What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-28 · 131 added, 125 removed, 351 unchanged (42% of the section changed)

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Business Overview

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

We make industry-leading chips and Silicon 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.

Rambus is an industry-leading provider of chips, silicon IP and innovations that address the fundamental challenges of accelerating data and enable critical performance improvements for data center and other growing markets.

The ongoing growth of the cloud, along with the widespread advancement of artificial intelligence (“AI”) and other data-intensive workloads, continue to drive an exponential increase in data usage and 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 experience in interconnect technologies, Rambus is ideally positioned to address the challenges of moving and protecting data.

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

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, intellectual property (“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.

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

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.

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

Executive Summary

The Company’s continued execution delivered strong results during fiscal year 2022, driven by continued demand in our memory interface chips, continued design wins in Silicon IP and continued stability from our royalties revenue.

Highlights from our annual results for the year ended December 31, 2022 were as follows:

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• Operating expenses of $270.3 million;

• GAAP diluted net income per share of $0.16;

• Diluted net loss per share of $0.13;

• Net cash provided by operating activities of $230.4 million.

We had record annual product revenue of $143.9 million in 2021, which was primarily driven by our memory interface chips and was up 26% as compared to 2020.

We produced record product revenue of $227.1 million in 2022, up 58% as compared to 2021, which was primarily driven by our memory interface chips.

In addition, our cash provided by operating activities for 2022 was $230.4 million, which was a record for the Company and up 10% as compared to 2021.

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The Company’s consolidated revenue is comprised of product revenue, contract and other revenue and royalties.

Product revenue consists primarily of memory interface chips and is a significant and growing segment of the business.

Product revenue consists primarily of memory interface chips and is an increasingly growing part of our business.

Our memory interface chips are sold to major DRAM manufacturers, Micron, Samsung and SK hynix, as well as directly to system manufacturers and cloud providers, for integration into server memory modules.

Product revenue accounted for 50%, 44% and 46% of our consolidated revenue for the years ended December 31, 2022, 2021 and 2020, respectively.

Contract and other revenue consists primarily of Silicon IP, which is comprised of our high-speed interface and security IP.

Revenue sources under contract and other include our 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 accounts receivable in any given period.

Contract and other revenue accounted for 14%, 19% and 27% of our consolidated revenue for the years ended December 31, 2021, 2020 and 2019, respectively.

Royalty revenue is derived from our patent licenses, through which we provide our customers certain rights to our broad worldwide portfolio of patented inventions.

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Royalties may be structured as fixed, variable or a hybrid of fixed and variable royalty payments.

Leading semiconductor and electronic system companies such as AMD, Broadcom, Cisco,

CXMT, IBM, Infineon, Kioxia, Marvell, Mediatek, Micron, Nanya, NVIDIA, Panasonic, Phison, Qualcomm, Samsung, SK hynix, Socionext, STMicroelectronics, Toshiba, Western Digital, Winbond, and Xilinx have licensed our patents.

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

The vast majority of our patents originate from our internal research and development efforts.

Revenues from royalties accounted for 31%, 42% and 34% of our consolidated revenue for the years ended December 31, 2022, 2021 and 2020, respectively.

Contract and other revenue consists primarily of Silicon IP, which is comprised of our high-speed interface and security IP.

Revenue sources under contract and other include our IP core licenses, software licenses and related implementation, support and maintenance fees and engineering services fees.

Contract and other revenue accounted for 19%, 14% and 19% of our consolidated revenue for the years ended December 31, 2022, 2021 and 2020, respectively.

Costs and Expenses

Cost of product revenue for 2022 increased approximately $39.6 million to $89.0 million from $49.4 million as compared to 2021, primarily due to increases in sales volumes of our memory interface chips.

Cost of contract and other revenue for 2021 decreased approximately $0.9 million to $4.7 million from $5.6 million as compared to 2020.

Cost of contract and other revenue remained flat at $4.7 million for the year ended December 31, 2022 as compared to 2021.

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

Our research and development expenses for 2021 decreased approximately $4.2 million as compared to 2020, primarily due to decreased engineering development tool costs of $3.6 million, headcount-related expenses of $1.7 million, retention bonus expense related to acquisitions of $1.1 million, allocated information technology costs of $0.8 million, facilities costs of $0.7 million and prototyping costs of $0.6 million, offset by an increase in engineering costs allocated to cost of revenue of $1.9 million, consulting costs of $1.8 million and stock-based compensation expense of $0.6 million.

