and April 28, 2012.  The results of operations for the three months ended May 4, 2013 are not necessarily indicative of the results to be expected for future quarters or the full year.

 

There have been no significant changes in our critical accounting policies during the three months ended May 4, 2013, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended February 2, 2013. 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 2013 Annual Report.

 

Use of estimates:  The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or US GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  The primary areas that require significant estimates and judgments by management include, but are not limited to, revenue recognition, allowances for doubtful accounts, sales returns, warranty obligations, inventory valuation, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, restructuring costs, litigation and other loss contingencies.  These estimates and assumptions are based on historical experience and various other factors that we believe to be reasonable under the circumstances.  Actual results could differ from those estimates, and such differences may be material to our consolidated financial statements.

 

Business combinations:  In May 2012, we completed our acquisition of certain assets from Trident Microsystems, Inc. and certain of its subsidiaries (collectively referred to as “Trident”). The consolidated financial statements include the results of operations of Trident commencing as of the acquisition date. Refer to Note 10, "Business combinations”, in Part II, Item 8 of our fiscal 2013 Annual Report.

 

Recent accounting pronouncements:  In March 2013, the FASB issued ASU 2013-05, which permits an entity to release cumulative translation adjustments into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity.  Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, or, if a controlling financial interest is no longer held. The revised standard is effective for fiscal years beginning after December 15, 2013. We do not anticipate that the adoption of this new guidance will have a material impact on our consolidated financial statements.

 

  

2.             Cash, cash equivalents and marketable securities

 

Cash, cash equivalents and marketable securities consist of the following (in thousands):

 

		May 4, 2013												February 2, 2013
		Book Value				Net Unrealized Gains (Losses)				Fair Value				Book Value				Net Unrealized Gains (Losses)				Fair Value
Corporate bonds		$	29,793			$	492			$	30,285			$	30,642			$	537			$	31,179
Money market funds			14,135				-				14,135				21,032				-				21,032
Municipal bonds and notes			513				11				524				515				14				529
Fixed income mutual funds			1,267				25				1,292				1,259				20				1,279
Total cash equivalents and marketable securities		$	45,708			$	528			$	46,236			$	53,448			$	571			$	54,019
Cash on hand held in the United States											6,158												1,441
Cash on hand held overseas											32,862												27,466
Total cash on hand											39,020												28,907
Total cash, cash equivalents and marketable securities										$	85,256											$	82,926
Reported as:
Cash and cash equivalents											54,447												51,218
Short-term marketable securities											16,690												17,455
Long-term marketable securities											14,119												14,253
										$	85,256											$	82,926

 

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

 

		May 4, 2013								February 2, 2013
		Book Value				Fair Value				Book Value				Fair Value
Due in one year or less		$	31,958			$	32,117			$	39,595			$	39,766
Due in greater than one year			13,750				14,119				13,853				14,253
Total		$	45,708			$	46,236			$	53,448			$	54,019

 

 

3.             Fair values of assets and liabilities

 

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).” The accounting standards establish a consistent framework for measuring fair value and disclosure requirements about fair value measurements and among other things, require us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

Fair value hierarchy

 

The accounting standards discuss valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

●

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

●

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

●

Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our estimate of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

 

Determination of fair value

 

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

 

Our foreign currency derivative instruments are classified as Level 2 because they are valued using quoted prices and other observable data of similar instruments in active markets.

 

The tables below present the balances of our assets and liabilities measured at fair value on a recurring basis as of May 4, 2013 and February 2, 2013 (in thousands):  

  

		May 4, 2013
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Corporate bonds		$	30,285			$	30,285			$	-			$	-
Money market funds			14,135				14,135				-				-
Municipal bonds and notes			524				524				-				-
Fixed income mutual funds			1,292				1,292				-				-
Total cash equivalents and marketable securities		$	46,236			$	46,236			$	-			$	-
Restricted cash			1,771				1,771				-				-
Derivative instruments asset			522				-				522				-
Total assets and (liabilities) measured at fair value		$	48,529			$	48,007			$	522			$	-

 

		February 2, 2013
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Corporate bonds		$	31,179			$	31,179			$	-			$	-
Money market funds			21,032				21,032				-				-
Municipal bonds and notes			529				529				-				-
Fixed income mutual funds			1,279				1,279				-				-
Total cash equivalents and marketable securities		$	54,019			$	54,019			$	-			$	-
Restricted cash			1,769				1,769				-				-
Derivative instruments asset			438				-				438				-
Total assets and (liabilities) measured at fair value		$	56,226			$	55,788			$	438			$	-

 

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

 

Our non-marketable promissory notes receivable and preferred stock investments in privately-held venture capital funded technology companies are recorded at cost and are adjusted to fair value only in the event that they become other-than-temporarily impaired, as we are not able to estimate their fair value by practicable means. As further described in Note 6, as of May 4, 2013, we held equity investments in five, and promissory notes receivable in two, privately-held venture capital funded technology companies and an equity investment in one joint venture, with an aggregate face value equal to cost of $9.4 million. As of May 4, 2013, we did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments; as a result they were not evaluated for impairment. Each of these equity investments in privately-held companies constituted less than a 20% ownership position. Furthermore, we do not believe that we have the ability to exert significant influence over any of these companies.

 

 4.             Derivative financial instruments

 

We use derivative instruments primarily to manage exposures to foreign currency exchange rate risks. Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Substantially all of our revenue is transacted in U.S. dollars; however, a significant amount of our operating expenditures and capital purchases are incurred in or exposed to other currencies, primarily the Israeli shekel, or NIS.

 

 

Foreign exchange contracts are recognized either as assets or as liabilities on the balance sheet at fair value at the end of each reporting period. The accounting treatment of these instruments is based on whether the instruments are designated as hedge or non-hedge instruments. For those derivatives qualifying for hedge accounting, the effective portions of derivative’s gains or losses on these hedges are initially recorded in accumulated other comprehensive income (“AOCI”) until the hedged item is recognized in earnings. The effective portions of net investment hedges are recorded in OCI as a part of the cumulative translation adjustment. We record the ineffective portions of the hedging instruments in interest and other income, net in our condensed consolidated statements of operations. For those derivative instruments that do not qualify for hedge accounting, we record the changes in fair value directly in earnings as interest and other income, net in our condensed consolidated statement of operations.

 

Beginning in the first quarter of fiscal 2012, we elected to discontinue assessing new derivative contracts that are used in managing NIS denominated transactions for hedge effectiveness and thus such contracts do not qualify for hedge accounting. As a result of this change, we recognize all gains and losses from changes in the fair value of these derivate contracts directly into earnings rather than deferring any such amounts in OCI.

 

As of May 4, 2013, we had foreign exchange contracts to sell up to approximately $7.9 million for a total amount of approximately NIS 30.1 million that mature on or before February 24, 2014.  As of February 2, 2013, we had foreign exchange contracts to sell up to approximately $10.4 million for a total amount of approximately NIS 42.3 million that mature on or before December 23, 2013.  For the three months ended May 4, 2013 and April 28, 2012, we recognized gains of approximately $0.3 million and $0.1 million, respectively, as a result of foreign exchange contracts.

 

The following table presents the fair value of our outstanding derivative instruments as of May 4, 2013 and February 2, 2013 (in thousands):

 

Derivative Assets		Balance Sheet Location		May 4, 2013				February 2, 2013
Foreign exchange contracts not designated as cash flow hedges		Prepaid expenses and other current assets		$	522			$	438
Total fair value of derivative instruments				$	522			$	438

 

The effects of derivative instruments on income and accumulated other comprehensive income for the three months ended May 4, 2013 and April 28, 2012 are summarized as follows (in thousands):

 

		Gains (Losses) Recognized in Accumulated Other Comprehensive Income on Derivatives (Effective Portion)				Gains Reclassified from Accumulated Other Comprehensive Income into Earnings					Gains (Losses) Recognized in Earnings on Derivatives (Including Ineffective Portion)
Derivatives instruments		Amount				Amount			Location		Amount			Location
Three months ended May 4, 2013, foreign exchange contracts		$	-			$	-		Operating expenses and cost of revenue		$	285		Interest and other income, net
Three months ended April 28, 2012, foreign exchange contracts		$	-			$	-		Operating expenses and cost of revenue		$	82		Interest and other income, net

 

There was no impact from ineffective portions on designated cash flow derivative contracts for the three months ended May 4, 2013 and April 28, 2012.

 

5.             Restricted cash

 

 As of May 4, 2013 and February 2, 2013, we had $1.8 million of restricted cash related to deposits pledged to a financial institution with regard to our foreign exchange hedging transactions and an office-space operating lease.

 

  

6.             Investments in and notes receivable from privately held companies

 

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

 

Equity investments:		May 4, 2013				February 2, 2013
Issuer B		$	2,000			$	2,000
Issuer C			1,000				1,000
Issuer D			1,000				1,000
Issuer E			300				300
Issuer F			2,000				2,000
Issuer G			143				143
Total equity investments			6,443				6,443
Notes receivable:
Issuer B			500				750
Issuer H			2,500				2,500
Total notes receivable			3,000				3,250
Total equity investments and notes receivable		$	9,443			$	9,693

 

Equity investments

  

During fiscal 2009, we purchased shares of preferred stock in a privately-held venture capital funded technology company (“Issuer B”) at a total investment cost of $1.0 million. In the fourth quarter of fiscal 2010, we purchased additional shares of preferred stock in Issuer B at a cost of $1.0 million.

 

In the third quarter of fiscal 2011, we purchased shares of preferred stock in another privately-held technology company (“Issuer C”) at a total investment cost of $1.0 million.

 

In the fourth quarter of fiscal 2011, we purchased shares of preferred stock in another privately-held technology company (“Issuer D”) at a total investment cost of $1.0 million.

 

In the fourth quarter of fiscal 2011, we also purchased a convertible note from another privately-held technology company (“Issuer E”) with a face value equal to the cost of $0.3 million.

 

In the second quarter of fiscal 2012, we purchased shares of preferred stock in another privately-held technology company (“Issuer F”) at a total investment cost of $2.0 million.

 

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

 

Notes receivable from privately-held companies

 

In November 2010, we loaned $1.0 million to Issuer B and received a secured promissory note. This promissory note is secured by the assets of Issuer B, bears interest at a rate of 5% per annum and is scheduled to be fully repaid by June 2013.

 

In January 2012, we loaned $2.5 million to a privately-held venture capital funded technology company (“Issuer H”), pursuant to a strategic agreement dated January 25, 2012. We made this loan in exchange for a secured promissory note, which is secured by the assets of Issuer H and bears interest at a rate of 3% per annum. The principal amount and accrued interest are due 36 months from the agreement date. On May 16, 2013, we entered into a Non-Exclusive License Agreement with Issuer H, under which we agreed to apply the loan balance of $2.5 million to offset the initial license fees under this license agreement, as further described in Note 18.

 

As of May 4, 2013 and February 2, 2013, our notes receivable from privately-held companies were valued at $3.0 million and $3.3 million, respectively, representing their cost. We made each of the above-described investments because we viewed the issuer as either having strategic technology or a business that would complement our technological capabilities or help create an opportunity for us to sell our chipset solutions. The Company analyzes each investment quarterly for evidence of impairment.

 

 

The Company’s President and Chief Executive Officer is a member of the Board of Directors of five of the seven companies we have invested in. Each of the aforementioned investment transactions is negotiated without the personal involvement of our Board members or, where applicable, the executive officer who may have a personal interest in the transaction. 

 

7.             Composition of certain financial statement captions

 

The following tables summarize the main items comprising certain financial statement captions as of May 4, 2013 and February 2, 2013 (in thousands):  

 

Accounts receivable

 

		May 4, 2013				February 2, 2013
Accounts receivable		$	27,763			$	23,002
Allowance for doubtful accounts			(1,503	)			(1,354	)
Total accounts receivable, net		$	26,260			$	21,648

 

Inventory

 

		May 4, 2013				February 2, 2013
Wafers and other purchased materials		$	9,632			$	12,553
Work-in-process			2,162				1,071
Finished goods			7,233				11,305
Total inventory		$	19,027			$	24,929

 

Prepaid expenses and other current assets

 

		May 4, 2013				February 2, 2013
Prepayments for inventory		$	2,535			$	2,542
Amounts due from seller related to DTV acquisition			1,848				4,519
Note receivable			500				750
Assets held for sale			-				623
Other current assets			5,546				5,144
Total prepaid expenses and other current assets		$	10,429			$	13,578

 

Software, equipment and leasehold improvements

 

		Estimated Useful Lives (years)					May 4, 2013				February 2, 2013
Software			2				$	25,342			$	24,216
Equipment		2	to	5				18,404				17,688
Office equipment and furniture			2					8,510				8,338
Leasehold improvements		1	to	6				3,144				3,097
Total								55,400				53,339
Less: Accumulated depreciation and amortization								(38,975	)			(36,233	)
Total software, equipment and leasehold improvements, net							$	16,425			$	17,106

 

 

Software, equipment and leasehold improvement depreciation and amortization expense for the three months ended May 4, 2013 and April 28, 2012 was $2.9 million and $2.7 million, respectively.

 

Accrued liabilities:

 

		May 4, 2013				February 2, 2013
Income taxes		$	2,487			$	4,508
License fees			2,001				3,553
Deferred revenue			1,008				3,099
Rebates			3,001				1,475
Settlements			288				425
Other accrued liabilities			5,336				5,661
Total accrued liabilities		$	14,121			$	18,721

 

8.             Business Combinations

 

On May 4, 2012, we completed our acquisition of certain assets from Trident Microsystems, Inc. and certain of its subsidiaries (collectively referred to as “Trident”) used in or related to Trident’s digital television and PC television businesses (the “DTV business”) for a purchase price of $38.2 million, subject to adjustments based on the closing asset balance of the DTV business, plus the assumption of certain employee related liabilities pursuant to an Asset Purchase Agreement dated March 23, 2012 (the “Purchase Agreement”). Trident filed for voluntarily petition under Chapter 11 bankruptcy on January 4, 2012. In April 2012, we were selected as the successful bidder to acquire Trident’s DTV business. The purchase price of the Trident acquisition was paid in cash.

 

In connection with the Trident acquisition, we acquired all of Trident’s DTV business products, certain licensed intellectual property rights, specified tangible assets and other assets specified in the Purchase Agreement. We also acquired the right to use certain facilities of Trident under short-term facilities use agreements for facilities located in Shanghai and Beijing, China, Germany, The Netherlands, Taiwan and California. We hired approximately 320 employees whose services are used in the DTV business. We also entered into a transition services agreement with Trident under which Trident agreed to provide certain services to us following the closing. The purchaser of Trident's set-top box business also agreed to provide transition support services to us.

 

The addition of Trident's industry-leading DTV media processor System-on-a-Chip, or SoC, products for next-generation Internet-enabled digital televisions has significantly expanded our served available market. DTV products complement our existing IPTV set-top-box and connected media player SoC solutions and augment our ability to develop innovative solutions for the anticipated convergence of IP-video delivery across any device within the home.

 

In connection with this acquisition, we obtained a valuation of the assets acquired in order to allocate the purchase price. The total purchase price was allocated to the net tangible and identified intangible assets based upon fair values as of May 4, 2012. The fair value of the tangible assets and identifiable intangible assets acquired, net of liabilities assumed, exceeded the purchase price by $1.4 million, which was recognized in the consolidated statements of operations as a gain on acquisition in fiscal 2013.

 

The purchase price in the transaction was allocated as follows (in thousands, except years):

 

		Amount
Purchase consideration:
Cash		$	38,210
Tangible assets acquired and liabilities assumed		$	38,431
Identifiable intangible assets:						Estimated Useful Lives (years)
Developed technology			1,168				3
Gain on acquisition			(1,389	)
Total consideration		$	38,210

 

The results of operations of the DTV business have been included in the consolidated results of operations from May 4, 2012.

