ITEM 1. BUSINESS
Recent Developments
On December 7, 2017, the Company and Silicon Laboratories Inc., (“Silicon Labs”) announced a definitive agreement under which Silicon Labs and Sequin Merger Subsidiary, Inc. were to acquire the Company, subject to certain closing conditions. On January 23, 2018, the Company announced that due to certain closing conditions not being satisfied, the parties would instead move forward with an asset sale (the “Asset Sale”) of the Company’s Z-Wave business unit to Silicon Labs. The proposed Asset Sale was consummated on April 18, 2018. The Company has also announced its intention to initiate a plan of liquidation following the closing of the proposed Asset Sale. The plan of liquidation was approved by the Company’s shareholders at a special meeting of shareholders held on April 17, 2018.
If the Company moves forward with its plan of liquidation, all of the forward-looking statements, strategy, marketing, and other information set forth in this Annual Report on Form 10-K (the “Annual Report”), to the extent that such information refers to future operations, shall be rendered ineffective. Under these circumstances, the Company will cease to carry on its business and operations, except to the extent necessary to wind down the Company. The Company’s legal existence will continue to the extent necessary to wind down its affairs until the plan of liquidation is completed.
The following is therefore a description of the historical nature of the Company, materially accurate in all respects for the past fiscal year and to provide information relevant to understanding the Company’s financial results and its business for the fiscal year ended February 3, 2018. The financial statements presented in this Annual Report differ from those presented historically as to form regarding the classification of accounts associated with assets determined to be held for sale as of February 3, 2018, specifically the Z-Wave business unit and the subsequent event transaction with Integrated Silicon Solution (Cayman), Inc. (“ISSI”). On February 15, 2018, the Company completed the sale of its Media Connectivity business unit to ISSI. In addition, on March 30, 2018, the Company completed the sale of its Smart TV and Set-top Box business units to V-Silicon. Please refer Footnote 20 – Subsequent events in ITEM 8 – FINANCIAL STATEMENTS contained in this Form 10-K for additional detail regarding these transactions and their impact on the Company’s business and operations.
Overview
We are a global integrated system-on-chip (“SoC”) solutions provider offering intelligent platforms for use in a variety of home entertainment and home and industrial control appliances. Our goal is to ensure that our chipsets serve as the foundation for some of the world’s leading consumer products, including televisions, media connectivity, smart home devices, and mobile Internet of Things (“IoT”) products. Our business generates revenue primarily by delivery of relevant, cost-effective semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We also derive a portion of our revenue from other products and services, including technology licenses, software development kits, and engineering support services for hardware and software.
On February 15, 2018, we divested our Media Connectivity business, and on March 30, 2018, we divested our Smart TV and Set-top Box businesses. As a result, following March 30, 2018, we no longer operated our Connected Smart TV Platforms business. On April 18, 2018, we divested our Z-Wave business; and as a result, we will not operate our Z-Wave business following this divestiture. As a result of these divestitures, the only remaining business unit is Mobile IoT, which to date has not generated any material revenue.
Products
Media Processor
Our media processor product line consisted of a range of functionally similar platforms that were based on highly integrated chips, embedded software, and hardware reference designs. These highly integrated chips typically included all the functions required to create a complete system solution with only the addition of memory. The integrated functions included application processing (“CPU”), graphics processing (“GPU”), media processing (audio and video decoding/encoding), display processing, security management, memory control, and peripheral interfaces. Our embedded software suite provided an operating environment and coordinates the real-time processing of digital video and audio content, was readily customizable by our customers and is interoperable with multiple standard operating systems. Our reference system designs provided a hardware implementation of the circuit board, access to our embedded software suite, and could include prototypes for customer evaluation and use.
Our chipsets were generally configured for either the smart television (“Smart TV”) or streaming Set-top box, the latter of which includes related products, such as connected media players. Chipsets created for Smart TV obtain inputs from high definition multimedia interface (“HDMI”) and analog video and provided outputs to flat panel interfaces. Chipsets created for the set-top box obtain inputs from Ethernet and other broadcast interfaces and provide output to HDMI and analog video. Core components were therefore shared across these products while their configured hardware/software platforms and support were offered separately.
Media Connectivity Controllers
Our Media Connectivity product line consisted of wired home networking controller chipsets that were designed to provide connectivity solutions between various home entertainment products and incoming video streams. We believe these connectivity solutions provided consumers additional connectivity choices with increased flexibility and reliability and allowed system integrators and service providers an opportunity to reduce the time and cost of home networking installations. Our Media Connectivity solutions were based on the HomePNA (“HPNA”), HomePlug AV (“HPAV”), and G.hn standards. HPNA is a standard used for transferring internet protocol, or IP, content across coaxial cables and phone lines whereas HPAV is used for transferring IP content across power lines. G.hn is the next generation International Telecommunications Union (“ITU”) standard ratified in 2011 to create a unified global standard across coaxial cables, phone lines, and power lines. Products based on these technologies enable service providers, such as telecommunication carriers, cable operators and satellite providers, to deliver high definition television services (“HDTV”) and other media-rich applications throughout the home. Our HomePNA chipsets complied with the ITU G.9954 standard to support distribution of multimedia content throughout the home, while our HomePlug AV chipsets provide connectivity over existing powerline wiring, supporting advanced encryption standard (“AES”), high quality of service (“QoS”) and remote management and diagnostic capabilities. Our G.hn chipset was compliant with ITU G.9960/61 which supports connectivity over any type of existing wires inside the home. We designed the G.hn chipset to employ multiple input, multiple output (“MIMO”) technology to deliver higher throughput with extended coverage even in the presence of high noise conditions. We have not generated significant revenue from our products based on HPAV or G.hn technologies.
IoT
Devices
Our IoT Devices family consisted of our wireless Z-Wave chips, modules and cellular-based mobile IoT tracking tags and modems. Following the divestiture of our Z-Wave business, our IoT Devices family consisted of our cellular-based mobile IoT tracking tags and modems. Our Z-Wave chips and modules were incorporated into devices that enable consumers to enjoy advanced home control and automation functionality, such as home security, environmental and energy control and monitoring, within both new and existing homes. Devices that incorporated our wireless chips and modules operate on the Z-Wave mesh networking protocol. Our Z-Wave wireless chips utilized a low-bitrate, low-power, low-cost RF communication technology that provided an interoperable platform for home automation security and monitoring solutions. We derived most of our revenue within our IoT Devices product line by selling a module, which included a Z-Wave chip plus additional circuitry and components that provided our customers with a ready-to-use solution. Our Z-Wave chips and the Z-Wave protocol they used to communicate commands were built into an ecosystem of over 2,400 certified interoperable products, consisting primarily of intelligent appliances for use within the home.
Mobile IoT Devices
Our mobile IoT solutions are currently used primarily for tracking applications, such as small tags that can be attached to track pets, keys, children, luggage, and vehicles. These solutions are based on the Long-Term Evolution (“LTE”) network and leading edge systems technology (from our acquisition of Bretelon in fiscal 2016) to provide an ultra-low power and low-cost device. We believe this technology is very versatile and has the ability to be powered by inexpensive coin cell batteries or other power supply methods, such as from an external DC input and rechargeable batteries. Most of our mobile IoT revenue to date has been based on non-recurring engineering (“NRE”) contracts.
License Arrangements and
Other Products
From time to time, we derive revenue from the license of our internally developed intellectual property. We also offer certain legacy products that are sold into prosumer and other industrial applications. Additionally we derive revenue from the sale of products including software development kits and engineering support services for hardware and software. These products account for a minor portion of our total revenue.
Target Markets
Connected
Smart TV Platforms
Market
The Connected Smart TV Platforms market (before fiscal 2017 reported as three separate target markets of Smart TV, Media Connectivity and Set-top Box) consists of all products that are sold to integrate into digital televisions as well as other adjacent markets using chipset products that are designed for video post-processing, products delivering IP streaming video, including hybrid versions of these products and communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP, or data through wired or wireless connectivity. We serve this market with our media processor chips, dedicated post-processing products and home networking controllers.
IoT
Devices Market
The IoT Devices market consists of both smart home applications (including gateways and automated consumer devices) and mobile IoT applications (primarily tracking tags). Our smart home product line is marketed under our Z-Wave brand of wireless chips, modules and Z-Wave mesh networking protocol.
License and Other Markets
The license and other markets include other products and services, including technology licenses, software development kits, and engineering support services for hardware and software.
