What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-02 · 75 added, 94 removed, 176 unchanged (49% of the section changed)

19 unchanged sentences

Interest expense

Income tax expense

Income tax (benefit) expense

Adjusted EBITDA

Our Adjusted EBITDA for the year ended December 31, 2023 includes a one-time employee retention tax credit received of $2.0 million in the second quarter of 2023.

Design wins .

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New design wins in each successive quarter of 2023 were 66, 62, 37, and 52, respectively, compared to 61, 49, 48, and 52 in each successive quarter of 2022, respectively.

Effect of the COVID-19 Pandemic on our Business

The COVID-19 outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, “shelter-in-place,” “stay-at-home,” total lock-down orders, business limitations or shutdowns and similar orders.

More recently, new variants of COVID-19, such as the Omicron variant and its subvariants, that are significantly more contagious than previous strains have emerged.

The spread of these new strains has caused many government authorities and businesses to reimplement the aforementioned measures to try to reduce the spread that had become less prevalent.

While some of these restrictions have been lifted, the lingering impact of the COVID pandemic continues to create significant volatility throughout the

global economy, including supply chain constraints, labor supply issues and higher inflation.

Accordingly, it is unclear at this point the full impact COVID-19 and its variants will have on the global economy and on our company.

Overall, our business remained operational in the midst of the COVID-19 pandemic.

However, as a result of the ongoing related responses from government authorities, our business, results of operations and financial condition have been, and continue to be, adversely impacted.

For example, we have experienced electronics supply chain and demand disruptions from extended factory shutdowns, particularly in some Asian countries, which created unusual order patterns, and subsequently slowed Toggle MRAM demand, particularly from our industrial customers.

We continue to see an impact as reflected in reduced demand from some customers and distributors.

While we are working closely with our manufacturing partners and suppliers to support demand for our products, the full impact on our demand from customers remains unknown.

Management is thus planning for a broad range of possible demand outcomes in an effort to ensure the success of our business under a variety of end market conditions.

The emergence of potential new variants of COVID-19, and the prevalence of cases of infection globally adds additional uncertainty and could result in further impacts to our business and operations, including those discussed above and in “Risk Factors” in Part II, Item 1A of this report.

Recently, the United States Government declared that it was no longer treating COVID-19 as a pandemic.

Since our business is dependent on a global supply chain, we expect to continue to navigate the impact of COVID-19, particularly in some Asian countries.

Effect of COVID-19 on our Business

The COVID-19 outbreak resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19.

Overall, our business remained operational in the midst of COVID-19.

The United States Government has declared that it was no longer treating COVID-19 as a pandemic.

Since our business is

dependent on a global supply chain, we expect to continue to navigate the impact of COVID-19, particularly in some Asian countries.

We will continue to monitor the situation and take additional actions as warranted.

These actions may include further altering our operations in order to protect the best interests of our employees, customers and suppliers, and to comply with government requirements, while also planning and executing our business to best support our customers, suppliers, and partners.

The ultimate extent of the impact of the COVID-19 pandemic on our business, results of operations and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted, including, but not limited to, the duration and spread of the COVID-19 outbreak, its severity, the emergence and severity of its variants, the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to use them, general economic factors, such as increased inflation, supply chain restraints, labor supply issues, and how quickly and to what extent normal economic and operating conditions can resume.

Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends.

See “Risk Factors” in Part II, Item 1A of this report for additional risks we face due to the COVID-19 pandemic.

The ultimate extent of the impact of COVID-19 on our business, results of operations and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted.

See “Risk Factors” in Part II, Item 1A of this report for additional risks we face due to COVID-19.

Results of Operations

Below are factors we want to highlight for understanding our 2023 annual results and year over year comparison with proper historical perspective:

● 2022 represented a year of broad semiconductor supply chain challenges driven by factors including the COVID-19 pandemic and international trade conflicts, which significantly impacted our results.

● Our relationships with our foundry partners and assembly and test partners contributed significantly to our ability to secure more capacity and support the growth of product revenue in 2022 compared to 2021.

● Our manufacturing efficiency and yields improved throughout 2022 resulting in significantly higher product margins compared to 2021.

● The first half of 2023 was impacted by supply chain challenges that were overcome in the second half of the year as the industry reverted to pre-COVID-19 seasonal patterns.

● Our commitment to improving our manufacturing excellence enabled us to drive yield improvements within our internal and external foundries network to sustain and improve existing product margins.

