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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-26 · 225 added, 248 removed, 267 unchanged (64% of the section changed)

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• Revenue of $242.7 million;

Operating costs and expenses of $328.6 million;

• Operating expenses of $228.8 million;

• GAAP diluted net loss per share of $0.39;

• Net cash provided by operating activities of $185.5 million

We redefined our perimeter in 2019 with significant merger and acquisition activity throughout the year and focused the Company on Memory Interface Chips and Silicon IP solutions for the semiconductor market.

We closed the sale of our Payments and Ticketing businesses to Visa and completed two silicon IP acquisitions, Northwest Logic for digital controllers, and the Secure Silicon IP and Protocols businesses of Verimatrix, formerly Inside Secure.

Further, we delivered the second consecutive year of record revenue from products, with combined results from our Memory Interface Chips and Silicon IP businesses.

We had record annual product revenue of $114.0 million in 2020, which was primarily driven by our memory interface chips, and was up 56% as compared to 2019.

In addition, our cash provided by operating activities for 2020 was up 44% as compared to 2019.

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Business Overview

Rambus is a premier Silicon IP and Chip provider, delivering high-speed interface and embedded security solutions to make data faster and safer.

With 30 years of innovation, we continue to develop and license the foundational technology essential to all modern system on chips (SoCs) and computing systems.

The Company delivers a broad range of semiconductor solutions including architecture licenses, high-speed physical and digital controller Interface IP cores, Security IP cores and protocols, and memory interface Chips.

Our strategic objectives are to focus our product portfolio and research around our core strength in semiconductor technologies, optimize the Company for operational efficiency, and leverage our strong cash generation to re-invest for growth.

Rambus produces products and innovations that address the fundamental challenges of accelerating data.

We make industry-leading chips and IP that enable critical performance improvements for data center and other growing markets.

The ongoing shift to the cloud, along with the widespread advancement of AI across the data center, 5G, automotive and IoT, has led to exponential growth in data usage and tremendous demands on data infrastructure.

Creating fast and safe connections, both in and across systems, remains one of the most mission-critical design challenges limiting performance in advanced hardware for these markets.

As an industry pioneer with over 30 years of advanced semiconductor design experience, Rambus is ideally positioned to address the challenges of moving and protecting data.

We are a leader in high-performance memory subsystems, providing chips, IP and innovations that maximize the performance and security in data-intensive systems.

Whether in the cloud, at the edge or in your hand, real-time and immersive applications depend on data throughput and integrity.

Rambus products and innovations deliver the increased bandwidth, capacity and security required to meet the world’s data needs and drive ever-greater end-user experiences.

Our strategic objectives are focusing our product portfolio and research around our core strength in semiconductors, optimizing our operational efficiency, and leveraging our strong cash generation to re-invest for growth.

We continue to maximize synergies across our businesses and customer base, leveraging the significant overlap in our ecosystem of customers, partners and influencers.

By delivering comprehensive solutions for secure, connected semiconductors, we are able to bring better value to our customers and improved profitability for the Company.

In 2019, we redefined our perimeter through the successful divestiture of our Payments and Ticketing businesses, which allowed us to focus the Company on providing leading solutions for the semiconductor market.

The Rambus product and technology roadmap, as well as our go-to-market strategy, is driven by the application-specific requirements of our focus markets.

This not only allows us to better serve our traditional data center and communications markets, but also to expand into new, fast-growing markets that demand the highest levels of performance and security, including automotive, artificial intelligence (AI), Internet of Things (IoT) and government.

Revenue Sources

Our patented inventions are offered to our customers through patent, technology, software and IP core licenses, as well as product sales and services.

Today, a primary source of revenue is derived from our Architecture Licenses, through which we

provide our customers a license to use a certain portion of our broad worldwide portfolio of patented inventions.

Our patented inventions are offered to our customers through patent, technology, software and IP core licenses, as well as memory interface chips.

Today, a significant source of revenue is derived from our Architecture Licenses, through which we provide our customers a license to use a certain portion of our broad worldwide portfolio of patented inventions.

Our Architecture Licenses enable our customers to use the licensed portion of our portfolio of patented inventions in the customer’s own digital electronics products, systems or services.

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License agreements are structured with fixed or variable or a hybrid of fixed and variable royalty payments over certain defined periods ranging for periods of up to ten years.

Leading consumer product, industrial, semiconductor and system companies such as AMD, Broadcom, Cisco, Freescale, Fujitsu, GE, IBM, Intel, Micron, Nanya, NVIDIA, Panasonic, Qualcomm, Renesas, Samsung, SK hynix, STMicroelectronics, Toshiba, Western Digital and Xilinx have licensed our patents.

Leading semiconductor and electronic system companies such as AMD, Broadcom, Cisco, Fujitsu, IBM, Marvell, Mediatek, Micron, Nanya, NVIDIA, Panasonic, Phison, Qualcomm, Renesas, Samsung, SK hynix, Socionext, STMicroelectronics, Toshiba, Western Digital, Winbond, and Xilinx have licensed our patents.

The vast majority of our patents were secured through our internal research and development efforts.

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Revenues from royalties accounted for 33%, 41% and 56% of our consolidated revenue for the years ended December 31, 2020, 2019 and 2018, respectively.

The remainder of our revenue is product revenue, contract services and other revenue, which includes our product sales, IP core licenses, software licenses and related implementation, support and maintenance fees, and engineering services fees.

The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenue or account receivables in any given period.

The remainder of our revenue is product revenue, contract and other revenue, which includes our product sales, IP core licenses, software licenses and related implementation, support and maintenance fees, and engineering services fees.

Product revenue accounted for 47%, 33% and 17% of our consolidated revenue for the years ended December 31, 2020, 2019 and 2018, respectively.

Contract and other revenue accounted for 20%, 27% and 27% of our consolidated revenue for the years ended December 31, 2020, 2019 and 2018, respectively.

Cost of product revenue for 2019 increased approximately $8.9 million to $27.2 million from $18.3 million as compared to 2018 primarily due to increased cost of sales associated with higher sales of memory products.

Engineering expenses continue to play a key role in our efforts to maintain product innovations.

Our engineering expenses for 2019 decreased $12.7 million as compared to 2018 primarily due to decreased amortization costs of $9.4 million, headcount related expenses of $3.9 million, allocated information technology costs of $1.6 million and stock-based compensation expense of $1.5 million, offset by increased facilities costs of $2.1 million (primarily due to the adoption of the New Leasing Standard beginning in 2019 as discussed below), retention bonus accrual related to acquisitions of $2.0 million and engineering development tool costs of $1.2 million.

Sales, general and administrative expenses for 2019 increased $0.2 million as compared to 2018 primarily due to increased stock-based compensation expense of $6.3 million primarily due to the termination of the former chief executive officer at the end of June 2018, acquisition and divestiture related costs of $5.2 million and facilities costs of $2.6 million (primarily due to the adoption of the New Leasing Standard beginning in 2019 as discussed below), offset by decreased headcount related expenses of $3.8 million, amortization cost of $2.9 million, depreciation expense of $1.8 million, sales and marketing costs of $1.2 million, travel expenses of $1.2 million, consulting costs of $1.0 million, bonus accrual expense of $1.0 million and recruiting costs of $0.6 million.

Costs and Expenses

Cost of product revenue for 2020 increased approximately $10.5 million to $37.7 million from $27.2 million as compared to 2019 primarily due to increased cost of sales associated with our memory interface chips.

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Cost of contract and other revenue for 2020 decreased approximately $4.3 million to $5.6 million from $9.9 million as compared to 2019 primarily due to incurring lower costs as a result of the divestiture of our former Payments and Ticketing businesses in the fourth quarter of 2019.

Research and development expenses continue to play a key role in our efforts to maintain product innovations.

Our research and development expenses for 2020 decreased $17.0 million as compared to 2019 primarily due to decreased headcount-related expenses of $11.8 million (which includes the reduction in headcount due to the divestiture of the Payments and Ticketing businesses in 2019), consulting costs of $5.2 million, travel costs of $1.9 million and stock-based compensation expense of $1.0 million, offset by increased retention bonus expense related to acquisitions of $2.0 million and prototyping costs of $0.9 million.

Sales, general and administrative expenses for 2020 decreased $15.8 million as compared to 2019 primarily due to decreased headcount-related expenses of $5.4 million, acquisition and divestiture-related costs of $4.1 million, travel costs of $3.4 million, consulting costs of $2.7 million and depreciation expense of $1.2 million, offset by increased bonus accrual expense of $0.5 million and stock-based compensation expense of $0.3 million.

Impact of the COVID-19 Pandemic

In December 2019, the Novel Coronavirus (COVID-19) was reported in China, in January 2020 the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern, and in March 2020 the WHO declared it a pandemic.

The COVID-19 pandemic has created significant global economic uncertainty and may adversely impact the business of our customers, partners and vendors.

The extent of the impact of the Novel Coronavirus (COVID-19) on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, and impact on our partners or employees, all of which are uncertain and cannot be predicted.