Characteristics of Our Business
We do not enter into long-term commitment contracts with our customers, instead we rely on customer purchase orders to generate substantially all of our net revenue. However, our failure to accurately forecast demand can lead to product shortages that can impede production by our customers, may harm our relationship with these customers, or lead to excess inventory, which could negatively impact our gross margins in a particular period. During fiscal 2018, 2017, and 2016, we recorded provisions for excess inventory of $4.9 million, $2.0 million and $3.2 million, respectively, primarily as a result of the end of life of certain products.
Our Connected Smart TV Platforms market was based on the annual cycle of product launches. Major new consumer products were designed during the spring, produced during the summer and launched in the fall to take advantage of the holiday selling season. Our Connected Smart TV Platforms market generally experienced seasonality typical of the consumer electronics market, wherein the holiday selling season commands the highest sell-through of consumer electronic end-products, making the third quarter typically the strongest selling season for semiconductor components such as our chips and chipsets. We experienced lower sales in our first and fourth fiscal quarters and higher sales in our second and/or third fiscal quarters as a result of this seasonality of demand. Therefore, our operating results varied significantly from quarter to quarter.
For our Set-top Box products, we forecasted demand based not only on our assessment of the requirements of our direct customers, but also on the anticipated requirements of the telecommunications carriers that our direct customers serve. We worked with both our direct customers and these carriers to address the market demands and the necessary specifications for our technologies. Our business was substantially dependent upon being designed into set-top boxes and we were required to spend a considerable amount of resources to compete for these design wins. If we did obtain these design wins, it was often the case that our end customer and direct customer would continue to incorporate our chipset solutions for that generation of Set-top Boxes. However, if we were not designed into a particular generation of Set-top Boxes for our large target end customers, we stood to lose that portion of our market for the entire deployment time, which was typically two to three years.
Our IoT Devices market is characterized by the popularity of competing standards within the United States, Asia, and the European markets recognized by the ITU and other governing bodies. Our mobile IoT solutions are currently used primarily for tracking applications, such as small tags that can be attached to track pets, keys, children, luggage, and vehicles. The value of our IoT Devices market lies in the recognition of Z-Wave as a North American market leader for home security, automation and energy management. The primary differentiation between Z-Wave and other competing standards in the IoT Devices market is the requirement that all Z-Wave devices conform to a strict application level of device-to-device communication and operability, which allows all Z-Wave devices to be interoperable. This interoperability requirement does not exist with any other competing technologies in the IoT Devices market. We expect our IoT Devices market to grow in direct proportion to the adoption of the Z-Wave standard by a number of device manufacturers, service integrators and service providers.
Our target markets are also characterized by intense price competition. The semiconductor industry is highly competitive and, as a result, we expect our average selling prices to decline over time. On occasion, we have reduced our prices for individual customer volume orders as part of our strategy to obtain a competitive position in our markets. 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. If we are unable to reduce our costs sufficiently to offset any declines in product selling prices or are unable to introduce more advanced products with higher gross margins in a timely manner, we could see declines in our market share or gross margins. We expect our gross margins will vary from period to period due to changes in our average selling prices and average costs, volume order discounts, mix of product sales, amount of development revenue and provisions for inventory excess and obsolescence.
Industry Background
The growth of the internet, proliferation of over-the-top content, advances in communications infrastructure, digital video and audio compression technologies, home networking technologies and improvements in television displays have resulted in significant consumer demand for the end products sold in the markets that we primarily target.
Our IoT Devices market product categorizations beginning in the fourth quarter of fiscal 2016 includes Mobile IoT products and services as a result of our acquisition of Bretelon. IoT Devices products enable remote control and monitoring of a wide variety of home appliances such as thermostats, lighting and door locks. Much of the early adoption for home control and energy management products has been driven by installations of new security systems for the consumer home. However, the recent deployment of IoT Devices products by an increasing number of larger device manufacturers, system integrators and service providers has perpetuated the growing popularity of this market within the consumer goods industry. Low frequency, low power solutions can offer consumers cost efficient ways to monitor and conserve energy usage, to protect homes from theft and damage and to improve the convenience of performing certain household activities. Z-Wave’s device-interoperability allows service and security providers as well as consumers to deploy solutions with Z-Wave, secure in the knowledge that their solutions will operate with products from name brand vendors sold at retail and online. This allows service providers to focus on their core technology, with the services that they provide, and not the making or sourcing of the devices.
Customers
and Strategic Relationships
We sell our products principally to manufacturers and designers (OEMs and ODMs) as well as to distributors who, in turn, sell to manufacturers. Typically, when we sell to a distributor, that distributor has already received an order for our products directly from a manufacturer. Sales to our customers are typically made on a purchase order basis. We have also established strategic relationships with telecommunications carriers that provide wired and wireless communications services to consumers and businesses.
Sales and Marketing
Our sales and marketing strategy is to achieve design wins with technology leaders by providing quality, state-of-the-art products through superior sales channels. We sell our products worldwide through multiple channels, including our direct sales force, manufacturer representatives and independent distributors strategically located in a number of countries around the world. Members of our direct sales force are based in the United States, Denmark, Israel, Taiwan, South Korea and Japan. Our sales are also supported by representatives, resellers and distributors in other key countries such as China and India.
Our sales cycle typically ranges from nine to eighteen months and depends on a number of factors including the technical capabilities of the customer, customer need for customization and the length of customer evaluation and qualification of our offerings. In many cases, we must also qualify our products with our technology partners and, in some cases, with an end customer (e.g., a service provider). This qualification process may extend our sales cycle beyond its typical duration. We generally plan the fabrication of our products based on customer forecasts. In some instances, customer forecasts are driven by seasonality where our customers plan product launches around the holiday season.
For our larger volume designer and manufacturing customers, purchase orders for our products are generally non-cancelable between four and twelve weeks before our scheduled delivery dates and are not subject to rescheduling within four weeks of scheduled delivery dates.
Competition
The semiconductor industry generally, and the consumer electronics market specifically, are highly competitive markets characterized by rapid technological change, evolving standards, decreasing average selling prices per unit and short product life cycles. We believe that the principal factors on which we compete include time-to-market for new product introductions, product performance, customer interface and support, industry standards compatibility, software functionality, image quality, price, and product support.
We competed with a number of major domestic and international suppliers of chipset solutions and related applications in our Connected Smart TV Platforms market segment including, among others, Broadcom Ltd., Mediatek, RealTek, ST Microelectronics, Marvell Technology Group, Ltd. and Qualcomm and in our IoT Devices market segment, Texas Instruments, Freescale and Silicon Laboratories (through their selection and use of Zigbee-based chips).
Many of the aforementioned companies have higher profiles, larger financial resources and greater marketing resources than we do and may develop competitive products that may inhibit the wide acceptance of our products. Additionally, we believe that any industry manufacturer can develop products that compete directly with our products.
Research and Development
Historically, we have focused our research and development efforts primarily on two areas: video/audio decoder technologies and secure media processing for the Connected Smart TV Platforms market and the IoT Devices market. In building new solutions, our strategy was to build fully integrated chips and chipsets.
We have invested substantial resources in research and development of performance enhancements, cost reductions and additional features for future generations of our solutions in order to remain competitive in our industry. During fiscal 2018, 2017 and 2016 our research and development expenses were $72.3 million, $74.0 million, and $68.8 million, respectively.
Intellectual Property Protection
Our success depends, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws as well as agreements with customers, suppliers and employees to protect our proprietary technologies and processes.
As of February 3, 2018, we held 162 issued patents and we had 5 patent applications pending for our technology. The expiration dates of these patents are within the next one to twenty years. We cannot assure that our existing patents or pending patents, even if issued, will provide adequate protection for our competitive position. Additionally, because we have participated and continue to participate in developing various industry standards, we may be required to license some of our patents to others, including competitors, who develop products based on those standards. Appropriate portions of our patent portfolio are being assigned to buyers of our business units as those business units are divested. The Company does not intend to maintain a material patent portfolio after divestiture of the business units.
We generally enter into confidentiality agreements, evaluation (limited) license agreements and technology license agreements with our customers and strategic partners, and we typically control access to and distribution of product documentation and other proprietary information. Despite these precautions, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes, they may develop similar technology independently or they may design around our patents. As such, any rights granted under our patents may not provide us with meaningful protection.
Manufacturing
We are a fabless semiconductor company and we do not own or operate a fabrication, packaging or testing facility. We depend on third-party vendors to manufacture, package and test our products. By outsourcing manufacturing, we are able to avoid the costs associated with owning and operating our own manufacturing facility. This allows us to focus our efforts on the design and marketing of our products.