Sales, general and administrative expenses for 2021 increased approximately $4.6 million as compared to 2020, primarily due to increased consulting, legal and accounting costs of $3.0 million related to the shareholder activism activity and restatement matters, acquisition-related costs (including retention bonus expense) of $1.8 million, allocated information technology costs of $0.8 million, stock-based compensation expense of $0.8 million and recruiting expenses of $0.6 million, offset by decreased facilities costs of $2.2 million, other consulting costs of $0.6 million and sales and marketing costs of $0.6 million.

Impact of the COVID-19 Pandemic

In December 2019, the COVID-19 virus 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 and new variants have created significant global economic uncertainty and may adversely impact the business of our customers, partners and vendors.

The extent of the impact of the ongoing COVID-19 pandemic and subsequent variants 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.

The extent to which the ongoing COVID-19 pandemic and subsequent variants 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 COVID-19 and the new variants may not be fully reflected in our results of operations until future periods, if at all.

Our research and development expenses for 2022 increased approximately $23.1 million, primarily due to increased headcount-related expenses of $8.3 million, engineering development tool costs of $3.4 million, stock-based compensation expense of $2.9 million, consulting costs of $2.5 million, prototyping costs of $2.0 million, bonus accrual expense of $1.9 million, depreciation expense of $1.0 million and allocated information technology costs of $0.6 million, offset by a decrease in facilities costs of $1.3 million and retention bonus expense related to acquisitions of $0.7 million.

Sales, general and administrative expenses for 2022 increased approximately $15.7 million, primarily due to increased stock-based compensation expense of $5.0 million, headcount-related expenses of $3.4 million, facilities costs of $2.0 million, bonus accrual expense of $1.8 million, acquisition-related costs (including retention bonus expense) of $1.8 million, travel expenses of $0.9 million and general legal fees of $0.7 million, offset by decreases in legal and accounting costs of $3.0 million related to the shareholder activism activity and restatement matters in 2021 and allocated information technology costs of $0.6 million.

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.

We have a high degree of revenue concentration.

Our top five customers represented approximately 56% of our revenue for 2021 as compared to 46% in 2020 and 45% in 2019.

Our top five customers represented 58% of our revenue for 2022 as compared to 56% in 2021 and 46% in 2020.

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.

Our revenue from companies headquartered outside of the United States accounted for approximately 36% in 2021 as compared to 44% in 2020 and 41% in 2019.

Our revenue from companies headquartered outside of the United States accounted for 39% in 2022 as compared to 36% in 2021 and 44% in 2020.

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

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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.

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.

Several of our licensees have renewed or extended their license agreements with us during the year ended December 31, 2021, including Qualcomm, Kioxia and Western Digital.

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, including the 2021 acquisitions of AnalogX and PLDA, as well as the 2019 acquisitions of Northwest Logic and the Secure Silicon IP and Protocols business from Verimatrix, formerly Inside Secure.

Similarly, we evaluate our current businesses and technologies that are not aligned with our core business for potential divestiture, such as the sale of our Payments and Ticketing businesses to Visa International Service Association in 2019.

Several of our licensees have renewed or extended their license agreements with us during the year ended December 31, 2022, including Samsung, MediaTek, Phison and Qualcomm.

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, including the 2022 acquisition of Hardent and the 2021 acquisitions of AnalogX and PLDA.

Similarly, we evaluate our current businesses and technologies that are not aligned with our core business for potential divestiture.

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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— % 0.1 % 1.7 %

Loss on divestiture

— % — % 3.3 %

Change in fair value of earn-out liability 0.7 % 1.6 % (0.7) %

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Interest income and other income (expense), net 1.7 % 3.0 % 7.3 %

Gain on fair value of equity security 0.8 % — % — %

Loss on extinguishment of debt (18.4) % — % — %

Loss on fair value adjustment of derivatives, net (2.3) % — % — %

Interest expense (0.4) % (3.3) % (4.2) %

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Product revenue increased approximately $29.9 million to $143.9 million for the year ended December 31, 2021 from $114.0 million for 2020.

