RAMBUS INC (RMBS) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as described in more detail under “Note Regarding Forward-Looking Statements.” Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect. As a result of the factors described herein, and in the documents incorporated herein by reference, including, in particular, those factors described under “Risk Factors,” we undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes that are included elsewhere in this report.

Business Overview

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 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. 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. 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.

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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:

•Revenue of $454.8 million;

•Operating expenses of $270.3 million;

•Diluted net loss per share of $0.13; and

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

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.

Operational Highlights

Revenue Sources

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 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.

Royalty revenue is derived from our patent licenses, through which we provide our customers certain rights to our broad worldwide portfolio of patented inventions. Our patent licenses enable our customers to use a portion of our patent portfolio in their own digital electronics products. The licenses typically range in term up to ten years and define the specific field of use where our customers may utilize our inventions in their products. 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. 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. 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 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 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 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.

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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.

Trends

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

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. 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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Results of Operations

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

Product Revenue

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

Product revenue increased approximately $83.2 million to $227.1 million for the year ended December 31, 2022 from $143.9 million for 2021. The increase was due to continued market share gains of our memory interface chips.

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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 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, and our ability to meet our customers’ demands.

Royalties

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 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. We expect patent royalties will continue to vary from period to period based on our success in adding new customers, renewing or extending existing agreements, as well as the level of variation in our customers’ reported shipment volumes, sales price and mix, offset in part by the proportion of customer payments that are fixed or hybrid in nature. We also expect that our technology royalties will continue to vary from period to period based on our customers’ shipment volumes, sales prices and product mix.

Contract and Other Revenue

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.

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

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

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.

Cost of Contract and Other Revenue

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

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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.

Research and Development Expenses

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

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.

Sales, General and Administrative Expenses

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. Consistent with our business model, our licensing, sales and marketing activities aim to develop or strengthen relationships with potential new and current customers. 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 comparable recent or future periods.

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.

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

Amortization of Acquired Intangible Assets

Amortization expense is related to various acquired IP.

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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*    NM — percentage is not meaningful

In November 2020, we initiated a restructuring plan to reduce overall expenses to improve future profitability by reducing spending on research and development efforts and sales, general and administrative programs (the “2020 Restructuring Plan”). As a result, we recorded a charge of $3.3 million, primarily related to headcount costs. 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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*    NM — percentage is not meaningful

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.

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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.

Interest and Other Income (Expense), Net

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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 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, 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 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.

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 $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.

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. We continue to maintain a full valuation allowance on 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

Liquidity

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. Additionally, the majority of our cash and cash equivalents is in the United States. Our cash needs for the year ended December 31, 2022 were funded primarily from cash collected from our customers.

We do not anticipate any liquidity constraints as a result of either the current credit environment or investment fair value fluctuations. Additionally, we have the intent and ability to hold our debt investments that have unrealized losses in accumulated other comprehensive gain (loss) for a sufficient period of time to allow for recovery of the principal amounts invested. Further, we have no significant exposure to European sovereign debt. We continually monitor the credit risk in our portfolio and mitigate our credit risk exposures in accordance with our policies.

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

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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. 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. 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 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. Under the 2021 ASR Program, we pre-paid to Deutsche Bank the $100.0 million purchase price for our common stock and, in turn, we received an initial delivery of approximately 3.9 million shares of our common stock from Deutsche Bank in the second quarter of 2021, 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 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 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, 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 included 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 other liabilities, 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.

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

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$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 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.

Financing Activities

Cash used in financing activities 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 activities 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. We also paid $10.6 million in payments of taxes on restricted stock units, $12.5 million under installment payment arrangements to acquire fixed assets and $0.1 million in fees related to the 2021 ASR Program, offset by $9.0 million in proceeds from the issuance of common stock under equity incentive plans.

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.

Contractual Obligations

As of December 31, 2022, our material contractual obligations were as follows:

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(1)    The above table does not reflect possible payments in connection with unrecognized tax benefits of approximately $20.9 million including $19.6 million recorded as a reduction of long-term deferred tax assets and $1.3 million in long-term income taxes payable, as of December 31, 2022. As noted in Note 18, “Income Taxes,” of Notes to Consolidated Financial Statements of this Form 10-K, although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, we cannot reasonably estimate the outcome at this time.

(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.

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

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 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 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. 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. The 2021 ASR Program was part of the share repurchase program previously authorized by our Board on October 29, 2020. Under the 2021 ASR Program, we pre-paid to Deutsche Bank the $100.0 million purchase price for our common stock and, in turn, we received an initial delivery of approximately 3.9 million shares of our common stock from Deutsche Bank in the second quarter of 2021, 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 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 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. 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.

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, 2022, the cumulative price of $90.1 million was recorded as an increase to accumulated deficit.

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Warrants

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 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

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, investments, income taxes, litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Overview

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. 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 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.