 

For the three months ended May 4, 2013, net sales of approximately $13.5 million and an operating loss of approximately $0.7 million, attributable to the DTV business, were included in the consolidated results of operations. We believe that Trident and/or a vendor of Trident owed us $1.8 million and $4.5 million as of May 4, 2013 and February 2, 2013, respectively, which are included in “Prepaid expenses and other current assets” in the condensed consolidated balance sheets. Trident paid us $2.7 million during the three months ended May 4, 2013. As further described in Note 13, in April 2013, we initiated a lawsuit against Trident and a vendor to fully recover the outstanding balance of $1.8 million that we believe is due to us as of May 4, 2013.

 

 

The following unaudited pro forma consolidated results of operations give effect to the acquisition of the DTV business as if it had occurred on January 30, 2011 (in thousands, except per share data):

 

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Net revenue		$	52,540			$	63,202
Net loss			(4,533	)			(32,247	)
Basic and diluted net loss per share		$	(0.13	)		$	(0.99	)

 

The unaudited pro forma consolidated results of operations are provided for informational purposes only and do not purport to represent actual consolidated results of operations had the acquisition occurred on the date assumed, nor are these financial statements necessarily indicative of future consolidated results of operations. We expect to incur costs and realize benefits associated with integrating the operations of the DTV business. The unaudited pro forma consolidated results of operations do not reflect the cost of any integration activities or any benefits that may result from operating efficiencies or revenue synergies.

 

9.             Intangible assets

 

Intangible assets at the end of each period consisted of the following (in thousands, except for years):

 

		May 4, 2013
		Gross Value				Accumulated Amortization and Effect of Currency Translation				Net Value				Weighted Average Remaining Amortization Period (Years)
Acquired intangible assets:
Developed technology		$	52,025			$	(36,033	)		$	15,992				3.4
Customer relationships			20,218				(16,099	)			4,119				3.4
Trademarks			2,678				(2,013	)			665				5.6
Non-compete agreements			1,400				(1,400	)			-				-
Purchased IP - amortizing			16,047				(8,870	)			7,177				2.2
Total amortizing			92,368				(64,415	)			27,953				3.2
Purchased IP - not yet deployed			5,912				-				5,912
Total intangibles		$	98,280			$	(64,415	)		$	33,865

  

 

		February 2, 2013
		Gross Value				Accumulated Amortization and Effect of Currency Translation				Net Value				Weighted Average Remaining Amortization Period (Years)
Acquired intangible assets:
Developed technology		$	52,025			$	(34,567	)		$	17,458				3.6
Customer relationships			20,218				(15,782	)			4,436				3.6
Trademarks			2,678				(1,983	)			695				5.9
Non-compete agreements			1,400				(1,400	)			-				-
Purchased IP - amortizing			15,854				(7,970	)			7,884				2.4
Total amortizing			92,175				(61,702	)			30,473				3.4
Purchased IP - not yet deployed			6,100				-				6,100
Total intangibles		$	98,275			$	(61,702	)		$	36,573

 

 

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

 

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

 

We test long-lived assets, including our intangible assets, other than IP R&D, 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.

 

Amortization expense related to intangible assets was $2.7 million and $2.4 million for the three months ended May 4, 2013 and April 28, 2012, respectively.  As of May 4, 2013, we had $5.9 million of Purchased IP, which we have not yet begun to amortize.

 

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

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Cost of sales		$	2,327			$	1,991
Operating expenses			389				394
Total intangibles amortization expense		$	2,716			$	2,385

  

The estimated future amortization expense of intangible assets with finite lives as of May 4, 2013 is as follows (in thousands):

 

Fiscal year		Total
2014 (remaining nine months)		$	7,930
2015			8,800
2016			6,574
2017			3,912
2018			636
Thereafter			101
Total		$	27,953

 

10.          Product warranty

 

In general, we sell products with a one-year limited warranty that our products will be free from defects in materials and workmanship.  Warranty cost is estimated at the time revenue is recognized based on historical activity, and additionally, for any specific known product warranty issues.  Accrued warranty cost includes hardware repair and/or replacement and software support costs and is included in accrued liabilities on the accompanying condensed consolidated balance sheets.

 

Details of the change in accrued warranty as of May 4, 2013 and April 28, 2012 are as follows (in thousands):

 

Three Months Ended		Balance Beginning of Period				Additions and Adjustments				Deductions				Balance End of Period
May 4, 2013		$	1,447			$	(154	)		$	(243	)		$	1,050
April 28, 2012		$	1,326			$	124			$	(325	)		$	1,125

 

11.          Restructuring costs

 

In fiscal 2013 we initiated a number of targeted actions to address several areas in our business model which resulted in the adoption of company-wide cost saving measures. These actions were intended to align our cost structure with our current business outlook and divest or exit underperforming operations. As a result of the restructuring program, we recognized total restructuring costs of $3.3 million in fiscal 2013.

 

Pursuant to these restructuring initiatives, during the quarter ended May 4, 2013, we took further actions resulting in the headcount reduction of 17 employees and severance and termination related charges to cost of revenues and operating expenses of $40,000 and $210,000, respectively. Expenses recognized for restructuring activities impacting our operating expenses are presented in the “Restructuring costs” line of the condensed consolidated statements of operations. We will continue assessing further cost-saving measures during the remaining of our fiscal 2014.

 

 

The following table summarizes the restructuring costs, outstanding payable balance and cumulative restructuring costs (in thousands):

 

		Employee Severance				Impairment of Long-Lived Assets				Facility Exit Costs				Total				Cumulative Restructuring Costs
Charges in fiscal 2013		$	2,167			$	1,089			$	8			$	3,264			$	3,264
Cash payments			(1,153	)			-				-				(1,153	)
Non-cash items			-				(1,089	)			-				(1,089	)
Balance at February 2, 2013			1,014				-				8				1,022				3,264
Charges for the three months ended May 4, 2013			250				-				-				250				250
Cash payments			(882	)			-				(5	)			(887	)
Non-cash items			-				-				-				-
Balance at May 4, 2013		$	382			$	-			$	3			$	385			$	3,514

 

In connection with our restructuring measures, we closed down the operations of our wholly-owned subsidiary in Canada, which filed for bankruptcy on May 30, 2013. Upon filing for bankruptcy, the main outstanding liability of our Canadian entity relates to minimum monthly payments under a non-cancelable operating lease agreement for office space. In accordance with the provisions of the lease agreement and current communication with the Landlord’s agent, if Sigma Canada exercises its early termination provision, Sigma Canada would be liable for an early termination penalty of $0.3 million and monthly lease payments of approximately $45,000 from May 2013 through May 2015, totaling $1.1 million. In accordance with applicable bankruptcy regulations, we believe that the obligations under this lease agreement would be discarded against our Canadian subsidiary and, therefore, we have not recorded any charges associated with the early termination of this non-cancelable lease agreement for the three months ended May 4, 2013.

 

12.          Sale of development project

 

On March 8, 2013, we entered into an Asset Purchase Agreement with a third party (the “Buyer”) to sell certain development projects (intellectual property) and long-lived assets (the “Connectivity Assets”) related to the connectivity technology over coaxial cable market, including the transfer of 21 employees (the “Connectivity Employees”) to the Buyer. The aggregate carrying amount of the Connectivity Assets ultimately transferred was approximately $0.6 million and were classified as assets held for sale in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet at February 2, 2013. We received an initial payment of $2.0 million in cash at the closing of the transaction and a payroll expense reimbursement payment of $0.6 million (as described more fully below). Under the terms of the Asset Purchase Agreement, if certain technical milestones are met by September 30, 2013 as a result of further development of the transferred technology by the Buyer, we will be paid an additional $5.0 million in cash. There can be no assurance that this technical milestone will be met.

 

In April 2013, upon receiving the closing consideration of $2.0 million, we recorded a gain of $1.1 million, net of the carrying value of the Connectivity Assets and fees for legal and bank services of approximately $0.4 million. The gain is included in “Gain on sale of development project” in the accompanying condensed consolidated statements of operations for the three months ended May 4, 2013. The gain was recorded in the current fiscal quarter on the basis that we obtained a signed agreement, the closing consideration of $2.0 million was received (non-refundable), delivery of the underlying assets and intellectual property and transfer of employees occurred during our quarter ended May 4, 2013, and we do not have further obligations or deliverables under the Asset Purchase Agreement beyond May 4, 2013. 

 

We have elected to account for the contingent payment under the milestone under the milestone method described by FASB ASC Topic 605-28, under which consideration contingent on the achievement of a substantive milestone is recognized in its entirety in the period when the milestone is achieved. Milestones are considered substantive based on the potential enhancement of value to the Buyer and the fact that consideration earned from the achievement of a milestone relates solely to past performance. Accordingly, payment consideration if and when the milestone is met associated with the technical milestone will be recorded as other income in our consolidated statements of operations in its entirety, which is due by September 30, 2013, in accordance with the Asset Purchase Agreement.

 

 

Additionally, in April 2013, in connection with the Asset Purchase Agreement, the Buyer reimbursed us for payroll expenses related to the employees transferred to the Buyer for the period from February 1, 2013 through the actual payroll transfer, totaling $0.6 million.

  

13.          Commitments and contingencies

 

Commitments

 

Operating leases

 

Our primary facility is located in Milpitas, California. We also lease facilities in China, Denmark, France, Germany, The Netherlands, Hong-Kong, Israel, Japan, California, Singapore, Taiwan, Vietnam, Korea and Israel. We also lease vehicles under non-cancelable leases.

 

As further described in Note 11, in connection with certain restructuring measures adopted in fiscal 2013 and our quarter ended May 4, 2013, we have early terminated our non-cancelable lease agreement in Canada. As a result, minimum annual payments related to such non-cancelable lease agreement have been excluded from the below table.

 

Future minimum annual payments under non-cancelable operating leases as of May 4, 2013 are as follows (in thousands):

 

Fiscal Year		Amount
2014 (remaining nine months)		$	3,911
2015			4,351
2016			2,900
2017			1,640
2018			144
Total minimum lease payments		$	12,946

 

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 May 4, 2013, the total amount of outstanding non-cancelable purchase orders was approximately $19.3 million.

 

Indemnifications

 

In certain limited circumstances, we have agreed and may agree in the future to indemnify certain customers against patent infringement claims from third parties related to our intellectual property. In these limited circumstances, the terms and conditions of sale generally limit the scope of the available remedies to a variety of industry-standard methods including, but not limited to, a right to control the defense or settlement of any claim, procure the right for continued usage, and a right to replace or modify the infringing products to make them non-infringing. To date, we have not incurred or accrued any significant costs related to any claims under such indemnification provisions.

 

Our articles of incorporation and bylaws require that we indemnify our officers and directors against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to us. In addition, we have entered into separate indemnification agreements with each of our directors and executive officers, which provide for indemnification of these individuals under similar circumstances and under additional circumstances. The indemnification obligations are more fully described in our charter documents and the form of indemnification agreement filed with our SEC reports. We purchase insurance to cover claims or a portion of the claims made against our directors and officers. Since a maximum obligation is not explicitly stated in our charter documents or in our indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. The fair value of these obligations was zero on our consolidated balance sheet as of May 4, 2013.

 

 

Royalties

 

We pay royalties for the right to sell certain products under various license agreements. During the three months ended May 4, 2013 and April 28, 2012, we recorded royalty expense of $0.5 million and $0.4 million, respectively, in cost of revenue in the condensed consolidated statements of operations.

 

Our wholly owned subsidiary, Sigma Designs Israel S.D.I. 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 May 4, 2013, we had obtained grants from the OCS aggregating to $4.8 million for certain of our research and development projects in Israel. We completed the most recent of these projects in 2007. 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 grants received, plus LIBOR-based interest. As of May 4, 2013, our remaining obligation under these programs was $0.7 million.

 

Contingencies

 

Litigation

 

From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. We expect that the number and significance of these matters will increase as our business expands. In particular, we could face an increasing number of patent and other intellectual property claims as the number of products and competitors in our industry grows. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources or cause us to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to us or at all. 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.

 

In March 2013, we filed a motion to intervene in (and become a party to) U.S. Ethernet Innovations, LLC (USEI) v. AT&T Mobility, LLC (“AT&T”) and others, Case No. 5-10-cv-05254 CW, currently pending in the U.S. District Court for the Northern District of California, or the Litigation. In this Litigation, USEI filed a patent infringement complaint alleging that various AT&T products infringe USEI patents that have now expired, including alleging that set-boxes deployed by AT&T that contain our SoCs infringe a USEI patent. USEI has made similar allegations that other defendants infringe this and other now expired USEI patents in this Litigation and other related cases. Further, other interveners have already been added to this Litigation and other related cases. USEI seeks monetary damages, attorney’s fees, and an injunction against AT&T, other defendants and other interveners. AT&T, other defendants and other interveners have denied the allegations of infringement made by USEI and asserted that USEI’s patents are invalid, unenforceable, and not infringed. The Court granted our motion to intervene. As a result, we filed a declaratory judgment complaint. USEI answered this complaint and asserted counter-claims against us. We have responded to those counter-claims. The parties are now conducting discovery in the matter. The trial date for the Litigation has been set for January 5, 2015.

  

In April 2013, we initiated a lawsuit against Trident and NXP Semiconductors Netherlands B.V. (“NXP”) Adv. Aoc. No. 13-50940 (CSS) in the United States Bankruptcy Court for the District of Delaware. Trident filed for voluntarily petition under Chapter 11 bankruptcy on January 4, 2012. We were selected as the successful bidder and in May 2012, we entered into an Asset Purchase Agreement (“APA”) with Trident to acquire certain assets of its digital television and PC television businesses, as further discussed in Note 8. In connection with the APA, we entered into a Transition Services Agreement (“TSA”) under which Trident agreed to provide certain transition services to us following the closing, including management of billings and collections with their former customers and payment to former vendors, among others. We are seeking recovery of $1.8 million that we paid to Trident to specifically pay to NXP, on our behalf pursuant to the TSA, for purchases of inventory that Trident, on our behalf, made from NXP during the month of June 2012. NXP claimed they had not received payment of $1.8 million from Trident and reduced such amount from our inventory prepayment balance with NXP. Both Trident and NXP have filed motions to dismiss our claims and we have answered their motions. The Court has not yet ruled on their motions to dismiss. As a result of the complexities and uncertainties surrounding the process of voluntary petition under Chapter 11 bankruptcy (filed by Trident in January 2012), we are unable to determine the likelihood of an unfavorable outcome of recovering all or less than $1.8 million in this lawsuit and, accordingly, we are unable to reasonably estimate a potential range of loss, if any, at this time. Accordingly, we have not recognized any impairment on this receivable due from Trident or NXP to us, which is recorded in “Prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheet at May 4, 2013.

 

 

Third-party licensed technology

 

We license technologies from various third parties and incorporate that technology into our products. Some of these licenses require us to pay royalties and others require us to report sales activities so that royalties may be collected from our customers. From time to time, we are audited by licensors of these technologies for compliance with the terms of these licenses. In the first quarter of fiscal 2013, we settled one such audit for $1.4 million. In the third quarter of fiscal 2013, we settled another audit for $6.3 million. For license agreements where we have royalty obligations, we charge any settlement payments that we make in connection with audits to cost of revenue. For license agreements where we simply have reporting obligations, we treat any settlement payments as penalties and charge the amounts to operating expenses in sales and marketing. In addition, in the third quarter of fiscal 2013, we settled another audit for $0.3 million payable in four quarterly equal installments commencing in September 2012. Concurrently, we negotiated a license agreement for this technology for a period of three years for an amount of $3.5 million, also payable in four quarterly equal installments commencing in September 2012. The full amount of the license fees was recorded as purchased IP in fiscal 2013 and will be amortized over the license term. On December 4, 2012, we received a letter from another technology licensor notifying us of their intent to audit our compliance with the terms of a license agreement that we use in our DTV business. On February 28, 2013, we received a letter from another technology licensor notifying us of their intent to audit our compliance with the terms of a license agreement that we use in our Media player business. As of May 4, 2013, the end of our first fiscal quarter to which this report relates, we believe we were in compliance with our license agreements. However, we could be required to make additional payments as a result of pending or future compliance audits.

