10.

Commitments and contingencies

Commitments

Operating Leases

Our primary facility in Fremont, California is leased under a non-cancelable lease. The lease carries a term of

calendar months commencing on

January

2015

for which payments began in

October

2015.

We also lease facilities in San Diego, Shanghai, Shenzhen, Hong Kong, Taiwan, Vietnam, South Korea, Japan, Singapore, Israel, Germany, France, Denmark and The Netherlands and have vehicles in Israel under non-cancelable leases.

Aggregate future minimum annual payments under all operating leases are as follows (in thousands):

Fiscal Years	Operating Leases

2018	$	3,803
2019		1,825
2020		1,167
2021		710
2022		463
Thereafter		-
Total minimum lease payments	$	7,968

Rent expense, recorded on a straight-line basis, was

$3.7

million,

million and

$4.4

million for fiscal

2017,

2016

and

2015,

respectively.

Purchase commitments

We place non-cancelable orders to purchase semiconductor products from our suppliers on an

eight

twelve

week lead-time basis. As of

January

28,

2017,

the total amount of outstanding non-cancelable purchase orders was approximately

$16.1

million.

Third-party licensed technology

October

2015,

we entered into an agreement with a vendor to purchase

$6.1

million of licensed technology for integration into future iterations of our products. Payments under this agreement are being made on an annual basis from

December

2015

through

December

2018.

As of

January

28,

2017,

remaining payments under this agreement totaled

million. In addition to this agreement, we have entered into other purchase arrangements for certain licensed technology; remaining payments under these agreements totaled

$3.3

million as of

January

28,

2017.

Payments under these arrangements are being made through fiscal

2018.

We have fully accrued these amounts as of

January

28,

2017.

Design tools

June

2016,

we entered into an agreement with a vendor to purchase

$7.8

million of design tools. Payments under this agreement are being made on a quarterly basis from

August

2016

through

May

2019.

As of

January

28,

2017,

remaining payments under this agreement totaled

million. In addition to this agreement, we have entered into other purchase arrangements for certain design tools; remaining payments under these agreements totaled

$0.8

million as of

January

28,

2017.

Payments under these arrangements are being made through fiscal

2019.

We have fully accrued these amounts as of

January

28,

2017.

Royalties

We pay royalties for the right to sell certain products under various license agreements. During fiscal

2017,

2016

and

2015,

we recorded gross royalty expense of

$5.0

million,

$4.2

million and

$2.5

million, respectively, in cost of revenue in the consolidated statements of operations.

Our wholly-owned subsidiary, Sigma Designs Israel SDI Ltd. (formerly CopperGate Communications, Ltd.), participated in programs sponsored by the Office of the Chief Scientist of Israel's Ministry of Industry, Trade and Labor, or the OCS, for the support of research and development activities that we conducted in Israel. Through

January

28,

2017,

we had obtained grants from the OCS aggregating to

$5.2

million of our research and development projects in Israel. We completed the most recent of these projects in

2013.

We are obligated to pay royalties to the OCS, amounting up to

4.5%

of the sales of certain products up to an amount equal to the grants received, plus LIBOR-based interest. As of

January

28,

2017,

our remaining potential obligation under these programs was approximately

$1.2

million.

Contingencies

Product Warranty

In general, we sell products with a

one

-year limited warranty that our products will be free from defects in material and workmanship. Warranty cost is estimated at the time revenue is recognized based on historical activity, and additionally, for any specific known product warranty issues. Accrued warranty cost includes hardware repair and/or replacement and is included in accrued liabilities in the accompanying consolidated balance sheets.

Details of the change in accrued warranty for fiscal

2017,

2016

and

2015

are as follows (in thousands):

Fiscal Years	Balance Beginning of Period		Additions		Deductions			Balance End of Period

2015	$	620	$	763	$	(519	)	$	864
2016	$	864	$	828	$	(733	)	$	959
2017	$	959	$	493	$	(669	)	$	783

Litigation

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

may

not be available on terms favorable to us. If an unfavorable outcome were to occur against us, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs and, potentially, in future periods.

Adv

anced Micro Device, Inc. Litigation:

January

23,

2017,

Advanced Micro Devices, Inc. and ATI Technologies ULC (collectively “AMD”), filed suit against us and many other named defendants, including VIZIO, Mediatek and LG in the United States District Court for the District of Delaware asserting infringement of U.S. Patent Nos.

7,633,506

and

7,796,133.

January

24,

2017,

AMD instituted proceedings in the United States International Trade Commission (“ITC”) asserting infringement of U.S. Patent Nos.

7,633,506

and

7,796,133.

The Delaware and ITC complaint seek unspecified monetary damages and injunctive relief. At this time, we are unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on our business, operating results, cash flows or financial position

Broadcom Corporation Litigation:

March

2017,

Broadcom Corporation (“Broadcom”), filed suit against us in the United States District Court for the Central District of California asserting infringement of U.S. Patent No.

7,310,104.

March

2017,

Broadcom instituted proceedings in the United States ITC asserting infringement of U.S. Patent Nos.

8,284,844,

7,590,059,

8,068,171

and

7,342,967.

The California and ITC complaint seek unspecified monetary damages and injunctive relief. At this time, we are unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on our business, operating results, cash flows or financial position.

Indemnifications

In certain limited circumstances, we have agreed and

may

agree in the future to indemnify certain customers against intellectual property infringement claims from

third

parties related to the use of our technology. In these limited circumstances, the terms and conditions of sale or our standing agreement with such customers generally limit the scope of the available remedies to a variety of industry-standard methods including, but not limited to, a right to control the defense or settlement of any claim, procure the right for continued usage, and a right to replace or modify the infringing products to render them non-infringing. To date, we have not incurred or accrued any costs related to any claims under such indemnification provisions

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

Third-party licensed technology

We regularly license technology from various

third

party licensors and incorporate that technology into our product offerings. Some technology licenses require us to pay royalties directly to the licensor, while others require us to report sales activities to our licensors so that royalties

may

be collected from our customers. From time to time, we are audited by our licensors for compliance with the terms of our license agreements

. On

February

10,

2017,

we received a letter from

one

of our licensors notifying us of their intent to audit our compliance with the terms of the license agreements. We have not yet begun the audit proceedings, but intend to cooperate with the licensor to bring the audit process to a resolution.

may

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