At this point, the extent to which the Novel Coronavirus (COVID-19) may impact our financial condition or results of operations remains uncertain.

Actual results could differ from any estimates and any such differences could be material to our financial statements.

Furthermore, the effect of the Novel Coronavirus (COVID-19) may not be fully reflected in our results of operations until future periods, if at all.

There are a number of trends that may have a material impact on us in the future, including but not limited to, the evolution of memory and SerDes technology, adoption of security solutions, the use and adoption of our inventions or technologies generally, industry consolidation, and global economic conditions with the resulting impact on sales of consumer electronic systems.

In addition, as discussed under “Results of Operations” below, our adoption of the New Revenue Standard will have a significant impact on our revenue trends as compared to periods prior to 2018 in which we reported revenue under ASC 605.

We have a high degree of revenue concentration.

Our top five customers for each reporting period represented approximately 46% of our revenue for 2020 as compared to 46% in 2019 and 49% in 2018.

The particular customers that account for such revenue concentration have varied from period-to-period as a result of the addition of new contracts, expiration of existing contracts, renewals of existing contracts, industry consolidation and the volumes and prices at which the customers have recently sold to their customers.

The particular customers which account for revenue concentration have varied from period-to-period as a result of the addition of new contracts, expiration of existing contracts, renewals of existing contracts, industry consolidation, and the volumes and prices at which the customers have recently sold to their customers.

These variations are expected to continue in the foreseeable future.

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We expect that revenue derived from international customers will continue to represent a significant portion of our total revenue in the future.

To date, the majority of the revenue from international customers has been denominated in U.S.

However, to the extent that such customers’ sales to their customers are not denominated in U.S.

dollars, any revenue that we receive as a result of such sales could be subject to fluctuations in currency exchange rates.

In addition, if the effective price of licensed products sold by our foreign customers were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed products could fall, which in turn would reduce our revenue.

We do not use financial instruments to hedge foreign exchange rate risk.

Currently, our revenue from international customers is denominated in U.S.

For additional information concerning international revenue, refer to Note 7, “Segments and Major Customers,” of Notes to Consolidated Financial Statements of this Form 10-K.

Our licensing cycle for new licensees as well as renewals for existing licensees is lengthy, costly and unpredictable without any degree of certainty.

We may incur costs in any particular period before any associated revenue stream begins, if at all.

Our lengthy license negotiation cycles could make our future revenue difficult to predict because we may not be successful in entering into licenses with our customers in the amounts projected, or on our anticipated timelines.

The semiconductor industry is intensely competitive and highly cyclical, limiting our visibility with respect to future sales.

To the extent that macroeconomic fluctuations negatively affect our principal customers, the demand for our products and technology may be significantly and adversely impacted and we may experience substantial period-to-period fluctuations in our operating results.

The royalties we receive from our semiconductor customers are partly a function of the adoption of our technologies by systems companies.

Many systems companies purchase semiconductors containing our technologies from our customers and do not have a direct contractual relationship with us.

The royalties we receive from our semiconductor customers are partly a function of the adoption of our technologies by system companies.

Many system companies purchase semiconductors containing our technologies from our customers and do not have a direct contractual relationship with us.

Our customers generally do not provide us with details as to the identity or volume of licensed semiconductors purchased by particular system companies.

As a result, we face difficulty in analyzing the extent to which our future revenue will be dependent upon particular system companies.

Cost of product revenue as well as sales, general and administrative expenses in the aggregate and as a percentage of revenue increased in 2019 as compared to the prior year.

Engineering costs in the aggregate and as a percentage of revenue decreased in 2019 as compared to the prior year.

In the near term, we expect these costs in the aggregate to be higher as we intend to continue to make investments in the infrastructure and technologies required to increase our product innovation in semiconductor, security and other technologies.

In addition, while we have not been involved in material litigation since 2014, to the extent litigation is again necessary, our expectations on the amount and timing of any future general and administrative costs are uncertain.

As a part of our overall business strategy, from time to time, we evaluate businesses and technologies for potential acquisition that are aligned with our core business and designed to supplement our growth, including the 2019 acquisitions of Northwest Logic and the Secure Silicon IP and Protocols business from Verimatrix, formerly Inside Secure.

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We expect to continue to evaluate and potentially enter into strategic acquisitions or divestitures which may adversely impact our business and operating results.

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Results of Operations

On January 1, 2018, we adopted ASC 606.

Consistent with the modified retrospective adoption method, our results of operations for the period prior to our adoption of ASC 606 remain unchanged as revenue for the year ended December 31, 2017 was recognized under ASC 605.

Therefore, the period is not directly comparable.

The adoption of ASC 606 limits the comparability of revenue and certain expenses presented in the results of operations for the years ended December 31, 2019 and 2018, when compared to the same period in 2017.

The following table sets forth, for the periods indicated, the percentage of total revenue represented by certain items reflected in our consolidated statements of operations:

Years Ended December 31,

2020 2019 2018

33.3 % 40.5 % 56.4 %

Product revenue

47.0 % 32.6 % 16.7 %

Contract and other revenue

19.7 % 26.9 % 26.9 %

Total revenue

Operating costs and expenses:

100.0 % 100.0 % 100.0 %

Cost of revenue:

Cost of product revenue 15.6 % 12.1 % 7.9 %

Cost of contract and other revenue

2.3 % 4.4 % 5.1 %

Amortization of acquired intangible assets 7.1 % 6.4 % 10.2 %

Total cost of revenue 25.0 % 22.9 % 23.2 %

Gross profit 75.0 % 77.1 % 76.8 %

Operating expenses:

Research and development 57.6 % 70.0 % 68.5 %

Sales, general and administrative 35.3 % 45.3 % 42.5 %

Amortization of acquired intangible assets 0.4 % 1.2 % 2.4 %

Restructuring and other charges

1.7 % 3.9 % 1.0 %

Loss on divestiture

Gain from sale of intellectual property

Total operating costs and expenses

Operating income (loss)

— % 3.3 % — %

Change in fair value of earn-out liability (0.7) % — % — %

Total operating expenses 94.3 % 123.7 % 114.4 %

Operating loss (19.3) % (46.6) % (37.6) %

Interest income and other income (expense), net 7.2 % 12.2 % 14.1 %

Loss on extinguishment of debt

Interest expense (4.2) % (4.4) % (7.0) %

Interest and other income (expense), net 3.0 % 7.8 % 7.1 %

Income (loss) before income taxes

Loss before income taxes (16.3) % (38.8) % (30.5) %

Provision for income taxes 1.7 % 1.5 % 37.8 %

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* Includes stock-based compensation:

Cost of product revenue

Research and development

Sales, general and administrative

Years Ended December 31,

(Dollars in millions)

Net loss (18.0) % (40.3) % (68.3) %

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Total Revenue

Royalties $ 81.0 $ 90.8 $ 130.5 (10.8) % (30.4) %

Product revenue 114.0 73.0 38.7 56.2 % 88.6 %

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Royalty revenue

Our royalty revenue, which includes patent and technology license royalties, decreased approximately $39.7 million to $90.8 million for the year ended December 31, 2019 from $130.5 million for 2018.

Royalty revenue, which includes patent and technology license royalties, decreased approximately $9.8 million to $81.0 million for the year ended December 31, 2020 from $90.8 million for 2019.

The decrease was due primarily to the timing of renewals and the related structure of architecture license agreements which include both fixed and variable components.

Our royalty revenue decreased approximately $159.1 million to $130.5 million for the year ended December 31, 2018 from $289.6 million for 2017.

The decrease was due primarily to the change in revenue recognition whereby we no longer recognize revenue at the time billings become due and collectable.

Upon adoption of ASC 606 in the first quarter of 2018, we now recognize revenue at the inception of certain fixed-fee licensing arrangements when our performance obligations are met.

Under the previous revenue recognition standard (ASC 605), our revenue for the year ended would have been higher.

With changes in revenue recognition due to the adoption of ASC 606 in 2018, our royalty revenue for 2018 was significantly lower than that for 2017 primarily due to the change from the adoption of ASC 606 as noted above.

This accounting change will not impact billings or the cash flow from these arrangements.

Furthermore, we may experience greater variability in quarterly and annual revenue in future periods as a result of the revenue accounting treatment applied to future fixed-fee licensing arrangements.

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Royalty revenue decreased approximately $39.7 million to $90.8 million for the year ended December 31, 2019 from $130.5 million for 2018.

The decrease was due primarily to the timing of renewals and the related structure of architecture license agreements which include both fixed and variable components.

We are continuously in negotiations for licenses with prospective customers.

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Product revenue

Product revenue consists of revenue from the sale of memory and security products in 2019.

Product revenue consists of revenue from the sale of memory and security products.

Product revenue increased approximately $41.0 million to $114.0 million for the year ended December 31, 2020 from $73.0 million for 2019.

The increase was primarily due to greater market share gains of our memory interface chips.

Product revenue consisted of revenue from the sale of memory, security and lighting products in 2018 and 2017.

The increase was due to market share gains of our memory interface chips.