 

Early termination lease agreement for office-space

 

In connection with our restructuring measures adopted during the third and fourth quarters of fiscal 2013, as further described in Note 11, and due to the lack of solvency and liquidity of our wholly owned subsidiary in Canada (“Sigma Canada”), we have decided to close down the operations of Sigma Canada. On February 23, 2013, our Board of Directors approved the filing for bankruptcy of Sigma Canada, which we filed on May 30, 2013. Sigma Canada has appointed a Trustee in Canada to provide legal advice and assistance throughout the bankruptcy process. Based on our current assessment of the financial condition and obligations of Sigma Canada, outstanding obligations beyond the filing date for bankruptcy are mainly related to the minimum monthly payment obligations under a non-cancellable operating lease agreement for office space entered with a Canadian Landlord (“Landlord”). In accordance with the provisions of the lease agreement and current communication with the Landlord’s agent, if Sigma Canada exercises its early termination provision, Sigma Canada would be liable for an early termination penalty of $0.3 million and monthly lease payments of approximately $45,000 from May 2013 through May 2015, totaling $1.1 million. It is possible that the landlord will pursue legal action against us, the parent company in the United States, in response to the bankruptcy filing of Sigma Canada. However, at this time we have no visibility of the potential outcome if the Landlord were to take this action. In accordance with ASC 450, “Accounting for Contingencies,” we should record an accrual for a loss contingency when information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and the amount of a loss can be reasonably estimated. Due to the uncertainty as to whether the Landlord will pursue further action against us in the United States and the fact that the premises are vacant and in ready condition to be leased to a third party, the actual material damage to the Landlord cannot be estimated at this time. Therefore, we are not in a position to reasonably estimate the amount of the loss, if any. Accordingly, we have not recorded any charges associated with the early termination of the lease during the quarter ended May 4, 2013 or during our fiscal year 2013.

 

14.           Net loss per share

 

Basic and diluted net loss per share for the periods presented is computed by dividing net loss by the weighted average number of common shares outstanding.

 

The following table sets forth the basic and diluted net loss per share computed for the three months ended May 4, 2013 and April 28, 2012 (in thousands, except per share amounts):

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Net loss, as reported		$	(4,533	)		$	(13,702	)
Weighted-average common shares outstanding - basic			33,912				32,661
Dilutive effect of employee stock plans			-				-
Weighted-average common shares outstanding - diluted			33,912				32,661
Net loss per share - basic		$	(0.13	)		$	(0.42	)
Net loss per share - diluted		$	(0.13	)		$	(0.42	)

 

 

The following table sets forth the excluded anti-dilutive and excluded potentially dilutive securities for the three months ended May 4, 2013 and April 28, 2012 (in thousands):

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Stock options excluded because the effect of including would be anti-dilutive			32				153
Stock options excluded because exercise price is in excess of average stock price			4,841				5,547
Restricted stock awards and units excluded because the effect of including would be anti-dilutive			26				21
Restricted stock awards and units excluded because potential buyback shares exceed weighted average restricted stock units and awards outstanding			544				733

 

15.           Equity incentive plans and employee benefits

 

Stock option awards

 

Activity of our combined stock option plans for the three months ended May 4, 2013 is summarized as follows:

 

		Number of Options				Weighted Average Exercise Price (Per Option)
As of February 2, 2013			5,055,787			$	12.50
Granted			-				-
Exercised			(9,949	)			3.26
Cancelled or forfeited			(459,834	)			11.18
As of May 4, 2013			4,586,004			$	12.65
Options exercisable as of:
February 2, 2013			3,790,842			$	13.31
May 4, 2013			3,621,537			$	13.42

 

Restricted stock awards

 

Activity of our restricted stock awards, or RSAs, for the three months ended May 4, 2013 is summarized as follows:

 

		Number of RSAs				Weighted Average Grant-Date Fair Value (Per RSA)				Aggregate Value
As of February 2, 2013			163,311			$	8.71			$	1,422,439
Granted			-				-
Vested			(6,588	)			9.50
Cancelled			(13,175	)			9.50
As of May 4, 2013			143,548			$	8.60			$	1,234,513

 

 Restricted stock units

 

Activity of our restricted stock units, or RSUs, for the three months ended May 4, 2013 is summarized as follows:

 

		Number of RSUs				Weighted Average Grant-Date Fair Value (Per RSU)				Aggregate Value
As of February 2, 2013			632,262			$	6.28			$	3,970,605
Granted			37,675				4.65
Vested			(44,024	)			6.14
Cancelled			(75,582	)			6.39
As of May 4, 2013			550,331			$	6.16			$	3,390,039

 

 

Employee stock purchase plan

 

During the three months ended May 4, 2013, we had no activity under the 2010 Stock Purchase Plan.

 

Stock-based compensation expense

 

The following table sets forth the total stock-based compensation expense that is included in each functional line item in the condensed consolidated statements of operations (in thousands):

 

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Cost of revenue		$	83			$	117
Research and development			1,090				1,463
Sales and marketing			349				472
General and administrative			511				774
Total stock-based compensation		$	2,033			$	2,826

 

401(k) tax deferred savings plan

 

We maintain a 401(k) tax deferred savings plan for the benefit of qualified employees who are U.S. based. The matching program was suspended effective December 1, 2012. The matching contributions we made to the 401(k) tax deferred savings plan totaled zero and $0.3 million for the three months ended May 4, 2013 and April 28, 2012, respectively.

 

Group registered retirement savings plan

 

We maintain a Group Registered Retirement Savings Plan, or GRRSP, for the benefit of qualified employees who are based in Canada. We made matching contributions to the GRRSP of approximately $0.1 million for the three months ended May 4, 2013 and April 28, 2012. In connection with the Company’s restructuring, as further described in Note 11, we terminated the GRRSP in April 2013.

 

Endowment insurance pension plan

 

Related to our acquisition of our DTV business in May 2013, we added operations in Shanghai, China, where we are required to provide pension insurance to our Shanghai employees. The matching contributions to the pension insurance totaled $0.7 million and zero for the three months ended May 4, 2013 and April 28, 2012, respectively.

 

Retirement pension plans

 

The following table summarizes our contributions to retirement pension plans for the benefits of qualified employees based in the following countries (in thousands):

 

 

			Three Months Ended
			May 4, 2013				April 28, 2012
	Denmark		$	48			$	47
	Taiwan			39				14
(*)	The Netherlands			159				-
(*)	Germany			94				-
	Total matching contributions		$	340			$	61

 

(*) Related to our acquisition of our DTV business in May 2013, we added operations in The Netherlands and Germany.

 

Severance plan

 

We maintain a severance plan for several Israeli employees pursuant to Israel's Severance Pay Law. Accrued severance liability at May 4, 2013 and February 2, 2013 totaled $1.2 million, partially offset by $1.1 million of severance employee funds.

 

 

16.           Income taxes

 

We recorded a provision for income taxes of $2.2 million and $0.2 million for the three months ended May 4, 2013 and April 28, 2012, respectively.  The increase in tax expense is primarily attributable to increasing profitability in taxable jurisdictions.  During the three months ended May 4, 2013, 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.

 

We benefit from tax incentives granted by local tax authorities in certain foreign jurisdictions.  The Economic Development Board of Singapore granted development and expansion incentives to our wholly owned subsidiary in Singapore in 2008 for a period of four years, which ended March 1, 2012, contingent on meeting specified requirements.  The Company is currently in negotiation with the Economic Development Board for its operations plan in Singapore and is not benefiting from the incentives during the three months ended May 4, 2013.

 

17.           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, Hong Kong, 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 or expense or net income.

 

We sell our products into four primary target markets, which are the DTV market, home networking market, set-top box market, and home control and energy management market. We also have license revenue, included in the license and other market, that complements our home control customer solutions. Starting with the first quarter of fiscal 2014, we have defined the DTV market to include all products that are sold into digital televisions as well as other adjacent markets using chipset products that are designed for video post-processing and have eliminated the prosumer and industrial audio/video market as a separate revenue segment as the majority of demand accruing from these sales will be represented in the DTV market segment. Also starting with the first quarter of fiscal 2014, we have defined the set-top box market to include all set-top box products delivering IP streaming video, including hybrid versions of these products, and we have eliminated the connected media player market as a separate revenue market as the majority of demand accruing from these sales will be represented in the set-top box market segment.

 

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

 

		Three Months Ended
		May 4, 2013				April 28, 2012
DTV		$	15,842			$	2,571
Home networking			20,181				20,838
Set-top box			9,315				13,542
Home control and energy management			4,589				3,184
License and other			2,613				123
Net revenue		$	52,540			$	40,258

 

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

 

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Asia		$	38,039			$	36,604
North America			5,030				1,866
Europe			7,990				589
Other Regions			1,481				1,199
Net revenue		$	52,540			$	40,258

 

 

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

 

		Three Months Ended
		May 4, 2013				April 28, 2012
China, including Hong Kong		$	27,505			$	30,077
Hungary			5,577				*
United States			4,570				1,372
Thailand			4,120				*
Taiwan			3,416				3,382
Brazil			1,478				1,184
Japan			*				1,836
Rest of the world			5,042				1,558
Net revenue		$	52,540			$	40,258

 

The following table sets forth the major customers that accounted for 10% or more of our net revenue:

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Flextronics			14	%			16	%
TP Vision			11	%			*
Motorola			*				16	%
Gemtek			*				14	%

 

 * Accounted for less than 10% of our period net revenue.

 

18.           Subsequent events

 

Non-exclusive license agreement

 

On May 16, 2013, we entered into a Non-Exclusive License Agreement with Issuer H, as further described in Note 6, under which we agreed to apply Issuer H’s loan balance of $2.5 million plus accrued interest to offset the initial license fees under this license agreement for certain technologies. Upon execution of the license agreement, we paid Issuer H $1.7 million in the form of forgiveness of debt on Issuer H’s outstanding loan balance. Upon completion of certain deliverables by Issuer H related to the licensed technology, we will forgive the remaining outstanding debt (principal and accrued interest). We also agreed to pay a royalty to Issuer H based on our future net revenue from the sale of products incorporating the licensed technology.

 

Filing for bankruptcy of our wholly-owned Canadian entity

 

As further described in Note 13, on May 30, 2013 (the “Petition Date”), our wholly-owned subsidiary in Canada filed with the Canadian Bankruptcy Court voluntary petition for relief under the Canadian Bankruptcy Code.

 

 

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

 

You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements and related notes in this Form 10-Q.  Except for historical information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "predict," "potential," "plan," or the negative of these terms, and similar expressions intended to identify forward-looking statements.  These forward-looking statements, include, but are not limited to, statements about our capital resources and needs, including the adequacy of our current cash reserves, revenue, anticipated deployments and design wins in the set-top box market, anticipated seasonality associated with our DTV business 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

 

Our goal is to be a leader in intelligent media platforms for use in home entertainment and control. We focus on integrated system-on-chip, or SoC, solutions that serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes and video networking products. All of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We sell our products into four primary markets which are the Digital Television, or DTV market, the home networking market, the set-top box market, and the home control and energy management market. We derive a minor portion of our revenue from other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

 

Our chipset products and target markets

 

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

 

We derive nearly all of our operating net revenue from sales of chipset products. We sell our chipsets into four primary target markets, which are the DTV market, the home networking market, set-top box market, and home control and energy management market. We also have license revenue, included in the license and other market, that complements our home control customer solutions. Because of our focus on these target markets, we separately report revenues that we derive from sales into each of these target markets.

 

Starting with the first quarter of fiscal 2014, we have defined the DTV market to include all products that are sold into digital televisions or “SmartTVs” as well as other adjacent markets using chipset products that are designed for video post-processing. We have also eliminated the prosumer and industrial audio/video market as a separate revenue segment as the majority of demand accruing from these sales will be represented in the DTV market segment. We believe DTV products complement our existing set-top box products, which will provide substantial research and development leverage and improved operating scale to augment our ability to develop innovative solutions for the anticipated convergence of IP-video delivery across any device within the connected home.

 

The home networking market consists of 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 target the home networking market with our wired home networking controllers that are designed to provide connectivity solutions between various home entertainment products and incoming video streams.

 

Also starting with the first quarter of fiscal 2014, we have defined the set-top box market to include all set-top box products delivering IP streaming video, including hybrid versions of these products. We have also eliminated the connected media player market as a separate revenue market as the majority of demand accruing from these sales will be represented in the set-top box market. We serve this market primarily with our media processor products.

 

Our home control and energy management automation product line consists of our wireless Z-Wave chipsets, which consist of wireless transceiver devices along with a mesh networking protocol.

 

We also have technology license revenue and sell products into other markets, such as the digital signage, high definition television, or HDTV, projection TV and PC-based add-in markets, which we refer to as our other market. We derive minor revenue from sales of our products into these other markets.

 

 

We have presented our results in the historical periods consistent with our new presentation of markets so that the presented information is comparable.

 

Restructuring program

 

In fiscal 2013, we initiated a number of key targeted actions to streamline several areas in our business, which resulted in the adoption of company-wide cost saving measures. These actions were intended to align our cost structure with our current business outlook, divest or exit certain operations and lower our cost structure. As a result of the restructuring program, we reduced our headcount by 109 employees and recognized total restructuring costs of $3.3 million in fiscal 2013. Pursuant to these restructuring initiatives, during the quarter ended May 4, 2013, we took further actions resulting in the headcount reduction of 17 employees and charges to operating expenses of $0.3 million, consisting primarily of severance and termination related costs. Expenses recognized for restructuring activities are presented in the “Restructuring costs” line of the condensed consolidated statements of operations. We will continue assessing further cost-saving measures during the remaining of our fiscal 2014.

 

Sale of development project

 

In March 2013, we entered into an Asset Purchase Agreement with a third party, or the Buyer, to sell certain development projects (intellectual property) and long-lived assets related to the connectivity technology over coaxial cable market, including the transfer of 21 employees to the Buyer. The aggregate carrying amount of the transferred assets was $0.6 million and were classified as assets held for sale in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet at February 2, 2013. We received an initial payment of $2.0 million in cash at the closing of the transaction and a payroll expense reimbursement payment of $0.6 million. Under the terms of the Asset Purchase Agreement, if certain technical milestones are met by September 30, 2013 as a result of further development of the transferred technology by the Buyer, we will be paid an additional $5.0 million in cash. There can be no assurance that this technical milestone will be met. For the three months ended May 4, 2013, we recorded a gain of $1.1 million, which was the amount of the closing consideration we received minus the carrying value of the transferred assets and expenses incurred in connection with the sale.

 

Critical Accounting Policies and Estimates

 

There have been no significant changes in our critical accounting policies during the three months ended May 4, 2013, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended February 2, 2013. 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 2013 Annual Report.

 

Use of estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or US GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  The primary areas that require significant estimates and judgments by management include, but are not limited to, revenue recognition, allowances for doubtful accounts, sales returns, warranty obligations, inventory valuation, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, restructuring costs, litigation and other loss contingencies.  These estimates and assumptions are based on historical experience and various other factors that we believe to be reasonable under the circumstances.  Actual results could differ from those estimates, and such differences may be material to our consolidated financial statements.

 

Business combinations

 

In May 2012, we completed our acquisition of certain assets from Trident Microsystems, Inc. and certain of its subsidiaries (collectively referred to as “Trident”). The consolidated financial statements include the results of operations of Trident commencing as of the acquisition date. Refer to Note 8, "Business combinations” of Part 1, Item 1, “notes to unaudited condensed consolidated financial statements."