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

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

We believe that product revenue will continue to increase in 2023 as compared to 2022, mainly from the sale of our memory interface chips.

However, our ability to continue to grow product revenue is dependent on, among other things, our ability to continue to obtain orders from customers, our ability to meet our customers’ demands and our ability to mitigate any supply chain risk due to the ongoing COVID-19 pandemic and subsequent variants.

However, 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.

Royalty revenue, which includes patent and technology license royalties, increased approximately $3.1 million to $139.8 million for the year ended December 31, 2022 from $136.7 million for 2021.

The increase was primarily due to the timing and structure of license renewals.

Royalty revenue decreased approximately $9.8 million to $84.6 million for the year ended December 31, 2020 from $94.4 million for 2019.

The decrease was primarily due to the timing and structure of license renewals.

Royalty revenue increased approximately $52.1 million to $136.7 million for the year ended December 31, 2021 from $84.6 million for 2020.

The increase was primarily due to the timing and structure of license renewals.

We are continuously in negotiations for licenses with prospective customers.

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Contract and other revenue consists of revenue from technology development projects.

Contract and other revenue increased approximately $40.2 million to $87.9 million for the year ended December 31, 2022 from $47.7 million for 2021.

The increase was primarily due to higher revenue associated with our Silicon IP offerings.

Contract and other revenue remained flat at $47.7 million for the year ended December 31, 2021 as compared to 2020.

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 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.

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.

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

For the year ended December 31, 2021 as compared to 2020, cost of product revenue increased 30.9% primarily due to increases in sales volumes of our memory interface chips.

For the year ended December 31, 2020 as compared to 2019, cost of product revenue increased 39.0% primarily due to increases in sales volumes of our memory interface chips.

For the year ended December 31, 2022 as compared to 2021, cost of product revenue increased approximately $39.6 million, primarily due to increases in sales volumes of our memory interface chips.

For the year ended December 31, 2021 as compared to 2020, cost of product revenue increased approximately $11.7 million, primarily due to increases in sales volumes of our memory interface chips.

In the near term, we expect costs of product revenue to continue to be higher as we expect higher sales of our various products in 2023 as compared to 2022.

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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, 2021 as compared to 2020, cost of contract and other revenue decreased 15.8% due to lower engineering services associated with the contracts.

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, 2022 as compared to 2021, cost of contract and other revenue remained flat.

For the year ended December 31, 2021 as compared to 2020, cost of contract and other revenue decreased approximately $0.9 million due to lower engineering services associated with the contracts.

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

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

For the year ended December 31, 2021 as compared to 2020, total research and development expenses decreased 3.0% primarily due to decreased engineering development tool costs of $3.6 million, headcount-related expenses of $1.7 million, retention bonus expense related to acquisitions of $1.1 million, allocated information technology costs of $0.8 million, facilities costs of $0.7 million and prototyping costs of $0.6 million, offset by an increase in engineering costs allocated to cost of revenue of $1.9 million, consulting costs of $1.8 million and stock-based compensation expense of $0.6 million.

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, 2022 as compared to 2021, total research and development expenses increased approximately $23.1 million, primarily due to increased headcount-related expenses of $8.3 million, engineering development tool costs of $3.4 million, stock-based compensation expense of $2.9 million, consulting costs of $2.5 million, prototyping costs of $2.0 million, bonus accrual expense of $1.9 million, depreciation expense of $1.0 million and allocated information technology costs of $0.6 million, offset by a decrease in facilities costs of $1.3 million and retention bonus expense related to acquisitions of $0.7 million.

For the year ended December 31, 2021 as compared to 2020, total research and development expenses decreased approximately $4.1 million, primarily due to decreased engineering development tool costs of $3.6 million, headcount-related expenses of $1.7 million, retention bonus expense related to acquisitions of $1.1 million, allocated information technology costs of $0.8 million, facilities costs of $0.7 million and prototyping costs of $0.6 million, offset by an increase in engineering costs allocated to cost of revenue of $1.9 million, consulting costs of $1.8 million and stock-based compensation expense of $0.6 million.

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.

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In addition, we work with current customers through marketing, sales and technical efforts to drive adoption of their products that use our innovations and solutions, by system companies.