Semiconductor fabrication
We rely on Taiwan Semiconductor Manufacturing Company (“TSMC”), Global Foundries (“GF”) and, to a lesser extent, Grace Semiconductors to fulfill the majority of our semiconductor fabrication needs including chipset manufacturing. We believe that our fabless manufacturing approach provides us with the benefits of superior manufacturing capability as well as flexibility to move the manufacturing, assembly and testing of our products to those vendors that offer the best capability at an attractive price. Nevertheless, because we do not have long-term pricing agreements with all of our third-party manufacturers, our costs and services are subject to sudden price fluctuations based on the cyclical demand for semiconductors. In addition, we may be unable to secure sufficient capacity at our third-party manufacturers’ facilities which could harm our ability to ship products to our customers in a timely manner and negatively impact our financial results in any particular period.
Assembly and test
Once our wafers have been manufactured, they are shipped from TSMC, GF, and our other third-party foundries to independent assembly and test facilities where they are sorted, packaged and tested. Generally, we store our sorted die in our die bank and only package the products for sale when we book an order. We outsource all packaging and testing of our products to independent third-party assembly and test facilities, primarily to Advanced Semiconductor Engineering, Inc. (“ASE”) in Taiwan. Our products are designed to use low-cost, standard packages and to be tested with widely available test equipment.
Quality assurance
We are committed to maintaining the highest level of quality in our products. We have designed and implemented a quality management system that provides the framework for continual improvement of products, processes and customer service to ensure customer satisfaction. We also rely on in-depth simulation studies, design review and product verification during our design phase. We rely on bench testing to perform design validation, product reliability qualification to verify product quality and manufacturing testing to validate the products in production. To ensure consistent product quality, reliability and yield, and together with our manufacturing logistics partners, we closely monitor the production cycle by regularly reviewing manufacturing process data from each wafer foundry and assembly subcontractor. We are ISO 9001 certified as are our key manufacturing partners, ASE, TSMC and GF.
Environmental Laws
Our products and certain aspects of our operations are regulated under various environmental laws in the U.S., Europe and other parts of the world. These environmental laws are broad in scope and regulate numerous activities including the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of our products and the recycling and treatment and disposal of our products. Certain of these laws also pertain to tracking and labeling potentially harmful substances that may have been incorporated into our products. These product labeling and environmental laws require us to know whether certain substances are present in our products and to what degree. Environmental laws may limit the use of certain substances in our products or may require us to provide product safety information to our customers if certain substances are present in our products in sufficient quantities. Additionally, we may be required to recycle certain of our products when they become waste. Compliance with environmental laws and regulations across multiple jurisdictions is complex and we regularly review known and pending laws and regulations to ensure we are compliant. Additionally, we may be subject to regulatory penalties for infringements outside our direct control. We did not incur any material expenditures in fiscal 2018 in relation to any environmental matter.
Backlog
Our backlog, which primarily comprises cancellable purchase orders from our customers at February 3, 2018 was approximately $17.0 million, compared with backlog of approximately $27.1 million at January 28, 2017. As our sales are made primarily through purchase orders from the delivery of products and the amount of backlog at any date depends upon various factors including the timing of the receipt of orders, fluctuations in orders for existing product lines and the introduction of any new product lines. Accordingly, we believe that the amount of our backlog at any date is not a reliable measure of our future revenue. In addition, as a result of the divestiture of our Multimedia business and our Z-Wave business, we do not expect to generate any future revenue from that business, and all of our revenue in the future will be derived from our IoT Devices market, specifically the Mobile IoT business.
Employees
As of February 3, 2018, we had 409 full-time employees worldwide, including 259 in research and development, 66 in sales and marketing, 62 in general and administration and 22 in operations and quality assurance.
Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel who are in great demand. While we have work councils or employee representatives in certain countries, our employees are not represented by any collective bargaining unit and we have never experienced a work stoppage. We believe that our employee relations are satisfactory.
Corporate Information
We were incorporated in California in January 1982. Our principal offices are located at 47467 Fremont Boulevard, Fremont, California 94538, and our telephone number is (510) 897-0200. Our website is www.sigmadesigns.com; however, the information in or that can be accessed through our website is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports are available free of charge through the “Investor Overview” section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Additionally, copies of materials filed by us with the Securities and Exchange Commission may be accessed at the Securities and Exchange Commission Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or at
www.sec.gov.
For information about the Securities and Exchange Commission’s Public Reference Room, contact 1-800-SEC-0330 or send an electronic message to
publicinfo@sec.gov.
ITEM 1A. RISK FACTORS
Befo
re deciding to purchase, hold
or sell our common stock, you should carefully consider the risks described below in addition to the other information contained in this Report and in our other filings with the
Securities and Exchange Commission (“
SEC
”)
, including our previously filed reports on Forms 10-Q and 8-K.
If any of the following risks actually occur
s
, our business, financial condition and results of operations could be harmed and the trading price of our common stock may decline causing you to lose all or part of your investment in our common stock. The risks and uncertainties described below are not
the only risks
that may occur in the course of our business
. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risks Related to the Plan of Liquidation
If we do not implement our proposed plan of liquidation (the “Plan of Liquidation”), our business could be harmed and our shareholders could face adverse tax consequences.
If we do not implement the Plan of Liquidation, we would have to continue business operations despite the sale of assets that have historically generated nearly all of our revenue. Following the completion of the Asset Sale, we will have limited assets with which to generate operating revenue and likely will have retained only those employees required to wind down our remaining business. We do not yet know if we will be successful in divesting our Mobile IoT Business. However, we do not expect a sale of this business or a shutdown of this business to be material to our operations or assets available for distribution to shareholders. Additionally, we may elect not to invest in another operating business following the closing of the Asset Sale. Furthermore, our shareholders could, depending on their particular circumstances, incur an increased shareholder-level U.S. federal income tax liability in the event that property (including cash from the Asset Sale) distributed to shareholders is characterized as a dividend for U.S. federal income tax purposes.
We cannot determine at this time the amount or timing of any distributions to our shareholders because there are many factors, some of which are outside of our control, that could affect our ability to make such distributions.
On February 15, 2018, we closed the sale of our Media Connectivity Business for $23.5 million, net of holdback amounts. On March 30, 2018, we closed the sale of our Multimedia business for $5.3 million. On April 18, 2018, we closed the asset sale and received gross proceeds of $240 million. Assuming we initiate the Plan of Liquidation, we plan to distribute, in an initial distribution (with potential subsequent distributions thereafter), a portion of the net proceeds from the Asset Sale and the Company’s other cash, subject to a contingency reserve for foreseeable remaining costs and liabilities. The amount and timing of the distributions to shareholders will be determined by the Company’s Board of Directors (the “Company Board”) in its discretion, subject to the provisions of the Plan of Liquidation, if approved. The Company Board anticipates that the amount of aggregate distributions to shareholders following the Asset Sale will between $235 and $255 million or $5.95 to $6.46 per share based on 39,499,507 shares outstanding as of February 26, 2018. The amount ultimately distributed to shareholders may be less than anticipated as a result of unforeseen circumstances. Subsequent distributions will be made in such amounts and at such times as determined by the Company Board in its discretion in accordance with the Plan of Liquidation. However, at this time, we cannot determine when we will be able to make any distributions to our shareholders or the amount of any such distributions. Those determinations depend on a variety of factors, including, but not limited to, whether we are able to sell our remaining assets and the prices therefor; the timing of the sale of our remaining assets; the amount we will be required to pay to satisfy unknown or contingent liabilities in the future, including liabilities related to recently filed shareholder litigation related to the Asset Sale and the Plan of Liquidation; the cost of operating our business through the date of our final dissolution; inaccuracies in the cost estimates to resolve currently foreseeable contingent liabilities; general business and economic conditions; and other matters. With respect to the sale of the Mobile IoT Business, the Company has and continues to pursue all strategic alternatives. We do not yet know if we will be successful in divesting our Mobile IoT Business. However, we do not expect a sale of this business or a shutdown of this business to be material to our operations or assets available for distribution to shareholders. The Company intends to continue operating its businesses until it is able to complete transactions that will maximize shareholder value or otherwise wind down these businesses in accordance with existing commitments. There can be no assurance, however, as to the time it will take to complete such transactions or wind down.
