REVENUE RECOGNITION

Revised Revenue Recognition Accounting Policy

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method. The new revenue standard has been applied to all contracts that were not completed as of the date of adoption. To the extent that modifications occurred prior to the adoption of ASC 606, the Company has reflected the aggregate impact of any modification when evaluating the impact of the adoption.

The Company's revenue is primarily derived from fixed fee license agreements and per-unit royalty agreements, along with less significant revenue earned from development, services and other revenue. The adoption of ASC 606 affected the Company's revenue recognition model for both fixed fee license revenue and per-unit royalty revenue presented as “royalty and license revenue” on the Company’s condensed consolidated statements of operations and comprehensive income (loss). All of the Company’s revenue in the periods presented have been derived from contracts with customers and consequently have been recognized under ASC 606.

Fixed fee license revenue

In applying ASC 606, the Company is required to recognize revenue from a fixed fee license agreement when it has satisfied its performance obligations, which typically occurs upon the transfer of rights to the Company's technology upon the execution of the license agreement. However, in certain contracts, the Company grants a license to its existing patent portfolio at the inception of the license agreement as well as rights to the portfolio as it evolves throughout the contract term. For such arrangements, the Company has concluded that it has two separate performance obligations:

•Performance Obligation A: to transfer rights to the Company's patent portfolio as it exists when the contract is executed;

•Performance Obligation B: to transfer rights to the Company's patent portfolio as it evolves over the term of the contract, including access to new patent applications that the licensee can benefit from over the term of the contract.

Under the Company's previous accounting practices under ASC 605, fixed license fees were generally recognized on a straight-line basis over the contract term. As a result of the adoption of ASC 606, if a fixed fee license agreement contains only Performance Obligation A, the Company will recognize most or all of the revenue from the agreement at the inception of the contract. For fixed fee license agreements that contain both Performance Obligation A and B, the Company will be required to allocate the transaction price based on the standalone price for each of the two performance obligations. The Company has developed a process, and established internal controls around such process, to estimate standalone prices related to Performance Obligation A and B using a number of factors primarily related to the attributes of its patent portfolio. Once the transaction price is allocated, the portion of the transaction price allocable to Performance Obligation A will be recognized in the quarter the license agreement is signed and the customer can benefit from rights provided in the contract, and the portion allocable to Performance Obligation B will be recognized on a straight-line basis over the contract term. For such contracts, a contract liability account will be established and included within "deferred revenue" on the condensed consolidated balance sheet. As the rights and obligations in a contract are interdependent, contract assets and contract liabilities that arise in the same contract have been presented on a net basis.

Historically, certain of the Company's license agreements contained fixed fees related to past infringements for which the fixed fees were recognized as revenue or recorded as a deduction to its operating expense in the quarter the license agreement was signed. After the adoption of ASC 606, the Company will recognize revenue from such fixed fees related to past infringements in the same manner in the quarter the license agreement is signed.

Payments for fixed fee license contracts typically are due in full within 30 - 45 days from execution of the contract. From time to time, the Company enters into a fixed fee license contract with payments due in a number of installments payable throughout the contract term. In such cases, the Company will determine if a significant financing component exists and if it does, the Company will recognize more or less revenue and corresponding interest expense or income, as appropriate.

Per-unit Royalty revenue

Under the Company's previous accounting practices under ASC 605, it recognized revenue from per-unit royalty agreements in the period in which the related royalty report was received from its licensees, generally one quarter in arrears from the period in which the underlying sales occurred (i.e. on a "quarter-lag"). ASC 606 requires an entity to record per-unit royalty revenue in the same period in which the licensee’s underlying sales occur. As the Company generally does not receive the per-unit licensee royalty reports for sales during a given quarter within the time frame that allows the Company to adequately review the reports and include the actual amounts in its quarterly results for such quarter, the Company accrues the related revenue based on estimates of its licensees’ underlying sales, subject to certain constraints on its ability to estimate such amounts. The Company’s estimates are developed based on a combination of available data including, but not limited to, approved customer forecasts, a lookback at historical royalty reporting for each of its customers, and industry information available for the licensed products.