Product revenue increased approximately $34.3 million to $73.0 million for the year ended December 31, 2019 from $38.7 million for 2018.

The increase was primarily due to higher sales of memory products, partially offset by lower sales of lighting products, as a result of closing our lighting division in the first quarter of 2018.

We believe that product revenue will increase in 2020, mainly from the sale of our memory products.

The increase was primarily due to greater market share gains of our memory interface chips.

We believe that product revenue will continue to increase in 2021 as compared to 2020, mainly from the sale of our memory interface chips.

Our ability to continue to grow product revenue is dependent on, among other things, our ability to continue to obtain orders from customers and our ability to meet our customers’ demands.

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Contract and other revenue decreased approximately $12.5 million to $47.7 million for the year ended December 31, 2020 from $60.2 million for 2019.

The decrease was primarily due to lower revenue associated with our Payments and Ticketing businesses, which was divested in the fourth quarter of 2019, offset by growth experienced in our Silicon IP business.

The decrease was primarily due to the divestiture of our former Payments and Ticketing businesses resulting in no corresponding revenue in 2020, offset by growth experienced in our Silicon IP offerings.

Contract and other revenue decreased approximately $1.8 million to $60.2 million for the year ended December 31, 2019 from $62.0 million for 2018.

The decrease was primarily due to lower revenue from various memory and lighting technology development projects, partially offset by higher revenue from various security technology development projects.

The decrease was primarily due to lower revenue associated with our Payments and Ticketing businesses, which were divested in the fourth quarter of 2019, offset by growth experienced in our Silicon IP offerings.

We believe that contract and other revenue will fluctuate over time based on our ongoing technology development contractual requirements, the amount of work performed, the timing of completing engineering deliverables, and the changes to work required, as well as new technology development contracts booked in the future.

Cost of product revenue

Years Ended December 31,

(Dollars in millions)

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Cost of product revenue $ 37.7 $ 27.2 $ 18.3 39.0 % 48.4 %

Cost of product revenue are costs attributable to the sale of memory and security products.

Cost of product revenue also included costs attributable to the sale of lighting products in 2018 and 2017.

Cost of product revenue also included costs attributable to the sale of lighting products in 2018.

For the year ended December 31, 2020 as compared to 2019, cost of product revenue increased 39.0% primarily due to increased cost of sales associated with higher sales of memory interface chips.

For the year ended December 31, 2019 as compared to 2018, cost of product revenue increased 48.4% primarily due to increased cost of sales associated with higher sales of memory products.

For the year ended December 31, 2018 as compared to 2017, cost of product revenue decreased 23.1% primarily due to decreased cost of sales associated with the closure of the lighting division announced in the first quarter of 2018, offset by increased cost of sales associated with higher sales of memory products.

In the near term, we expect costs of product revenue to be higher as we expect higher sales of our various products in 2021 as compared to 2020.

Engineering costs:

Years Ended December 31,

(Dollars in millions)

Engineering costs

Cost of contract and other revenue

Amortization of intangible assets

Total cost of contract and other revenue

Research and development

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Cost of contract and other revenue $ 5.6 $ 9.9 $ 11.7 (43.0) % (15.4) %

Cost of contract and other revenue reflects the portion of the total engineering costs which are specifically devoted to individual customer development and support services.

For the year ended December 31, 2020 as compared to 2019, cost of contract and other revenue decreased 43.0% primarily due to the divestiture of our Payments and Ticketing businesses in the fourth quarter of 2019.

For the year ended December 31, 2019 as compared to 2018, cost of contract and other revenue decreased 15.4% primarily due to lower revenue associated with our former Payments and Ticketing businesses, which were divested in the fourth quarter of 2019.

In the near term, we expect cost of contract and other revenue to vary from period to period based on varying revenue recognized from contract and other revenue.

Research and development expenses

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Research and development expenses

Research and development expenses $ 129.8 $ 145.8 $ 145.7 (11.0) % 0.0 %

Stock-based compensation 10.0 11.0 12.6 (9.1) % (12.3) %

Total research and development

Total engineering costs

Engineering costs are allocated between cost of contract and other revenue and research and development expenses.

Cost of contract and other revenue reflects the portion of the total engineering costs which are specifically devoted to individual customer development and support services as well as amortization expense related to various acquired intellectual property for patent licensing.

The balance of engineering costs, incurred for the development of applicable technologies, is charged to research and development.

In a given period, the allocation of engineering costs between these two components is a function of the timing of the development and implementation schedules of individual customer contracts.

For the year ended December 31, 2019 as compared to 2018, total engineering costs decreased 6.6% primarily due to decreased amortization costs of $9.4 million, headcount related expenses of $3.9 million, allocated information technology costs of $1.6 million and stock-based compensation expense of $1.5 million, offset by increased facilities costs of $2.1 million as discussed below, retention bonus accrual related to acquisitions of $2.0 million and engineering development tool costs of $1.2 million.

Total research and development expenses $ 139.8 $ 156.8 $ 158.3 (10.8) % (1.0) %

Research and development expenses are those expenses incurred for the development of applicable technologies.

For the year ended December 31, 2020 as compared to 2019, total research and development expenses decreased 10.8% primarily due to decreased headcount-related expenses of $11.8 million (which includes the reduction in headcount due to the divestiture of the Payments and Ticketing businesses in 2019), consulting costs of $5.2 million, travel costs of $1.9 million and stock-based compensation expense of $1.0 million, offset by increased retention bonus expense related to acquisitions of $2.0 million and prototyping costs of $0.9 million.

For the year ended December 31, 2019 as compared to 2018, total research and development expenses decreased 1.0% primarily due to decreased headcount-related expenses of $3.9 million, allocated information technology costs of $1.6 million and stock-based compensation expense of $1.5 million, offset by increased facilities costs of $2.1 million as discussed below, retention bonus accrual related to acquisitions of $2.0 million and engineering development tool costs of $1.2 million.

On January 1, 2019, we adopted the New Leasing Standard using the alternative transition method.

In accordance with the New Leasing Standard, we were required to derecognize the Sunnyvale and Ohio facilities as imputed facility obligations (as accounted for under the previous leasing guidance) and recognize these facilities as operating leases.

In accordance with the New Leasing Standard, we were required to derecognize our previous Sunnyvale and Ohio facilities as imputed facility obligations (as accounted for under the previous leasing guidance) and recognize these facilities as operating leases.

This change resulted in no longer recognizing interest expense associated with these imputed facility lease obligations, but instead, recognizing lease expense that was included in operating costs and expenses.

For additional information on the impact of the new accounting standard on our leases, see Note 3, “Recent Accounting Pronouncements” and Note 10, “Leases,” of Notes to Consolidated Financial Statements of this Form 10-K.

For the year ended December 31, 2018 as compared to 2017, total engineering costs decreased 5.3% primarily due to decreased amortization costs of $11.4 million, prototyping costs of $1.8 million and depreciation expense of $1.4 million, offset by increased consulting expenses of $1.2 million, engineering development tool costs of $1.0 million, allocated information technology costs of $1.1 million and stock-based compensation expense of $0.4 million.

In the near term, we expect engineering costs to be higher as we continue to make investments in the infrastructure and technologies required to maintain our product innovation in semiconductor, security and other technologies.

In the near term, we expect research and development expenses to be higher as we continue to make investments in the infrastructure and technologies required to maintain our product innovation in semiconductor, security and other technologies.

Sales, general and administrative costs

Years Ended December 31,

(Dollars in millions)

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Sales, general and administrative costs

$ 69.9 $ 86.0 $ 89.1 (18.7) % (3.6) %

Stock-based compensation

15.7 15.4 9.1 2.0 % 68.8 %

Total sales, general and administrative costs

$ 85.6 $ 101.4 $ 98.2 (15.5) % 3.2 %

Sales, general and administrative expenses include expenses and costs associated with trade shows, public relations, advertising, litigation, general legal, insurance and other sales, marketing and administrative efforts.

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Due to the long business development cycles we face and the semi-fixed nature of sales, general and administrative expenses in a given period, these expenses generally do not correlate to the level of revenue in that period or in recent or future periods.

For the year ended December 31, 2019 as compared to 2018, total sales, general and administrative costs increased 0.2% primarily due to increased stock-based compensation expense of $6.3 million primarily due to the termination of the former chief executive officer at the end of June 2018, acquisition and divestiture related costs of $5.2 million and facilities costs of $2.6 million (primarily due to the adoption of the New Leasing Standard beginning in 2019 as discussed above), offset by decreased headcount related expenses of $3.8 million, amortization cost of $2.9 million, depreciation expense of $1.8 million, sales and marketing costs of $1.2 million, travel expenses of $1.2 million, consulting costs of $1.0 million, bonus accrual expense of $1.0 million and recruiting costs of $0.6 million.

For the year ended December 31, 2018 as compared to 2017, total sales, general and administrative costs decreased 6.3% primarily due to decreased stock-based compensation expense of $6.0 million primarily due to the termination of the former chief executive officer at the end of June 2018, consulting costs of $1.1 million and sales and marketing costs of $1.2 million, offset by increased facilities costs of $1.0 million and recruiting costs of $0.6 million.

