Note 10 - Commitments and Contingencies | 6 Months Ended |
Aug. 02, 2014 |
Commitments and Contingencies Disclosure [Abstract] | ' |
Commitments and Contingencies Disclosure [Text Block] | ' |
10. Commitments and contingencies |
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Commitments |
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Product warranty |
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In general, we sell products with up to a one-year limited warranty that our products will be free from defects in materials and workmanship. Warranty cost is estimated at the time revenue is recognized based on historical activity, and additionally, for any specific known product warranty issues. Accrued warranty cost includes hardware repair and/or replacement and is included in accrued liabilities on the accompanying condensed consolidated balance sheets. |
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Details of the change in accrued warranty as of August 2, 2014 and August 3, 2013 are as follows (in thousands): |
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Three Months Ended | | Balance | | | Additions and Adjustments | | | Deductions | | | Balance End | |
Beginning of | of Period |
Period | |
2-Aug-14 | | $ | 630 | | | $ | 117 | | | $ | (107 | ) | | $ | 640 | |
3-Aug-13 | | $ | 1,050 | | | $ | 192 | | | $ | (202 | ) | | $ | 1,040 | |
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Six Months Ended | | Balance | | | Additions and Adjustments | | | Deductions | | | Balance End | |
Beginning of | of Period |
Period | |
2-Aug-14 | | $ | 620 | | | $ | 241 | | | $ | (221 | ) | | $ | 640 | |
3-Aug-13 | | $ | 1,447 | | | $ | 38 | | | $ | (445 | ) | | $ | 1,040 | |
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Purchase commitments |
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We place non-cancelable orders to purchase semiconductor products from our suppliers on an eight to twelve week lead-time basis. As of August 2, 2014, the total amount of outstanding non-cancelable purchase orders was approximately $39.3 million. |
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Design Tools |
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We entered into an agreement with a vendor to purchase $12.9 million of design tools. Payments under this agreement are being made on a quarterly basis from June 2013 through March 2016. As of August 2, 2014, remaining payments under this agreement totaled $9.5 million. We have fully accrued this amount as of August 2, 2014. |
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Indemnifications |
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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. |
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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 August 2, 2014. |
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Royalties |
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We pay royalties for the right to sell certain products under various license agreements. During the three and six months ended August 2, 2014, we recorded gross royalty expense of $0.5 million and $1.1 million, respectively, and $0.6 million and $1.1 million for the three and six months ended August 3, 2013, respectively, in cost of revenue in the condensed consolidated statements of operations. |
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Our wholly owned subsidiary, Sigma Designs Israel SDI Ltd. (formerly Coppergate Communications, Ltd.), participated in programs sponsored by the Office of the Chief Scientist of Israel's Ministry of Industry, Trade and Labor, or the OCS, for the support of research and development activities that we conducted in Israel. Through August 2, 2014, we had obtained grants from the OCS aggregating to $5.2 million of our research and development projects in Israel. We completed the most recent of these projects in 2013. We are obligated to pay royalties to the OCS, amounting up to 4.5% of the sales of certain products up to an amount equal to the grants received, plus LIBOR-based interest. As of August 2, 2014, our remaining potential obligation under these programs was approximately $1.1 million. |
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Contingencies |
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Litigation |
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From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. We expect that the number and significance of these matters will increase as our business expands. In particular, we could face an increasing number of patent and other intellectual property claims as the number of products and competitors in our industry grows. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources or cause us to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to us. If an unfavorable outcome were to occur against us, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs and, potentially, in future periods. |
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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-top 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, for which we have responded. The parties have now completed fact discovery and have moved on to expert discovery. USEI attempted to expand the scope of claims to cover all of our semiconductors; however, the court approved our motion to limit the case to only those devices initially claimed in the original USEI filing. Case management hearings for this multi-party suit have resulted in the court entertaining separate sequential trials for the various interveners remaining in the case. Intel Corporation, as one intervener, has requested that it proceed first, which would set a precedent for all subsequent trials. The trial date currently set by the court for the first trial is January 5, 2015. |
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In February 2014, Mentor Graphics Corporation (“Mentor”) filed a complaint against us, Case No. 3-14-cv00742, in the U.S. District Court for the Northern District of California, for unspecified damages alleging copyright infringement, breach of contract, unjust enrichment, and a request for audit and accounting relating to a certain Reference Platform License Agreement for Embedded Software, dated March 28, 2008 (the “Mentor Agreement”) by and between Trident Microsystems, Inc. (“Trident”) and Mentor. The Mentor Agreement was assigned to us in connection with our acquisition of assets related to the DTV business of Trident. We have filed our answer to this complaint, denying the substantive allegations. No trial date has been set. |
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Third-party licensed technology |
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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 third quarter of fiscal 2013, we settled an 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 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 set-top box business. In the first quarter of 2015, we resolved this audit through binding arbitration for $0.2 million in penalties, $0.1 million of which was included in the condensed consolidated statement of operations for the six months ended August 2, 2014. |
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We could be required to make additional payments as a result of pending or future compliance audits. For license agreements where we have royalty obligations, we charge any settlement payments that we make in connection with audits to cost of revenue. For license agreements where we simply have reporting obligations, we treat any settlement payments as penalties and charge the amounts to operating expenses in sales and marketing. During the quarter ended August 2, 2014, we have been notified by one of our licensors of their intent to audit for compliance with the terms of the license, for which the audit process has yet to commence. As of August 2, 2014, we believe we are in compliance with this and our other license agreements. |