In addition, we will continue to incur claims, liabilities and expenses from operations (such as operating costs, salaries, directors’ and officers’ insurance, payroll and local taxes, legal and accounting fees and miscellaneous office expenses) as we seek to close the Asset Sale and effect the Plan of Liquidation. Our estimates regarding our expense levels may be inaccurate. Any unforecasted or unexpected claims, liabilities or expenses that arise between the date of this Form 10-K and the liquidation and final dissolution of Sigma or any claims, liabilities or expenses that exceed our estimates could leave us with less cash than is necessary to pay liabilities and expenses and would likely reduce the amount of cash available for ultimate distribution to our shareholders. Further, if cash to be received from the sale of our remaining assets, including the Mobile IoT Business, is not adequate to provide for all of our obligations, liabilities, expenses and claims, we will not be able to distribute any additional amounts to our shareholders.
For the foregoing reasons, there can be no assurance as to the timing and amount of distributions to our shareholders, even if all of our remaining assets, including the Mobile IoT Business, are sold; provided that the Company must complete the distribution of all of its properties and assets to its shareholders as provided in the Plan of Distribution to be developed by the Company’s Board of Directors as soon as practicable following the filing of the Certificate of Dissolution with the Secretary of State of the State of California and in any event on or before the tenth anniversary of such filing.
We may be unable to sell our remaining assets and our remaining lines of business at acceptable prices, or at all.
In order to maximize shareholder value and pursuant to the terms of the Plan of Liquidation, we presently intend to sell our remaining assets and lines of businesses. However, we may not be able to find purchasers for such assets due to market conditions or we may be unable to obtain acceptable value for these remaining assets and lines of business. As a result, we may be forced to attempt to sell our remaining assets and lines of businesses at a time or at a value which is unfavorable to us which would delay or decrease the potential liquidating distributions to our shareholders We do not yet know if we will be successful in divesting our Mobile IoT Business. However, we do not expect a sale of this business or a shutdown of this business to be material to our operations or assets available for distribution to shareholders.
If any of the parties to a future sale agreement default thereunder, or if a sale does not otherwise close, our liquidating distributions to our shareholders may be delayed or reduced.
The consummation of any future potential sales transaction is subject to the satisfaction of applicable closing conditions. If the transaction contemplated by a future sale agreement does not close because of a buyer default, failure of a closing condition or for any other reason, we will need to locate a new buyer for the asset or line of business, which we may be unable to do promptly or at a price or on terms that are as favorable as the failed transaction. We will also incur additional costs involved in locating a new buyer and negotiating a new sale agreement for the applicable asset. These additional costs are not included in our projections. In the event that we incur these additional costs, our liquidating distributions to our shareholders would be delayed or reduced.
The Company’s Board may abandon or delay implementation of the Plan of Liquidation even if it is approved by our shareholders.
The Company’s Board has adopted and approved a Plan of Liquidation for the liquidation of the Company following the closing of the Asset Sale. The Company’s Board has reserved the right, in its reasonable discretion and subject to applicable law, to abandon or delay implementation of the Plan of Liquidation. Following completion of the Asset Sale, we will continue to exist as a public company until we are dissolved. Although the Company Board has no present intention to pursue any alternative to the Plan of Liquidation, the Company Board may conclude either that its fiduciary obligations require it to pursue business opportunities that present themselves or that abandoning the Plan of Liquidation is otherwise in our best interests and the best interests of our shareholders. If the Company Board elects to pursue any alternative to the Plan of Liquidation, the value of our common stock may decline and distributions to our shareholders may be reduced and/or delayed.
If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, each of our shareholders who receives liquidating distributions could be held liable for payment to our creditors of his or her pro rata share of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to such shareholder in the liquidation.
We intend to file a Certificate of Election to Wind Up and Dissolve with the Secretary of State of the State of California and then complete the wind down. We intend to then file a Certificate of Dissolution and such other documents as are necessary with the Secretary of State of the State of California and other government agencies as required to dissolve the Company. Pursuant to California law, we will continue to exist for a minimum of three years after our dissolution becomes effective for the purpose of prosecuting and defending suits against us and enabling us and our subsidiaries to close their business, dispose of their property, discharge their liabilities and distribute any remaining assets to shareholders any remaining assets. If a court holds at any time that we have failed to make adequate provision for our expenses and liabilities in the liquidation or if the amount ultimately required to be paid in respect of such liabilities exceeds the amount available from our contingency reserve, our creditors could seek an injunction against the making of distributions on the grounds that the amounts to be distributed are needed to provide for the payment of our expenses and liabilities. Any such action could delay or substantially diminish the amount of any cash distributions to shareholders. If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, creditors could assert claims against each shareholder receiving a distribution for the payment of any shortfall, up to the amounts previously received by the shareholder in distributions from us. In such event, a shareholder could be required to return part or all of the distributions previously made to such shareholder pursuant to the Plan of Liquidation and could receive nothing from us under the Plan of Liquidation. Moreover, in the event a shareholder has paid taxes on amounts previously received by the shareholder, a repayment of all or a portion of such amount could result in a shareholder incurring a net tax cost if the shareholder’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. The Company’s Board is not required to obtain a solvency opinion as a condition to authorizing a liquidating distribution and we cannot assure you that the contingency reserve established by us will be adequate to cover all expenses and liabilities.
The tax treatment of any liquidating distributions may vary from shareholder to shareholder, and the discussion in this Form 10-K or with proxy statements filed with the SEC regarding such tax treatment are general in nature. You should consult your own tax advisor instead of relying on the discussions of tax treatment in any of these statements for tax advice.
We have not requested a ruling from the Internal Revenue Service (“IRS”) with respect to the anticipated tax consequences of the liquidation, and we will not seek an opinion of counsel with respect to the anticipated tax consequences of any liquidating distributions. If any of the anticipated tax consequences described in this Form 10-K proves to be incorrect, the result could be increased taxation at the corporate and/or shareholder level, thus reducing the benefit to our shareholders and us from the liquidation and distributions. Tax considerations applicable to particular shareholders may vary with and be contingent upon the shareholder’s individual circumstances.
If we decide to use a liquidating trust as permitted by the Plan of Liquidation, interests of our shareholders in such a trust would not be transferable.
The interests of our shareholders in a liquidating trust set up by us under the approved Plan of Liquidation would not be transferable, which could adversely affect your ability to realize the value of such interests. In addition, as shareholders will be deemed for U.S. federal income tax purposes to have received a liquidating distribution from the Company equal to their pro rata share of the value of the net assets transferred to the liquidating trust, the distribution by the Company of non-transferable interests could result in tax liability to the former Company shareholders without such holders being readily able to realize the value of the distributed interests to pay such taxes.
The Company Board may at any time turn management of our liquidation over to a third party, and some or all of our directors may resign from the Company Board at that time.
Our Board of Directors may at any time turn our management over to a third party to complete the liquidation of our remaining assets and distribute the available proceeds to our shareholders, and some or all of our directors may resign from the Company Board at or before that time. If management is turned over to a third party and all of our directors resign, the third party would have sole control over the liquidation process, including the sale or distribution of any remaining assets under the Plan of Liquidation, if approved.
If we fail to retain the services of appropriate personnel, the Plan of Liquidation may not succeed.
The success of the Plan of Liquidation depends in part upon our ability to retain the services of qualified personnel who will be charged with operating the Company following the closing of the Asset Sale until we are able to sell our remaining assets and complete transactions for our remaining business. The retention of qualified personnel may be particularly difficult given that we expect to liquidate the Company, and there can be no assurance that we will be successful in retaining the services of such qualified personnel or that we will be able to retain the services of such qualified personnel for the amounts the Company is willing to pay for such services. Our Compensation Committee is currently reviewing executive officer retention and incentive compensation related to the liquidation but has not approved any such compensation as of the date of the filing of this Form 10-K. In addition, one of our directors is entitled to the acceleration of payment of certain compensation payable in the event the liquidation occurs before the entire amount of the compensation is paid.
We will continue to incur claims, liabilities and expenses that will reduce the amount available for distribution to shareholders.
Claims, liabilities and expenses from operations (such as operating costs, salaries, directors’ and officers’ insurance, payroll and local taxes, legal and accounting fees and miscellaneous office expenses) will continue to be incurred as we seek to close the Asset Sale and wind down operations. These expenses will reduce the amount of assets available for ultimate distribution to shareholders. If we incur obligations, liabilities, expenses and claims in excess of those we currently anticipate, the amount distributed to our shareholders may be lower than we currently estimate.
Our stock transfer books will close on the date we file the Certificate of Dissolution with the Secretary of State of the State of California, after which it will not be possible for shareholders to trade our stock.