In the future, sales, general and administrative costs will vary from period to period based on the trade shows, advertising, legal, acquisition and other sales, marketing and administrative activities undertaken, and the change in sales, marketing and administrative headcount in any given period.

In the near term, we expect our sales, general and administrative costs to remain relatively flat.

Restructuring and other charges:

Years Ended December 31,

(Dollars in millions)

For the year ended December 31, 2020 as compared to 2019, total sales, general and administrative costs decreased 15.5% primarily due to decreased headcount-related expenses of $5.4 million, acquisition and divestiture-related costs of $4.1 million, travel costs of $3.4 million, consulting costs of $2.7 million and depreciation expense of $1.2 million, offset by increased bonus accrual expense of $0.5 million and stock-based compensation expense of $0.3 million.

For the year ended December 31, 2019 as compared to 2018, total sales, general and administrative costs increased 3.2% primarily due to increased stock-based compensation expense of $6.3 million primarily due to the termination of the former chief executive officer at the end of June 2018, acquisition and divestiture related costs of $5.2 million and facilities costs of $2.6 million (primarily due to the adoption of the New Leasing Standard beginning in 2019 as discussed above), offset by decreased headcount related expenses of $3.8 million, depreciation expense of $1.8 million, sales and marketing costs of $1.2 million, travel expenses of $1.2 million, consulting costs of $1.0 million, bonus accrual expense of $1.0 million and recruiting costs of $0.6 million.

In the future, sales, general and administrative expenses will vary from period to period based on the trade shows, advertising, legal, acquisition and other sales, marketing and administrative activities undertaken, and the change in sales, marketing and administrative headcount in any given period.

In the near term, we expect our sales, general and administrative expenses to remain relatively flat.

Amortization of acquired intangible assets

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Amortization of acquired intangible assets

Amortization of acquired intangible assets included in total cost of revenue $ 17.4 $ 14.3 $ 23.7 21.2 % (39.6) %

Amortization of acquired intangible assets included in total operating expenses 1.0 2.7 5.7 (61.3) % (51.5) %

Total amortization of acquired intangible assets $ 18.4 $ 17.0 $ 29.4 7.9 % (41.9) %

Amortization expense is related to various acquired IP.

For the year ended December 31, 2020 as compared to 2019, total amortization of acquired intangible assets increased 7.9% primarily due to additional amortization from intangible assets acquired as part of the acquisitions from the second half of 2019, partially offset by certain other intangible assets being fully amortized.

For the year ended December 31, 2019 as compared to 2018, total amortization of acquired intangible assets decreased 41.9% primarily due to certain intangible assets being fully amortized.

Restructuring and other charges

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Restructuring and other charges $ 4.1 $ 8.8 $ 2.2 (53.6) % NM*

_____________________________________

* NM — percentage is not meaningful

During 2019, we initiated a restructuring program to reduce overall expenses which is expected to improve future profitability by reducing spending on research and development efforts and sales, general and administrative programs (the “2019 Plan”).

Additionally, we recorded other severance related charges of $1.4 million during the third quarter of 2019.

In November 2020, we initiated a restructuring program to reduce overall expenses which is expected to improve future profitability by reducing spending on research and development efforts and sales, general and administrative programs.

As a result, we recorded a charge of $3.3 million primarily related to headcount costs.

During 2019, we initiated a restructuring program to reduce overall expenses.

Additionally, we recorded other severance-related charges of $1.4 million.

During 2018, we closed our lighting division and manufacturing operations in Brecksville, Ohio.

We believed that such business was not core to our strategy and growth objectives.

As a result, we recorded a charge of $2.2 million related to employee terminations and severance costs, and facility-related costs.

During 2017, we did not initiate any restructuring programs.

Refer to Note 18, “Restructuring and Other Charges,” of Notes to Consolidated Financial Statements of this Form 10-K for further discussion.

Loss on divestiture

Years Ended December 31,

(Dollars in millions)

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Loss on divestiture

During the second quarter of 2019, we entered into a share purchase agreement with Visa International Service Association (the “Purchaser”), pursuant to which the Purchaser had agreed to acquire all of the outstanding shares of our subsidiary, Smart Card Software Limited, which was comprised of our Payments and Ticketing businesses.

The decision to sell these businesses reflects our ongoing review of our business to focus on products and offerings that are core to our semiconductor business.

Consequently, we measured these businesses at the lower of their carrying value or fair value less any costs to sell, and subsequently recognized a loss of approximately $7.4 million during the year ended December 31, 2019.

$ — $ 7.4 $ — — % 100.0 %

During 2020 and 2018, we did not record a charge for loss on divestiture.

During 2019, we entered into a share purchase agreement with Visa International Service Association (the “Purchaser”), pursuant to which the Purchaser had agreed to acquire all of the outstanding shares of our subsidiary, Smart Card Software Limited, which was comprised of our Payments and Ticketing businesses.

The decision to sell these businesses reflected our review of our business to focus on products and offerings that are core to our semiconductor business.

Refer to Note 17, “Divestiture,” of Notes to Consolidated Financial Statements of this Form 10-K for further discussion.

Change in fair value of earn-out liability

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Change in fair value of earn-out liability $ (1.8) $ — $ — 100.0 % — %

During 2020, we recorded a full reduction in the fair value of the earn-out liability related to the 2019 asset purchase agreement to acquire the Secure Silicon IP and Protocols business from Verimatrix, formerly Inside Secure, since the specified performance milestones were not met for calendar year 2020, which resulted in a gain in our consolidated statements of operations.

Interest and other income (expense), net

Years Ended December 31,

(Dollars in millions)

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Interest income and other income (expense), net $ 17.5 $ 27.4 $ 32.6 (36.0) % (16.1) %

Loss on extinguishment of debt

Interest expense (10.3) (9.9) (16.3) 5.0 % (39.5) %

Interest and other income (expense), net $ 7.2 $ 17.5 $ 16.3 (59.0) % 7.2 %

______________________________________

* NM — percentage is not meaningful

Interest income and other income (expense), net, consists primarily of interest income of $20.4 million and $27.2 million for the years ended December 31, 2019 and 2018, respectively, due to the significant financing component of licensing agreements as a result of the adoption of the New Revenue Standard as of January 1, 2018.

Interest income and other income (expense), net, primarily consists of interest income of $14.2 million, $20.4 million and $27.2 million for the years ended December 31, 2020, 2019 and 2018, respectively, due to the significant financing component

of licensing agreements.

Interest income and other income (expense), net, also includes interest income generated from investments in high quality fixed income securities and any gains or losses from the re-measurement of our monetary assets or liabilities denominated in foreign currencies.

Loss on extinguishment of debt relates to the extinguishment of a portion of the 2018 Notes during 2017.

Refer to Note 12, “Convertible Notes,” of Notes to Consolidated Financial Statements of this Form 10-K for additional details.

Beginning January 1, 2019, interest expense for all periods disclosed primarily consists of interest expense associated with the non-cash interest expense related to the amortization of the debt discount and issuance costs on the 1.375% convertible senior notes due 2023 (the “2023 Notes”) and the 1.125% convertible senior notes due 2018 (the “2018 Notes”), as well as the coupon interest related to these notes.

Interest expense for all periods disclosed primarily consists of interest expense associated with the non-cash interest expense related to the amortization of the debt discount and issuance costs on the 1.375% convertible senior notes due 2023 (the “2023 Notes”) and the 1.125% convertible senior notes due 2018 (the “2018 Notes”), as well as the coupon interest related to these notes.

Interest expense decreased in 2019 as compared to the same period in 2018 primarily due to the 2018 Notes maturing in the third quarter of 2018.

Interest expense increased in 2018 as compared to the same period in 2017 primarily due to the full year of interest expense related to the 2023 Notes offset by the maturing of the 2018 Notes in the third quarter of 2018.

We expect our non-cash interest expense to increase steadily as the notes reach maturity.

Refer to Note 12, “Convertible Notes,” of Notes to Consolidated Financial Statements of this Form 10-K for additional details.

Prior to 2019, interest expense also included the interest expense associated with our imputed facility lease obligations on the Sunnyvale and Ohio facilities.

For the years ended December 31, 2018 and 2017, we recognized $4.3 million and $4.4 million, respectively, of interest expense in connection with the imputed financing obligations in our statements of operations.

In accordance with the New Leasing Standard, we were required to derecognize the Sunnyvale and Ohio facilities as imputed facility obligations (as accounted for under the previous leasing standard) and recognize these facilities as operating leases.

This change resulted in no longer recognizing interest expense associated with these imputed facility lease obligations, but instead,

recognizing lease expense which would be included in operating costs and expenses.

Prior to 2019, interest expense also included the interest expense associated with our previous imputed facility lease obligations on the Sunnyvale and Ohio facilities.

For the year ended December 31, 2018, we recognized $4.3 million of interest expense in connection with the imputed financing obligations in our statements of operations.