 

 

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
		May 4, 2013				% of Net Revenue				April 28, 2012				% of Net Revenue
Net revenue		$	52,540				100%			$	40,258				100%
Cost of revenue			25,594				49%				19,163				48%
Gross profit			26,946				51%				21,095				52%
Operating expenses
Research and development			20,204				39%				21,789				54%
Sales and marketing			5,682				11%				6,888				17%
General and administrative			4,762				9%				6,379				16%
Restructuring costs			210				0%				-				0%
Impairment of IP, mask sets and design tools			188				0%				-				0%
Total operating expenses			31,046				59%				35,056				87%
Loss from operations			(4,100	)			(8	%)			(13,961	)			(35	%)
Gain on sale of development project			1,079				2%				-				0%
Interest and other income, net			691				2%				491				1%
Loss before income taxes			(2,330	)			(4	%)			(13,470	)			(34	%)
Provision for income taxes			2,203				4%				232				*
Net loss		$	(4,533	)			(8	%)		$	(13,702	)			(34	%)

 

* The percentage of net revenue is less than one percent.

Net revenue

 

Our net revenue for the three months ended May 4, 2013 increased $12.3 million, or 31%, compared to the corresponding period in the prior fiscal year.  Net revenue increased $13.5 million from the addition of DTV products, resulting from our acquisition of certain assets from Trident Microsystems in the second quarter of fiscal 2013, $2.1 million from technology license revenue and an increase in the home control and energy management market of $1.4 million, partially offset by a net decrease in sales into the set-top box market of $4.2 million as we transition to the next generation products where Internet protocol services and OTT delivery are converging with traditional broadcasting.

 

Net revenue by target market

 

We sell our products into four primary target markets, consisting of: the DTV market, which includes the products resulting from our acquisition of certain assets from Trident Microsystems in the second quarter of fiscal 2013 and our prosumer and industrial audio/video products previously reported as a separate revenue market; the home networking market; the set-top box market, which includes the combination of our previously separately reported IPTV media processor products and our connected home player products; and the home control and energy management market. We also have license and other revenue that complements our home control customer solutions.

 

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

 

		Three Months Ended
		May 4, 2013				% of Net Revenue				April 28, 2012				% of Net Revenue
DTV		$	15,842				30%			$	2,571				6%
Home networking			20,181				38%				20,838				52%
Set-top box			9,315				18%				13,542				34%
Home control and energy management			4,589				9%				3,184				8%
License and other			2,613				5%				123				*
Net revenue		$	52,540				100%			$	40,258				100%

 

* This market provided less than 1% of our net revenue in this period. 

 

DTV market:  Our acquisition of the DTV assets of Trident Microsystems in the second quarter of fiscal 2013 allowed us to expand our participation in the DTV market providing $13.5 million additional revenue during the three months ended May 4, 2013. Our participation in the DTV market previously had not been significant and had been included in the prosumer and industrial audio/video market and license and other markets category.  Our DTV revenue was derived mainly from our Europe and Asia regions. Although our direct sales volume is higher in Asia, demand is created in many regions around the world. We expect that our DTV business may experience seasonality common to consumer electronics markets as Trident Microsystems typically experienced slower DTV sales in the first quarter of the calendar year and strongest DTV sales in the third calendar quarter.  We expect our revenue from the DTV market to continue to be a significant percentage of net revenues but will fluctuate in future periods as we develop and introduce new products for this market. Starting with the first quarter of fiscal 2014, we have defined the DTV market to include all products that we sell into digital televisions as well as other adjacent markets using chipset products that are designed for video-post processing, including our prosumer and industrial video products. Our results for the first quarter of fiscal 2013 have been presented above consistent with this characterization. 

 

 

Home networking market:  For the three months ended May 4, 2013, net revenue from sales of our products into the home networking market decreased $0.7 million, or 3%, compared to the corresponding period in the prior fiscal year.  The slight decrease was primarily the result of lower ASPs in our highest volume region of Asia, partially offset by our continued expansion in South America.  With the introduction of our new DTV market, the home networking market decreased as a percentage of total net revenue by 14 percentage points; however, excluding DTV revenues, our revenue from the home networking market as a percentage of total net revenue for the three months ended May 4, 2013 increased 3 percentage points compared to the corresponding period in the prior fiscal year.  We expect our revenue from the home networking market to fluctuate in future periods based on changes in inventory levels at contract manufacturers who manufacture equipment incorporating our products for deployment by telecommunication providers and transitions to next generation technologies.

 

Set-top box market:  For the three months ended May 4, 2013, net revenue from sales of our products into the set-top box market decreased $4.2 million, or 31%, compared to the corresponding period in the prior fiscal year.  This decrease in set-top box market net revenue was attributable to a decline of 20% in units shipped, primarily in Asia, and lower ASPs. IPTV service providers deploy set-top boxes for many years and take a long time to evaluate potential new platforms, which results in long cycles between design wins and actual revenue. As such, our recent decline in demand is a result of design losses that took place over a year ago. On the other hand, we believe that our recent successes in design wins, especially for Mediaroom second generation, should result in a new wave of deployments that will ramp over the next year or more. Furthermore, we believe that our investments in hybrid broadcast capabilities and over-the-top content access have the potential to result in additional design wins and deployments in the future. Our revenue from the set-top box market as a percentage of our total net revenue for the three months ended May 4, 2013 decreased from 34% to 18% of our total net revenues. We expect our revenue from the set-top box market to fluctuate in future periods as this revenue is dependent on IPTV service deployments by telecommunication service providers, adoption of newer and future generations of our technology, changes in inventory levels at the contract manufacturers that supply them and competitive market pressures. Starting with the first quarter of fiscal 2014, we have defined the set-top box market to include all set-top products delivering IP streaming video, including hybrid versions of these products. Our results for the first quarter of fiscal 2013 have been presented above consistent with this characterization.

 

Home control and energy management market:  For the three months ended May 4, 2013, net revenue from sales of our products into the home control and energy management market increased $1.4 million, or 44%, compared to the corresponding period in the prior fiscal year.  The increase was primarily the result of increased demand in the home control and energy management market, evidenced by the 51% increase in unit shipments primarily in Asia, and to a lesser extent in North America.  Our revenue from the home control and energy management market as a percentage of our total net revenue for the three months ended May 4, 2013 was 9%, an increase of 1 percentage point compared to the corresponding period in the prior fiscal year.  However, excluding DTV revenue, the increase was 5 percentage points. The percentage point increase is primarily the result of the increase in demand in the home control and energy management market as well as the decline in demand in the set-top box market.  We expect our revenue from the home control and energy management market to continue to increase in the foreseeable future.

  

License and other markets:  Our other market consists primarily of technology license revenue and other ancillary markets. The increase in net revenue for the three months ended May 4, 2013 compared to the same period in the prior year was the result of $2.1 million of technology license revenue derived from our home control and energy management technology with a customer in our North America region with no license revenue recorded in the same period of the prior year.

 

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
		May 4, 2013				% of Net Revenue				April 28, 2012				% of Net Revenue
Asia		$	38,039				72%			$	36,604				91%
North America			5,030				10%				1,866				5%
Europe			7,990				15%				589				1%
Other Regions			1,481				3%				1,199				3%
Net revenue		$	52,540				100%			$	40,258				100%

 

Asia:  Our net revenue in absolute dollars from Asia increased $1.4 million, or 4%, for the three months ended May 4, 2013, compared to the corresponding period in the prior fiscal year. This increase was primarily due to the addition of the DTV revenue of $6.0 million, partially offset by the $4.8 million, or 23%, decline in the revenue from the set-top box market. Our net revenue from Asia as a percentage of our total net revenue for the three months ended May 4, 2013 was 72%, representing a decrease from the set-top box market of 19 percentage points compared to the corresponding period in the prior fiscal year. This decrease is primarily due to the significant reduction in revenue in Asia, the addition of customers in the DTV market with operations located in Europe, and the increase in North America due to license revenue.

 

 

North America:  Our net revenue in absolute dollars from North America increased $3.2 million, or 170%, for the three months ended May 4, 2013 compared to the corresponding period in the prior fiscal year.  The North America net revenue represented 10% of total net revenue compared to 5% in the comparable prior year period. The increase was primarily due to the technology license revenue of $2.1 million, an increase in revenue from the home control and energy management market of $0.4 million, the addition of revenue resulting from our acquisition of the DTV assets from Trident of $0.3 million and an increase in the set-top box market of $0.3 million in the three months ended May 4, 2013.

  

Europe:  Our net revenue in absolute dollars from Europe increased $7.4 million, or 1,257%, for the three months ended May 4, 2013, compared to the corresponding period in the prior fiscal year. The Europe net revenue represented 15% of total net revenues compared to 1% in the comparable prior year period. The increase is primarily the result of the addition of customers in the DTV market with operations in Europe of $7.0 million in the current period, primarily in Hungary.

 

Other regions: Our net revenue in absolute dollars from other regions increased $0.3 million, or 23%, for the three months ended May 4, 2013 compared to the corresponding period in the prior fiscal year.  The other regions net revenue represented 3% of total net revenue, flat compared to the comparable prior year period. The increase in net revenue was primarily due to an increase in demand in the home networking market in Brazil.  

 

Major Customers

 

The following table sets forth the major customers that accounted for 10% or more of our net revenue:

 

		Three Months Ended
		May 4, 2013				April 28, 2012
Flextronics			14	%			16	%
TP Vision			11	%			*
Motorola			*				16	%
Gemtek			*				14	%

 

* This customer provided less than 10% of our net revenue in this period.

 

 Gross Profit and Gross Margin

 

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

 

		Three Months Ended
		May 4, 2013				% Change				April 28, 2012
Gross profit		$	26,946				28	%		$	21,095
Gross margin %			51.3	%							52.4	%

 

The $5.6 million, or 28%, increase in gross profit for the three months ended May 4, 2013, compared to the corresponding period in the prior fiscal year, was primarily due to the addition of DTV product revenue resulting from our acquisition of the DTV assets from Trident, which generated an additional $4.6 million of gross profit, license revenue of $2.1 million, and an increase in gross profit resulting from the home control and energy management market of $0.7 million, partially offset by the decline in gross profit resulting from the set-top box market of $2.2 million.

 

Our gross margin declined 1.1 percentage points, or 2%, for the three months ended May 4, 2013, compared to the corresponding period in the prior fiscal year. The decline was primarily due to the sale of lower margin DTV market products which reduced overall gross margin by 6.2 percentage points. Excluding DTV products, our gross margin would have been 57.5%, an increase of 5.1 percentage points, or 10%, compared to the three months ended April 28, 2012. Although average selling prices, or ASP, continuously declined across most of our target markets, we continued our significant efforts to reduce average cost per unit, or ACU, across our markets. This increase in gross margin, excluding DTV, was primarily a result of technology license revenue of $2.1 million which has no cost of sale and no corresponding license revenue in the three months ended April 28, 2012, an increase in the volume of shipments of our home networking products, which have a higher gross margin than our other markets, which also improved due to its reduced ACU. These improvements were partially offset by the continued decline in volume and ASP of our set-top box market. The decrease in ACUs was primarily due to cost reduction efforts and a decreased percentage of fixed costs per unit due to a 67% increase in units shipped. Our fixed costs include items such as depreciation and amortization, reserves and compensation costs for operations. 

 

 

Research and development expense

 

Research and development expense consists of compensation and benefits costs including variable compensation expense such as profit sharing, development and design costs such as mask, prototyping, testing and subcontracting costs, depreciation and amortization of our engineering design tools and equipment costs, stock-based compensation expense, and other expenses such as costs for facilities and travel. The following table sets forth research and development expense and the related change (in thousands, except percentages):

 

		Three Months Ended
		May 4, 2013				April 28, 2012				$ Change				% Change
Research and development expense		$	20,204			$	21,789			$	(1,585	)			-7	%
Percent of net revenue			38.5	%			54.1	%

 

Research and development expense for the three months ended May 4, 2013 and April 28, 2012 include $5.0 million and zero, respectively, for DTV research and development activities subsequent to our acquisition of certain assets used in the DTV business from Trident Microsystems in the second quarter of fiscal 2013. Excluding DTV, our research and development expenses decreased $6.6 million, or 30%, for the three months ended May 4, 2013 compared to the three months ended April 28, 2012. Headcount increased 21% for the same period, primarily in Asia, due to the DTV asset acquisition during the second quarter of fiscal 2013; however, headcount decreased from the fourth quarter of fiscal 2013 by 14%, primarily in North America, due to a reduction in force as part of our restructuring efforts.

 

The decrease in expense was primarily due to development and design cost reductions of $1.5 million and compensation and benefits reductions of $1.0 million, partially offset by higher IT and facility costs of $0.7 million and higher depreciation and amortization of $0.4 million.

 

Development and design costs decreased mainly due to a reduction in outside services and subcontractor costs of $0.5 million, software development of $0.4 million, and smaller reductions in tools, preproduction fabrication, license costs and NRE costs. Compensation and benefits reductions include $0.8 million associated with general cost reduction efforts, lower stock-based compensation of $0.4 million due to a decrease in headcount, and an R&D tax credit of $0.4 million. These cost reductions were partially offset by higher pension costs of $0.6 million in Shanghai and Taiwan related to DTV employees acquired during the second quarter of fiscal 2013. The higher IT and facility costs is partially due to increased rent and infrastructure costs associated with the additional locations acquired in connection with our acquisition of DTV assets from Trident Microsystems. As part of our restructuring plan discussed above, we anticipate research and development expense will continue to be lower when compared to the corresponding period in the prior year in dollars and as a percentage of revenue.

 

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. The following table sets forth sales and marketing expense and the related change (in thousands, except percentages):

 

		Three Months Ended
		May 4, 2013				April 28, 2012				$ Change				% Change
Sales and marketing expense		$	5,682			$	6,888			$	(1,206	)			-18	%
Percent of net revenue			10.8	%			17.1	%

 

Sales and marketing expense for the three months ended May 4, 2013 and April 28, 2012 include $0.3 million and zero, respectively, for DTV sales and marketing activities subsequent to our acquisition of certain assets used in the DTV business from Trident Microsystems in the second quarter of fiscal 2013. Excluding DTV, our sales and marketing expense decreased $1.5 million, or 22%, for the three months ended May 4, 2013 compared to the three months ended April 28, 2012.

 

The decrease was primarily due to compensation and benefits reductions of $0.7 million and the effect of general cost reduction efforts, reducing trade show costs by $0.1 million, travel and entertainment by $0.2 million and various smaller savings cumulating to $0.2 million. The reduction in compensation and benefits was primarily due to a change in mix of headcount from North America to Asia, as a result of the acquisition of DTV assets in the second quarter of fiscal 2013 when we added employees primarily in China, and later headcount reductions in North America resulting in a lower cost of $0.4 million, and reduction from the fourth quarter of fiscal 2013 by 5%. As part of our restructuring plan discussed above, we anticipate sales and marketing expense will continue to be lower when compared to the corresponding period in the prior year as a percentage of revenue, however will fluctuate in dollars with the level of sales activity and timing of marketing events.

 

 

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. The following table sets forth general and administrative expense and the related change (in thousands, except percentages):

 

		Three Months Ended
		May 4, 2013				April 28, 2012				$ Change				% Change
General and administrative expense		$	4,762			$	6,379			$	(1,617	)			-25	%
Percent of net revenue			9.1	%			15.8	%

 

General and administrative expense for the three months ended May 4, 2013 and April 28, 2012 include $0.2 million and zero, respectively, for DTV general and administrative activities subsequent to our acquisition of certain assets used in the DTV business from Trident Microsystems in the second quarter of fiscal 2013. Excluding DTV, our general and administrative expense decreased $1.8 million, or 28%, for the three months ended May 4, 2013 compared to the three months ended April 28, 2012. Headcount increased 9% for the same period, primarily in Asia, due to the acquisition of DTV assets during the second quarter of fiscal 2013; however, headcount decreased from the fourth quarter of fiscal 2013 by 15% due our restructuring efforts.

