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 consolidated statements of operations and comprehensive income (loss). Although all of the Company's revenues in the periods presented have been derived from contracts with customers, revenues for the year ended December 31, 2018 have been recognized in accordance with ASC 606 while revenues for the other periods presented have been recognized under the previous revenue standard ASC 605.

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 has recognized 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 has allocated 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 has been 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 has been 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 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 has recognized 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 has determined 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 have been 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. After the adoption of ASC 606, the Company has recorded adjustments to decrease revenue by $326,000 and $333,000 during the three months ended June 30 and September 30, 2018, respectively, and recorded an adjustment to increase revenue by $189,000 during the three months ended December 31, 2018. The adjustments represent the difference between per-unit royalty based on actual sales reported by the Company's licensees in a quarter-lag, and the estimate of per-unit royalty that was reported in the same quarter the underlying sales occurred. The Company had no adjustment recorded 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 has recognized 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 has established contract assets for the unbilled minimum royalties on a contract basis. Such contract asset balance has been 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 continued 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 has been 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 year ended December 31, 2018 under ASC 606. Revenues for the years ended December 31, 2017 and 2016 are presented in accordance with ASC 605.



	Years Ended December 31,
	2018		2017		2016
	(in thousands)
Fixed fee license revenue	$	83,573	$	12,575	$	30,389
Per-Unit royalty revenue	26,984		21,514		25,641
Total royalty and license revenue	110,557		34,089		56,030
Development, services, and other	422		924		1,056
Total revenues	$	110,979	$	35,013	$	57,086

As of December 31, 2018, the Company had contract assets of $9.0 million included within prepaid expenses and other current assets, and $7.2 million included within other non-current assets, net, on the consolidated balance sheet. The balance of these contract assets increased by $11.2 million from January 1, 2018 to December 31, 2018, primarily related to certain contracts entered into during the year ended December 31, 2018 that included a minimum royalty arrangement. The balance of the contract assets as of December 31, 2018 also included the Company's estimate of per-unit royalty related to the underlying sales that occurred in the fourth quarter, 2018.

Impact of Adoption of ASC 606

Presented in the tables below is disclosure of the impact of adoption on the Company's consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2018, as well as consolidated balance sheet as of December 31, 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 years 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 number of shares and per share amounts.



	2018									2017			2016
	As Reported (ASC 606)			Adjustments			ASC 605			As Reported (ASC 605)			As Reported (ASC 605)
Revenues:
Fixed fee license revenue	$	83,573		$	(68,094	)	$	15,479		$	12,575		$	30,389
Per-unit royalty revenue	26,984			(8,482		)	18,502			21,514			25,641
Total royalty and license revenue	110,557			(76,576		)	33,981			34,089			56,030
Development, services, and other	422						422			924			1,056
Total revenues	110,979			(76,576		)	34,403			35,013			57,086
Total costs and operating expenses	57,878						57,878			80,435			72,349
Operating income (loss)	53,101			(76,576		)	(23,475		)	(45,422		)	(15,263		)
Interest and other income	1,634			—			1,634			611			754
Income (loss) before provision for income taxes	54,735			(76,576		)	(21,841		)	(44,811		)	(14,509		)
Provision for income taxes from continuing operations	(392		)	—			(392		)	(480		)	(25,521		)
Income (loss) from continuing operations	54,343			(76,576		)	(22,233		)	(45,291		)	(40,030		)
Income (loss) from discontinued operations, net of tax	—			—			—			—			649
Net income (loss)	$	54,343		$	(76,576	)	$	(22,233	)	$	(45,291	)	$	(39,381	)
Basic net income (loss) per share
Continuing operations	$	1.78		$	(2.51	)	$	(0.73	)	$	(1.55	)	$	(1.39	)
Discontinued operations	—			—			—			—			0.02
Total	$	1.78		$	(2.51	)	$	(0.73	)	$	(1.55	)	$	(1.37	)
Shares used in calculating basic net income (loss) per share	30,459			30,459			30,459			29,179			28,759
Diluted net income (loss) per share
Continuing operations	$	1.73		$	(2.51	)	$	(0.73	)	$	(1.55	)	$	(1.39	)
Discontinued operations	—			—			—			—			0.02
Total	$	1.73		$	(2.51	)	$	(0.73	)	$	(1.55	)	$	(1.37	)
Shares used in calculating diluted net income (loss) per share	31,407			30,459			30,459			29,179			28,759



	December 31, 2018									December 31, 2017
	As Reported (ASC 606)			Adjustments			ASC 605			As Reported (ASC 605)
Prepaid expenses and other current assets	$	9,856		$	(8,973	)	$	883		$	736
Other assets, net	7,532			(7,231		)	301			344
Other current liabilities	(3,194		)	220			(2,974		)	(3,896		)
Deferred revenue - current	(4,591		)	(10,040		)	(14,631		)	(4,424		)
Long-term deferred revenue	(30,203		)	(70,126		)	(100,329		)	(22,303		)
Accumulated deficit	$	98,521		$	95,329		$	193,850		$	171,616

Contracted Revenue

Based on contracts signed and payments received as of December 31, 2018, the Company expects to recognize $34.5 million revenue related to Performance Obligation B under its fixed fee license agreements, which is satisfied over time, including $13.6 million over one to three years and $20.9 million over more than three years.