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, 2021 as compared to 2020, total sales, general and administrative costs increased 5.3% primarily due to increased consulting, legal and accounting costs of $3.0 million related to the shareholder activism activity and restatement matters during the first quarter of 2021, acquisition-related costs (including retention bonus expense) of $1.8 million, allocated information technology costs of $0.8 million, stock-based compensation expense of $0.8 million and recruiting expenses of $0.6 million, offset by decreased facilities costs of $2.2 million, other consulting costs of $0.6 million and sales and marketing costs of $0.6 million.

For the year ended December 31, 2020 as compared to 2019, total sales, general and administrative costs decreased 14.0% 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 and consulting costs of $2.7 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, 2022 as compared to 2021, total sales, general and administrative costs increased approximately $15.7 million, primarily due to increased stock-based compensation expense of $5.0 million, headcount-related expenses of $3.4 million, facilities costs of $2.0 million, bonus accrual expense of $1.8 million, acquisition-related costs (including retention bonus expense) of $1.8 million, travel expenses of $0.9 million and general legal fees of $0.7 million, offset by decreases in legal and accounting costs of $3.0 million related to the shareholder activism activity and restatement matters in 2021 and allocated information technology costs of $0.6 million.

For the year ended December 31, 2021 as compared to 2020, total sales, general and administrative costs increased approximately $4.6 million, primarily due to increased consulting, legal and accounting costs of $3.0 million related to the shareholder activism activity and restatement matters during the first quarter of 2021, acquisition-related costs (including retention bonus expense) of $1.8 million, allocated information technology costs of $0.8 million, stock-based compensation expense of $0.8 million and recruiting expenses of $0.6 million, offset by decreased facilities costs of $2.2 million, other consulting costs of $0.6 million and sales and marketing 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.

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Amortization expense is related to various acquired IP.

For the year ended December 31, 2021 as compared to 2020, total amortization of acquired intangible assets decreased 5.1% primarily due to certain intangible assets being fully amortized, offset by additional amortization from intangible assets acquired as part of the acquisitions of AnalogX and PLDA in 2021.

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, 2022 as compared to 2021, total amortization of acquired intangible assets decreased approximately $1.8 million, primarily due to certain intangible assets being fully amortized, partially offset by additional amortization from intangible assets acquired in 2022.

For the year ended December 31, 2021 as compared to 2020, total amortization of acquired intangible assets decreased approximately $1.0 million, primarily due to certain intangible assets being fully amortized, offset by additional amortization from intangible assets acquired as part of the acquisitions of AnalogX and PLDA in 2021.

Restructuring and Other Charges

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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.

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

The 2020 Restructuring Plan was completed in 2021.

Refer to Note 17, “Restructuring and Other Charges,” of Notes to Consolidated Financial Statements of this Form 10-K for additional information.

Change in Fair Value of Earn-Out Liability

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During the fourth quarter of 2021, we remeasured the fair value of the earn-out liability related to the acquisition of PLDA, which is subject to certain revenue targets of the acquired business for the next three years.

The remeasurement of the earn-out liability resulted in an additional expense of $5.3 million on our consolidated statements of operations.

For the years ended December 31, 2022 and 2021, the change in the fair value of the earn-out liability related to the 2021 acquisition of PLDA, which is subject to certain revenue targets of the acquired business for a period of three years from the date of acquisition.

During the year ended December 31, 2022, the first-year earn-out target was achieved, and the fair value relating to the remaining two years of the earn-out period were remeasured.

As a result of these adjustments, we recorded a net loss of $3.1 million on our consolidated statements of operations.

During the fourth quarter of 2021, we remeasured the fair value of the earn-out liability related to the acquisition of PLDA, which resulted in an additional expense of $5.3 million on our consolidated statements of operations.

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 on our consolidated statements of operations.