 

The decrease in expense was primarily due to lower professional fees of $0.9 million, compensation and benefits reductions of $0.4 million and lower facility and infrastructure costs of $0.3 million.

 

Professional fees were greater in the three months ended April 28, 2012 due to the costs associated with the acquisition of the DTV assets. Compensation and benefit costs were lower primarily due to lower stock-based compensation costs due to a reduction in headcount. Our other cost saving efforts reduced costs by an aggregate of $0.2 million compared to the three months ended April 28, 2012. As part of our restructuring plan discussed above, we anticipate general and administrative expense will continue to be lower when compared to the corresponding period in the prior fiscal year as a percentage of revenue, however dollar amounts can fluctuate in any quarter based on activities such as legal actions and acquisition activity.

 

Impairment of IP, mask sets and design tools

 

We test long-lived assets, including purchased intangible assets (other than goodwill and in-process research and development) 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. During our quarter ended May 4, 2013, we recorded an impairment of intangible assets of $0.2 million. There were no such impairments recorded in the three months ended April 28, 2012.

 

Restructuring costs

 

In fiscal 2013, we initiated a number of key targeted actions to streamline several areas of our business, which resulted in the adoption of company-wide cost saving measures. These actions were intended to align our cost structure with our current business outlook, divest or exit certain operations and lower our cost structure. As a result of the restructuring program, we recognized total restructuring costs of $3.3 million in fiscal 2013.

 

Pursuant to these restructuring initiatives, during the quarter ended May 4, 2013, we took further actions resulting in the headcount reduction of 17 employees and charges to cost of revenues and operating expenses of $40,000 and $210,000, respectively, consisting primarily of severance and termination related costs. Expenses recognized for restructuring activities impacting our operating expenses are presented in the “Restructuring costs” line of the condensed consolidated statements of operations. We will continue assessing further cost-saving measures during the remainder of our fiscal 2014.

 

 

The following table summarizes the restructuring costs, outstanding payable balance and cumulative restructuring costs (in thousands):

 

		Employee Severance				Impairment of Long-Lived Assets				Facility Exit Costs				Total				Cumulative Restructuring Costs
Charges in fiscal 2013		$	2,167			$	1,089			$	8			$	3,264			$	3,264
Cash payments			(1,153	)			-				-				(1,153	)
Non-cash items			-				(1,089	)			-				(1,089	)
Balance at February 2, 2013			1,014				-				8				1,022				3,264
Charges for the three months ended May 4, 2013			250				-				-				250				250
Cash payments			(882	)			-				(5	)			(887	)
Non-cash items			-				-				-				-
Balance at May 4, 2013		$	382			$	-			$	3			$	385			$	3,514

 

In connection with our restructuring measures adopted during the third and fourth quarters of fiscal 2013, as further described in Note 11, "Restructuring costs", to our unaudited condensed consolidated financial statements, and due to the lack of solvency and liquidity of our wholly-owned subsidiary in Canada, or Sigma Canada, we closed down the operations of Sigma Canada.

 

Gain on sale of development project

 

On March 8, 2013, we entered into an Asset Purchase Agreement with a third party, or the Buyer, to sell certain development projects (intellectual property) and long-lived assets related to the connectivity technology over coaxial cable market, including the transfer of 21 employees to the Buyer. The aggregate carrying amount of the transferred assets was approximately $0.6 million, and we classified these assets as assets held for sale in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet at February 2, 2013. In April 2013, upon receiving the closing consideration of $2.0 million, we recorded a gain of $1.1 million, net of the carrying value of the transferred assets and fees for legal and financial advisory services of approximately $0.4 million.

 

Interest and other income, net

 

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

 

		Three Months Ended
		May 4, 2013				April 28, 2012				$ Change				% Change
Interest and other income, net		$	691			$	491			$	200				41	%

 

Interest and other income primarily consist of gains or losses on foreign exchange transactions, interest income from marketable securities, gains or losses on disposal of assets, gains or losses on sales of marketable securities and gains or losses on currency hedging activities. The increase of less than $0.1 million, or 7%, for the three months ended May 4, 2013 compared to the three months ended April 28, 2012 was primarily due to improved foreign currency fluctuations of $0.3 million partially offset by lower interest income from a lower average cash balance of $0.2 million.  

 

Provision for income taxes

 

We recorded a provision for income taxes of $2.2 million and $0.2 million for the three months ended May 4, 2013 and April 28, 2012, respectively. The effective tax rates for the three months ended May 4, 2013 and April 28, 2012, were (78)% and (2)%, respectively.  Our effective tax rates for the three months ended May 4, 2013 and April 28, 2012 differ from the federal statutory rate of 35% primarily because of net losses in a foreign tax jurisdiction with a zero tax rate where no tax benefit could be realized.  The increase in negative tax rate is primarily attributable to increasing profitability in taxable jurisdictions relative to our overall worldwide loss.  During the three months ended May 4, 2013, 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.  During the three months ended April 28, 2012, the provision for income taxes was computed using a projected annual effective tax rate.

 

We benefit from tax incentives granted by local tax authorities in certain foreign jurisdictions.  The Economic Development Board of Singapore granted development and expansion incentives to our wholly-owned subsidiary in Singapore in 2008 for a period of four years, which ended March 1, 2012, contingent on meeting specified requirements.  We are currently in negotiation with the Economic Development Board for our operations plan in Singapore and are not benefiting from any Singapore tax incentives during the three months ended May 4, 2013.

 

 

Liquidity and Capital Resources

 

The following table sets forth the balances of cash and cash equivalents and short-term marketable securities (in thousands):

 

		May 4, 2013				February 2, 2013
Cash and cash equivalents		$	54,447			$	51,218
Short-term marketable securities			16,690				17,455
		$	71,137			$	68,673

 

As of May 4, 2013, our principal sources of liquidity consisted of cash and cash equivalents and short-term marketable securities of $71.1 million, which represents an increase of $2.5 million from $68.7 million at February 2, 2013.  Our cash benefited from positive cash flow generated by operations of $5.6 million, net proceeds from the sale of a development project of $2.0 million and the repayment of a note receivable of $0.3 million. These sources of cash were partially offset by $2.6 million of purchases of software, equipment and leasehold improvements and $2.8 million of purchases of IP.

 

As of May 4, 2013, we held $14.1 million of long-term marketable securities.  Although these marketable securities have maturities of greater than one year, we classify them as available-for-sale and may access these funds prior to their contractual maturities.

 

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

 

		Three Months Ended
		May 4, 2013				February 2, 2013
Net cash provided by (used in):
Operating activities		$	5,636			$	(6,926	)
Investing activities			(2,270	)			41,602
Financing activities			32				55
Effect of foreign exchange rate changes on cash and cash equivalents			(169	)			36
Net increase in cash and cash equivalents		$	3,229			$	34,767

 

Cash flows from operating activities

 

Net cash generated by operating activities of $5.6 million for the three months ended May 4, 2013 was primarily due to a $4.5 million operating income before non-cash charges of $9.1 million and an increase of $1.1 million in operating assets and liabilities. 

 

Non-cash charges consisted primarily of $5.6 million of depreciation and amortization, $2.0 million of stock-based compensation, $1.7 million for deferred taxes, $0.6 million provision for excess and obsolete inventory, a $0.1 million provision for sales returns, discounts and doubtful accounts, and $0.2 million impairment of IP, mask sets and design tools, partially offset by a $1.1 million gain recognized from our sale of a development project.  

 

The increase in operating assets and liabilities for the three months ended May 4, 2013 included a decrease in inventory of $5.3 million, an increase in accounts payable of $3.1 million, a decrease in prepaid expenses and other current assets of $2.1 million, and an increase in other long term liabilities of $0.5 million. These increases were partially offset by an increase in accounts receivable of $4.7 million, a decrease in accrued, compensation and related benefits and other liabilities of $5.3 million, and an increase in other non-current assets of $0.1 million. The changes in operating assets and liabilities generally reflect the increase in revenues and also the restructuring efforts resulting in an increase in accounts receivable and a decrease in inventory and expenses.

 

Net cash used in operating activities of $6.9 million for the three months ended April 28, 2012 was primarily due to net loss of $13.7 million, a $2.5 million increase in accounts receivable, a $1.2 million net decrease in accrued compensation and related benefits and other liabilities and accounts payable, and a $1.0 million decrease in other long-term liabilities. These amounts were partially offset by non-cash expenses of $8.4 million and a $3.1 million decrease in inventory. Non-cash expenses included in net income for the three months ended April 28, 2012 consisted primarily of $5.1 million in depreciation and amortization and $2.8 million in stock-based compensation expense.

 

The increase in accounts receivable was primarily the result of increased revenue compared to our prior fiscal quarter as well as the timing of product shipments during the quarter, which resulted in a decrease in our days of sales outstanding to 53 for the fiscal quarter ended April 28, 2012 compared to 54 for the previous fiscal quarter. The decrease in inventory was the result of lower media processor wafer purchases during the quarter, which resulted in an increase in our annualized rate of inventory turns to 3.8 times per year compared to 3.4 for the prior quarter. The net decrease in accounts payable and accrued compensation and related benefits and other liabilities was primarily due to decreased purchases of inventory and the timing of payments for inventory and software.

 

 

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

 

Cash flows from investing activities

 

Net cash used in investing activities was $2.3 million for the three months ended May 4, 2013, which was primarily due to payments of $2.6 million for capital assets, primarily to support research and development activities and purchases of IP of $2.8 million. These uses were partially offset by net proceeds from the sale of a development project of $2.0 million, net sales of marketable securities of $0.9 million and the repayment of a note receivable of $0.3 million.

 

Net cash provided by investing activities was $41.6 million for the three months ended April 28, 2012, which was primarily due to net sales of marketable securities of $44.3 million to fund our purchase of the DTV assets from Trident Microsystems, partially offset by purchases of software, equipment and leasehold improvements of $1.9 million and purchases of IP of $0.7 million.

 

Cash flows from financing activities

 

Net cash provided by financing activities was less than $0.1 million for the three months ended May 4, 2013, which was primarily due to proceeds from exercises of employee stock options.

 

Net cash provided by financing activities was less than $0.1 million for the three months ended April 28, 2012, which was due to proceeds from exercises of employee stock options.

 

While we generated cash from operations for fiscal 2011, 2010, 2009 and the first three months of fiscal 2014, we consumed cash in operations in fiscal 2013 and 2012 and it is possible that our operations will consume additional cash in future periods.  Based on our current anticipated cash needs, we believe that our current balances of cash, cash equivalents and short-term marketable securities will be sufficient to meet our anticipated working capital requirements, obligations, capital expenditures, strategic investments and other cash needs for at least the next twelve months.  However, it is possible that we may need to raise additional funds to finance our activities during or beyond the next 12 months and our future capital requirements may vary significantly from those currently planned.  Our cash, cash equivalent and marketable securities balances will continue to fluctuate based upon our ability to grow revenue, reduce our expenses, the timing of payments to us from customers and to vendors from us and the timing of inventory purchases and subsequent manufacture and sale of our products.  From time to time, we may also increase our long-term investments which will cause our marketable securities balances to decrease.

 

Our marketable securities include primarily corporate bonds, money market funds, fixed income mutual funds and municipal notes and bonds.  We monitor all our marketable securities for impairment and if these securities are reported to have had a decline in fair value, we may need to use significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of each investment including: (i) the nature of the investment; (ii) the cause and duration of any impairment; (iii) the financial condition and near term prospects of the issuer; (iv) for securities with a reported decline in fair value, our ability to hold the security for a period of time sufficient to allow for any anticipated recovery of fair value; (v) the extent to which fair value may differ from cost; and  (vi) a comparison of the income generated by the securities compared to alternative investments.  We would recognize an impairment charge if a decline in the fair value of our marketable securities is judged to be other-than-temporary.

 

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.

 

As further described in Note 11, “Restructuring costs” and Note 13, “Commitments and contingencies,” of the Notes to the Unaudited Condensed Consolidated Financial Statements of this Form 10-Q, in connection with certain restructuring measures adopted in fiscal 2013 and our quarter ended May 4, 2013, we have early terminated our non-cancelable lease agreement in Canada. As a result, minimum annual payments related to such non-cancelable lease agreement have been excluded from the below table.

 

 

The following table sets forth the amounts of payments due under specified contractual obligations as of May 4, 2013 (in thousands):

 

		Payments Due by Period
		Fiscal 2014 (Remaining 9 months)				Fiscal 2015 - 2016				Fiscal 2017 - 2018				Total
Operating leases		$	3,911			$	7,251			$	1,784			$	12,946
Non-cancelable purchase obligations			19,311				-				-				19,311
Total contractual obligations		$	23,222			$	7,251			$	1,784			$	32,257

 

Recent accounting pronouncements

 

See Note 1, “Recent Accounting Pronouncements,” of the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The following discussion about our market risk disclosures involves forward-looking statements.  Actual results could differ materially from those projected in the forward-looking statements.  We face exposure to market risk from adverse movements in interest rates and foreign currency exchange rates, which could impact our operations and financial condition.  To mitigate some of the foreign currency exchange rate risk, we utilize derivative financial instruments to hedge certain foreign currency exposures.  We do not use derivative financial instruments for speculative or trading purposes.

 

Interest rate sensitivity:  As of May 4, 2013 and February 2, 2013, we held approximately $85.3 million and $82.9 million, respectively, of cash, cash equivalents and short-term and long-term marketable securities.  If short-term interest rates were to decrease 10%, the decreased interest income associated with these cash, cash equivalents and marketable securities would not have a significant impact on our net income and cash flows.

 

Foreign currency exchange rate sensitivity:  We transact our revenue in U.S. dollars.  The U.S. dollar is our functional and reporting currency except for our subsidiaries in Canada, China, Denmark, France, Germany, Japan, The Netherlands, Taiwan and Vietnam where the Canadian Dollar, Chinese Renminbi, Danish Krone, Euro, Euro, Japanese Yen, Euro, Taiwanese Dollar and Vietnamese Dong are the primary functional currencies, respectively.  Additionally, significant portions of our Israel subsidiary’s expenses are payroll related and are denominated in Israeli shekels.  This foreign currency exposure gives rise to market risk associated with exchange rate movements of the U.S. dollar against the Israeli shekel.  To the extent the U.S. dollar weakens against the Israeli shekel, our Israeli subsidiary will experience a negative impact on its results of operations.

 

As of May 4, 2013, with the exception of our Israel operation, we had not entered into foreign exchange forward contracts to hedge certain balance sheet exposures or inter-company balances against future movements in foreign exchange rates.  For our Israel operation, we do hedge portions of our forecasted expenses that are denominated in the Israeli Shekel with foreign exchange forward contracts.  As of May 4, 2013, we had foreign exchange contracts with notional values of approximately $7.9 million that mature on or before February 24, 2014.  These hedges of cash flow exposures will only mitigate a portion of our foreign exchange exposure.  If foreign exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10% from the exchange rates at May 4, 2013, the notional value of our derivative instruments would decline and we would record a foreign exchange loss of approximately $0.6 million, a portion of which should be offset by our foreign exchange hedging activities.

 

We maintain certain cash balances denominated in the Canadian Dollar, Chinese Renminbi, Danish Krone, Euro, Hong Kong Dollar, Israeli Shekel, Singapore Dollar, Taiwanese Dollar and Vietnamese Dong.  If foreign exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10% from the exchange rates at May 4, 2013, the aggregate fair value of all these foreign currency amounts would decline by $0.8 million.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We are committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures and implementing controls and procedures.

