. 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 1, 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

2019		3,565
2020		2,388
2021		1,841
2022		526
2023		-
Thereafter		-
Less: Discontinued operations		(1,058	)
Total	$	7,262

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

$3.7

million,

$3.7

million and

$4.0

million for fiscal

2018,

2017,

and

2016,

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

February 3, 2018,

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

$18.9

million, of which

$7.6

million applied to operations held for sale.

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

February 3, 2018,

remaining payments under this agreement totaled

$1.5

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

$2.1

million as of

February 3, 2018.

Payments under these arrangements are being made through fiscal

2019.

We have fully accrued these amounts as

February 3, 2018.

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

February 3, 2018,

remaining payments under this agreement totaled

$3.9

million, all of which relate to liabilities held for sale. In addition to this agreement, we have entered into other purchase arrangements for certain design tools; remaining payments under these agreements totaled

$3.0

million as of

February 3, 2018

. Payments under these arrangements are being made through fiscal

2019.

We have fully accrued these amounts as of

February 3, 2018.

Royalties.

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

2018,

2017

and

2016,

we recorded gross royalty expense of

$2.4

million,

$5.0

million and

$4.2

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

February 3, 2018,

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

February 3, 2018,

our remaining potential obligation under these programs was approximately

$1.2

million. We disposed of this entity on

February 15, 2018.

Subsequent to our year end and with the disposition of our Israeli subsidiary, we have

further future obligation to the OCS.

Contingencies

Contingent payment.

January 23, 2018,

the Company announced an asset sale of the Company’s Z-Wave business unit to Silicon Laboratories Inc. which included the potential for a termination fee. This transaction closed successfully on

April 18, 2018

and the Company

longer has any contingent liability related to the agreement – See Footnote

– Subsequent events.

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

2018,

2017

and

2016

are as follows (in thousands):

Fiscal years	Balance Beginning of Period		Additions		Deletions			Balance End of Period

2016	$	864	$	828	$	(773	)	$	959
2017	$	959	$	493	$	(669	)	$	783
2018	$	783	$	513	$	(653	)	$	643

Litigation

From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. Any claims or proceedings against us, whether meritorious or

not,

could be time consuming, could result in costly litigation, could require significant amounts of management time, could result in the diversion of significant operational resources or could 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 the perceived value of our business or our business units, our financial position and our results of operations for the period in which the unfavorable outcome occurs and, potentially, in future periods.

Advanced Micro Device, Inc. Patent Infringement Litigation.

January 23, 2017,

AMD 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. On

April 13, 2018,

the Administrative Law Judge (“ALJ”) issued a Final Initial Determination (“ID”), finding that the Company infringed claims

and

of U.S. Patent

No.

7,633,506,

and did

not

infringe claims

and

of U.S. Patent

No.

7,796,133.

The ALJ also recommended that a Cease and Desist Order and a Limited Exclusion Order be issued by the ITC against the Company. As part of a Continuation of Supply/Last Buy Notice Agreement between the Company and a customer, the customer has agreed to indemnify and defend the Company from the AMD ITC and Delaware actions and to assume all defense of such matters. Therefore, the Company has reasonable expectation of

material liability from the litigation.

Broadcom Corporation Patent Infringement Litigation.

March 7, 2017,

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 8, 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. As part of a Continuation of Supply/Last Buy Notice Agreement between the Company and a customer, the customer has agreed to indemnify and defend the Company from the Broadcom ITC and California actions and to assume all defense of such matters. Therefore, the Company has reasonable expectation of

material liability from the litigation.

Arris

International plc

Contract Pricing Dispute

2017,

Arris gave notice of its intent to pursue litigation regarding the “Most Favored Nation” clause of its customer contract, wherein Arris asserted that it had

not

received product pricing for which it was entitled. Arris made its assertion based upon its interpretation of the Company’s pricing structure for another customer, an interpretation the Company disputed. On

May 18, 2017,

the Company and Arris attended mediation in the state of New York with

resolution. Subsequent to year end, the parties agreed to a settlement with

material effect to the Company’s financial position.

Advanced Silicon Technologies S.a.r.l

tent Infringement

Litigation

June 21, 2017,

AST filed suit against Sigma Designs Technology Denmark ApS and Sigma Designs Technology Germany GmbH in the District Court of Düsseldorf, Germany alleging infringement of Patent

No.

1424653.

In late

February, 2018,

the German Federal Patent Court accepted and posted notice of the Company’s statement of defense to nullity the action. The litigation is ongoing. The Company is unable to determine the future outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on its business, operating results, cash flows or financial position. Subsequent to year end, this liability was assumed by a

third

party as part of a business unit purchase.

Shareholder Litigation

. Subsequent to year end,

three

actions were brought against the Company relating to the asset sale transaction with Silicon Laboratories, Inc. These actions are more fully described in Footnote

– Subsequent events.

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, a right to obtain non-infringing 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 that provide for indemnification of these individuals under these and under additional circumstances. The indemnification obligations are more fully described in our charter documents and in 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 notice from a licensor of their intent to audit our compliance with the terms of their license agreements. In fiscal

2018,

the audit was completed and the Company paid

$2.1

million to settle all associated claims.

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 in substantial compliance with the terms of our license agreements.