We will close our stock transfer books and discontinue recording transfers of our common stock at the close of business on the date we file the Certificate of Dissolution with the Secretary of State of the State of California. Thereafter, certificates or book entry positions representing shares of our common stock will not be assignable or transferable on the Company’s books. The proportionate interests of all of our shareholders will be fixed on the basis of their respective stock holdings at the close of business on the date of filing of the Certificate of Dissolution, and any distributions after such date made by the Company shall be made solely to the shareholders of record at the close of business on the date of filing of the Certificate of Dissolution.
We will continue to incur the expenses of complying with public company reporting requirements.
Following the Asset Sale and through the subsequent liquidation and dissolution, we have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act even though compliance with these reporting requirements is economically burdensome. Until we are able to deregister our shares and suspend our periodic reporting obligations under the Exchange Act, we will remain a reporting issuer and will incur attendant costs relating to filing such reports with the SEC. We currently intend to file the Certificate of Dissolution with the Secretary of State of the State of California once the Company has been completely wound down without court proceedings. To the extent that we delay filing the Certificate of Dissolution, we would be obligated to continue complying with the applicable reporting requirements of the Exchange Act. The expenses incurred by us in complying with the applicable reporting requirements will reduce the assets available for ultimate distribution to our shareholders.
If we decide to “go dark” our stock price will decline and shareholders may lose access to a viable trading market.
Given the expense and resource demands of being a public company, we may decide to “go dark,” or cease filing periodic report with the SEC. This will result in a substantial decrease in disclosure by us of our operations and prospects, and a substantial decrease in the liquidity and value of the Company’s common stock. After we “go dark” our shares may still be quoted in the “Pink Sheets”, an electronic interdealer quotation service, although there can be no assurance of this or that if such quotations begin they will continue for any length of time. The Pink Sheets are not a stock exchange and we do not have the ability to list on, or control whether our shares are quoted on Pink Sheets. Shareholders may still continue to trade our common stock in the OTC market, but liquidity and the value of our common stock would likely be negatively affected.
If we have not accurately assessed the current fair values of our assets and liabilities, we will not be able to realize amounts equal to their balance sheet carrying values. This may materially affect anticipated future shareholder distributions.
As a result of announcing a future liquidation, Generally Accepted Accounting Principles (GAAP) require that we assess the current fair value of assets and liabilities presented in our financial statements. These assessments will be tested as we account for actual disposition and winding down transactions. In some cases, we have relied on third-party valuations. In others, we apply rules required by GAAP which may or may not result in deriving an accurate approximate realizable value. Risks are inherent in assessing current value when measured against the outcome of future transactions. Those risks include the accuracy of:
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our valuation of our intellectual property, including that purchased by us and that developed by us;
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our valuation of our existing fixed assets and business units;
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our valuation of our various classes of finished goods and other inventory;
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our evaluation of our ability to collect amounts owed to us;
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the accuracy of the valuation by a third party of a business unit and our reliance thereon;
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our evaluation of our ability to settle future obligations to third parties, including occupancy rents and leases, equipment leases, installment purchase contracts and contracts related to intellectual property licenses;
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our evaluation of our existing liabilities associated with employee termination, with particular note taken for the termination costs related to employees of certain other countries and territories, the rules for which we may not have accurately assessed;
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the cost coincident with the unknown duration of time that assets and liabilities must be held;
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our assessment of the current state of litigation and potential litigation against us; and
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our assessment of our tax obligations.
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Our assessment of these items requires a substantial amount of judgment. This judgment is exercised by our choice of assumptions from which a wide latitude of likely future outcomes are possible. Among these assumptions are:
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our assumption related to the timing and amount of future business revenue streams, whether from sale of business units, sale of independent assets, or continuing operations;
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our assumption related to the duration of the retention of our assets and liabilities with required staffing until disposition;
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our assumption related to the likelihood of our ability to meet certain contractual requirements;
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our assumptions regarding the marketability of business units;
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our assumption regarding the likelihood of outside-party fulfillment of defined and contingent contractual terms;
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our assumption regarding the timing and transactional costs associated with dispositions and;
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our ability to affect timely and efficient closing of disposition transactions.
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The judgments and the resulting valuations taken therefrom form the basis for our fair value assessment of carrying values on our financial statements. If we fail to accurately assess fair values in our financial statement presentation, the amounts realized from disposition transactions will be different from amounts in the financial statement presentation, and these amounts may differ in a material amount. If such material differences are found to exist, the amount available for distribution to our shareholders will be materially affected.
The US income tax consequences of the disposal of foreign and domestic entities and operations is not presently known. Income tax expense related to asset disposals could have a substantial effect on the cash flow and our ability to make future distributions to our shareholders.
The financial statement presentation contained herein, as have our historical financial statement presentations, assumes that profits generated by foreign business ventures will continue to be reinvested into each of those ventures. A liquidation or disposal of those foreign business units for the purpose of making domestic distributions to our shareholders will cause income tax expense effects which are unknown, and unknowable, at this time. These expenses will have a material effect on our cash flow and our ability to make distributions to our shareholders.
Risks Related to the Asset Sale and the Liquidation
Recently filed litigation could have the effect of delaying or preventing completion of the Plan of Liquidation, and could reduce the amount of cash available for distribution to shareholders in the liquidation.
On March 15, 2018, a complaint captioned Ann Noyes v. Sigma Designs, Inc., et al., Case No. 18-cv-01645-WHO was filed in the United States District Court for the Northern District of California naming as defendants Sigma, certain members of the Company Board and Silicon Labs. This action purports to be a class action brought by a shareholder alleging, among other things, that the defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 by filing a materially incomplete and misleading preliminary proxy statement on February 23, 2018. The complaint seeks, among other things, either to enjoin the proposed transactions or to rescind the transactions or award rescissory damages in the event the transactions are consummated. An award of rescissory damages could reduce the amount of cash available for distribution to shareholders in any liquidation that Sigma might undertake following the Asset Sale. A second complaint, making similar allegations, captioned David Speiser v. Sigma Designs, Inc., et al., Case No. 18-cv-01670-WHO, was filed in the same court on March 16, 2018. On March 27, 2018, a third complaint, captioned Robert Stein v. Sigma Designs, Inc., et al., Case No. 3:18-cv-1879-JSW, was filed in the same court, making similar allegations regarding the definite proxy statement filed on March 19, 2018.
Current business partners could reject assignment or novation of various agreements to transfer the rights and obligations of the Company to the entities acquiring Company business units or other assets and liabilities.
As part of the divestiture of business units and other assets, licenses, sales contracts, ongoing purchase orders, and other agreements under which the Company currently has rights and obligations are being transferred to the parties purchasing business units and other assets. Acquisition of the rights to continue doing business under certain contracts and other agreements by the purchasers of our business units and other assets may be, in certain instances, contingent upon consent to assignment by the Company’s business partners with whom the contracts or other agreements were made. Likewise, the assumption of liabilities by the acquiring entities may need to be consented to and a release of future liability to the Company may need to be obtained from certain business partners in order to avoid ongoing liability under the contracts or other agreements through which the Company originally accepted that liability. Failure to obtain the consents and releases necessary to transfer the assets and liabilities to the acquiring entities could result in a need to adjust the amount of reserves held by the Company for liquidation and result in a reduction or delay in distribution of cash to the Company’s shareholders. Resolution of material disputes over the rights of assignment, transfer, or novation of agreements could require litigation or other protracted and expensive processes which could reduce the amount of funds available for distribution to our shareholders and delay such distributions.
Risks Related to Our Business and Our Industry
IF THE PLAN FOR LIQUIDATION AND DISSOLUTION IS NOT COMPLETED IN A TIMELY MANNER AS DISCUSSED ABOVE, THE COMPANY, TO THE EXTENT THAT IT IS ABLE TO CONTINUE OPERATIONS, IF AT ALL, WILL REMAIN SUBJECT TO THE FOLLOWING RISKS.
If we do not successfully anticipate market needs and develop products and product enhancements in a timely manner, or if those products do not gain market acceptance, we may not be able to compete effectively in our target markets 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:
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accurately predict market requirements and evolving industry standards;
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accurately design new chipset products;
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timely complete and introduce new product designs;
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timely qualify and obtain industry interoperability certification of our products and the equipment into which our products will be incorporated;
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ensure that our subcontractors have sufficient foundry, assembly and testing capacity, packaging materials and acceptable manufacturing yields;
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shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration; and
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gain market acceptance of our products and our customers’ products.