 

As of May 4, 2013, the end of the period covered by this Quarterly Report on Form 10-Q, we have, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and effectiveness of our disclosure controls and procedures, as such terms are defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act.  Based on this evaluation, we have concluded that our disclosure controls and procedures were effective as of May 4, 2013.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended May 4, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

In May 2012, we completed our acquisition of certain assets used in the digital TV, or DTV, business from Trident Microsystems.  See Note 8, “Business Combinations,” in Notes to Unaudited Condensed Consolidated Financial Statements for discussion of the acquisition and related financial data.  We consider this transaction to be material to our results of operations, cash flows and financial position from May 4, 2012 through May 4, 2013 and believe the internal controls and procedures of the DTV operations may have a material effect on our internal control over financial reporting.  During the second quarter of fiscal 2013, we began to evaluate and implement the alignment and integration of the DTV business into our systems, processes and procedures. We are currently in the finalization process of integrating DTV operations.  We anticipate a successful integration of operations and internal control over financial reporting.  Our management will continue to evaluate our internal control over financial reporting as it executes integration activities.

 

During fiscal 2014 to date, we have experienced turnover in our finance and accounting function, including our Chief Financial Officer.  We have hired and continue to hire key qualified personnel to address departures in our finance and accounting department and believe this turnover has not had a material impact on our internal control over the financial reporting as of May 4, 2013. We will continue assessing and monitoring the impact, if any, of this turnover on our internal control over financial reporting.

 

 

PART II.  OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

For a discussion of legal proceedings, see Note 13, “Commitments and contingencies,” in the Notes to condensed consolidated financial statements, included in Part I, Item 1, of this Form 10-Q. For an additional discussion of certain risks associated with legal proceedings, see “Risk Factors” immediately below.

 

ITEM 1A.  RISK FACTORS

 

If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed.  In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock.  The risks and uncertainties described below are not the only ones we face.  You should also refer to other information set forth in this Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

 

Risks Related to Our Business and Our Industry

 

If we do not successfully anticipate market needs and develop products and product enhancements in a timely manner that meet those needs, or if those products do not gain market acceptance, we may not be able to compete effectively and our ability to generate revenue will suffer.

 

We may not be able to accurately anticipate future market needs or be able to develop new products or product enhancements to meet such needs or to meet them in a timely manner. Our ability to develop and deliver new products successfully will depend on various factors, including our ability to:

 

●

accurately predict market requirements and evolving industry standards;

●

accurately design new chipset products;

●

timely complete and introduce new product designs;

●

timely qualify and obtain industry interoperability certification of our products and the equipment into which our products will be incorporated;

●

ensure that our subcontractors have sufficient foundry, assembly and test capacity and packaging materials and achieve acceptable manufacturing yields;

●

shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration; and

●

gain market acceptance of our products and our customers' products.

 

If we fail to anticipate market requirements or to develop new products or product enhancements to meet those needs in a cost-effective and timely manner, it could substantially decrease market acceptance and sales of our present and future products and we may be unable to attract new customers or retain our existing customers, which would significantly harm our business and financial results.

 

Even if we are able to anticipate, develop and commercially introduce new products and enhancements, our new products or enhancements may not achieve widespread market acceptance. Any failure of our products to achieve market acceptance could adversely affect our business and financial results.

 

If demand for our chipsets declines or does not grow, we will be unable to increase or sustain our net revenue.

 

We expect our chipsets to account for a substantial majority of our net revenue for the foreseeable future. For fiscal 2013, sales of our chipsets represented nearly all of our net revenue. Even if the consumer electronic markets that we target continue to expand, manufacturers of consumer products in these markets may not choose to utilize our chipsets in their products. The markets for our products are characterized by frequent introduction of new technologies, short product life cycles and significant price competition. If we or our customers are unable to manage product transitions in a timely and cost effective manner, our net revenue would suffer. In addition, frequent technological changes and introduction of next generation products may result in inventory obsolescence which would increase our cost of revenue and adversely affect our operating performance. If demand for our chipsets declines or fails to grow or we are unable to develop new products to meet our customers' demand, our net revenue could be harmed.

 

Our industry is highly competitive and we may not be able to compete effectively, which would harm our market share and cause our revenue to decline.

 

The markets in which we operate are extremely competitive and are characterized by rapid technological change, continuously evolving customer requirements and declining average selling prices. We may not be able to compete successfully against current or potential competitors. Most of our products compete with large semiconductor providers that have substantial experience and expertise in video, audio and multimedia technology and in selling to consumer equipment providers. Many of these companies have substantially greater engineering, marketing and financial resources than we have. As a result, our competitors may be able to respond better to new or emerging technologies or standards and to changes in customer requirements. Further, some of our competitors are in a better financial and marketing position from which to influence industry acceptance of a particular industry standard or competing technology than we are. Our competitors may also be able to devote greater resources to the development, promotion and sale of products, and may be able to deliver competitive products at a lower price. We also may face competition from newly established competitors, suppliers of products based on new or emerging technologies and customers who choose to develop their own chipsets. Additionally, some of our competitors operate their own fabrication facilities or may have stronger manufacturing partner relationships than we have. We expect our current customers, particularly in the set-top box market, to seek additional suppliers of chipsets for inclusion in their products, which will increase competition and could reduce our market share. If we do not compete successfully, our market share and net revenue could decline.

 

 

Our restructuring efforts may not be effective, might have unintended consequences, and could negatively impact our business.

 

In the third and fourth quarter of fiscal 2013 and the first quarter of fiscal 2014, we launched and implemented a restructuring plan to significantly reduce our operating expenses. Despite our efforts to structure our business to operate in a cost-effective manner, some cost reduction measures could have unexpected negative consequences, such as attrition among employees and a slowdown of development projects. While our restructuring efforts are intended to reduce our costs, we cannot be certain that all restructuring efforts will be successful, or that we will not be required to implement additional restructuring activities in the future. If we are unable to recognize the anticipated benefit from our restructuring plan, our results of operations would be harmed.

 

If we fail to achieve initial design wins for our products, we may be unable to recoup our investments in our products and revenue could decline.

 

We expend considerable resources in order to achieve design wins for our products, especially our new products and product enhancements, without any assurance that a customer will select our product. Once a customer designs a semiconductor into a product, it is likely to continue to use the same semiconductor or enhanced versions of that semiconductor from the same supplier across a number of similar and successor products for a lengthy period of time due to the significant costs and risks associated with qualifying a new supplier and potentially redesigning the product to incorporate a different semiconductor. As a result, if we fail to achieve an initial design win in a customer's qualification process, we may lose the opportunity for significant sales to that customer for a number of its products and for a lengthy period of time, or we would only be able to sell our products to these customers as a second source, which usually means we would only be able to sell a limited amount of product to them. Also, even if we achieve new design wins with customers, these manufacturers may not purchase our products in sufficient volumes to recoup our development costs, and they can choose at any time to stop using our products, for example, if their own products are not commercially successful. This may cause us to be unable to recoup our investments in the development of our products and cause our revenue to decline.

 

We depend on a limited number of customers and any reduction, delay or cancellation of an order from these customers or the loss of any of these customers could cause our revenue to decline.

 

Our dependence on a limited number of customers means that the loss of a major customer or any reduction in orders by a major customer could materially reduce our net revenue and adversely affect our results of operations. We expect that sales to relatively few customers will continue to account for a significant percentage of our net revenue for the foreseeable future. We have no firm, long-term volume commitments from any of our major customers and we generally accept purchase commitments from our customers based upon their purchase orders. Customer purchase orders may be cancelled and order volume levels can be changed, cancelled or delayed with limited or no penalties. We have experienced fluctuations in order levels from period to period and expect that we will continue to experience such fluctuations and may experience cancellations in the future. We may not be able to replace the cancelled, delayed or reduced purchase orders with new orders. Any difficulty in the collection of receivables from key customers could also harm our business.

 

For the three months ended May 4, 2013, TP Vision and Flextronics accounted for 11% and 14%, respectively, of our net revenue.  For the three months ended April 28, 2012, Flextronics, Motorola and Gemtek accounted for 16%, 16% and 14%, respectively, of our net revenue.

 

Our business also depends on demand for our chipsets from companies, such as large telecommunication carriers, who are not our direct customers but deploy IPTV set-boxes that incorporate our chipsets. Large carriers often use multiple set-top box providers, who in turn sometimes use multiple contract manufacturers to purchase our chipsets and manufacture set-top boxes. Even though we do not sell our products directly to these companies that ultimately deploy set-top boxes to consumers, these companies have a significant impact on the demand for our chipsets. For example, a significant number of our chipsets are incorporated in set-top boxes deployed by AT&T. This significant concentration on AT&T set-top boxes was increased by our acquisition of CopperGate. A significant percentage of the chipsets sold by CopperGate are also used in set-top boxes as well as gateways deployed by AT&T. In the past, companies that deploy set-top boxes incorporating our chipsets have had significant fluctuations in demand, which has resulted in a decline in our business from our direct customers, such as original equipment manufacturers and contract manufacturers. We may experience increased competition as companies that deploy set-top boxes incorporating our chipsets seek additional or alternate sources of supply of chipsets for inclusion in their products. Any decrease in the demand from the companies that deploy IPTV set-top boxes incorporating our chipsets, and in particular AT&T, could have a material and adverse effect on our net revenue and results of operations.

 

 

We base orders for inventory on our forecasts of our customers' demand and if our forecasts are inaccurate, our financial condition and liquidity will suffer.

 

We place orders with our suppliers based on our forecasts of our customers' demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. When the demand for our customers' products increases significantly, we may not be able to meet demand on a timely basis and we may need to expend a significant amount of effort and time working with our customers to allocate a limited supply and maintain positive customer relations. If we underestimate customer demand, we may forego revenue opportunities, lose market share and damage our customer relationships. Conversely, if we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect to or at all. For example, during fiscal 2013 and 2012, we recorded a provision for excess inventory of $7.1 million and $9.0 million, respectively, which was primarily the result of the end of life of certain products and our end customer’s transition to a next generation product sold by one of our competitors. When we have excess or obsolete inventory, the value of our inventory declines, which increases our cost of revenue and reduces our liquidity.

 

We have engaged, and may in the future engage in acquisitions of other businesses and technologies which could divert our attention and prove difficult to integrate with our existing business and technology.

 

We continue to consider investments in and acquisitions of other businesses, technologies or products as part of our efforts to improve our market position, broaden our technological capabilities and expand our product offerings. For example, in May 2012, we completed the acquisition of certain assets used in the digital TV business of Trident Microsystems, where we hired approximately 320 new employees. In March 2011, we completed the acquisition of certain assets from a large computer manufacturer and in November 2009, we completed the acquisition of CopperGate Communications Ltd., an Israeli company, which added substantial operations, including 141 employees. We also completed the acquisition of Zensys Holdings Corporation in December 2008, the acquisition of certain assets of the VXP Group from Gennum Corporation in February 2008 and the acquisition of Blue7 Communications in February 2006. In the future, we may not be able to acquire or successfully identify companies, products or technologies that would enhance our business. Once we identify a strategic opportunity, the process to consummate a transaction could divert our attention from the operation of our business causing our financial results to decline.

 

Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expense, and the recording and subsequent amortization of amounts related to certain purchased intangible assets, any of which items could negatively impact our results of operations. We may also record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. For example, in fiscal 2012, we recorded a goodwill impairment charge of $45.1 million, which represented a full write-off of all goodwill associated with our acquisitions to date, which had a materially adverse impact on our results of operations. In addition, in order to complete acquisitions, we may issue equity securities and incur debt, which would result in dilution to our existing shareholders and could negatively impact profitability.

 

We may experience difficulties in integrating acquired businesses. Integrating acquired businesses involves a number of risks, including:

 

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potential disruption of our ongoing business and the diversion of management resources from other business concerns;

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unexpected costs or incurring unknown liabilities;

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difficulties relating to integrating the operations and personnel of the acquired businesses;

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adverse effects on the existing customer relationships of acquired companies; and

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adverse effects associated with entering into markets and acquiring technologies in areas in which we have little experience.

 

If we are unable to successfully integrate the businesses we acquire, our operating results could be harmed.

 

The timing of our customer orders and product shipments can adversely affect our operating results and stock price.

 

Our net revenue and operating results depend upon the volume and timing of customer orders received during a given period and the percentage of each order that we are able to ship and recognize as net revenue during each period. Customers may change their cycle of product orders from us, which would affect the timing of our product shipments. Any failure or delay in the closing of orders expected to occur within a quarterly period, particularly from significant customers, would adversely affect our operating results. Further, to the extent we receive orders late in any given quarter, we may not be able to ship products to fill those orders during the same period in which we received the corresponding order which could have an adverse impact on our operating results for that period.

 

 

We are facing and may face additional intellectual property claims that could be costly to defend and result in our loss of significant rights.

 

The semiconductor industry is characterized by frequent litigation regarding patent and intellectual property rights. We believe that it may be necessary, from time to time, to initiate litigation against one or more third parties to preserve our intellectual property rights. From time to time, we have received, and may receive in the future, notices that claim we have infringed upon, misappropriated or misused other parties' proprietary rights. We have also been subject to claims based on our alleged failure to comply with license terms. Any of the foregoing events or claims could result in litigation. In fiscal 2013, we were named in a lawsuit alleging certain of our products infringe the patents held by another party. In addition, we have filed a motion to intervene, which has been granted, in a patent infringement lawsuit based upon now expired patents that was previously brought by U.S. Ethernet Innovations, LLC, or USEI, against AT&T Mobility, Inc., or AT&T, after the court in early 2013 lifted a stay that had been in place regarding the allegedly infringing AT&T product that contains our chipset and after renewed requests for indemnification and defense concerning the lawsuit. USEI has asserted counter-claims against us in this action, and we have responded to these counter-claims. From time to time, we have been subject to audits of our compliance with license agreements. As a result of these audits, we have been required to make additional payments to our licensing partners. Any litigation or additional audits of our licensing compliance, including the audits we are currently undergoing, could result in significant expense to us and divert the efforts of our technical and management personnel. In the event of an adverse result in any such litigation or additional payments from any licensing audits, we could be required to pay substantial damages, cease the manufacture, use and sale of certain products or expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation or audit, and we may not be successful in such development or in obtaining such licenses on acceptable terms, if at all. In addition, patent disputes in the electronics industry have often been settled through cross-licensing arrangements. Although we have a portfolio of applicable issued patents, we may not be able to settle an alleged patent infringement claim through a cross-licensing arrangement.

 

To remain competitive, we need to continue to transition our chipsets to increasingly smaller sizes while maintaining or increasing functionality, and our failure to do so may harm our business.

 

We periodically evaluate the benefits, on a product-by-product basis, of migrating to more advanced technology to reduce the size of our chipsets. The smaller chipset size reduces our production and packaging costs, which enables us to be competitive in our pricing. We also continually strive to increase the functionality of our chipsets, which is essential to competing effectively in our target markets. The transition to smaller geometries while maintaining or increasing functionality requires us to work with our contractors to modify the manufacturing processes for our products and to redesign some products. This effort requires considerable development investment and a risk of reduced yields as a new process is brought to acceptable levels of operating and quality efficiency. In the past, we have experienced difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes, all of which could harm our relationships with our customers, and our failure to do so would impact our ability to provide competitive prices to our customers, which would have a negative impact on our sales.

 

The average selling prices of semiconductor products have historically decreased rapidly and will likely do so in the future, which could harm our revenue and gross margins.

 

The semiconductor industry, in general, and the consumer electronics markets that we target, specifically, are characterized by intense price competition, frequent introductions of new products and short product life cycles, which can result in rapid price erosion in the average selling prices for semiconductor products. A decline in the average selling prices of our products could harm our revenue and gross margins. The willingness of customers to design our chipsets into their products depends to a significant extent upon our ability to sell our products at competitive prices. In the past, we have reduced our prices to meet customer requirements or to maintain a competitive advantage. Reductions in our average selling prices to one customer could impact our average selling prices to all customers. If we are unable to reduce our costs sufficiently to offset declines in product selling prices or are unable to introduce more advanced products with higher margins in a timely manner, we could experience declines in our net revenue and gross margins.