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Interest income and other income (expense), net $ 7.8 $ 9.7 $ 17.8 (20.0) % (45.6) %

Gain on fair value of equity security 3.5 — — 100.0 % — %

Loss on extinguishment of debt (83.6) — — 100.0 % — %

Loss on fair value adjustment of derivatives, net (10.6) — — 100.0 % — %

Interest expense (1.9) (10.7) (10.3) (82.5) % 3.5 %

Interest and other income (expense), net $ (1.0) $ 7.5 $ 17.6 (113.2)% (57.3) %

Interest and other income (expense), net $ (84.8) $ (1.0) $ 7.5 NM* (113.2) %

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* NM — percentage is not meaningful

Interest income and other income (expense), net, consists primarily of interest income of $5.6 million, $9.3 million, and $14.6 million for the years ended December 31, 2022, 2021 and 2020, 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.

Interest expense for all periods disclosed consists primarily 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”), as well as the coupon interest related to these notes.

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

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

Gain on fair value of equity security was $3.5 million in 2022 and related to the sale of an equity security with an immaterial carrying value on our Consolidated Statement of Operations of this 10-K.

The $83.6 million loss on extinguishment of debt and the $10.6 million loss on fair value adjustment of derivatives, net, related to the repurchases of $162.1 million aggregate principal amount of our 1.375% Convertible Senior Notes due 2023 (the “2023 Notes”) during the first and third quarters of 2022 and the settlement of the related convertible senior note hedges and warrants in the same periods.

Interest expense for all periods disclosed consists primarily of interest expense associated with the non-cash interest expense related to the amortization of the debt issuance costs on the 2023 Notes, as well as the coupon interest related to these notes.

Prior to the adoption of ASU No.

2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) (“ASU 2020-06”) on January 1, 2022, interest expense also included the non-cash interest expense related to the amortization of the debt discount.

For the year ended December 31, 2022 as compared to 2021, interest expense decreased approximately $8.8 million, primarily due to the partial repurchases of the 2023 Notes in the first and third quarters of 2022 and the adoption of ASU 2020-06 on January 1, 2022.

For the year ended December 31, 2021 as compared to 2020, interest expense remained relatively flat.

Refer to Note 3, “Recent Accounting Pronouncements,” and Note 12, “Convertible Notes, ” of Notes to Consolidated Financial Statements of this Form 10-K for additional information on the adoption of ASU 2020-06 and the partial repurchases of the convertible notes, respectively.

Provision for Income Taxes

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Our effective tax rate for the year ended December 31, 2022 differed from the U.S.

statutory rate primarily due to the foreign-derived intangible income deduction and certain capitalized research expenditures, partially offset by the change in the valuation allowance against U.S.

statutory rate primarily due to the foreign-derived intangible income deduction, acquisition indebtedness, and certain capitalized research expenditures, 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, 2021 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.

statutory rate primarily due to the foreign-derived intangible income deduction and certain capitalized research expenditures, 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.

statutory rate primarily due to the full valuation allowance on the current year tax loss.

We recorded a provision for incomes taxes of $5.0 million for the year ended December 31, 2021, 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 and an increase in the valuation allowance on California deferred tax assets.

For the year ended December 31, 2021, we paid withholding taxes of $20.4 million.

We recorded a provision for incomes taxes of $3.9 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.

We recorded a provision for income taxes of $6.5 million for the year ended December 31, 2022, which was primarily comprised of taxes on foreign earnings, withholding tax expense and tax expense from the amortization of indefinite-lived intangibles.

For the year ended December 31, 2022, we paid withholding taxes of $21.1 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.

We recorded a provision for incomes taxes of $5.0 million for the year ended December 31, 2021, which was primarily comprised of taxes on foreign earnings, withholding tax expense, tax expense from the amortization of indefinite-lived intangibles and an increase in the valuation allowance on California deferred tax assets.

For the year ended December 31, 2021, we paid withholding taxes of $20.4 million.

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federal and California deferred tax assets was appropriate.

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 $0.7 million of the valuation allowance on our deferred tax asset for California research and development tax credits.

In 2021, based on available evidence, we recorded a full valuation allowance on our California deferred tax assets.

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

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Net cash provided by operating activities $ 230.4 $ 209.2 $ 185.5

Net cash used in investing activities $ (115.7) $ (97.6) $ (141.5)

Net cash provided by (used in) investing activities $ 152.0 $ (115.7) $ (97.6)

Net cash used in financing activities $ (362.9) $ (114.2) $ (61.2)

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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.

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

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.

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The 2020 Repurchase Program replaced the previous 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.

years ended December 31, 2022 and 2021, we repurchased shares of our common stock under the 2020 Repurchase Program as discussed below.