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If we fail to anticipate market requirements or develop new products or product enhancements in a cost-effective and timely manner, it may substantially decrease market acceptance and sales of our present and future products and may impact our ability 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 may adversely affect our business and financial results.
If demand for our chipsets declines or fails to increase, or if growth of the consumer electronics market does not continue, we will be unable to grow 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 2018, sales of our chipsets represented a substantial amount 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 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 may suffer. In addition, frequent technological changes and the 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 in our target markets, 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 market participants. Most of our products compete with large semiconductor providers that have substantial experience and expertise in video, audio, multimedia and IoT technology and in selling to consumer equipment providers. Many of these companies have substantially greater engineering, marketing and financial resources. As a result, other market participants may be able to respond more effectively 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 competing technology than are we. Our competitors may also be able to devote greater resources to the development, promotion and sale of products and may be able to deliver similar products at a lower price. We also may face competition from newly established market participants, 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 to seek additional suppliers of chipsets for inclusion in their products, which may impact our position in the industry and reduce our market share and net revenue.
If we fail to achieve design wins
for our products
, we may be unable to recoup our investment in our products which may cause a decline in our revenue
and results of operations
.
We expend considerable resources in order to achieve design wins for our products, specifically new products and product enhancements. Once a customer designs a chip or chipset into a product, the customer is likely to continue to use the same chip or chipset or enhanced versions of that chip or chipset across a number of successor products for an extended timeframe. Failure to do so may result in significant costs and risks associated with qualifying a new supplier or redesigning the product to incorporate a different chip or chipset. Conversely, if we do not achieve an initial design win in a customer’s qualification process, we may lose the opportunity for significant sales to that same customer for a number of its current and future products. In some cases, even if we achieve a new design win, manufacturers may fail to purchase our products in sufficient volume to recoup our development costs or they may choose at any time to stop purchasing our products. This may cause our revenue and our results of operations to decline.
Our growth strategy depends upon our ability to expand our product portfolio through external collaborations, which, if unsuccessful, may adversely
a
ffect our business.
We may continue to explore opportunities to enter into collaboration agreements and external alliances with other companies. Failures by our collaborative partners to meet their contractual, regulatory or other obligations to us, or any disruption in the relationships between ourselves and these partners, could have a material adverse effect on our business. In addition, our collaborative relationships may give rise to disputes regarding each party’s relative rights, obligations and revenues including the ownership of intellectual property and associated rights and obligations. These could result in the loss of intellectual property rights or other intellectual property protections, may delay the development and sale of potential products and may lead to lengthy and expensive litigation or arbitration.
We depend on a limited number of customers and any reduction, delay or cancellation of an order
or a payment
from
a
customer or the loss of any customer 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 time to time and expect that we will continue to experience such fluctuations and cancellations in the future. We may also 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 harm our business.
Our inability to manage
transition
s
to new
solutions and product
s
in an effective manner could reduce the demand for our solutions and products and the profitability of our operations.
Continuing improvements in technology result in frequently updated solutions and new product introductions, short product life cycles and improvements in product performance characteristics. If we cannot manage the transition to new solutions offerings and their respective products and services in an effective manner, customer demand for our solutions and products could diminish and our profitability could suffer. We are increasingly sourcing new products and transitioning existing products through our contract manufacturers and manufacturing outsourcing relationships in order to generate cost efficiencies and to deliver products faster to better serve our customers. Product transitions present execution challenges and risks, including the risk that new or upgraded products may have quality issues or other defects. The success of product transitions depends on a number of factors that include the availability of sufficient quantities of components at attractive costs and our ability to sell and manage inventory of older generation products. Failure to properly manage and oversee a product transitions could have a material and adverse effect on our net revenue and results of operations.
If we fail to accurately assess product forecasts from our customers, our financial condition and liquidity could suffer.
We place orders with our suppliers based on 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 allocating a limited supply of product and maintaining 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. If one or more of our customers should experience insolvency or illiquidity and fail to obtain sufficient financing to sustain operations, the collectability of a portion of our accounts receivable as well as the salability of any inventory we hold for that customer could be impacted. While we seek to maintain adequate reserves for such risks, there can be no assurance that such reserves will always be adequate. For example, during fiscal 2018, 2017 and 2016, we recorded a provision for excess inventory of $4.9 million, $2.0 million and $3.2 million, respectively. When we have excess or obsolete inventory, the value of our inventory declines which increases our cost of revenue and reduces our liquidity.
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 any 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.
If we do not adequately enforce or protect our intellectual property, we may fail to prevent the misappropriation or unauthorized use of our proprietary intellectual property
. E
nforcement and protection of our intellectual property may be expensive and
the cost
could result in the loss of our ability to enforce one or more patents.
We rely primarily on patent, copyright, trademark and trade secret laws as well as nondisclosure and confidentiality agreements to protect our proprietary information, technologies and processes including our patent portfolio. Preventing the unauthorized use of our products, technologies and proprietary information is difficult, expensive and time consuming. We cannot be certain that the steps we have taken, or may take in the future, have prevented or will prevent the misappropriation or unauthorized use of our proprietary information particularly in foreign countries where the laws may not protect our proprietary intellectual property as fully or as readily as those of the United States. Further, the laws in certain foreign countries in which our products are or may be manufactured or sold, including certain countries in Asia, may not protect our intellectual property rights to the same extent as the laws in the United States.
We may need to litigate in the United States, China or elsewhere in the world to enforce our contract and/or intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others. As a result of any such litigation, we could lose our ability to enforce one or more patents, portions of our license agreements could be determined to be invalid or unenforceable (which may in turn result in other licensees either not complying with their existing license agreements and/or initiating litigation) and/or we could incur substantial unexpected operating costs. Any action we take to enforce our contract or intellectual property rights could be costly and could absorb significant management time and attention which, in turn, could negatively impact our operating results. Further, even a positive resolution to our enforcement efforts may take time to conclude and may reduce our revenues in the period prior to conclusion.
If we fail to obtain intellectual property protection for our technology, our business could be adversely affected.
Patent and other proprietary rights are essential to our business. The success of our business depends to a significant degree on our ability to obtain and enforce patent rights both in the United States and in other countries. We cannot be certain that pending patent applications will result in issued patents, that issued patents will not be challenged by our competitors or that the intellectual rights of third parties will not prevent us from selling our products in our target markets.
Claims by third parties that our technology infringes their intellectual property could adversely affect our business.
Certain third parties have asserted or may assert patent, copyright and other intellectual property rights against our products or products using our technologies or other technologies used in our industry. These claims have resulted and may again result in our involvement in litigation. We may not prevail in such litigation given, among other factors, the complex technical issues and inherent uncertainties in intellectual property litigation. If any of our products or services were found to infringe on another company’s intellectual property rights, we could be subject to an injunction or be required to redesign our products or services which could be costly, be required to license such rights, or be required to pay damages or other compensation to such other company. If we are unable to redesign our products or services, license such intellectual property rights used in our products or services or otherwise distribute our products through a licensed supplier, we could be prohibited from making and selling such products or providing such services. We are contingently liable under certain product sales, services, license and other agreements to indemnify certain customers against certain types of liability and/or damages arising from qualifying claims of patent infringement by products or services sold or provided by us. Reimbursements under indemnification arrangements could have an adverse effect on our results of operations. Furthermore, any such litigation could severely disrupt the supply of our products and the businesses of our chipset customers and their customers which, in turn, may result in a decline in our chipset sales thereby causing a corresponding decline in our chipset revenues. Any claim, regardless of its merit, could be time consuming to address, result in costly litigation, divert the efforts of our technical and management personnel or cause product release or shipment delays, any of which could have an adverse effect on our operating results.
We may continue to be involved in litigation and may have to appear in front of administrative bodies including the United States International Trade Commission. Our involvement in certain litigation proceedings will cause us to defend against patent assertions related to our products by third parties, some of whom are attempting to gain competitive advantage or leverage in licensing negotiations. We may not be successful in such proceedings, and if we are not, the range of possible outcomes is broad and may include, for example, monetary damages, royalty payments and/or an injunction on the sale of certain of our chipset products (and on the sale of our customers’ devices using such products). A negative outcome in any of our existing proceedings or in future proceedings could result in significant costs to us, or may materially and adversely impact our business, results of operations and financial condition.
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.