 

We added three new directors to our board of directors in fiscal 2013, a new majority of our five-member board of directors, which may lead to changes in the execution of our business strategies and objectives.

 

In connection with our annual meeting of shareholders in August 2012, three new directors were elected to our board of directors and constitute a majority of our five-member board of directors. Because of these additions, our board of directors has not worked together as a group for an extended period of time. We have also nominated a slate of directors for our 2013 annual meeting of shareholders, which includes two new director nominees. This turnover in our board of directors may lead to changes in the execution of our business strategies and objectives as these new directors analyze our business and contribute to the formulation of our business strategies and objectives.

 

We rely upon patents, trademarks, copyrights and trade secrets to protect our proprietary rights and if these rights are not sufficiently protected, it could harm our ability to compete and to generate revenue.

 

Our ability to compete may be affected by our ability to protect our proprietary information. As of February 2, 2013, we held 116 patents, which were due to expire from one to fifteen years, and had 111 patent applications under review. These patents and patent applications cover the technology underlying our products. We cannot assure you that any additional patents for which we have applied will be issued or that any issued patents will provide meaningful protection of our product innovations. Like other semiconductor companies, we rely primarily on trade secrets and technological know-how in the conduct of our business. We use measures such as confidentiality agreements to protect our intellectual property. However, these methods of protecting our intellectual property may not be sufficient.

 

 

The complexity of our products could result in unforeseen delays or expenses and in undetected defects, which could damage our reputation with current or prospective customers, adversely affect the market acceptance of new products and result in warranty claims.

 

Highly complex products, such as those that we offer, frequently contain defects, particularly when they are first introduced or as new versions are released. Our chipsets contain highly sophisticated silicon technology and complex software. In the past we have experienced, and may in the future experience, defects in our products, both with our chipsets and the related software products we offer. If any of our products contain defects or have reliability, quality or compatibility problems, our reputation may be damaged and our customers may be reluctant to buy our products, which could harm our ability to retain existing customers and attract new customers. In addition, these defects could interrupt or delay sales or shipment of our products to our customers. Manufacturing defects may not be detected by the testing process performed by our subcontractors. If defects are discovered after we have shipped our products, it could result in unanticipated costs, order cancellations or deferrals and product returns or recalls, harm to our reputation and a decline in our net revenue, income from operations and gross margins.

 

In addition, our agreements with some customers contain warranty provisions which provide the customer with a right to damages if a defect is traced to our products or if we cannot correct errors in our product reported during the warranty period. However, any contractual limitations to our liability may be unenforceable in a particular jurisdiction. We do not have insurance coverage for any warranty or product liability claims and a successful claim could require us to pay substantial damages. A successful warranty or product liability claim against us, or a requirement that we participate in a product recall, could have adverse effects on our business results.

 

If our third-party manufacturers do not achieve satisfactory yields or quality, our relationships with our customers and our reputation will be harmed, which in turn would harm our operating results and financial performance.

 

The fabrication of semiconductors is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields and, in some cases, cause production to be stopped or suspended. Although we work closely with our third-party manufacturers to minimize the likelihood of reduced manufacturing yields, their facilities have from time to time experienced lower than anticipated manufacturing yields that have resulted in our inability to meet our customer demand. It is not uncommon for yields in semiconductor fabrication facilities to decrease in times of high demand, in addition to reduced yields that may result from normal wafer lot loss due to workmanship or operational problems at these facilities. When these events occur, especially simultaneously, as happens from time to time, we may be unable to supply our customers' demand. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from the wafer foundries or defects, integration issues or other performance problems in our products could cause us significant customer relations and business reputation problems or force us to sell our products at lower gross margins and therefore harm our financial results.

 

If the growth of demand in the consumer electronics market does not continue, our ability to increase our revenue could suffer.

 

Our business is highly dependent on developing sectors of the consumer electronics market, including DTV, home networking, set-top box, and home control and energy management. The consumer electronics market is highly competitive and is characterized by, among other things, frequent introductions of new products and short product life cycles. The consumer electronics market may also be negatively impacted by a slowdown in overall consumer spending. The worldwide economy, generally, and consumer spending, specifically, has significantly declined, which has negatively impacted our target markets. If our target markets do not grow as rapidly or to the extent we anticipate, our business could suffer. We expect the majority of our revenue for the foreseeable future to come from the sale of our chipsets for use in emerging consumer applications. Our ability to sustain and increase revenue is in large part dependent on the continued growth of these rapidly evolving market sectors, whose future is largely uncertain. Many factors could impede or interfere with the expansion of these consumer market sectors, including consumer demand in these sectors, general economic conditions, and other competing consumer electronic products, delays in the deployment of telecommunications video services and insufficient interest in new technology innovations. In addition, if market acceptance of the consumer products that utilize our products does not occur as expected, our business could be harmed.

 

Due to the cyclical nature of the semiconductor industry, our operating results may fluctuate significantly, which could adversely affect the market price of our common stock.

 

The semiconductor industry is highly cyclical and subject to rapid change and evolving industry standards and, from time to time, has experienced significant downturns. These downturns are characterized by decreases in product demand, excess customer inventory and accelerated erosion of prices. These factors have caused, and could cause, substantial fluctuations in our net revenue and in our operating results. Any downturns in the semiconductor industry may be severe and prolonged, and any failure of this industry to fully recover from downturns could harm our business. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products. Accordingly, our operating results have varied and may vary significantly as a result of the general conditions in the semiconductor industry, which could cause our stock price to decline.

 

 

Our ability to raise capital in the future may be limited and our failure to raise capital when needed could prevent us from executing our growth strategy.

 

We believe that our existing cash and cash equivalents, and short-term and long-term marketable securities will be sufficient to meet our anticipated cash needs for at least the next 12 months. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:

 

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market acceptance of our products;

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the need to adapt to changing technologies and technical requirements;

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the existence of opportunities for expansion; and

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access to and availability of sufficient management, technical, marketing and financial personnel.

 

If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain debt financing. In fiscal 2013, we used $14.6 million of our cash in our operating activities. During the second quarter of fiscal 2013, we made cash payments aggregating $38.2 million related to the acquisition of certain assets of the DTV business of Trident Microsystems. During fiscal 2009, we used an aggregate of $85.9 million to purchase 4.2 million shares of our common stock. In November 2009, we used approximately $116.0 million in cash (which included approximately $28.0 million of acquired CopperGate cash) for the acquisition of CopperGate. The amount of cash we used for these acquisitions and common stock repurchases could limit our ability to execute our business plans and require us to raise additional capital in the future in order to fund any further repurchases or for other purposes. The sale of additional equity securities or convertible debt securities would result in additional dilution to our shareholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to us, if at all.

 

Changes in our effective tax rate or tax liability may have an adverse effect on our results of operations.

 

As a global company, we are subject to taxation in Hong Kong, Israel, Singapore, the United States and various other countries and states. Significant judgment is required to determine and estimate worldwide tax liabilities. Any significant change in our future effective tax rates could adversely impact our consolidated financial position, results of operations and cash flows. Our future effective tax rates may be adversely affected by a number of factors including:

 

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changes in tax laws in the countries in which we operate or the interpretation of such tax laws;

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changes in the valuation of our deferred tax assets and liabilities, including the effect of foreign exchange rate fluctuations relative to the U.S. Dollar;

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increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions;

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changes in stock-based compensation expense;

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changes in generally accepted accounting principles; and

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our ability to use our tax attributes such as research and development tax credits and net operating losses of acquired companies to the fullest extent.

 

In an effort to increase commercial activities in Singapore, an agency of the government of Singapore negotiated with us a reduction in its customary income tax rates in return for our commitment to fulfill a defined set of milestones that were comprised of business activities in Singapore including the establishment of an operations center. During fiscal 2009, we established a foreign operating subsidiary in Singapore. However, due to changes in our business conditions, product development cycles and other factors, we have only been able to fulfill a portion of these milestones. As a result, we have initiated renewed negotiations with the Singapore tax agency in an effort to modify the business milestones to be more achievable and continue to benefit from a reduced rate of taxation. Even though the agency continues to negotiate with us, there is a risk that we will not be able to achieve the modified milestones which could result in a significantly higher tax rate on the income we recognize in Singapore. For the three months ended May 4, 2013, we did not recognize any tax benefits from Singapore. The increased tax rate in Singapore if we were to permanently lose some or all of these tax benefits could be applied to current profits or retroactively to income generated over previous years in Singapore, which could have a material adverse impact on our consolidated financial results.

 

We anticipate that a portion of our consolidated pre-tax income will continue to be subject to foreign tax at relatively lower tax rates when compared to the United States’ federal statutory tax rate and, as a consequence, our effective income tax rate has been and is expected to continue to be lower than the United States’ federal statutory rate. Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure, if the relative mix of United States and international income or losses changes for any reason, or if we lose the benefit of our reduced tax rate in Singapore. Accordingly, there can be no assurance that our income tax rate will be less than the United States’ federal statutory rate.

 

 

We have a history of fluctuating operating results, including net losses in fiscal 2012 and 2013 and we may not be able to return to profitability in the future, which may cause the market price of our common stock to decline.

 

We have a history of fluctuating operating results. We reported net income of $26.4 million in fiscal 2009, net income of $2.5 million in fiscal 2010, net income of $9.1 million in fiscal 2011, a net loss of $168.0 million in fiscal 2012, a net loss of $101.8 million in fiscal 2013, and a net loss of $4.5 million for the three months ended May 4, 2013. To return to profitability, we will need to successfully develop new products and product enhancements and sustain higher revenue while controlling our cost and expense levels. In recent years, we made significant investments in our product development efforts and have expended substantial funds to enhance our sales and marketing efforts and otherwise operate our business. However, we may not realize the benefits of these investments. We may incur operating losses in future quarterly periods or fiscal years, which in turn could cause the price of our common stock to decline.

 

Our sales cycle can be lengthy, which could result in uncertainty and delays in generating net revenue.

 

Because our products are based on constantly evolving technologies, we have experienced a lengthy sales cycle for some of our chipsets, particularly those designed for set-top box applications. After we have qualified a product with a customer, the customer will usually test and evaluate our product with its service provider prior to the customer completing the design of its own equipment that will incorporate our product. Our customers and the telecommunications carriers our customers serve may need from three months to more than a year to test, evaluate and adopt our product and an additional three to more than nine months to begin volume production of equipment that incorporates our product. Our complete sales cycle typically ranges from nine to eighteen months, but could be longer. As a result, we may experience a significant delay between the time we increase expenditures for research and development, sales and marketing efforts and inventory and the time we generate net revenue, if any, from these expenditures. In addition, because we do not have long-term commitments from our customers, we must repeat our sales process on a continual basis even for current customers looking to purchase a new product. As a result, our business could be harmed if a customer reduces or delays its orders, chooses not to release products incorporating our chipsets or elects not to purchase a new product or product enhancements from us.

 

The complexity of our international operations may increase our operating expenses and disrupt our business.

 

We transact business and have operations worldwide. For example, we derive a substantial portion of our net revenue from our customers outside of North America and we plan to continue expanding our business in international markets in the future. For fiscal 2013, we derived 92% of our revenue from customers outside of North America. We also have significant international operations, including research and development facilities in Vietnam, sales and research and development facilities in China, Denmark, France, Israel, Japan, Singapore, Taiwan, Korea, Germany and The Netherlands and a sales and distribution facility in Hong Kong.

 

As a result of our international business, we are affected by economic, regulatory and political conditions in foreign countries, including the imposition of government controls, changes or limitations in trade protection laws, unfavorable changes in tax treaties or laws, varying statutory equity requirements, difficulties in collecting receivables and enforcing contracts, natural disasters, labor unrest, earnings expatriation restrictions, misappropriation of intellectual property, changes in import/export regulations, tariffs and freight rates, economic instability, public health crises, acts of terrorism and continued unrest in many regions and other factors, which could have a material impact on our international revenue and operations. In particular, in some countries we may experience reduced intellectual property protection. Our results of operations could also be adversely affected by exchange rate fluctuations, which could increase the sales price in local currencies of our products in international markets. Overseas sales and purchases to date have been denominated in U.S. dollars. Although we engage in some hedging of our foreign currency exposures, we do not hedge all such exposures and our hedging arrangements may not always be effective. See “Foreign currency exchange rate sensitivity” under Part I Item 3 “Quantitative and Qualitative Disclosures about Market Risk” in this Form 10-Q. Moreover, local laws and customs in many countries differ significantly from those in the United States. We also face challenges in staffing and managing our global operations. If we are unable to manage the complexity of our global operations successfully, our financial performance and operating results could suffer.

 

The volatile global economy could negatively affect our business, results of operations and financial condition.

 

Current uncertainty in global economic conditions poses a risk to the overall economy as consumers and businesses may defer purchases in response to tighter credit and negative financial news, which could negatively affect demand for our products and other related matters. Consequently, demand for our products could be different from our expectations due to factors including:

 

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changes in business and economic conditions, including conditions in the credit market that could negatively affect consumer confidence;

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customer acceptance of our products and those of our competitors;

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changes in customer order patterns including order cancellations; and

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reductions in the level of inventory our customers are willing to hold.

 

 

Because many of our products are incorporated into customer devices, a general slowdown in the economy or in consumer confidence could have a significant negative impact on the demand for the products that incorporate our products, which in turn would have a negative impact on our results of operations. There could also be a number of secondary effects from the current uncertainty in global economic conditions, such as insolvency of suppliers resulting in product delays, an inability of our customers to obtain credit to finance purchases of our products or a desire of our customers to delay payment to us for the purchase of our products. The effects, including those mentioned above, of the current global economic environment could negatively impact our business, results of operations and financial condition.

 

We rely on a limited number of independent third-party manufacturers for the fabrication, assembly and testing of our chipsets and the failure of any of these third-party manufacturers to deliver products or otherwise perform as requested could damage our relationships with our customers, decrease our sales and limit our growth.

 

We are a fabless semiconductor company and thus we do not own or operate a fabrication or manufacturing facility. We depend on independent manufacturers, each of whom is a third-party manufacturer for numerous companies, to manufacture, assemble and test our products. We currently rely on Taiwan Semiconductor Manufacturing Corporation, or TSMC, and, to a lesser extent, United Microelectronics Corporation, or UMC, and NXP Semiconductors, or NXP, to produce substantially all of our chipsets. We only recently began working with NXP as a result of our acquisition of certain assets of the DTV business from Trident Microsystems. As we continue to establish a relationship with NXP, we may experience delays, disruptions and technical or quality control problems as we integrate them into our manufacturing processes. In June 2013, we filed a lawsuit against NXP, as well as Trident, to attempt to recover $1.8 million in damages we suffered resulting from the period of time during which Trident was acting on our behalf in operating our DTV business and placing orders with NXP for inventory. This lawsuit could adversely affect our relationship with NXP. We rely on Advanced Semiconductor Engineering, Inc., or ASE, to assemble, package and test substantially all of our products. These third-party manufacturers may allocate capacity to the production of other companies' products while reducing product deliveries or the provision of services to us on short notice or they may increase the prices of the products and services they provide to us with little or no notice. In particular, other clients that are larger and better financed than we are or that have long-term agreements with ASE, TSMC, UMC or NXP may cause any or all of them to reallocate capacity to those clients, decreasing the capacity available to us.