The following table sets forth our results of operations for the periods indicated:

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Interest expense

Other income (expense), net

Other income, net

Net income before income taxes

Income tax expense

Income tax benefit (expense)

Net income and comprehensive income

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North America;

and Europe, Middle East and Africa (EMEA).

Europe, Middle East and Africa (EMEA).

We recognize revenue by geography based on the region in which our products are sold, and not to where the end products in which they are assembled are shipped.

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Total revenue increased by $3.8 million, or 6.3%, from $60.0 million during the year ended December 31, 2022, to $63.8 million during the year ended December 31, 2023.

Product sales increased by $11.1 million or 25.3%, from $43.9 million to $55.0 million.

The increase was primarily driven by a higher volume of toggle units produced and sold, along with average sales price increases to offset supplier increases.

The increase was primarily driven by the increase in licensing, royalty, patent, and other revenue of $5.7 million due to revenue recognized under our RAD-Hard projects.

This was offset by a decline in product sales due to volume shifts in customer demand of $1.9 million or 3.5%, from $55.0 million during the year ended December 31, 2022, to $53.1 million during the year ended December 31, 2023.

Licensing, royalty, patent, and other revenue is a highly variable revenue item characterized by a small number of transactions annually with revenue based on size and terms of each transaction.

Licensing, royalty, patent, and other revenue decreased by $6.3 million, from $11.2 million during the year ended December 31, 2021 to $5.0 million during the year ended December 31, 2022.

The decrease was primarily due to the intellectual property monetization deal to sell five patents to a customer for a total contract value of $5.3 million in 2021, along with a decrease in license revenues from a contractual agreement with a customer for the development of a RAD-Hard product, consisting of a technology license, a design license agreement and development contract entered into during the year ended December 31, 2021.

We estimate royalty revenue earned throughout the year, with an annual adjustment recognized for actual sales in the first quarter of each fiscal year.

Licensing, royalty, patent, and other revenue increased by $5.7 million, from $5.0 million during the year ended December 31, 2022, to $10.6 million during the year ended December 31, 2023.

The increase was primarily due to an increase in licensing revenues of $5.5 million from our contractual agreements with customers for the development of RAD-Hard products, along with an increase of $0.7 million of other revenue related to a contractual arrangement with a customer for the development of reliability models for strategic radiation hardened toggle MRAM, offset in part by a decrease of $0.5 million in royalty revenue.

There were no patent sales during the year ended December 31, 2023.

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Total cost of sales

Cost of product sales increased by $4.1 million, or 19.3%, from $21.0 million during the year ended December 31, 2021, to $25.1 million during the year ended December 31, 2022.

The increase was due to an increase in product sales and price increases from suppliers, partially offset by increased yields on toggle products.

Cost of licensing, royalty, patent, and other revenue decreased by $0.1 million, or 9.8%, from $1.0 million during the year ended December 31, 2021, to $0.9 million during the year ended December 31, 2022.

The decrease was due primarily to a decline in licensing costs.

Our gross margin decreased from 60.0% during the year ended December 31, 2021, to 56.6% during the year ended December 31, 2022.

Our gross margin decreased due to price increases from suppliers and lower licensing, royalty, patent, and other revenue.

Cost of product sales decreased by $0.4 million, or 1.7%, from $25.1 million during the year ended December 31, 2022, to $24.7 million during the year ended December 31, 2023.

The decrease was primarily due to a reduction in product sales compared to the prior year.

Cost of licensing, royalty, patent, and other revenue increased by $0.9 million, or 96.9%, from $0.9 million during the year ended December 31, 2022, to $1.8 million during the year ended December 31, 2023.

The increase was due to an increase in licensing costs related to labor and materials associated with the progression of our RAD-Hard projects.

Our gross margin increased from 56.6% during the year ended December 31, 2022, to 58.4% during the year ended December 31, 2023.

Our gross margin increased by offsetting increased pricing from suppliers with increased yields on our toggle products and increased licensing revenue to offset the decrease in product sales.

Operating Expenses

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Personnel-related expenses, including salaries, benefits, bonuses, and stock-based compensation, are among the most significant component of each of our operating expense categories.

Year Ended December 31,

(Dollars in thousands)

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Research and Development Expenses.

Research and development expenses decreased by $1.5 million, or 12.0%, from $12.6 million during the year ended December 31, 2021, to $11.1 million during the year ended December 31, 2022.