On November 11, 2020, we entered into an accelerated share repurchase program with Deutsche Bank AG, London Branch as counterparty, through its agent Deutsche Bank Securities Inc.

(“Deutsche Bank”) (the “2020 ASR Program”).

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

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During the second quarter of 2021, the accelerated share repurchase program was completed and we received an additional 0.1 million shares of our common stock, which were retired, as the final settlement of the accelerated share repurchase program.

On June 15, 2021, we entered into the 2021 ASR Program with Deutsche Bank.

On June 15, 2021, we entered into an accelerated share repurchase program with Deutsche Bank (the “2021 ASR Program”).

The 2021 ASR Program was part of the share repurchase program previously authorized by our Board on October 29, 2020.

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The remaining $20.0 million of the initial payment was recorded as a reduction to stockholders’ equity as an unsettled forward contract indexed to our stock.

During the fourth quarter

of 2021, the accelerated share repurchase program was completed and we received an additional 0.4 million shares of our common stock, which were retired, as the final settlement of the accelerated share repurchase program.

As of December 31, 2021, there remained an outstanding authorization to repurchase approximately 12.9 million shares of our outstanding common stock under the 2020 Repurchase Plan.

During the fourth quarter of 2021, the accelerated share repurchase program was completed and we received an additional 0.4 million shares of our common stock, which were retired, as the final settlement of the accelerated share repurchase program.

On September 9, 2022, we entered into an accelerated share repurchase program with Wells Fargo Bank, National Association (“Wells Fargo”) (the “2022 ASR Program”).

The 2022 ASR Program was part of the share repurchase program previously authorized by our Board on October 29, 2020.

Under the 2022 ASR Program, we pre-paid to Wells Fargo the $100.0 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 Wells Fargo in the third quarter of 2022, which were retired and recorded as a $80.0 million reduction to stockholders’ equity.

The remaining $20.0 million of the initial payment was recorded as a reduction to stockholders’ equity as an unsettled forward contract indexed to our stock.

During the fourth quarter of 2022, the accelerated share repurchase program was completed and we received an additional 0.1 million shares of our common stock, which were retired, as the final settlement of the accelerated share repurchase program.

As of December 31, 2022, there remained an outstanding authorization to repurchase approximately 9.7 million shares of our outstanding common stock under the 2020 Repurchase Program.

Refer to “Share Repurchase Program” below.

Operating Activities

Cash provided by operating activities of $230.4 million for the year ended December 31, 2022 was primarily a t tributable to the cash generated from customer licensing, product sales and engineering services fees.

C hanges in operating assets and liabilities for the year ended December 31, 2022, primarily included a decrease in unbilled receivables and an increase in accounts payable, offset by decreases in income taxes payable, operating lease liabilities and deferred revenue, as well as increases in accrued salaries and benefits and other liabilities, inventories, accounts receivable and prepaids and other current assets.

Cash provided by operating activities of $209.2 million for the year ended December 31, 2021 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, 2021 primarily include d decreases in unbilled receivables, inventories, prepaids and other current assets and increases in accounts payable and deferred revenue, offset by increases in accounts receivable, as well as decreases in income taxes payable, accrued salaries and benefits and operating lease liabilities.

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.

Investing Activities

Cash provided by investing activities of $152.0 million for the year ended December 31, 2022 consisted of proceeds from the sale and maturities of available-for-sale marketable securities of $276.7 million and $59.6 million , respectively, and proceeds from the sale of an equity security of $3.0 million, offset by purchases of available-for-sale marketable securities of

$150.9 million , $17.5 million paid to acquire property, plant and equipment, the acquisition of Hardent for $16.1 million, net of cash acquired of $0.2 million, and the acquisition of intangible assets for $3.0 million .

Cash used in investing activities of $115.7 million for the year ended December 31, 2021 consisted of purchases of available-for-sale marketable securities of $567.9 million, $97.1 million paid for the acquisitions of AnalogX and PLDA, net of total cash acquired of $8.6 million, and $13.8 million paid to acquire property, plant and equipment, offset by proceeds from the maturities and sale of available-for-sale marketable securities of $336.2 million and $227.0 million, respectively.