In accordance with the adoption of ASC 842, the New Leasing Standard, we were required to derecognize our previous Sunnyvale and Ohio facilities as imputed facility obligations (as accounted for under the previous leasing standard) and recognize these facilities as operating leases.

This change resulted in no longer recognizing interest expense associated with these imputed facility lease obligations, but instead, recognizing lease expense which would be included in operating costs and expenses.

Provision for income taxes

Years Ended December 31,

(Dollars in millions)

Years Ended December 31, 2019 to 2020 2018 to 2019

(Dollars in millions) 2020 2019 2018 Change Change

Provision for income taxes $ 4.0 $ 3.4 $ 87.3 16.9 % (96.1) %

Effective tax rate (10.0) % (3.9) % (123.6) %

Our effective tax rate for the year ended December 31, 2020 differed from the U.S.

statutory rate primarily due to the expiration of foreign tax credits, partially offset by the change in the valuation allowance against U.S.

deferred tax assets.

Our effective tax rate for the year ended December 31, 2019 was different from the U.S.

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federal deferred tax assets.

Our effective tax rate for the year ended December 31, 2017 was different from the U.S.

statutory rate primarily due to the valuation allowance on expiring 2010 foreign tax credits and certain federal research and development credits, and the remeasurement of deferred taxes from 35% to 21% due to U.S.

federal tax reform.

We recorded a provision for incomes taxes of $4.0 million for the year ended December 31, 2020, which was primarily comprised of taxes on foreign earnings, the full valuation allowance on U.S.

federal deferred tax assets, withholding tax expense, tax expense from the amortization of indefinite-lived intangibles, partially offset by a partial California deferred tax asset valuation allowance release.

For the year ended December 31, 2020, we paid withholding taxes of $19.7 million.

We recorded a provision for incomes taxes of $3.4 million for the year ended December 31, 2019, which was primarily comprised of taxes on foreign earnings, the full valuation allowance on U.S.

federal deferred tax assets, withholding tax expense, and acquisition-related impacts.

3 unchanged sentences

For the year ended December 31, 2018, we paid withholding taxes of $20.4 million.

We recorded a provision for incomes taxes of $63.9 million for the year ended December 31, 2017, which was primarily comprised of our valuation allowance on unused 2010 foreign tax credits and certain federal research and development credits, and our deferred remeasurements following U.S.

federal tax reform.

For the year ended December 31, 2017, we paid withholding taxes of $20.5 million.

The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence, both positive and negative.

During the third quarter of 2018, the Company assessed the changes in its underlying facts and circumstances and evaluated the realizability of its existing deferred tax assets based on all available evidence, both positive and negative, and the weight accorded to each, and concluded a full valuation allowance associated with U.S.

We periodically evaluate the realizability of our net deferred tax assets based on all available evidence, both positive and negative.

During the third quarter of 2018, we assessed the changes in our underlying facts and circumstances and evaluated the realizability of our existing deferred tax assets based on all available evidence, both positive and negative, and the weight accorded to each, and concluded a full valuation allowance associated with U.S.

federal and California deferred tax assets was appropriate.

As such, the Company has set up and continues to maintain a full valuation allowance against its U.S.

federal deferred tax assets.

During 2020, as a result of the enactment of California A.B.

85 and the temporary suspension of California net operating loss utilization for tax years 2020 through 2022, we released $0.6 million of the valuation allowance on our deferred tax asset for California research and development tax credits.

We continue to maintain a full valuation allowance on the remainder of our California and U.S.

federal deferred tax assets as we do not expect to be able to fully utilize them.

Liquidity and Capital Resources

(In millions)

(In millions) December 31,

2020 December 31,

Cash and cash equivalents $ 136.1 $ 102.2

5 unchanged sentences

Net cash used in investing activities $ (90.4) $ (141.5) $ (68.0)

Net cash provided by (used in) financing activities

Net cash used in financing activities $ (61.2) $ (0.3) $ (127.7)

We currently anticipate that existing cash, cash equivalents and marketable securities balances and cash flows from operations will be adequate to meet our cash needs for at least the next 12 months.

6 unchanged sentences

As a part of our overall business strategy, from time to time, we evaluate businesses and technologies for potential acquisitions that are aligned with our core business and designed to supplement our growth.

To provide us with more flexibility in returning capital back to our stockholders, on January 21, 2015, our Board authorized a share repurchase program authorizing the repurchase of up to an aggregate of 20.0 million shares.

During 2019, we did not repurchase any shares of our common stock under our share repurchase program.

As of December 31, 2019, there remained an outstanding authorization to repurchase approximately 3.6 million shares of our outstanding common stock under the current share repurchase program.

To provide us with more flexibility in returning capital to our stockholders, on October 29, 2020, our Board approved the 2020 Repurchase Program authorizing the repurchase of up to an aggregate of 20.0 million shares.

Share repurchases under the 2020 Repurchase Program may be made through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules, and regulations.

There is no expiration date applicable to the 2020 Repurchase Program.

The 2020 Repurchase Program replaced the previous 2015 Repurchase Program approved by our Board in January 2015 and canceled the remaining shares outstanding as part of the previous authorization.

On November 11, 2020, we entered into the 2020 ASR Program with Deutsche Bank.

The 2020 ASR Program was part of the broader share repurchase program previously authorized by our Board on October 29, 2020.

Under the 2020 ASR Program, we pre-paid to Deutsche Bank the $ 50.0 million purchase price for our common stock and, in turn, we received an initial delivery of approximately 2.6 million shares of our common stock from Deutsche Bank in the fourth quarter of 2020, which were retired and recorded as a $ 40.0 million reduction to stockholders’ equity.

The remaining $ 10.0 million of the initial payment was recorded as a reduction to stockholders’ equity as an unsettled forward contract indexed to our stock.

As of December 31, 2020, there remained an outstanding authorization to repurchase approximately 17.4 million shares of our outstanding common stock under the 2020 Repurchase Plan.

Refer to “Share Repurchase Program” below.

Operating Activities

Cash provided by operating activities of $128.5 million for the year ended December 31, 2019 was primarily attributable to the cash generated from customer licensing billings, technology and software licenses and related implementation, support and maintenance fees, product sales, and engineering services fees.

Cash provided by operating activities of $185.5 million for the year ended December 31, 2020 was primarily attributable to the cash generated from customer licensing, product sales and engineering services fees.

Changes in operating assets and liabilities for the year ended December 31, 2020 primarily included decreases in unbilled receivables, accounts receivable, prepaids and other current assets, and an increase in accrued salaries and benefits, offset by a decrease in income taxes payable and an increase in inventories.

Cash provided by operating activities of $128.5 million for the year ended December 31, 2019 was primarily attributable to the cash generated from customer licensing, technology and software licenses and related implementation, support and maintenance fees, product sales, and engineering services fees.

Changes in operating assets and liabilities for the year ended December 31, 2019 primarily included decreases in accounts receivable, unbilled receivables and deferred revenue, offset by increases in prepaids and other current assets, inventories and accrued salaries and benefits.

Cash provided by operating activities of $87.1 million for the year ended December 31, 2018 was primarily attributable to the cash generated from customer licensing billings, technology and software licenses and related implementation, support and maintenance fees, product sales and engineering services fees.

Cash provided by operating activities of $87.1 million for the year ended December 31, 2018 was primarily attributable to the cash generated from customer licensing, technology and software licenses and related implementation, support and maintenance fees, product sales and engineering services fees.

Changes in operating assets and liabilities for the year ended December 31, 2018 primarily included increases in unbilled receivables, accounts receivable and prepaids and other current assets, offset by decreases in accounts payable and accrued salaries and benefits and other liabilities.

Cash provided by operating activities of $117.4 million for the year ended December 31, 2017 was primarily attributable to cash generated from customer licensing billings, technology and software licenses and related implementation, support and maintenance fees, product sales and engineering services fees.

Changes in operating assets and liabilities for the year ended December 31, 2017 primarily included increases in accounts receivable and accrued salaries and benefits and other liabilities as well as decreases in prepaids and other current assets.

Investing Activities

Cash used in investing activities of $141.5 million for the year ended December 31, 2019 primarily consisted of purchases of available-for-sale marketable securities of $657.4 million, $21.9 million paid for the acquisition of Northwest Logic, net of cash acquired of $0.1 million, $45.0 million paid for the acquisition of the Secure Silicon IP and Protocols business from Verimatrix, formerly Inside Secure, and $6.5 million paid to acquire property, plant and equipment, offset by proceeds from the maturities and sale of available-for-sale marketable securities of $507.4 million and $6.8 million, respectively, and net proceeds of $76.0 million from the divestiture of the Company’s Payments and Ticketing businesses.

Cash used in investing activities of $90.4 million for the year ended December 31, 2020 consisted of purchases of available-for-sale marketable securities of $899.0 million, $29.7 million paid to acquire property, plant and equipment, and $1.1 million paid to settle a net working capital adjustment related to the divestiture of our Payments and Ticketing businesses, offset by proceeds from the maturities and sale of available-for-sale marketable securities of $817.8 million and $21.6 million, respectively.