The decrease was primarily due to higher expenses in 2021 relating to the development of our 28 nm product that started production in 2022.

Research and development expenses increased by $0.7 million, or 6.0%, from $11.1 million during the year ended December 31, 2022, to $11.8 million during the year ended December 31, 2023.

The increase was primarily due to higher expenses relating to the development and enhancement of our new xSPI family of STT-MRAM products and increases in share-based compensation.

Year Ended December 31,

(Dollars in thousands)

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General and administrative expenses increased by $2.6 million, or 21.8%, from $11.7 million during the year ended December 31, 2022, to $14.3 million during the year ended December 31, 2023.

The increase was primarily due to increases in expenses related to profit sharing and professional service fees.

The increase was primarily due to increases in professional service costs, share-based compensation, and depreciation.

Year Ended December 31,

(Dollars in thousands)

3 unchanged sentences

Sales and marketing expenses increased by $0.4 million, or 8.6%, from $4.9 million during the year ended December 31, 2022, to $5.3 million during the year ended December 31, 2023.

The increase was primarily due to an increase in variable compensation costs.

The increase was primarily due to an increase in variable compensation costs and contract labor.

Interest Expense

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Interest expense decreased by $0.2 million, or 77.0%, from $0.3 million during the year ended December 31, 2022, to $0.1 million during the year ended December 31, 2023.

The decrease was due to lower outstanding balances under the credit facility during the year resulting in less interest incurred.

Other Income (Expense), Net

The decrease was due to having no outstanding balance under our 2019 Credit Facility as we paid off the outstanding balance in full in March 2023, resulting in no interest incurred during the remainder of 2023 after the outstanding balance was paid in full.

Other Income, Net

Year Ended December 31,

(Dollars in thousands)

Other income (expense), net

Other income (expense), net changed by $0.3 million, or 234.8%, from $0.1 million of expense during the year ended December 31, 2021 to $0.2 million of income during the year ended December 31, 2022.

The increase was primarily due to interest income earned on the money market cash account.

Other income, net

Other income, net changed by $3.0 million, from $0.2 million of expense during the year ended December 31, 2022, to $3.2 million of income during the year ended December 31, 2023.

The increase was primarily due to the employee retention tax credit received during the second quarter of 2023 of $2.0 million, along with an increase in interest income earned on the money market cash account as a result of increased cash balances and increasing interest rates, offset by a loss on prepayment and termination of our 2019 Credit Facility.

Liquidity and Capital Resources

As of December 31, 2023, we had $36.9 million of cash and cash equivalents, compared to $26.8 million as of December 31, 2022.

We believe our cash and cash equivalents, coupled with the amount available under our credit facility and our anticipated growth and sales levels are sufficient to meet our anticipated capital requirements in the next 12 months.

As of December 31, 2023, we have no outstanding debt as we paid off our 2019 Credit Facility in full in March 2023.

We believe our cash and cash equivalents are sufficient to meet our anticipated capital requirements in the next 12 months.

Our future capital requirements will depend on many factors, including, among other things, our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, and the introduction of new products.

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The following table summarizes our cash flows for the periods indicated (in thousands):

Year Ended December 31,

(In thousands)

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Cash Flows From Operating Activities

During the year ended December 31, 2023, cash provided by operating activities was $13.1 million, which consisted of net income of $9.1 million, non-cash charges of $6.4 million and changes in net operating assets and liabilities of $2.3 million.

The non-cash charges primarily consisted of stock-based compensation of $5.0 million, depreciation and amortization of $1.2 million, and a loss on prepayment and termination of our 2019 credit facility of $0.2 million.

The change in our net operating assets and liabilities was primarily due to an increase in accounts receivable of $0.9 million due to timing of cash receipts for outstanding balances, an increase in inventory of $1.7 million to meet anticipated production volumes, an increase in prepaid and other current assets of $0.4 million, an increase in other assets of $0.2 million, an increase in accounts payable of $0.5 million, an increase in accrued liabilities of $0.8 million, and a decrease in deferred revenue of $0.5 million.

During the year ended December 31, 2022, cash provided by operating activities was $9.5 million, which primarily consisted of net income of $6.1 million, adjusted by non-cash charges of $5.3 million and a decrease of $1.9 million in our net operating assets and liabilities.

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These were offset by an increase of $0.6 million in accounts payable due to timing of invoice due dates and a $0.2 million increase in lease liabilities.