As a result of accruing per-unit royalty revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true up revenue to the actual amounts reported by its licensees. During the three months ended June 30, 2018, the Company trued up approximately $(326,000) royalty revenue based on its licensees' reports for sales occurred in the previous quarter. The Company had no true-ups for the three months ended March 31, 2018.

Certain of the Company's per-unit royalty agreements contains a minimum royalty provision which sets forth minimum amounts to be received by the Company during the contract term. Per the Company's previous accounting policy under ASC 605, such minimum royalties were recognized as revenue at the end of each reporting period (usually a calendar year) if the actual royalties reported by the customer for that reporting period were below the minimum threshold set forth in the contract. Under ASC 606, minimum royalties are considered a fixed transaction price to which the Company will have an unconditional right once all other performance obligations, if any, are satisfied. Therefore, the Company recognizes all minimum royalties as revenue at the inception of the license agreement, or in the period in which all remaining revenue recognition criteria have been met. The Company will establish contract assets for the unbilled minimum royalties on a contract basis. Such contract asset balance will be reduced by the actual royalties reported by the licensee during the contract term until fully utilized, after which point any excess per-unit royalties reported will be recognized as revenue. As the rights and obligations in a contract are interdependent, contract assets and contract liabilities that arise in the same contract have been presented on a net basis.

Payments of per-unit royalties typically are due within 30 to 60 days from the end of the calendar quarter in which the underlying sales took place.

Development, services, and other revenue

With little change from its previous accounting practices related to development, service and other revenue, the Company will continue to recognize revenue from this stream when it has satisfied service obligations. Consistent with the Company’s previous accounting practices under ASC 605, the performance obligation related to its development, service and other revenue is satisfied over a period of time, and such revenue is recognized evenly over the period of performance obligation, which is generally consistent with the contractual term.

Adjustments upon Adoption of ASC 606

The following table summarizes adjustments related to the Company's adoption of ASC 606.



(in thousands)	Balance at December 31, 2017 as Reported under ASC 605			Adjustment for Fixed Fee License Revenue *		Elimination of Quarter-Lag Per-Unit Royalties			Total Adjustments upon Adoption of ASC 606			Balance at January 1, 2018 (ASC 606)
Prepaid expenses and other current assets	$	736				$	4,996		$	4,996		$	5,732
Deferred revenue - current	(4,424		)	1,766					1,766			(2,658		)
Long-term deferred revenue	(22,303		)	11,573					11,573			(10,730		)
Accumulated deficit	171,616			(13,339	)	(4,996		)	(18,335		)	153,281

* Adjustment for fixed fee license revenue includes both the recognition of Performance Obligation A upon the adoption of ASC 606, which had previously been deferred under ASC 605, and the change in the transaction price allocated to Performance Obligation B and consequently the revenue recognized as of January 1, 2018.

Disaggregated Revenue

The following table presents the disaggregation of the Company's revenue for the three and six months ended June 30, 2018 under ASC 606. Revenues for the three and six months ended June 30, 2017 are presented in accordance with ASC 605.



(in thousands)	Three Months Ended June 30,
	2018		2017		Increase (Decrease)
Fixed fee license revenue	$	1,881	$	1,765	$	116		7	%
Per-Unit royalty revenue	4,111		5,020		(909		)	(18	)%
Total royalty and license revenue	5,992		6,785		(793		)	(12	)%
Development, services, and other revenue	152		245		(93		)	(38	)%
Total revenues	$	6,144	$	7,030	$	(886	)	(13	)%

	Six Months Ended June 30,
	2018		2017		Increase (Decrease)
Fixed fee license revenue	$	77,637	$	4,275	$	73,362		1,716	%
Per-Unit royalty revenue	13,690		11,516		2,174			19	%
Total royalty and license revenue	91,327		15,791		75,536			478	%
Development, services, and other revenue	233		463		(230		)	(50	)%
Total revenues	$	91,560	$	16,254	$	75,306		463	%

For the three and six months ended June 30, 2018, the Company recognized $1.2 million and 1.8 million, respectively, as revenue that had been included in deferred revenue as of the beginning of the period. As of June 30, 2018, the Company had contract assets of $5.1 million and $4.1 million included within prepaid expenses and other current assets and other non-current assets on the condensed consolidated balance sheet, respectively. During the three-month period ended June 30, 2018, the balance of contract assets decreased by $0.1 million caused by the net change in the Company's estimates for its per-unit royalty revenues. During the six-month period ended June 30, 2018, the balance of contract assets increased by $4.3 million mainly driven by certain contracts entered into during the period which included a minimum royalty arrangement, partially offset by a decrease in the Company's estimate for its per-unit royalty revenues. During the three months ended June 30, 2018, there was no impairment of the contract assets.