Cash used in investing activities of $68.0 million for the year ended December 31, 2018 primarily consisted of purchases of available-for-sale marketable securities of $282.1 million, $10.8 million paid to acquire property, plant and equipment and $3.0 million paid for investment in a privately held company, offset by proceeds from the maturities of available-for-sale marketable securities of $223.1 million, proceeds from the sale of assets held for sale of $3.8 million and proceeds from the sale of an equity security of $1.3 million.

Cash used in investing activities of $75.5 million for the year ended December 31, 2017 primarily consisted of cash paid for purchases of available-for-sale marketable securities of $102.5 million and $9.4 million paid to acquire property, plant and equipment, offset by proceeds from the maturities and sales of available-for-sale marketable securities of $32.0 million and $4.5 million, respectively.

Financing Activities

Cash used in financing activities of $61.2 million for the year ended December 31, 2020 was primarily due to an aggregate payment of $50.0 million to Deutsche Bank as part of the 2020 ASR Program.

We also paid $13.2 million under installment payment arrangements to acquire fixed assets, $9.4 million in payments of taxes on restricted stock units and $0.1 million in fees related to the 2020 ASR Program, offset by $11.5 million in proceeds from the issuance of common stock under equity incentive plans.

Cash used in financing activities was $0.3 million for the year ended December 31, 2019 and was primarily due to $8.4 million in payments under installment payment arrangements to acquire fixed assets and $7.0 million in payments of taxes on restricted stock units, offset by $15.1 million proceeds from the issuance of common stock under equity incentive plans.

Cash used in financing activities was $127.7 million for the year ended December 31, 2018 and was primarily due to the repayment of the remaining aggregate principal of the 2018 Notes amounting to $81.2 million, which became due in August 2018, an aggregate payment of $50.0 million to Citibank N.A., as part of our accelerated share repurchase program, and $6.8 million in payments of taxes on restricted stock units, offset by $11.4 million proceeds from the issuance of common stock under equity incentive plans.

Cash provided by financing activities was $46.5 million for the year ended December 31, 2017 and was primarily due to $172.5 million from the issuance of the 2023 Notes, $23.2 million from the issuance of warrants and $15.8 million proceeds from the issuance of common stock under equity incentive plans, offset by $72.3 million paid for the repurchase of $56.8 million aggregate principal amount of the 2018 Notes and $15.5 million paid primarily for the conversion feature of the repurchased 2018 Notes, an aggregate payment of $50.0 million to Barclays Bank PLC, as part of our accelerated share repurchase program, $33.5 million related to the purchase of the Convertible Note Hedge Transactions, $5.1 million in payments of taxes on restricted stock units and $3.3 million in issuance costs related to the issuance of the 2023 Notes.

Contractual Obligations

On December 15, 2009, we entered into a lease agreement for approximately 125,000 square feet of office space located at 1050 Enterprise Way in Sunnyvale, California commencing on July 1, 2010 and expiring on June 30, 2020.

The office space is used for our corporate headquarters, as well as engineering, sales, marketing and administrative operations and activities.

We have two options to extend the lease for a period of 60 months each and a one-time option to terminate the lease after 84 months in exchange for an early termination fee.

Pursuant to the terms of the lease, the landlord agreed to reimburse us approximately $9.1 million , which was received by the year ended December 31, 2011.

On November 4, 2011, to better plan for future expansion, we entered into an amended lease for our Sunnyvale facility for approximately an additional 31,000 square feet of space commencing on March 1, 2012 and expiring on June 30, 2020.

Additionally, a tenant improvement allowance to be provided by the landlord was approximately $1.7 million .

On September 29, 2012, we entered into a second amended Sunnyvale lease to reduce the tenant improvement allowance to approximately $1.5 million .

On January 31, 2013, we entered into a third amendment to the Sunnyvale lease to surrender the 31,000 square-foot space from the first amendment back to the landlord and recorded a total charge of $2.0 million related to the surrender of the amended lease.

On March 8, 2010, we entered into a lease agreement for approximately 25,000 square feet of office and manufacturing areas, located in Brecksville, Ohio.

The office space was used for our lighting division’s engineering activities while the manufacturing space was used for the manufacturer of prototypes.

This lease was amended on September 29, 2011 to expand the facility to approximately 51,000 total square feet and the amended lease expired on July 31, 2019.

We had an option to extend the lease for a period of 60 months .

During 2018, we closed our lighting division and manufacturing operations in

Brecksville, Ohio, and sold the related equipment.

Refer to Note 18, “Restructuring Charges,” of Notes to Consolidated Financial Statements of this Form 10-K for additional details.

We undertook a series of structural improvements to ready the Sunnyvale and Brecksville facilities for our use.

Since certain improvements to be constructed by us were considered structural in nature and we were responsible for any cost overruns, for accounting purposes, we were treated in substance as the owner of the construction project during the construction period.

At the completion of each construction, we concluded that we retained sufficient continuing involvement to preclude de-recognition of the building under the FASB authoritative guidance applicable to the sale leasebacks of real estate.

As such, prior to January 1, 2019 when the New Leasing Standard became effective for us, we accounted for the buildings as owned real estate and recorded an imputed financing obligation for our obligations to the legal owners.

Upon adoption of the New Leasing Standard, these leases were treated as operating leases.

Prior to the adoption of the New Leasing Standard, monthly lease payments on the facility were allocated between the land element of the lease (which was accounted for as an operating lease) and the imputed financing obligation.

The imputed financing obligation was amortized using the effective interest method and the interest rate was determined in accordance with the requirements of sale leaseback accounting.

For the years ended December 31, 2018 and 2017, we recognized in our Consolidated Statements of Operations $4.3 million and $4.4 million, respectively, of interest expense in connection with the imputed financing obligation on these facilities.

At December 31, 2018, the imputed financing obligation balance in connection with these facilities was $37.6 million, which was primarily classified under long-term imputed financing obligation.

On July 8, 2019, we entered into a definitive triple net space lease agreement with 237 North First Street Holdings, LLC (the “Landlord”), whereby we will lease approximately 90,000 square feet of office space located at 4453 North First Street in San Jose, California (the “Lease”).

The office space will serve as our corporate headquarters and include engineering, marketing and administrative functions.

We expect to move to the new premises during the summer of 2020.

The Lease has a term of 128 months from the commencement date in October 2019.

The starting rent of the Lease is approximately $3.26 per square foot on a triple net basis.

The annual base rent increases each year to certain fixed amounts over the course of the term as set forth in the Lease and will be $4.38 per square foot in the eleventh year.

In addition to the base rent, we will also pay operating expenses, insurance expenses, real estate taxes, and a management fee.

The Lease also allows for an option to expand, wherein we have the right of first refusal to rent additional space in the building.

We have a one-time option to extend the Lease for a period of 60 months and may elect to terminate the Lease, via written notice to the Landlord, in the event the office space is damaged or destroyed.

Total future required payments under the Lease are approximately $41.0 million .

On December 15, 2009, we entered into a lease agreement for approximately 125,000 square feet of office space located at 1050 Enterprise Way in Sunnyvale, California, which commenced on July 1, 2010 and expired on June 30, 2020.

The office space was used for our corporate headquarters, as well as engineering, sales, marketing and administrative operations and activities.

On July 8, 2019, we entered into a definitive triple net space lease agreement with 237 North First Street Holdings, LLC (the “Landlord”), whereby we leased office space located at 4453 North First Street in San Jose, California, (the “Lease”).

In April 2020, the lease was amended for certain terms (the “Amended Lease”).

The Amended Lease includes approximately 90,000 square feet of office space, which serves as our corporate headquarters and includes engineering, sales, marketing and administrative functions.

The Amended Lease has a term of 128 months from the amended commencement date in April 2020.

The starting rent of the Amended Lease is approximately $3.26 per square foot on a triple net basis.

The annual base rent increases each year to certain fixed amounts over the course of the term as set forth in the Amended Lease and will be $4.38 per square foot in the final year of the Amended Lease term.

In addition to the base rent, we will also pay operating expenses, insurance expenses, real estate taxes, and a management fee under the Amended Lease.

The Amended Lease also allows for an option to expand, wherein we have the right of first refusal to rent additional space in the building.

We have a one-time option

to extend the Amended Lease for a period of 60 months and may elect to terminate the Amended Lease, via written notice to the Landlord, in the event the office space is damaged or destroyed.

Total required payments under the Amended Lease are approximately $41 million.

Pursuant to the terms of the Amended Lease, the landlord agreed to reimburse us up to $9.0 million, related to a tenant improvement allowance.

On November 17, 2017, we entered into an Indenture with U.S.

Bank, National Association, as trustee, relating to the issuance by us of $172.5 million aggregate principal amount of the 2023 Notes.

The aggregate principal amount of the 2023 Notes as of December 31, 2019 was $172.5 million , offset by unamortized debt discount and unamortized debt issuance costs of $22.2 million and $1.5 million , respectively, on the accompanying consolidated balance sheets.