Cash used in investing activities of $90.4 million for the year ended December 31, 2020 consisted o f 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 $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 our Payments and Ticketing businesses.

Financing Activities

Cash used in financing activit ies of $362.9 million for the year ended December 31, 2022 was primarily due to $258.1 million paid in connection with the partial repurchases of our 2023 Notes in the first and third quarters of 2022, an aggregate payment of $100.4 million as part of our 2022 ASR program (includes $0.4 million in fees related to the 2022 ASR program), $69.5 million paid in connection with the settlement of warrants associated with the partial repurchases of our 2023 Notes, $18.4 million in payments of taxes on restricted stock units and $14.4 million paid under installment payment arrangements to acquire fixed assets, offset by proceeds of $91.7 million from the settlement of senior convertible note hedges associated with the partial repurchases of our 2023 Notes and $6.1 million in proceeds from the issuance of common stock under equity incentive plans.

Cash used in financing activit ies of $114.2 million for the year ended December 31, 2021 was primarily due to an aggregate payment of $100.0 million to Deutsche Bank as part of the 2021 ASR Program.

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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.

Contractual Obligations

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Contractual obligations (1) (2)

Other contractual obligations $ 3,800 $ 3,200 $ 600 $ — $ — $ —

Software licenses (3)

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(2) For our lease commitments as of December 31, 2022, 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, 2021 were not material.

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

(5) In connection with the acquisitions of Northwest Logic in the third quarter of 2019 and the Secure Silicon IP and Protocols business in the fourth quarter of 2019, and the acquisitions of AnalogX and PLDA in the third quarter of 2021, we are obligated to pay retention bonuses to certain employees subject to certain eligibility and acceleration provisions including the condition of employment.

During the second and fourth quarters of 2022, we renewed certain software license agreements for engineering development tools, which are included in the table above.

As of December 31, 2022, approximately $15.6 million of the fair value of the software licenses was included in other current liabilities and $22.2 million was included in other long-term liabilities, in the accompanying Consolidated Balance Sheet of this Form 10-K.

(4) In connection with the acquisition of Northwest Logic in the third quarter of 2019, the Secure Silicon IP and Protocols business from Verimatrix, formerly Inside Secure, in the fourth quarter of 2019, the acquisitions of AnalogX and PLDA in the third quarter of 2021, and the acquisition of Hardent in the second quarter of 2022, we are obligated to pay retention bonuses to certain employees subject to certain eligibility and acceleration provisions, including the condition of employment.

(5) 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.

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

During 2022, we repurchased $162.1 million aggregate principal amount of our 2023 Notes.

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

Share Repurchase Program

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

The 2020 ASR Program was part of the 2020 Repurchase Program previously authorized by our Board on October 29, 2020.

The 2020 ASR Program was part of the 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.

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The remaining $20.0 million of the initial payment was recorded as a reduction to stockholders’ equity as an unsettled forward contract indexed to our stock.

During the fourth quarter

As of December 31, 2021, there remained an outstanding authorization to repurchase approximately 12.9 million shares of our outstanding common stock under the 2020 Repurchase Plan.

On September 9, 2022, we entered into the 2022 ASR Program with Wells Fargo.

The 2022 ASR Program was part of the share repurchase program previously authorized by our Board on October 29, 2020.

The remaining $20.0 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, 2022, there remained an outstanding authorization to repurchase approximately 9.7 million shares of our outstanding common stock under the 2020 Repurchase Program.

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

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During the year ended December 31, 2022, the cumulative price of $90.1 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.

In connection with the 2023 Notes, we separately entered into privately negotiated warrant transactions, whereby we sold warrants (the “Warrants”) to certain bank counterparties (the “Counterparties”) 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.

We received aggregate proceeds of approximately $23.2 million from the sale of the Warrants to the Counterparties.

The Warrants are separate transactions and are not part of the 2023 Notes or Convertible Note Hedge Transactions.

Holders of the 2023 Notes and Convertible Note Hedge Transactions will not have any rights with respect to the Warrants.

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

Internal Control Over Financial Reporting

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this report.

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021, the design and operation of our disclosure controls and procedures were effective at a reasonable assurance level.

As previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2020, our management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020, due to the inadequate design and maintenance of controls to evaluate and monitor the accounting for patent and technology licensing arrangements with unusual contract terms.