On a product-by-product basis, we periodically evaluate the benefits 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 which results in the redesign of existing products. This effort requires considerable development investment and a risk of reduced yields as new processes are brought to acceptable levels of operating and quality efficiency. In the past, we have experienced difficulties in shifting to smaller geometry process technologies and 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 geometries, all of which could harm our relationships with our customers and 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 market 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 and to maintain a competitive advantage. Reductions in our average selling prices to one customer could impact our average selling prices to another or to all customers. If we are unable to reduce our costs sufficiently to offset declines in product selling prices or we are unable to introduce more advanced products with higher margins in a timely manner, we may experience declines in our net revenue and gross margins.
The complexity of our products may result in unforeseen delays
and
expenses and in undetected defects which could damage our reputation with customers, adversely affect the market acceptance of our 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 may experience, defects in our products both with our chipsets and with 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, any of these factors 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, and could harm our reputation and cause a decline in our net revenue, our income from operations and our 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. Any contractual limitations to our liability may be unenforceable in a particular jurisdiction. Further, since we do not have insurance coverage for any warranty or product liability claim, a successful claim could require us to pay substantial damages. Any such 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 may be harmed which
could
affect
our operating results and financial performance.
The fabrication of our chips and chipsets 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, from time to time their facilities have experienced lower than anticipated manufacturing yields that have resulted in our inability to meet our customer demand. Many of these problems are difficult to detect at the early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from wafer foundries, defects, integration issues or other performance problems in our products may cause us to experience significant issues in customer relations or force us to sell our products at lower gross margins thereby harming our financial results.
Recent regulations related to conflict-free minerals may force us to incur additional expenses which may negatively impact our financial results and decrease our cash balance.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC requires companies to disclose the use of certain minerals and derivative metals (referred to as “conflict minerals,” regardless of their actual country of origin) in their products. These requirements require companies to investigate, disclose and report whether or not such metals originated from the Democratic Republic of Congo or adjoining countries. We have incurred additional expenses in our efforts to comply with these recent regulations; such expenses may become more significant in the future, which could negatively impact our financial results. In response to this regulation, we evaluate our use of minerals and derivative metals on an annual basis, the most recent of which was filed with the SEC on the specialized disclosure report on Form SD on June 1, 2017 concluding that our supply chain is conflict free undeterminable. We believe we are in full compliance with the disclosure requirements as stated within the aforementioned regulation.
As there may be only a limited number of suppliers offering “conflict free” metals, we cannot be sure that our contract manufacturers and other suppliers will be able to obtain necessary metals in sufficient quantities or at competitive prices. We are a fabless semiconductor company, and because of this our supply chain is complex. Some suppliers may choose not to share their confidential information related to their supply chain, which may cause us to face challenges with our customers if we are unable to sufficiently verify that the metals used in our products are “conflict free.” If this occurs, our customers may choose to disqualify us as a supplier and we may be required to write-off inventory in the event that it becomes unsalable as a result of these regulations.
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 the IoT Devices markets. 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 economies generally, and consumer spending specifically, have exhibited significant volatility 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, 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 impact 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 impact 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 may cause our stock price to decline.
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 The Netherlands, 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 changes in 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 US Dollar;
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increases in expenses not deductible for tax purposes including write-offs of acquired developed technology 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;
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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; and
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changes in the future effectiveness of accrued tax benefits in the context of our announced liquidation.
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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. Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of United States and international net income or net losses changes for any reason. Accordingly, there can be no assurance that our overall income tax rate will continue to be less than the United States federal statutory rate.
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. After we have qualified a product with a customer, the customer will undergo testing and evaluation of our product with its service provider prior to completing its design of equipment incorporating our product. Our customers and the telecommunications carriers our customers serve may need approximately three months to a year to test, evaluate and adopt our product and an additional three to nine months to begin volume production of equipment that incorporates our product. Our complete sales cycle typically ranges from nine to eighteen months, but may be longer. As a result, we may experience a significant delay between the time we increase expenditures for research and development, inventory and sales and marketing efforts 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 seeking to purchase 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 based upon a lengthy test cycle.
The complexity of our international operations may increase our operating expenses and disrupt our business.
We are a global company that transacts business worldwide. For example, we derive a substantial portion of our net revenue from our customers outside of North America. For fiscal 2018, we derived 89% of our revenue from customers outside of North America. We also have supported significant international operations, including research and development facilities in Shanghai, Vietnam, Singapore, Israel, France and The Netherlands; sales and research and development facilities in Taiwan Israel and Denmark; and sales and sales support facilities in South Korea, Japan and Shenzhen.
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. Specifically, we may experience reduced intellectual property protection in some countries.
Our results of operations could also be adversely affected by exchange rate fluctuations which could increase the sales price of our products in local currencies in international markets. Overseas sales and purchases to date have been denominated in U.S. dollars. We do not hedge such exposures. See
“Foreign currency exchange rate sensitivity”
under Part II Item 7A and
“Quantitative and Qualitative Disclosures about Market Risk”
in this Form 10-K. 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.
Currency exchange rate fluctuations could result in lower revenues, higher costs and decreased margins and earnings.
Large portions of our products are sold outside of the United States and are denominated in U.S. Dollars. As a result, sales may weaken if the U.S. Dollar strengthens against foreign currencies, effectively increasing the cost of our products for our international customers. Our international expenses are derived from operations in foreign currencies and these expenses could be affected by currency fluctuations including amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Currency exchange rate fluctuations could also disrupt the business of our overseas ODM and OEM customers by making their purchases of materials more expensive and more difficult to finance. Foreign currency fluctuations could have an adverse effect on our results of operations and financial condition.
A volatile global economy could negatively impact our business, results of operations and financial condition.
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. 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;
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reductions in the level of inventory our customers are willing to hold; and
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customer reaction to our announced intent to liquidate.
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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 consumer products that incorporate our chipsets, 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 chipsets or a desire of our customers to delay payment to us for the purchase of our products. Fluctuations in the global economic environment could negatively impact our business, results of operations and financial condition.
We rely on a limited number of 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 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 (“TSMC”) and Global Foundries (“GF”) to produce a majority of all of our chipsets. We rely on Advanced Semiconductor Engineering, Inc. (“ASE”) to assemble, package and test substantially all of our products. On short notice, 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 or they may increase the prices of the products and services they provide to us. In particular, other clients that are larger and better financed or that have long-term agreements with ASE, TSMC or GF may cause any or all of them to reallocate capacity to those clients thereby 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, technical or quality control problems in their manufacturing operations, our ability to ship products to our customers could be delayed. Further, if we were required to change or add additional third-party manufacturers or contract manufacturing sites, our relationships with our customers could be harmed and our market share and operating results would suffer. If our third-party manufacturers’ pricing increases and we are unable to pass along such increases to our customers, our operating results could be adversely affected. The addition of manufacturing locations or 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 discussed herein. Each of these factors could harm our business and negatively impact financial 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 two main wafer foundries, and to a lesser extent one additional foundry, to manufacture a substantial majority of our products. Moreover, we use a single source to assemble and test substantially all of our products. This practice exposes us to a substantial risk of delay, increased costs and customer dissatisfaction in the event our third-party manufacturers are unable to supply us with our chipset requirements. Particularly, during times when semiconductor capacity is limited or in the event that our current foundry were to stop producing wafers for us altogether, we may seek and we may be required to qualify one or more additional wafer foundries to meet our requirements. This may be time consuming and costly. In order to bring any new foundries on-line, we would need to qualify their facilities, which could take several months. Once qualified, each new foundry would then require an additional number of months to begin producing chipsets to meet our needs at which point our perceived need for additional capacity may have passed or the opportunities we have previously identified may be 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, could prove to be less reliable than utilizing our existing manufacturers. If we switch to a new third-party manufacturer, we may experience increased costs and expenses as well as significant delays in the delivery of our products to customers.
We may not be able to effectively manage our growth or develop our financial and managerial reporting systems, or 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.
In order to continue managing operations in a most efficient manner, we must continue to improve our operational, engineering, accounting and financial systems and procedures, our internal controls and our other internal management systems. This may require substantial managerial and financial resources and our efforts may not be successful. Our current systems, procedures and controls may not be adequate to support our future operations. If we fail to adequately manage and adapt our management systems to improve our operational, financial and management information, the quality of our products and the management of our operations could suffer, which could adversely affect our operating results.
Our ability to develop, market and sell products could be harmed if we are unable to retain or hire key personnel.