Our revenue consists of product, royalty and contract and other revenue. 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. Royalty revenue consists of patent and technology license royalties. 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.

Product Revenue

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.

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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.

Royalty Revenue

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 or cancellation of fees already incurred 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. 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; as such, we do not allocate the transaction price between the rights granted at contract inception and those subsequently granted over time as a function of these additions.

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), 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 5% and 10%, 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, 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’ 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 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 support and maintenance revenue over time.

Significant Judgments

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:

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•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 which we are required to estimate prior to receiving the final related reports from our customers.

Goodwill

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. 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.

When goodwill is assessed for impairment, we have the option to perform an assessment of qualitative factors of impairment (optional assessment) prior to necessitating a quantitative impairment test. Should the optional assessment be used for any given year, qualitative factors to consider for a reporting unit include: cost factors; financial performance; legal, regulatory, contractual, political, business, or other factors; entity specific factors; industry and market considerations; macroeconomic conditions; and other relevant events and factors affecting the reporting unit. If we determine in the qualitative assessment that it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is required. For a reporting unit tested using a quantitative approach, we compare the fair value of the reporting unit with the carrying amount of the reporting unit, including goodwill. The fair value of the reporting unit is estimated using an income approach.

Under the income approach, we measure fair value of the reporting unit based on a projected cash flow method using a discount rate determined by our management which is commensurate with the risk inherent in its current business model. Our discounted cash flow projections are based on its annual financial forecasts developed internally by management for use in managing our business. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, then the amount of goodwill impairment will be the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

Intangible Assets

Intangible assets are comprised of existing technology, customer contracts and contractual relationships, and other definite-lived and indefinite-lived intangible assets. Identifiable intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. Identifiable definite-lived intangible assets are being amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from six months to ten years.

We amortize definite-lived assets over their estimated useful lives. We evaluate definite-lived and indefinite-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The carrying value is not recoverable if it exceeds the undiscounted cash flows resulting from the use of the asset and its eventual disposition. Our estimates of future cash flows attributable to our assets require significant judgment based on our historical and anticipated results and are subject to many factors. Factors we consider important which could trigger an impairment review include significant negative industry or economic trends, significant loss of clients, and significant changes in the manner of our use of the acquired assets or the strategy for our overall business.

When we determine that the carrying value of the assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure the potential impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value. Different assumptions and judgments could materially affect the calculation of the fair value of our assets.

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

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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. Under the income approach, we measure fair value of the indefinite-lived intangible assets based on a projected cash flow method using a discount rate determined by our management which is commensurate with the risk inherent in our current business model. Our discounted cash flow projections are based on our annual financial forecasts developed internally by our management for use in managing our business. If the fair value of the indefinite-lived intangible assets exceeds its carrying value, the indefinite-lived intangible assets are not impaired and no further testing is required. If the implied fair value of the indefinite-lived intangible assets is less than the carrying value, the difference is recorded as an impairment loss.

Income Taxes

As part of preparing our consolidated financial statements, we are required to calculate the income tax expense (benefit) which relates to the pretax income or loss for the period. 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, 2022, our consolidated balance sheet included net deferred tax assets, before valuation allowance, of approximately $180.0 million, which consists of net operating loss carryovers, tax credit carryovers, capitalized research, amortization, employee stock-based compensation expenses, certain liabilities and certain assets. As of December 31, 2022, we have a valuation allowance of $201.9 million, resulting in net deferred tax liabilities of $21.9 million.

We maintain liabilities for uncertain tax positions within our long-term income taxes payable accounts and as a reduction to existing deferred tax assets or other refundable taxes to the extent tax attributes are available to offset such liabilities. These liabilities involve judgment and estimation and are monitored by us based on the best information available including changes in tax regulations, the outcome of relevant court cases and other information.

The calculation of our tax liabilities involves uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although ASC 740, “Income Taxes,” provides further clarification on the accounting for uncertainty in income taxes, significant judgment is required by us. If the ultimate resolution of tax uncertainties is different from what is currently estimated, it could materially affect income tax expense.

Stock-Based Compensation

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.

The accounting guidance for share-based payments requires the measurement and recognition of compensation expense in our statement of operations for all share-based payment awards made to our employees, directors and consultants including employee stock options, nonvested equity stock and equity stock units, and employee stock purchase grants. Stock-based compensation expense is measured at grant date, based on the estimated fair value of the award, reduced by an estimate of the annualized rate of expected forfeitures, and is recognized as expense over the employees’ expected requisite service period, generally using the straight-line method. 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. 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

We account for acquisitions of businesses using the purchase method of accounting, which requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, as well as contingent consideration, where applicable, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded on our consolidated statements of operations.

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Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed and pre-acquisition contingencies where applicable. Although we believe the assumptions and estimates made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Significant estimates and assumptions made by us in estimating the fair value of the existing technologies included revenue growth rates, operating expense margins, technology obsolescence rates and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

Recent Accounting Pronouncements

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.