The unamortized discount related to the 2023 Notes is being amortized to interest expense using the effective method over the remaining 3.1 years until maturity of the 2023 Notes on February 1, 2023.

Refer to Note 12, “Convertible Notes,” of Notes to Consolidated Financial Statements of this Form 10-K for additional details.

As of December 31, 2019 , our material contractual obligations are as follows (in thousands):

As of December 31, 2020, our material contractual obligations were as follows:

(In thousands) Total 2021 2022 2023 2024 2025

Contractual obligations (1) (2) (3)

Other contractual obligations

Software licenses (4)

$ 18,970 $ 12,541 $ 6,429 $ — $ — $ —

Acquisition retention bonuses (5)

6,370 3,370 3,000 — — —

Convertible notes 172,500 — — 172,500 — —

Interest payments related to convertible notes 5,936 2,372 2,372 1,192 — —

Total $ 203,776 $ 18,283 $ 11,801 $ 173,692 $ — $ —

______________________________________

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(2) For our lease commitments as of December 31, 2020, refer to Note 10, “Leases,” of Notes to Consolidated Financial Statements of this Form 10-K.

(3) Our other contractual obligations as of December 31, 2020 were not material.

(4) We have commitments with various software vendors for agreements generally having terms longer than one year.

1 unchanged sentence

Share Repurchase Program

During 2019, we did not repurchase any shares of our common stock under our share repurchase program.

On January 21, 2015, our Board approved a share repurchase program authorizing the repurchase of up to an aggregate of 20.0 million shares.

Share repurchases under the plan may be made through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules, and regulations.

There is no expiration date applicable to the plan.

On March 5, 2018, we initiated an accelerated share repurchase program with Citibank N.A.

The accelerated share repurchase program is part of the broader share repurchase program previously authorized by the Company’s Board on January 21, 2015.

Under the accelerated share repurchase program, we pre-paid to Citibank N.A., the $50.0 million purchase price for our common stock and, in turn, we received an initial delivery of approximately 3.1 million shares of our common stock from Citibank N.A., in the first quarter of 2018, which were retired and recorded as a $40.0 million reduction to stockholders’ equity.

The remaining $10.0 million of the initial payment was recorded as a reduction to stockholders’ equity as an unsettled forward contract indexed to our stock.

During the second quarter of 2018, the accelerated share repurchase program was completed and we received an additional 0.7 million shares of our common stock as the final settlement of the accelerated share repurchase program.

There were no other repurchases of our common stock during 2018.

On May 1, 2017, we initiated an accelerated share repurchase program with Barclays Bank PLC.

The accelerated share repurchase program is part of the broader share repurchase program previously authorized by our Board on January 21, 2015.

Under the accelerated share repurchase program, we pre-paid to Barclays Bank PLC, the $50.0 million purchase price for our common stock and, in turn, we received an initial delivery of approximately 3.2 million shares of our common stock from Barclays Bank PLC, in the second quarter of 2017, which were retired and recorded as a $40.0 million reduction to stockholders’ equity.

On January 21, 2015, our Board approved a share repurchase program authorizing the repurchase of up to an aggregate of 20.0 million shares (the “2015 Repurchase Program”).

Share repurchases under the 2015 Repurchase Program were made through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules, and regulations.

During the years ended December 31, 2020 and 2019, we did not repurchase any shares of our common stock under the 2015 Repurchase Program.

On October 29, 2020, our Board approved the 2020 Repurchase Program authorizing the repurchase of up to an aggregate of 20.0 million shares.

There is no expiration date applicable to the 2020 Repurchase Program.

The 2020 Repurchase Program replaced the previous program approved by the Board in January 2015 and canceled the remaining shares outstanding as part of the previous authorization.

On November 11, 2020, we entered into the 2020 ASR Program with Deutsche Bank.

The 2020 ASR Program was part of the broader 2020 Repurchase Program.

Under the 2020 ASR Program, we pre-paid to Deutsche Bank the $50.0 million purchase price for our common stock and, in turn, we received an initial delivery of approximately 2.6 million shares of our common stock from Deutsche Bank in the fourth quarter of 2020, which were retired and recorded as a $40.0 million reduction to stockholders’ equity.

The remaining $10.0 million of the initial payment was recorded as a reduction to stockholders’ equity as an unsettled forward contract indexed to our stock.

The number of shares to be ultimately purchased by us was determined based on the volume weighted average price of the common stock during the terms of the transaction, minus an agreed upon discount between the parties.

During the fourth quarter of 2017, the accelerated share repurchase program was completed and we received an additional 0.8 million shares of our common stock as the final settlement of the accelerated share repurchase program.

The number of shares to be ultimately purchased by us will be determined based on the volume-weighted-average price of the common stock during the terms of the transaction, minus an agreed upon discount between the parties.

Program is expected to be completed within six months from the beginning of the program.

There were no other repurchases of our common stock during 2020.

As of December 31, 2020, there remained an outstanding authorization to repurchase approximately 17.4 million shares of our outstanding common stock under the current share repurchase program.

We record stock repurchases as a reduction to stockholders’ equity.

We record share repurchases as a reduction to stockholders’ equity.

We record a portion of the purchase price of the repurchased shares as an increase to accumulated deficit when the price of the shares repurchased exceeds the average original proceeds per share received from the issuance of common stock.

During the year ended December 31, 2020, the cumulative price of $31.5 million was recorded as an increase to accumulated deficit.

In connection with the 2023 Notes, we separately entered into privately negotiated warrant transactions, whereby we sold to the Counterparties warrants (the “Warrants”) to acquire, collectively, subject to anti-dilution adjustments, approximately 9.1 million shares of our common stock at an initial strike price of approximately $23.30 per share, which represents a premium of 60% over the last reported sale price of our common stock of $14.56 on November 14, 2017.

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Revenue Recognition

We adopted the New Revenue Standard on January 1, 2018 and all the related amendments using the modified retrospective method.

We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit as of January 1, 2018.

The comparative information for 2017 has not been recast and continues to be reported under the accounting standards in effect for that period.

We recognize revenue upon transfer of control of promised goods and services in an amount that reflects the consideration we expect to receive in exchange for those goods and services.

Unless indicated otherwise below, all of the goods and services are distinct and are accounted for as separate performance obligations.

Where an arrangement includes multiple performance obligations, the transaction price is allocated to these on a relative standalone selling prices basis.

We have established standalone selling prices for all of our offerings - specifically, a same pricing methodology is consistently applied to all licensing arrangements;

Substantially all of the goods and services are distinct and are accounted for as separate performance obligations.

Where an arrangement includes multiple performance obligations, the transaction price is allocated to these on a relative standalone selling price basis.

We have established standalone selling prices for all of our offerings - specifically, the same pricing methodology is consistently applied to all licensing arrangements;

all services offerings are priced within tightly controlled bands and all contracts that include support and maintenance state a renewal rate or price that is systematically enforced.

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Royalty revenue consists of patent and technology license royalties.

Products consist of memory interface chips sold directly and indirectly to module manufacturers and OEMs worldwide through multiple channels, including our direct sales force and distributors.

Products primarily consist of memory interface chips sold directly and indirectly to module manufacturers and OEMs worldwide through multiple channels, including our direct sales force and distributors.

Contract and other revenue consists of software license fees, engineering fees associated with integration of our technology solutions into our customers’ products and support and maintenance fees.

Royalty Revenue

Our patent and technology licensing arrangements generally range between 1 and 7 years in duration and generally grant the licensee the right to use our entire IP portfolio as it evolves over time.

Our patent and technology licensing arrangements generally range between one year and ten years in duration and generally grant the licensee the right to use our entire IP portfolio as it evolves over time.

These arrangements do not typically grant the licensee the right to terminate for convenience and where such rights exist, termination is prospective, with no refund of fees already paid by the licensee.

There is no interdependency or interrelation between the IP included in the portfolio licensed upon contract inception and any IP subsequently made available to the licensee, and we would be able to fulfill our promises by transferring the portfolio and the additional IP use rights independently.

There is no interdependency or interrelation between the IP included in the portfolio licensed upon

contract inception and any IP subsequently made available to the licensee, and we would be able to fulfill our promises by transferring the portfolio and the additional IP use rights independently.

However, the numbers of additions to, and removals from the portfolio (for example when a patent expires and renewal is not granted to us) in any given period have historically been relatively consistent;

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Patent and technology licensing arrangements result in fixed payments received over time, with guaranteed minimum payments on occasion, variable payments calculated based on the licensee’s sale or use of the IP, or a mix of fixed and variable payments.

For fixed-fee arrangements (including arrangements that include minimum guaranteed amounts), variable royalty arrangements that we have concluded are fixed in substance and the fixed portion of hybrid fixed/variable arrangements, we recognize revenue upon control over the underlying IP use right transferring to the licensee, net of the effect of significant financing components calculated using customer-specific, risk-adjusted lending rates ranging between 3% and 6%, with the related interest income being recognized over time on an effective rate basis.