 

If we fail to effectively manage our relationships with the third-party manufacturers, if we are unable to secure sufficient capacity at our third-party manufacturers' facilities or if any of them should experience delays, disruptions or technical or quality control problems in our manufacturing operations or if we had to change or add additional third-party manufacturers or contract manufacturing sites, our ability to ship products to our customers could be delayed, our relationships with our customers would suffer and our market share and operating results would suffer. If our third-party manufacturers' pricing for the products and services they provide increases and we are unable to pass along such increases to our customers, our operating results would be adversely affected. Also, the addition of manufacturing locations or additional third-party subcontractors would increase the complexity of our supply chain management. Moreover, all of our product manufacturing, assembly and packaging is performed in Asian countries and is therefore subject to risks associated with doing business in these countries such as quarantines or closures of manufacturing facilities due to the outbreak of viruses such as swine flu, SARS, avian flu or any similar outbreaks. Each of these factors could harm our business and financial results.

 

We may not be able to effectively manage our growth or develop our financial and managerial control and reporting systems, and we may need to incur significant expenditures to address the additional operational and control requirements of our growth, either of which could harm our business and operating results.

 

To continue to grow, we must continue to expand and improve our operational, engineering, accounting and financial systems, procedures, controls and other internal management systems. This may require substantial managerial and financial resources and our efforts in this regard may not be successful. Our current systems, procedures and controls may not be adequate to support our future operations. For example, we implemented a new enterprise resource management system in fiscal 2009. We integrated the operations of CopperGate into our enterprise resource management system in fiscal 2011. We integrated DTV business operations, having completed the acquisition of certain assets of the DTV business of Trident Microsystems in the second quarter of fiscal 2013. Any integration efforts could be costly and time consuming. If we fail to adequately manage our growth or to improve and develop our operational, financial and management information systems or fail to effectively motivate or manage our current and future employees, the quality of our products and the management of our operations could suffer, which could adversely affect our operating results.

 

In the event we seek or are required to use a new manufacturer to fabricate or to assemble and test all or a portion of our chipset products, we may not be able to bring new manufacturers on-line rapidly enough, which could damage our relationships with our customers, decrease our sales and limit our growth.

 

We use a single wafer foundry to manufacture a substantial majority of our products and to a lesser extent two other foundries including NXP. We only recently began working with NXP as a result of our acquisition of certain assets of the DTV business from Trident Microsystems. We use a single source to assemble and test substantially all of our products. This exposes us to a substantial risk of delay, increased costs and customer dissatisfaction in the event our third-party manufacturers are unable to provide us with our chipset requirements. Particularly during times when semiconductor capacity is limited, we may seek to, and in the event that our current foundry were to stop producing wafers for us altogether, we would be required to, qualify one or more additional wafer foundries to meet our requirements, which would be time consuming and costly. In order to bring any new foundries on-line, our customers and we would need to qualify their facilities, which process could take as long as several months. Once qualified, each new foundry would then require an additional number of months to actually begin producing chipsets to meet our needs, by which time our perceived need for additional capacity may have passed, or the opportunities we previously identified may have been lost to our competitors. Similarly, qualifying a new provider of assembly, packaging and testing services would be a lengthy and costly process and, in both cases, they could prove to be less reliable than our existing manufacturers, which could result in increased costs and expenses as well as delays in deliveries of our products to our customers.

 

 

Our ability to develop, market and sell products could be harmed if we are unable to retain or hire key personnel.

 

Our future success depends upon our ability to recruit and retain the services of key executive, engineering, finance and accounting, sales, marketing and support personnel. Our Chief Executive Officer has served in that role for us for over thirty years and the loss of his services could have a negative impact on our operations. The supply of highly qualified individuals, in particular engineers in very specialized technical areas, or sales people specializing in the semiconductor industry, is limited and competition for such individuals is intense. As part of our restructuring efforts in fiscal 2013, we terminated a significant number of employees and also imposed work furloughs. Our remaining employees, many of whom are highly qualified engineers, may be discomforted by these actions and seek alternative employment opportunities. None of our officers or key employees is bound by an employment agreement for any specific term. For example, we recently announced the resignation of our Chief Financial Officer. The loss of the services of any of our key employees, the inability to attract or retain key personnel in the future or delays in hiring required personnel, particularly engineers and sales people, and the complexity and time involved in hiring and training new employees, could delay the development and introduction of new products, and negatively impact our ability to market, sell or support our products.

 

Litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our attention and resources.

 

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Companies such as ours in the semiconductor industry and other technology industries are particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. While we are not aware of any such contemplated class action litigation against us, we may in the future be the target of securities litigation. Any future lawsuits to which we may become a party will likely be expensive and time consuming to investigate, defend and resolve. Such costs, which include investigation and defense, the diversion of our attention and resources and any losses resulting from these claims, could significantly increase our expenses and adversely affect our profitability and cash flow.

 

Our business is subject to seasonality, which may cause our revenue to fluctuate.

 

Our business is subject to seasonality as a result of our target markets, particularly the DTV business, which historically has peaked in the third quarter. We sell a number of our semiconductor products to our customers who manufacture products for the consumer electronics market. Our customers who manufacture products for the consumer electronics market typically experience seasonality in the sales of their products which in turn may affect the timing and volume of orders for our chipsets. We expect to experience lower sales in our first and/or fourth fiscal quarters and higher sales in our second and/or third fiscal quarters as a result of the seasonality of demand associated with the consumer electronics markets. For example, we expect that our DTV business may experience some seasonality typical of the consumer electronics markets, resulting in slower DTV sales in the first and fourth quarter of each calendar year and strongest DTV sales in the third calendar quarter. As a result of the potential seasonality in our business, our operating results may vary significantly from quarter to quarter.

 

If credit market conditions deteriorate further, it could have a material adverse impact on our investment portfolio.

 

U.S. sub-prime mortgage defaults have had a significant impact across various sectors of the financial markets, causing global credit and liquidity related difficulties. Beginning mid-2007, global short-term funding markets have experienced credit issues, leading to liquidity issues and failed auctions in the auction rate securities market. If the global credit market continues to be weak or deteriorates further, the liquidity of our investment portfolio may be impacted and we could determine that some of our investments are impaired. This could materially adversely impact our results of operations and financial condition.

 

Regional instability in Israel may adversely affect business conditions and may disrupt our operations and negatively affect our revenues and profitability.

 

As a result of our acquisition of CopperGate in November 2009, we have engineering facilities, administrative and sales support operations and, as of May 4, 2013, we had 127 employees located in Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, as well as incidents of civil unrest. In addition, in the past, Israel and companies doing business with Israel has been the subject of economic boycotts. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, Israel has been and is subject to civil unrest and terrorist activity, with varying levels of severity since September 2000. Recently, there has been an increase in civil unrest and political instability in the Middle East, including the recent escalation of conflict in Syria. Any future armed conflicts, civil unrest or political instability in the region may negatively affect business conditions and adversely affect our results of operations.

 

 

In addition, our business insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could have a material adverse effect on our business and financial results.

 

The income tax benefits in Israel to which we are currently entitled from our approved enterprise program may be reduced or eliminated by the Israeli government in the future and also require us to satisfy specified conditions. If they are reduced or if we fail to satisfy these conditions, we may be required to pay increased taxes and would likely be denied these benefits in the future.

 

The Investment Center of the Ministry of Industry, Trade and Labor has granted “approved and/or beneficiary enterprise” status to certain product development programs at our facility in Tel Aviv. Sigma Designs Israel’s taxable income from the approved and beneficiary enterprise program is exempt from tax for a period of two years commencing calendar year 2008 and 2009, respectively, and will be subject to a reduced tax rate for an additional eight years thereafter, depending on the percentage of Sigma Designs Israel’s share capital held by non-Israelis. The Israeli government may reduce, or eliminate in the future, tax benefits available to approved enterprise programs. Our approved and beneficiary programs and the resulting tax benefits may not continue in the future at their current levels or at any level. The termination or reduction of these tax benefits would likely increase our tax liability. Additionally, the benefits available to an approved and beneficiary enterprise program are dependent upon the fulfillment of conditions stipulated under applicable law and in the certificate of approval. If we fail to comply with these conditions, in whole or in part, we may be required to pay additional taxes for the period in which we benefited from the tax exemption or reduced tax rates and would likely be denied these benefits in the future. In either case, the amount by which our taxes would increase will depend on the difference between the then applicable tax rate for non-approved enterprises and the rate of tax, if any, that we would otherwise pay as an approved enterprise, and the amount of any taxable income that we may earn in the future. The current maximum enterprise tax rate in Israel is 25%.

 

Failure to maintain effective internal control over financial reporting may cause us to delay filing our periodic reports with the SEC, affect our NASDAQ listing and adversely affect our stock price.

 

The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on internal control over financial reporting in their annual reports on Form 10-K. Our management is responsible for maintaining internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Our management assessed the effectiveness of our internal control over financial reporting as of February 2, 2013 and concluded that our internal control over financial reporting was effective. However, during the second quarter of fiscal 2013, we acquired certain assets used in the DTV business of Trident Microsystems. As a result of completing the accounting procedures related to this acquisition, we were unable to timely file our quarterly report on Form 10-Q for the quarterly period in which we completed this acquisition. In fiscal 2013, we also experienced significant turnover in our finance and accounting personnel. In addition, we recently announced the resignation of our chief financial officer. All of these changes placed a strain on our internal control over financial reporting, and we must continue to apply significant resources in order to maintain effective internal controls. Although we review our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, our failure to maintain adequate internal controls over financial reporting could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact our stock price.

 

Our headquarters, certain of our other facilities, and some of our suppliers and third-party manufacturers are located in active earthquake zones. Earthquakes, tsunamis, floods or other types of natural disasters affecting our suppliers, our manufacturers or us could cause resource shortages and production delays, which would disrupt and harm our business, results of operations and financial condition.

 

We are headquartered in the San Francisco Bay Area, have research and development and sales offices in Japan and outsource most of our manufacturing to Taiwan. Each of these areas is an active earthquake zone, and certain of our suppliers and third-party manufacturers conduct operations in the same regions or in other locations that are susceptible to natural disasters. The occurrence of a natural disaster, such as an earthquake, tsunami or flood, or localized extended outages of critical utilities or transportation systems, or any critical resource shortages, affecting us, our suppliers or our third-party manufacturers could cause a significant interruption in our production, business, damage or destroy our facilities or those of our suppliers and cause us to incur significant costs or result in limitations on the availability of our raw materials, any of which could harm our business, financial condition and results of operations.

 

 

Risks Related to Our Common Stock

 

Our operating results are subject to significant fluctuations due to many factors and any of these factors could adversely affect our stock price.

 

Our operating results have fluctuated in the past and may continue to fluctuate in the future due to a number of factors, including:

 

●

failure to reduce our expenses sufficiently to achieve profitability at current revenue levels;

●

the loss of one or more significant customers;

●

changes in our pricing models and product sales mix;

●

unexpected reductions in unit sales and average selling prices, particularly if they occur precipitously;

●

new product introductions by us and our competitors;

●

the level of acceptance of our products by our customers and acceptance of our customers' products by their end user customers;

●

an interrupted or inadequate supply of semiconductor chips or other materials included in our products;

●

availability of third-party manufacturing capacity for production of certain products;

●

shifts in demand for the technology embodied in our products and those of our competitors;

●

the timing of, and potential unexpected delays in, our customer orders and product shipments;

●

the impairment and associated write-down of strategic investments that we may make from time-to-time;

●

write-downs of accounts receivable;

●

inventory obsolescence;

●

a significant increase in our effective tax rate in any particular period as a result of the exhaustion, disallowance or accelerated recognition of our net operating loss carry-forwards or otherwise;

●

technical problems in the development, production ramp up and manufacturing of products, which could cause shipping delays;

●

the impact of potential economic instability in the United States and Asia-Pacific region, including the continued effects of the recent worldwide economic slowdown;

●

expenses related to implementing and maintaining a new enterprise resource management system and other information technologies; and

●

expenses related to our compliance efforts with Section 404 of the Sarbanes-Oxley Act of 2002.

 

In addition, the market prices of securities of semiconductor and other technology companies have been volatile. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies.

 

Accordingly, you may not be able to resell your shares of common stock at or above the price you paid.

 

Our stock price has demonstrated volatility and continued volatility in the stock market or our operating performance may cause further fluctuations or decline in our stock price.

 

The market for our common stock has been subject to significant volatility which is expected to continue. For example, for the quarter ended May 4, 2013, the closing sale price per share of our common stock on the NASDAQ Global Market ranged from a high of $5.20 on March 14, 2013 to a low of $4.36 on March 7, 2013. During the fiscal year ended February 2, 2013, the closing sale price per share of our common stock on the NASDAQ Global Market ranged from a high of $7.13 on August 28, 2012 to a low of $4.68 on April 10, 2012. This volatility may or may not be related or proportionate to our operating performance. Our operating performance as well as general economic and market conditions, could cause the market price of our common stock to decline.

 

If securities or industry analysts do not publish research or reports about our business or if they issue an adverse opinion regarding our stock, our stock price and trading volume could decline.

 

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about our business or us. If one or more of the analysts who cover us issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets which in turn could cause our stock price or trading volume to decline.

 

Provisions in our organizational documents and California law could delay or prevent a change in control of Sigma that our shareholders may consider favorable.

 

Our articles of incorporation and bylaws contain provisions that could limit the price that investors might be willing to pay in the future for shares of our common stock. Our Board of Directors can authorize the issuance of preferred stock that can be created and issued by our Board of Directors without prior shareholder approval, commonly referred to as "blank check" preferred stock, with rights senior to those of our common stock. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock could have the effect of delaying, deterring or preventing a change in control and could adversely affect the voting power of your shares. In addition, provisions of California law could make it more difficult for a third party to acquire a majority of our outstanding voting stock by discouraging a hostile bid or delaying or deterring a merger, acquisition or tender offer in which our shareholders could receive a premium for their shares or a proxy contest for control of Sigma or other changes in our management.

 

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5.  OTHER INFORMATION

 

None.

 

ITEM 6.  EXHIBITS

 

(a)

Exhibits

 

The following exhibits are filed herewith:

 

31.1

Certification of the President and Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

 

31.2

Certification of the Chief Financial Officer and Secretary pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

 

32.1

Certificate of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (1)

 

32.2

Certificate of Chief Financial Officer and Secretary pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (1)

  

101.INS** XBRL Instance Document.

101.SCH**XBRL Taxonomy Extension Schema Document.

101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF**XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB**XBRL Taxonomy Extension Label Linkbase Document.

101.PRE**XBRL Taxonomy Extension Presentation Linkbase Document.

 

** Furnished with this Form 10-Q. In accordance with Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for the purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

  

(1)  The certificates contained in Exhibits 32.1 and 32.2 are not deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof irrespective of any general incorporation by reference language contained in any such filing, except to the extent that the registration specifically incorporates it by reference.

 

 

 

 

SIGNATURES

 

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SIGMA DESIGNS, INC.
Date: June 13, 2013
	By:	/s/ Thinh Q. Tran
		Thinh Q. Tran
		President and Chief Executive Officer (Principal Executive Officer)
	By:	/s/ Elias N. Nader
		Elias N. Nader
		Interim Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

 

EXHIBIT INDEX

 

31.1

Certification of the President and Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

 

31.2

Certification of the Chief Financial Officer and Secretary pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

 

32.1

Certificate of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (1)

 

32.2

Certificate of Chief Financial Officer and Secretary pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (1)

 

101.INS** XBRL Instance Document.

101.SCH**XBRL Taxonomy Extension Schema Document.

101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF**XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB**XBRL Taxonomy Extension Label Linkbase Document.

101.PRE**XBRL Taxonomy Extension Presentation Linkbase Document.

 

** Furnished with this Form 10-Q. In accordance with Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for the purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

  

(1)  The certificates contained in Exhibits 32.1 and 32.2 are not deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof irrespective of any general incorporation by reference language contained in any such filing, except to the extent that the registration specifically incorporates it by reference.

 

 

 

48