We recognize that our success depends upon our ability to recruit and retain the services of key executive, engineering, finance and accounting, sales, marketing and support personnel. The supply of highly qualified individuals, in particular engineers in very specialized technical areas and sales people specializing in the semiconductor industry, is limited and competition for such individuals is intense. As part of our restructuring efforts in the past several fiscal years and this year, and currently with our intended liquidation, we terminated a significant number of employees. Our remaining employees, many of whom are highly qualified engineers, may be discomforted by these actions and may choose to seek alternative employment opportunities. The majority of our officers and key employees are not bound by an employment agreement for any specific term. 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 to fill existing vacancies, particularly engineers and sales personnel, 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 existing products.
Our ability to retain or hire key personnel is jeopardized by our announced intent to liquidate.
With the announcement of an intent to liquidate the Company, our vital highly-qualified employees may seek opportunities with other companies. Current conditions exist which make it difficult and costly to obtain and retain the sufficient operational, management and administrative staffing levels needed to effectively and efficiently maintain Company operations. This could adversely affect our future profitability and cash flow.
Litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our attention and resources.
Securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Companies in the semiconductor industry are particularly vulnerable to this kind of litigation due to the high volatility of stock prices. We are currently a party to several purported class action lawsuits related to the Asset Sale. In the future, we may be a party to additional securities litigation. Our current lawsuits and 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 which historically peaks 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 fourth fiscal quarters and higher sales in our second and third quarters as a result of the seasonality of demand associated with the consumer electronics markets. As a result of the potential seasonality in our business, our operating results may vary significantly from quarter to quarter.
With the post year-end sale of our Media Connectivity business unit, 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 and we may be required to satisfy certain specified conditions including the repayment of previously claimed grants and tax benefits.
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. Commencing calendar year 2014, Sigma Designs Israel’s taxable income from the approved and beneficiary enterprise program was subject to a reduced tax rate for eight years, depending on the percentage of Sigma Designs Israel’s share capital held by non-Israelis. Our approved and beneficiary programs and the resulting tax benefits may not continue in the future at their current levels or at any level. In addition, we have disposed of our operations in Israel subsequent to year end.
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 our disposition after year-end causes our failure to satisfy these conditions in whole or in part, we may be required to pay additional taxes for the periods in which we benefited from the tax exemption or reduced tax rates. The amount by which Israel may demand a repayment consists of difference between the then applicable tax rate otherwise imposed for non-approved enterprises and the rate of tax that we previously paid as an approved enterprise. These amounts will be determined and settled in future periods and may have an effect on our profitability and cash flows.
Failure to maintain effective internal control over financial reporting may cause us to delay filing our
periodic reports with the SEC, a
ffect our Nasdaq listing and adversely
a
ffect 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 3, 2018 and concluded that our internal control over financial reporting was effective. Although we routinely review our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, a failure to maintain adequate internal controls over financial reporting could result in an adverse reaction in the financial marketplace and to a loss of investor confidence in the reliability of our financial statements, which could negatively impact our stock price.
Our headquarters, certain of our other facilities, and some of our suppliers and third-party manufacturers are vulnerable
to natural
disasters and health epidemics
.
Our suppliers, manufacturers and we may face earthquakes, tsunamis, floods or other types of natura
l disasters as well as suffer the effects of health pandemics,
which could cause resource shortages and production delays, which in turn
may disrupt and harm our business, results of operations and financial condition.
We are headquartered in the San Francisco Bay Area, have a research and development and sales office 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 as well as be subject of the outbreak of viruses such as swine flu, SARS, avian flu or any similar pandemics. The occurrence of these or localized extended outages of critical utilities or transportation systems may affect us, our suppliers or our third-party manufacturers and could cause a significant interruption in our production, our business 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.
We rely significantly on information technology to operate our business and any failure, inadequacy, breach, interruption or security failure of that technology or any misappropriation of any data could harm our reputation or our ability to operate our business.
We rely on our information technology systems and networks, including the Internet and third-party hosted services (“information technology systems”), for product design, production, forecasting, ordering, manufacturing, transportation, and sales, as well as for processing financial information for external and internal reporting purposes. The failure of these systems to operate effectively, any problems with transitioning to upgraded or replacement systems, or any breach in security of these systems could cause interruptions in and reduced efficiency of our operations, could require significant resources to remediate the problem, and may have an adverse effect on our reputation, results of operations and financial condition.
We also use information technology systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. In the event our information technology systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in damage to our reputation and could cause our stock price to decline.
In addition, any breach of our network by data thieves or hackers may result in the loss of valuable business data, the loss of our customers’ or employees’ personal information or result a disruption of our business, which could give rise to unwanted media attention, damage our customer relationships and reputation and result in lost sales, fines or potential lawsuits. In addition, we must comply with increasingly complex regulatory standards enacted to protect our business and personal data. An inability to maintain compliance with these regulatory standards could subject us to legal risks.
Risks Related to Our Common Stock
Our stock price may not accurately reflect an eventual liquidated value of our Company.
We have announced the intent to liquidate our Company. Therefore, the market value of our common stock represents an investor evaluation of the liquidation value of our Company and the anticipated amount of distributions we may make to our shareholders in connection with the plan of liquidation. This investor evaluation is based upon our public comments, our published financial statements and other factors with which the investor community considers in assessing the market price of a stock. We may face unforeseen claims and liabilities as we continue to proceed with our liquidation plans. These claims and liabilities could result in an unanticipated reduction in the cash we have available to distribute to our shareholders. As we update our progress in the liquidation and any other public announcements about the Asset Sale, the liquidation or our business that remains, our stock price may significantly decrease and may be subject to volatility. As a result, the current stock price may not be reflective of the amount of cash we ultimately distribute to our shareholders. In addition, if we are unable to complete the Asset Sale and the plan of liquidation, our current stock price may not reflect the value of our ongoing business.
Our operating results are subject to significant fluctuations due to many factors and any of these factors could adversely impact 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:
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failure to reduce our expenses sufficiently to achieve profitability at current revenue levels;
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the loss of one or more significant customers;
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changes in our pricing models and product sales mix;
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unexpected reductions in unit sales and average selling prices, particularly if they occur precipitously;
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new product introductions by us and our competitors;
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the level of acceptance of our products by our customers and acceptance of our customers’ products by their end user customers;
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an interrupted or inadequate supply of semiconductor chips or other materials included in our products;
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availability of third-party manufacturing capacity for production of certain products;
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shifts in demand for the technology embodied in our products and those of our competitors;
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the timing of, and potential unexpected delays in, our customer orders and product shipments;
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the impairment and associated write-down of strategic investments that we may make from time-to-time;
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write-downs of accounts receivable;
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inventory obsolescence;
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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;
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technical problems in the development, production ramp up and manufacturing of products, which could cause shipping delays;
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the impact of potential economic instability in the United States and Asia-Pacific region, including the continued effects of the recent worldwide economic slowdown;
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expenses related to implementing and maintaining a new enterprise resource management system and other information technologies; and
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expenses related to our compliance efforts with Section 404 of the Sarbanes-Oxley Act of 2002.
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Some or all of these factors may be augmented as a result of our announced intention to complete the Asset Sale, liquidate the company and attempt to divest or shutdown our remaining businesses. In addition, the market prices of securities of semiconductor and other technology companies have been, and continue to remain, volatile. This volatility has significantly impacted the market price of securities of many technology companies. Accordingly, shareholders may not be able to resell their shares of common stock at or above the price paid.
Our stock price has demonstrated continued volatility in the stock market and our operating performance may cause further fluctuations in our stock price.
The market for our common stock has been subject to significant volatility which is expected to continue. For example, during the fiscal year ended February 3, 2018, the closing sale price per share of our common stock on the Nasdaq Global Market ranged from a low of $5.50 on April 7, 2017 to a high of $7.00 on January 23, 2018. This volatility may be related or proportionate to our operating performance. The volatility specifically in January 2018 may relate to the announcement of our planned liquidation. Our operating performance as well as general economic and market conditions, and our future actions and cash distributions related to our planned liquidation 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 company or our business. If one or more of the analysts who cover us issue an adverse opinion regarding our stock, our stock price may 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 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
otherwise
consider favorable.
Our articles of incorporation and bylaws contain provisions that could limit the price that investors may 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 may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we issue in the future. The issuance of preferred stock may have the effect of delaying, deterring or preventing a change in control and could adversely impact the voting power of certain shares. In addition, provisions of California law may make it more difficult for a third party to acquire a majority of our outstanding voting stock without our approval and would thereby discourage a hostile bid or delay or deter a merger, acquisition or tender offer in which our shareholders could receive a premium for their shares.