Where a licensee has the contractual right to terminate a fixed-fee arrangement for convenience without any substantive penalty

payable upon such termination, we apply the guidance in the New Revenue Standard to the duration of the contract in which the parties have present enforceable rights and obligations and only recognizes revenue for amounts that are due and payable.

For variable arrangements, we recognize revenue based on an estimate of the licensee’s sale or usage of the IP during the period of reference, typically quarterly, with a true-up being recorded when we receive the actual royalty report from the licensee.

• For fixed-fee arrangements (including arrangements that include minimum guaranteed amounts), we recognize revenue upon control over the underlying IP use right transferring to the licensee, net of the effect of significant financing components calculated using customer-specific, risk-adjusted lending rates ranging between 3% and 5%, with the related interest income being recognized over time on an effective rate basis.

Where a licensee has the contractual right to terminate a fixed-fee arrangement for convenience without any substantive penalty payable upon such termination, we only recognize revenue on contracts in which the parties have present enforceable rights and obligations and that are due and payable.

• For variable arrangements, we recognize revenue based on an estimate of the licensee’s sale or usage of the IP during the period of reference, typically quarterly, with a true-up recorded when we receive the actual royalty report from the licensee.

Product Revenue

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Contract and Other Revenue

Contract and other revenue consists of software license fees and engineering fees associated with integration of our technology solutions into our customers’ solutions (or products) and related support and maintenance.

Contract and other revenue consists of software license fees and engineering fees associated with integration of our technology solutions into our customers’ related support and maintenance.

An initial software arrangement generally consists of a term-based or perpetual license, significant software customization services and support and maintenance services that include post-implementation customer support and the right to unspecified software updates and enhancements on a when and if available basis.

We recognize license and customization services revenue based on an over time model, measured using the input method.

License and customization services revenue is reported as part of contract and other revenue.

Due to the nature of the work performed in these arrangements, the estimation of the over time model is complex and involves significant judgment.

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We recognize license renewal revenue at the beginning of the renewal period.

We recognize revenue from professional services purchased in addition to an initial software arrangement on a cumulative catch-up basis if these services are not distinct from the services provided as part of the initial software arrangement, or as a separate contract if these services are distinct.

Prior to the divestiture of our Payments and Ticketing businesses in 2019, our Payment Product Group derived a significant portion of its revenue from heavily customized software in the mobile market, whereby the Payment Product Group’s software solution interacts with third-party solutions and other payment platforms to provide the functionality the customer requires.

Historically, these third-party solutions have evolved at a rapid pace, with the Payment Product Group being required to deliver as part of its support and maintenance services the patches and updates needed to maintain the functionality of its own software offering.

As the utility of the solution to the end customer erodes very quickly without these updates, these were viewed as critical and the customized software solution and updates were not separately identifiable.

As such, these arrangements were treated as a single performance obligation;

revenue was deferred until completion of the customization services, and recognized ratably over the committed support and maintenance term.

Prior to the divestiture of our Payments and Ticketing businesses in 2019, our Ticketing Products Group primarily derived revenue from ticketing services arrangements that systematically consist of a software component, support and maintenance, managed services and hosting services.

The software could be hosted by third-party hosting service providers or us.

All arrangements entered into subsequent to the acquisition (we had originally acquired our Payments and Ticketing businesses in 2016) precluded customers from taking possession of the software at any time during the hosting term and we had concluded that should a customer that was under contract as of the acquisition date ever request possession of the software, the Ticketing Products Group would have the ability to charge the customer, and enforce a claim to payment of a substantive fee in exchange for such right, and that the costs of setting up the environment needed to run the software would act as a significant disincentive to the customer taking possession of the software.

Based on the above, we concluded that these services were a single performance obligation, with customers simultaneously receiving and consuming the benefits provided by the Ticketing Products Group’s performance, and recognized ticketing services revenue ratably over the term, commencing upon completion of setup activities.

We recognized setup fees upon completion.

While these activities did not transfer a service to the customer, we elected not to defer and amortized these fees over the expected duration of the customer relationship owing to the immateriality of the amounts charged.

Significant Judgments

Historically and with the exceptions noted below, no significant judgment has generally been required in determining the amount and timing of revenue from our contracts with customers.

For our contract and other revenue, revenue is recognized as services are performed on a percentage-of-completion basis, measured using the input method.

Due to the nature of the work performed in these arrangements, the estimation of percentage-of-completion is complex and involves significant judgment.

The key factor reviewed by us to estimate costs to complete each contract is the estimated man-months necessary to complete the project.

If circumstances arise that change the original estimates of extent of progress toward completion, revisions to the estimates are made that may result in increases or decreases in estimated revenues or costs.

Revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known.

Historically and with the exception noted below, no significant judgment has generally been required in determining the amount and timing of revenue from our contracts with customers.

• We have adequate tools and controls in place, and substantial experience and expertise in timely and accurately tracking man-months incurred in completing customization and other professional services, and quantifying changes in estimates.

Key estimates used in recognizing revenue predominantly consist of the following:

All fixed-fee arrangements result in cash being received after control over the underlying IP use right has transferred to the licensee, and over a period exceeding a year.

As such, all these arrangements include a significant financing component.

We calculate a customer-specific lending rate using a Daily Treasury Yield Curve Rate that changes depending on the date on which the licensing arrangement was entered into and the term (in years) of the arrangement, and take into consideration a licensee-specific risk profile determined based on a review of the licensee’s “Full Company View” Dun & Bradstreet report obtained on the date the licensing arrangement was signed by the parties, with a risk premium being added to the Daily Treasury Yield Curve Rate considering the overall business risk, financing strength and risk indicators, as listed.

• For fixed-fee arrangements in which cash is being received over a period exceeding a year, we calculate a customer-specific lending rate using a Daily Treasury Yield Curve Rate that changes depending on the date on which the licensing arrangement was entered into and the term (in years) of the arrangement, and take into consideration a licensee-specific risk profile determined based on a review of the licensee’s “Full Company View” Dun & Bradstreet report obtained on the date the licensing arrangement was signed by the parties, with a risk premium being added to the Daily Treasury Yield Curve Rate considering the overall business risk, financing strength and risk indicators, as listed.

• We recognize revenue on variable fee licensing arrangements on the basis of estimates.

In connection with the adoption of the New Revenue Standard, we have set up specific procedures and controls to ensure timely and accurate quantification of variable royalties, and implemented new systems to enable the preparation of the estimates and reporting of the financial information required by the New Revenue Standard.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.

Goodwill is not subject to amortization, but is subject to at least an annual assessment for impairment, applying a fair-value based test.

Goodwill is not subject to amortization, but is subject to at least an annual assessment for impairment.

We perform our impairment analysis of goodwill on an annual basis during the fourth quarter of the year unless conditions arise that warrant a more frequent evaluation.

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Different assumptions and judgments could materially affect the calculation of the fair value of our assets.

Acquired indefinite-lived intangible assets related to our in-process research and development (“IPR&D”) are capitalized and subject to impairment testing until completion or abandonment of the projects.

Upon successful completion of each project, we make a separate determination of useful life of the acquired indefinite-lived intangible assets and the related amortization is recorded as an expense over the estimated useful life of the specific projects.

Acquired indefinite-lived intangible assets related to our IPR&D are capitalized and subject to impairment testing until completion or abandonment of the projects.

Upon successful completion of each project, we make a separate determination of the useful life of the acquired indefinite-lived intangible assets and the related amortization is recorded as an expense over the estimated useful life of the specific projects.

Indefinite-lived intangible assets are subject to at least an annual assessment for impairment, applying a fair-value based test.

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In addition, we are required to assess the realization of the deferred tax asset or liability to be included on the consolidated balance sheet as of the reporting dates.

As of December 31, 2019, our consolidated balance sheet included net deferred tax assets, before valuation allowance, of approximately $187.7 million, which consists of net operating loss carryovers, tax credit carryovers, amortization, employee stock-based compensation expenses and certain liabilities, partially reduced by deferred tax liabilities associated with the ASC 606 adoption and certain assets.

As of December 31, 2020, our consolidated balance sheet included net deferred tax assets, before valuation allowance, of approximately $164.3 million, which consists of net operating loss carryovers, tax credit carryovers, amortization, employee stock-based compensation expenses, certain liabilities and certain assets.

As of December 31, 2020, we have a valuation allowance of $174.3 million resulting in net deferred tax liabilities of $10.0 million.

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Stock-Based Compensation

We maintained stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance based instruments.

We maintain stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance-based instruments.

In addition, we sponsor an Employee Stock Purchase Plan (“ESPP”), whereby eligible employees are entitled to purchase Common Stock semi-annually, by means of limited payroll deductions, at a 15% discount from the fair market value of the Common Stock as of specific dates.

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In addition, the accounting guidance for share-based payments requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow.

Our forfeiture rate

represents the historical rate at which our stock-based awards were surrendered prior to vesting.

Our forfeiture rate represents the historical rate at which our stock-based awards were surrendered prior to vesting.

The accounting guidance for share-based payments requires forfeitures to be estimated at the time of grant and revised on a cumulative basis, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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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