During the year ended December 31, 2021, cash provided by operating activities was $9.4 million, which primarily consisted of net income of $4.3 million, adjusted by non-cash charges of $5.0 million and a change of $4,000 in our net operating assets and liabilities.

The non-cash charges primarily consisted of stock-based compensation of $3.2 million, depreciation and amortization of $1.5 million, and non-cash interest expense of $0.3 million.

The change in our net operating assets and liabilities was primarily due to an increase of $1.7 million of accrued liabilities and an increase in deferred revenue of $0.8 million related to timing of RAD-Hard licensing revenue recognition.

These were offset by a decrease of $0.7 million in inventory, an increase of $0.5 million in prepaid expenses and other current assets, an increase of $0.6 million in accounts receivable due to increased sales volume and timing of cash receipts for outstanding balances, a decrease of $0.6 million in accounts payable due to the increased cash flow and increased efforts on timely payments, a decrease of $0.2 million in lease liabilities, and an increase of $11,000 in other assets.

Cash Flows From Investing Activities

Cash used in investing activities during the years ended December 31, 2022 and 2021 was $2.6 million and $1.0 million, respectively, which consisted of capital expenditures primarily for the purchase of manufacturing equipment and purchased software.

During the year ended December 31, 2023, cash used in investing activities was $1.4 million, which consisted of capital expenditures primarily for the purchase of manufacturing equipment offset by a nominal amount in proceeds received on the sale of property and equipment.

During the year ended December 31, 2022, cash used in investing activities was $2.6 million, which consisted of capital expenditures primarily for the purchase of manufacturing equipment and purchased software offset by a nominal amount in proceeds received on the sale of property and equipment.

Cash Flows From Financing Activities

During the year ended December 31, 2022, cash used in financing activities was $1.5 million, which primarily consisted of $2.4 million in payments on long-term debt offset by $0.9 million in proceeds from stock option exercises and purchases of shares under our employee stock purchase plan.

During the year ended December 31, 2023, cash used in financing activities was $1.6 million, which primarily consisted of $2.8 million of payments to pay off our 2019 Credit Facility offset by $1.2 million in proceeds from stock option exercises and purchases of shares under our employee stock purchase plan.

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The floor interest rates for 2019 Term Loan and the Line of Credit Facility were reduced from 4.75% and 6.75% to 3.75% and 4.75%, respectively.

The amended Line of Credit allows for a maximum draw of $5.0 million, subject to a formula borrowing base, has a two-year term and bears interest at a floating rate equal to the Wall Street Journal (WSJ) prime rate plus 1.5%, per annum, subject to a floor of 4.75%.

As of December 31, 2022, the interest rate was 9.00%.

The amended Line of Credit allowed for a maximum draw of $5.0 million, subject to a formula borrowing base, has a two-year term and bears interest at a floating rate equal to the Wall Street Journal (WSJ) prime rate plus 1.5%, per annum, subject to a floor of 4.75%.

The Line of Credit required a commitment fee of 1.6% of the maximum availability of the Line of Credit, which was paid in August 2019 upon closing, and was accounted for as a debt discount.

The Line of Credit also provides for a termination fee equal to 1% of the maximum availability under the Line of Credit, which is due in case of a termination of the Line of Credit prior to the scheduled maturity date, and an unused facility fee equal to 0.125% per annum of the average unused portion of the Line of Credit, which is expensed as incurred.

Currently, $4.0 million remains available under the Line of Credit, subject to borrowing base availability.

As of December 31, 2022, the effective interest rate under the Line of Credit was 9.36% and the outstanding balance was $1.0 million.

The Line of Credit also provided for a termination fee equal to 1% of the maximum availability under the Line of Credit, which was due in case of a termination of the Line of Credit prior to the scheduled maturity date, and an unused facility fee equal to 0.125% per annum of the average unused portion of the Line of Credit, which is expensed as incurred.

The Line of Credit was set to mature on August 5, 2023.

The third amendment entered into on July 22, 2022, extended the maturity date of the Line of Credit to August 5, 2023.

The amended 2019 Term Loan provides for a $6.0 million term loan.

The amended 2019 Term Loan has a term of 46 months, and a 16-month interest-only period followed by 30 months of equal principal payments of $200,000 per month, plus accrued interest.

The 2019 Term Loan bears interest at a floating rate equal to the WSJ prime rate minus 0.75%, subject to a floor of 3.75%.