Impact of Adoption of ASC 606

Presented in the tables below is disclosure of the impact of adoption on the Company's condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2018, as well as balance sheet as of June 30, 2018, in accordance with the requirements of ASC 606. The Company believes that this additional information is vital during the transition year to allow readers of its financial statements to compare financial results from the preceding financial year given the use of the modified retrospective method of adoption. The adoption of ASC 606 did not affect the Company's reported total amounts of cash flows from operating, investing and financing activities. Therefore, tables for this separate financial statement have not been provided.

Amounts contained in the tables below are in thousands, except per share data.



(in thousands)	Three Months Ended June 30,
	2018									2017
	As Reported (ASC 606)			Adjustments			ASC 605			As Reported (ASC 605)
Revenues:
Fixed fee license revenue	$	1,881		$	2,431		$	4,312		$	1,765
Per-unit royalty revenue	4,111			94			4,205			5,020
Total royalty and license revenue	5,992			2,525			8,517			6,785
Development, services, and other revenue	152			—			152			245
Total revenues	$	6,144		$	2,525		$	8,669		$	7,030
Operating expenses	14,439						14,439			21,941
Operating income (loss)	(8,295		)	2,525			(5,770		)	(14,911		)
Interest and other income	375			—			375			165
Income (loss) before (provision) benefit for income taxes	(7,920		)	2,525			(5,395		)	(14,746		)
Income tax (provision) benefit	162			—			162			(99		)
Net income (loss)	$	(7,758	)	$	2,525		$	(5,233	)	$	(14,845	)
Basic net income (loss) per share	$	(0.25	)	$	0.08		$	(0.17	)	$	(0.51	)
Diluted net income (loss) per share	$	(0.25	)	$	0.08		$	(0.17	)	$	(0.51	)


	Six Months Ended June 30,
	2018									2017
	As Reported (ASC 606)			Adjustments			ASC 605			As Reported (ASC 605)
Revenues:
Fixed fee license revenue	$	77,637		$	(69,909	)	$	7,728		$	4,275
Per-unit royalty revenue	13,690			(4,257		)	9,433			11,516
Total royalty and license revenue	91,327			(74,166		)	17,161			15,791
Development, services, and other revenue	233			—			233			463
Total revenues	$	91,560		$	(74,166	)	$	17,394		$	16,254
Operating expenses	29,750						29,750			44,017
Operating income (loss)	61,810			(74,166		)	(12,356		)	(27,763		)
Interest and other income	606			—			606			304
Income (loss) before provision for income taxes	62,416			(74,166		)	(11,750		)	(27,459		)
Income tax provision	(291		)	—			(291		)	(251		)
Net income (loss)	$	62,125		$	(74,166	)	$	(12,041	)	$	(27,710	)
Basic net income (loss) per share	$	2.06		$	(2.46	)	$	(0.40	)	$	(0.95	)
Diluted net income (loss) per share	$	2.00		$	(2.46	)	$	(0.40	)	$	(0.95	)



	June 30, 2018									December 31, 2017
	As Reported (ASC 606)			Adjustments			ASC 605			As Reported (ASC 605)
Prepaid expenses and other current assets	$	5,821		$	(5,123	)	$	698		$	736
Other non-current assets	4,421			(4,125		)	296			344
Deferred revenue - current	(4,769		)	(9,595		)	(14,364		)	(4,424		)
Long-term deferred revenue	(32,536		)	(73,851		)	(106,387		)	(22,303		)
Accumulated Deficit	$	91,156		$	92,501		$	183,657		$	171,616

Contracted Revenue

Based on contracts signed and payments received as of June 30, 2018, the Company expects to recognize $37.3 million revenue related to Performance Obligation B under its fixed fee license agreements, which is satisfied over time, including $14.1 million over one to three years, and $23.2 million over more than three years, respectively.