We have taken necessary remediation steps to address the material weakness discussed above to strengthen our internal control over financial reporting.

These include enhancement of our existing contract review control for patent and technology licensing arrangements, as well as implementation of a new control designed to evaluate and monitor, at inception and on a quarterly basis, the accounting assessment of patent and technology licensing arrangements with unusual terms.

Consequently, our management has concluded that the identified material weakness in internal control over financial reporting has been considered remediated as of December 31, 2021, as the related internal controls have been in operation for a sufficient period of time and our management has concluded, through testing, that these controls are operating effectively.

The Warrants are separate transactions and are not part of the 2023 Notes or the privately negotiated convertible note hedge transactions we entered into in November 2017 in connection with the 2023 Notes (“Convertible Note Hedge Transactions”).

The holders of the 2023 Notes and Convertible Note Hedge Transactions will not have any rights with respect to the Warrants.

In connection with the partial repurchase of our 2023 Notes in the first quarter of 2022, we entered into agreements with the Counterparties to retire the corresponding portions of warrants we had previously entered into with the Counterparties in connection with the issuance of the 2023 Notes.

Upon settlement, we paid $55.1 million in cash for the retirement of the proportionate amount of Warrants during the first quarter of 2022.

In connection with the partial repurchase of our 2023 Notes in the third quarter of 2022, we entered into agreements with the Counterparties to retire the corresponding portions of warrants we had previously entered into with the Counterparties in connection with the issuance of the 2023 Notes.

Upon settlement, we paid $14.4 million in cash for the retirement of the proportionate amount of Warrants during the third quarter of 2022.

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

Critical Accounting Policies and Estimates

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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.

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

Goods and services that are distinct 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;

We have established standalone selling prices for all of our distinct 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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Product revenue is recognized upon shipment of product to customers, net of accruals for estimated sales returns and allowances, and to distributors, net of accruals for price protection and rights of return on products unsold by the distributors.

To date, none of these accruals have been significant.

To date, none of these accruals have been material.

We transact with direct customers primarily pursuant to standard purchase orders for delivery of products and generally allow customers to cancel or change purchase orders within limited notice periods prior to the scheduled shipment date.

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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.

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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.

• 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, if required, when we receive the actual royalty report from the licensee.

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

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’ 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’ products, and 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.

We recognize license and customization services revenue at a point in time when final delivery is made or based on an over time model, depending on nature and amount of customization.

For the over time model, we recognize revenue over time by measuring the progress toward complete satisfaction of that performance obligation.

We measure progress using an input method.

We recognize revenue over time based on such progress measurement for each reporting period.

Due to the nature of the work performed in these arrangements, the estimation of the over time model 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.

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

We recognize support and maintenance revenue over time.

Significant Judgments

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.

Historically, no significant judgment has generally been required in determining the amount and timing of revenue from our contracts with customers, except for the following:

• There is significant judgment by us in determining the estimated man-months necessary for completing development and customization services.

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 significant changes in estimates.

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

• For contract revenue where we recognize revenue over time, the key factor reviewed by us to estimate costs to complete each contract is the estimated man-months necessary to complete the project.

• 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 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 sales and usage.

• We recognize revenue on variable fee licensing arrangements on the basis of sales and usage which we are required to estimate prior to receiving the final related reports from our customers.

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.

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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.

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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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.

Refer to Note 14.

Equity Incentive Plans and Stock-Based Compensation,” of Notes to Consolidated Financial Statements of this Form 10-K for more information regarding the valuation of stock-based compensation.

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.

Refer to Note 14, “ Equity Incentive Plans and Stock-Based Compensation,” of Notes to Consolidated Financial Statements of this Form 10-K for additional information regarding the valuation of stock-based compensation.

Business Combinations

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Recent Accounting Pronouncements

Refer to Note 3, Recent Accounting Pronouncements,” of Notes to Consolidated Financial Statements of this Form 10-K for discussion of recent accounting pronouncements including the respective expected dates of adoption.

Refer to Note 3, “Recent Accounting Pronouncements,” of Notes to Consolidated Financial Statements of this Form 10-K for a discussion of recent accounting pronouncements, including the respective expected dates of adoption.

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