As of December 31, 2022, the interest rate was 6.75%.

A final payment of 7% of the original principal amount of the 2019 Term Loan must be made when the 2019 Term Loan is prepaid or repaid, whether at maturity or as a result of a prepayment or acceleration or otherwise.

The additional payment, which is accounted for as a debt discount, is being accreted using the effective interest method.

The 2019 Term Loan has a prepayment fee equal to 2% of the total commitment, which is due only if the 2019 Term Loan is prepaid prior to the scheduled maturity date for any reason.

As of December 31, 2022, the effective interest rate under the 2019 Term Loan was 6.94% and the outstanding balance was $1.6 million.

The 2019 Term Loan matures on June 1, 2023.

The amended 2019 Term Loan provided for a $6.0 million term loan.

The amended 2019 Term Loan had a term of 46 months, and a 16-month interest-only period followed by 30 months of equal principal payments of $200,000 per month, plus accrued interest.

The 2019 Term Loan incurred interest at a floating rate equal to the WSJ prime rate minus 0.75%, subject to a floor of 3.75%.

A final payment of 7% of the original principal amount of the 2019 Term Loan was to be made when the 2019 Term Loan is prepaid or repaid, whether at maturity or as a result of a prepayment or acceleration or otherwise.

The additional payment, which is accounted for as a debt discount, was being accreted using the effective interest method.

The 2019 Term Loan had a prepayment fee equal to 2% of the total commitment, which was due only if the 2019 Term Loan was prepaid prior to the scheduled maturity date for any reason.

The 2019 Term Loan was to mature on June 1, 2023.

In conjunction with entering into the 2019 Credit Facility, on August 5, 2019, we and SVB amended and restated the warrant issued to SVB in connection with the first amendment to the 2017 Credit Facility, which was a warrant to purchase 9,375 shares of our common stock at an exercise price of $8.91 per share, to add an option by SVB to put the warrant back to us for $50,000 upon expiration or a liquidity event, to be prorated if SVB exercises a portion of the warrant.

The warrant expires on July 6, 2023.

The warrant is classified as a liability and recorded at fair value within other liabilities in our balance sheet.

Due to the put right, the warrant is subject to fair value remeasurement at each subsequent reporting date until the exercise or expiration of the warrant.

Any resulting change in the fair value of the warrant will be recorded as other (expense) income, net in our statements of income and comprehensive income.

The other (expense) income recognized for the years ended 2022 and 2021 related to the change in fair value of the warrant has been minimal and immaterial to the financial statements.

Additionally, in conjunction with entering into the first amendment to the 2019 Credit Facility, on July 15, 2020, we issued an additional warrant to SVB to purchase 21,500 shares of our common stock at an exercise price of $0.01 per share, which was to expire on July 15, 2025.

The warrant was classified as equity and was recorded as a debt discount that was amortized to interest expense using the effective interest method.

The fair value of the warrant was $152,000 on the date of issuance using the Black-Scholes option-pricing model.

On July 22, 2021, SVB elected to exercise the warrant associated with the first amendment to the 2019 Credit Facility, which resulted in a net cashless exercise of the warrant and the issuance of 21,463 shares of our common stock.

Collateral for the 2019 Credit Facility includes all of our assets except for intellectual property.

We are required to comply with certain covenants under the 2019 Credit Facility, including requirements to maintain a minimum cash balance and availability under the Line of Credit, and restrictions on certain actions without the consent of the lender, such as limitations on our ability to engage in mergers or acquisitions, sell assets, incur indebtedness, or grant liens or negative pledges on our assets, make loans or make other investments.

Under these covenants, we are prohibited from paying cash dividends with respect to our capital stock.

We were in compliance with all covenants at December 31, 2022.

The 2019 Credit Facility contains a material adverse effect clause which provides that an event of default will occur if, among other triggers, an event occurs that could reasonably be expected to result in a material adverse effect on our business, operations, or condition, or on our ability to perform our obligations under the 2019 Term Loan.

As of December 31, 2022, we do not believe that it is probable that the clause will be triggered within the next 12 months.

The amortization of the debt issuance costs and accretion of the debt discount is included in interest expense within the statement of income and comprehensive income and included in non-cash interest expense within the statements of cash flows.

The warrants were set to expire on July 6, 2023.

The warrant was classified as a liability and recorded at fair

value within other liabilities in our balance sheet.

Due to the put right, the warrant was subject to fair value remeasurement at each subsequent reporting date until the exercise or expiration of the warrant.

Any resulting change in the fair value of the warrant was to be recorded as other income, net, in our statements of income and comprehensive income.

The other income recognized for the years ended 2023 and 2022 related to the change in fair value of the warrant has been minimal and immaterial to the financial statements.

These warrants were extinguished as of December 31, 2023.

Collateral for the 2019 Credit Facility included all of our assets except for intellectual property.

We were required to comply with certain covenants under the 2019 Credit Facility, including requirements to maintain a minimum cash balance and availability under the Line of Credit, and restrictions on certain actions without the consent of the lender, such as limitations on our ability to engage in mergers or acquisitions, sell assets, incur indebtedness, or grant liens or negative pledges on our assets, make loans or make other investments.

Under these covenants, we were prohibited from paying cash dividends with respect to our capital stock.

The 2019 Credit Facility contained a material adverse effect clause which provides that an event of default will occur if, among other triggers, an event occurs that could reasonably be expected to result in a material adverse effect on our business, operations, or condition, or on our ability to perform our obligations under the 2019 Term Loan.

In March 2023, the 2019 Credit Facility, consisting of our Term Loan and Line of Credit, was paid in full, and there was no outstanding balance as of December 31, 2023.

We paid an early termination and prepayment fee of $170,000, which was recorded within other income, net, within the statements of income and comprehensive income for the year ended December 31, 2023.

We were in compliance with all covenants throughout the 2019 Credit Facility payoff date in March 2023.

The amortization of the debt issuance costs and accretion of the debt discount is included in interest expense within the statements of income and comprehensive income and included in non-cash interest expense within the statement of cash flows.

For additional information about the 2019 Credit Facility, see Note 6 in the accompanying Notes to Financial Statements in Part II, Item 8 of this Form 10-K.

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From time to time, we may provide distributors with price adjustments subsequent to the delivery of product to them and such amounts are dependent on the end customer and product sales price.

Price adjustments can be based on a

variety of factors, including customer, product, quantity, geography, and competitive differentiation.

Price adjustments can be based on a variety of factors, including customer, product, quantity, geography, and competitive differentiation.

Price protection rights grant distributors the right to a credit in the event of declines in the price of our products.

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We recognize revenue from non-refundable upfront payments when the license is transferred to the customer and we have no other performance obligations.

We also entered into a contractual agreement with a customer during the year ended December 31, 2021 for the development of a RAD-Hard product, consisting of a technology license, a design license agreement and development contract and a separate contractual agreement with a customer during the year ended December 31, 2022 for the development of a strategic radiation hardened field programmable gate array product, consisting of a technology license to provide design and development services under the contractual agreement.

We also have entered into multiple contractual agreements with customers for the development of a RAD-Hard product, consisting of a technology license, a design license agreement and development contract and for the development of a strategic radiation hardened field programmable gate array product, consisting of a technology license to provide design and development services under the contractual agreements.

We applied a five-step approach in determining the amount and timing of revenue to be recognized:

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The licenses provided to the customer are not transferable, are of limited value without the promised development services, and the customer cannot benefit from the license agreements without the specific obligated services in the development subcontract, as there is strong interdependency between the licenses and the development subcontract.

Accordingly, we determined the licenses were not distinct within the context of the contract and combined the license with other performance obligations.

Accordingly, we determined the

licenses were not distinct within the context of the contract and combined the license with other performance obligations.

As a result, we are recognizing revenue related to the performance obligations over time using the input method based on costs incurred to date relative to the total expected costs of the contract over the performance obligation period.

In an effort to monetize on our intellectual property, we may sell patents to customers.

The performance obligations are satisfied at the point in time at which the customer obtains control of the patents.

We recognize revenue from sales-based royalties from licenses of our technology at the later of when (1) the sale occurs or (2) the performance obligation to which some or all of the sales-based royalty has been allocated is satisfied (in whole or in part).

We record an unbilled receivable (within accounts receivable, net) for the portion of sales-based royalties that have been earned, but not invoiced at the end of each reporting period.

The unbilled accounts receivable is an estimate of consideration to which we expect to be entitled for uses of our intellectual property.

Certain customers report on a lagged basis and actual information is not available timely.

The estimates recorded are based on historical trends in the customer’s usage and current market conditions.

We record inventories at the lower of cost, determined on a first-in, first-out basis or net realizable value.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis