10-Q 1 rmbs-2015930x10q.htm 10-Q 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
ý     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-22339
_______________________________
RAMBUS INC.
(Exact name of registrant as specified in its charter)
_______________________________
Delaware
 
94-3112828
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1050 Enterprise Way, Suite 700
 Sunnyvale, California
 
 
 
94089
(Address of principal executive offices)
 
 
 
(ZIP Code)

Registrant’s telephone number, including area code: (408) 462-8000
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
 
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
The number of shares outstanding of the registrant’s Common Stock, par value $.001 per share, was 116,533,951 as of September 30, 2015.



RAMBUS INC.
TABLE OF CONTENTS
 
 
PAGE
Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014

2


NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These forward-looking statements include, without limitation, predictions regarding the following aspects of our future:
Success in the markets of our products and services or our customers’ products;
Sources of competition;
Research and development costs and improvements in technology;
Sources, amounts and concentration of revenue, including royalties;
Success in signing and renewing license agreements;
Terms of our licenses and amounts owed under license agreements;
Technology product development;
Dispositions, acquisitions, mergers or strategic transactions and our related integration efforts;
Impairment of goodwill and long-lived assets;
Pricing policies of our customers;
Changes in our strategy and business model, including the expansion of our portfolio of inventions, products and solutions to address additional markets in lighting, chip and system security;
Deterioration of financial health of commercial counterparties and their ability to meet their obligations to us;
Effects of security breaches or failures in our or our customers’ products and services on our business;
Engineering, sales and general and administration expenses;
Contract revenue;
Operating results;
International licenses and operations;
Effects of changes in the economy and credit market on our industry and business;
Ability to identify, attract, motivate and retain qualified personnel;
Effects of government regulations on our industry and business;
Manufacturing and supply partners and/or sale and distribution channels;
Growth in our business;
Methods, estimates and judgments in accounting policies;
Adoption of new accounting pronouncements;
Effective tax rates;
Restructurings and plans of termination;
Realization of deferred tax assets/release of deferred tax valuation allowance;
Trading price of our common stock;
Internal control environment;
The level and terms of our outstanding debt and the repayment or financing of such debt;
Litigation expenses;
Protection of intellectual property;
Any changes in laws, agency actions and judicial rulings that may impact the ability to enforce intellectual property rights;
Indemnification and technical support obligations;
Equity repurchase plans;
Issuances of debt or equity securities, which could involve restrictive covenants or be dilutive to our existing stockholders;

3


Outcome and effect of potential future intellectual property litigation and other significant litigation; and
Likelihood of paying dividends.
You can identify these and other forward-looking statements by the use of words such as “may,” “future,” “shall,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” “projecting” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.
Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A, “Risk Factors.” All forward-looking statements included in this document are based on our assessment of information available to us at this time. We assume no obligation to update any forward-looking statements.


4


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
RAMBUS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2015
 
December 31,
2014
 
(In thousands, except shares
and par value)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
216,553

 
$
154,126

Marketable securities
146,325

 
145,983

Accounts receivable
10,314

 
6,001

Prepaids and other current assets
10,859

 
8,541

Deferred tax assets
17,896

 
187

Total current assets
401,947

 
314,838

Intangible assets, net
70,426

 
89,371

Goodwill
116,899

 
116,899

Property, plant and equipment, net
59,077

 
64,023

Deferred tax assets, long-term
143,834

 
536

Other assets
3,690

 
2,612

Total assets
$
795,873

 
$
588,279

LIABILITIES & STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
5,928

 
$
6,962

Accrued salaries and benefits
9,362

 
14,840

Deferred revenue
5,129

 
4,133

Other current liabilities
7,191

 
8,723

Total current liabilities
27,610

 
34,658

Convertible notes, long-term
119,414

 
115,089

Long-term imputed financing obligation
38,751

 
39,063

Long-term income taxes payable
2,767

 
2,769

Other long-term liabilities
1,475

 
5,078

Total liabilities
190,017

 
196,657

Commitments and contingencies (Notes 9 and 13)


 


Stockholders’ equity:
 

 
 

Convertible preferred stock, $.001 par value:
 

 
 

Authorized: 5,000,000 shares
 

 
 

Issued and outstanding: no shares at September 30, 2015 and December 31, 2014

 

Common stock, $.001 par value:
 

 
 

Authorized: 500,000,000 shares
 

 
 

Issued and outstanding: 116,533,951 shares at September 30, 2015 and 115,161,675 shares at December 31, 2014
116

 
115

Additional paid-in capital
1,169,223

 
1,153,435

Accumulated deficit
(563,129
)
 
(761,526
)
Accumulated other comprehensive loss
(354
)
 
(402
)
Total stockholders’ equity
605,856

 
391,622

Total liabilities and stockholders’ equity
$
795,873

 
$
588,279

See Notes to Unaudited Condensed Consolidated Financial Statements

5


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share amounts)
Revenue:
 

 
 

 
 

 
 

Royalties
$
66,823

 
$
64,009

 
$
196,173

 
$
207,387

Contract and other revenue
6,956

 
5,703

 
23,332

 
17,131

Total revenue
73,779

 
69,712

 
219,505

 
224,518

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of revenue*
11,111

 
10,540

 
34,004

 
31,199

Research and development*
27,784

 
27,014

 
85,506

 
81,580

Sales, general and administrative*
17,860

 
18,200

 
53,701

 
55,639

Gain from sale of intellectual property
(106
)
 

 
(3,262
)
 
(170
)
Restructuring charges

 

 

 
39

Gain from settlement
(510
)
 
(510
)
 
(1,530
)
 
(1,530
)
Total operating costs and expenses
56,139

 
55,244

 
168,419

 
166,757

Operating income
17,640

 
14,468

 
51,086

 
57,761

Interest income and other income (expense), net
539

 
(549
)
 
874

 
(432
)
Interest expense
(3,117
)
 
(3,059
)
 
(9,291
)
 
(21,755
)
Interest and other income (expense), net
(2,578
)
 
(3,608
)
 
(8,417
)
 
(22,187
)
Income before income taxes
15,062

 
10,860

 
42,669

 
35,574

Provision for (benefit from) income taxes
(166,971
)
 
5,347

 
(155,727
)
 
17,214

Net income
$
182,033

 
$
5,513

 
$
198,396

 
$
18,360

Net income per share:
 

 
 

 
 

 
 

Basic
$
1.56

 
$
0.05

 
$
1.71

 
$
0.16

Diluted
$
1.52

 
$
0.05

 
$
1.67

 
$
0.16

Weighted average shares used in per share calculation:
 

 
 

 
 

 
 

Basic
116,444

 
114,523

 
115,940

 
114,080

Diluted
119,542

 
118,206

 
118,997

 
117,540

_________________________________________
*    Includes stock-based compensation:
Cost of revenue
$
12

 
$
12

 
$
51

 
$
34

Research and development
$
1,548

 
$
1,648

 
$
5,303

 
$
5,574

Sales, general and administrative
$
2,008

 
$
1,781

 
$
6,395

 
$
5,587


See Notes to Unaudited Condensed Consolidated Financial Statements

6


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In thousands)
 
2015
 
2014
 
2015
 
2014
Net income
 
$
182,033

 
$
5,513

 
$
198,396

 
$
18,360

Other comprehensive income:
 
 

 
 

 
 

 
 

Foreign currency translation adjustment
 

 

 
9

 

Unrealized gain (loss) on marketable securities, net of tax
 
13

 
12

 
40

 
(39
)
Total comprehensive income
 
$
182,046

 
$
5,525

 
$
198,445

 
$
18,321


See Notes to Unaudited Condensed Consolidated Financial Statements

7


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
198,396

 
$
18,360

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Stock-based compensation
11,749

 
11,195

Depreciation
9,374

 
10,350

Amortization of intangible assets
18,914

 
20,295

Non-cash interest expense and amortization of convertible debt issuance costs
4,744

 
13,226

Impairment of investment in non-marketable equity security

 
600

Deferred income taxes
(171,509
)
 
6,475

Gain from sale of intellectual property and property, plant and equipment, net
(3,257
)
 
(170
)
Change in operating assets and liabilities:
 

 
 

Accounts receivable
(4,313
)
 
(2,848
)
Prepaid expenses and other assets
(3,736
)
 
(1,714
)
Accounts payable
(1,001
)
 
425

Accrued salaries and benefits and other liabilities
(7,370
)
 
(23,541
)
Income taxes payable
593

 
(3,999
)
Deferred revenue
1,674

 
1,761

Net cash provided by operating activities
54,258

 
50,415

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(4,749
)
 
(5,593
)
Purchases of marketable securities
(124,862
)
 
(200,211
)
Maturities of marketable securities
81,396

 
86,636

Proceeds from sale of marketable securities
43,134

 
17,689

Proceeds from sale of intellectual property and property, plant and equipment
3,510

 
2,500

Net cash used in investing activities
(1,571
)
 
(98,979
)
Cash flows from financing activities:
 
 
 
Proceeds received from issuance of common stock under employee stock plans
10,081

 
8,336

Principal payments against lease financing obligation
(341
)
 
(226
)
Payments under installment payment arrangement

 
(56
)
Repayment of convertible senior notes

 
(172,500
)
Net cash provided by (used in) financing activities
9,740

 
(164,446
)
Net increase (decrease) in cash and cash equivalents
62,427

 
(213,010
)
Cash and cash equivalents at beginning of period
154,126

 
338,696

Cash and cash equivalents at end of period
$
216,553

 
$
125,686

 
 
 
 
Non-cash investing activities during the period:
 

 
 

Property, plant and equipment received and accrued in accounts payable and other liabilities
$
542

 
$
762


See Notes to Unaudited Condensed Consolidated Financial Statements

8


RAMBUS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Rambus Inc. (“Rambus” or the “Company”) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. Investments in entities with less than 20% ownership or in which the Company does not have the ability to significantly influence the operations of the investee are being accounted for using the cost method and are included in other assets.
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) necessary to state fairly the financial position and results of operations for each interim period presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Certain information and Note disclosures included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in Form 10-K for the year ended December 31, 2014.
Operating Segment Definitions
Operating segments are based upon Rambus' internal organization structure, the manner in which its operations are managed, the criteria used by its Chief Operating Decision Maker ("CODM") to evaluate segment performance and availability of separate financial information regularly reviewed for resource allocation and performance assessment.
The Company determined its CODM to be the Chief Executive Officer and determined its operating segments to be: (1) Memory and Interface Division ("MID"), which focuses on the design, development and licensing of technology that is related to memory and interfaces; (2) Cryptography Research Division ("CRD"), which focuses on the design, development and licensing of technologies for chip and system security and anti-counterfeiting; (3) Emerging Solutions Division ("ESD"), which includes the computational sensing and imaging group along with the development efforts in the area of emerging technologies; and (4) Lighting and Display Technologies ("LDT"), which focuses on the design, development and licensing of technologies for lighting.
For the three and nine months ended September 30, 2015, only MID and CRD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining other operating segment were shown under “Other.”
Reclassifications
Certain prior periods' amounts were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported net income for any of the periods presented.
2. Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718)," which makes amendments to the codification topic 718, "Accounting for Share-Based Payments," when the terms of an award provide that a performance target could be achieved after the requisite service period. The new accounting standards update becomes effective for the Company on January 1, 2016. The Company is currently evaluating the impact that this guidance will have on its financial position, results of operations or cash flows.

9


In May 2014, the FASB and International Accounting Standards Board issued their converged accounting standards update on revenue recognition. The core principle of the new guidance is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new guidance also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. In August 2015, the FASB deferred the effective date of this accounting standards update by one year. The new accounting standards update becomes effective for the Company on January 1, 2018. The Company is currently evaluating the impact that this guidance will have on its financial condition and results of operations.
3. Earnings Per Share
Basic earnings per share is calculated by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing the earnings by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, employee stock purchases, restricted stock and restricted stock units and shares issuable upon the conversion of convertible notes. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instrument was exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a net loss is reported.
The following table sets forth the computation of basic and diluted net income per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income per share:
(In thousands, except per share amounts)
Numerator:
 

 
 

 
 
 
 
Net income
$
182,033

 
$
5,513

 
$
198,396

 
$
18,360

Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
116,444

 
114,523

 
115,940

 
114,080

Effect of potential dilutive common shares
3,098

 
3,683

 
3,057

 
3,460

Weighted-average shares outstanding - diluted
119,542

 
118,206

 
118,997

 
117,540

Basic net income per share
$
1.56

 
$
0.05

 
$
1.71

 
$
0.16

Diluted net income per share
$
1.52

 
$
0.05

 
$
1.67

 
$
0.16

For the three months ended September 30, 2015 and 2014, options to purchase approximately 2.6 million and 3.9 million shares, respectively, and for the nine months ended September 30, 2015 and 2014, options to purchase approximately 2.6 million and 5.7 million shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise, taxes and related unrecognized stock-based compensation expense.
4. Intangible Assets and Goodwill
Goodwill
The following tables present goodwill information for each of the reportable segments for the nine months ended September 30, 2015:
Reportable Segment:
 
As of December 31, 2014
 
Additions to Goodwill
 
Impairment Charge of Goodwill
 
As of September 30, 2015
 
 
(In thousands)
MID
 
$
19,905

 
$

 
$

 
$
19,905

CRD
 
96,994

 

 

 
96,994

Total
 
$
116,899

 
$

 
$

 
$
116,899



10


 
 
As of
 
 
September 30, 2015
Reportable Segment:
 
Gross Carrying Amount
 
Accumulated Impairment Losses
 
Net Carrying Amount
 
 
(In thousands)
MID
 
$
19,905

 
$

 
$
19,905

CRD
 
96,994

 

 
96,994

Other
 
21,770

 
(21,770
)
 

Total
 
$
138,669

 
$
(21,770
)
 
$
116,899

Intangible Assets
The components of the Company’s intangible assets as of September 30, 2015 and December 31, 2014 were as follows:
 
 
 
As of September 30, 2015
 
Useful Life
 
Gross Carrying
 Amount
 
Accumulated
 Amortization
 
Net Carrying
 Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
185,321

 
$
(121,485
)
 
$
63,836

Customer contracts and contractual relationships
1 to 10 years
 
31,093

 
(24,503
)
 
6,590

Non-compete agreements
3 years
 
300

 
(300
)
 

Total intangible assets
 
 
$
216,714


$
(146,288
)
 
$
70,426

 
 
 
As of December 31, 2014
 
Useful Life
 
Gross Carrying
 Amount
 
Accumulated
 Amortization
 
Net Carrying
 Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
185,321

 
$
(104,426
)
 
$
80,895

Customer contracts and contractual relationships
1 to 10 years
 
31,093

 
(22,617
)
 
8,476

Non-compete agreements
3 years
 
300

 
(300
)
 

Total intangible assets
 
 
$
216,714

 
$
(127,343
)
 
$
89,371


During the three and nine months ended September 30, 2015, the Company did not purchase or sell any intangible assets. During the nine months ended September 30, 2014, the Company sold portfolios of its intellectual property covering wireless and other technologies for $4.4 million and the related gain was recorded as gain from sale of intellectual property and revenue in the condensed consolidated statements of operations.
The favorable contracts (included in customer contracts and contractual relationships) are acquired patent licensing agreements where the Company has no performance obligations. Cash received from these acquired favorable contracts reduces the favorable contract intangible asset. For the three months ended September 30, 2015 and 2014, the Company did not receive any cash related to the favorable contracts, respectively. For the nine months ended September 30, 2015 and 2014, the Company received $0.1 million and $0.9 million related to the favorable contracts, respectively. As of September 30, 2015 and December 31, 2014, the net balance of the favorable contract intangible assets was zero and $0.1 million, respectively.

11


Amortization expense for intangible assets for the three and nine months ended September 30, 2015 was $6.3 million and $18.9 million, respectively. Amortization expense for intangible assets for the three and nine months ended September 30, 2014 was $6.7 million and $20.3 million, respectively. The estimated future amortization expense of intangible assets as of September 30, 2015 was as follows (amounts in thousands):
Years Ending December 31:
Amount
2015 (remaining 3 months)
$
6,160

2016
24,311

2017
23,709

2018
10,827

2019
1,789

Thereafter
3,630

 
$
70,426


It is reasonably possible that the businesses could perform significantly below the Company's expectations or a deterioration of market and economic conditions could occur. This would adversely impact the Company's ability to meet its projected results, which could cause the goodwill in any of its reporting units or long-lived assets in any of its asset groups to become impaired. Significant differences between these estimates and actual cash flows could materially affect the Company's future financial results. If the Company determines that its goodwill or long-lived assets are impaired, it would be required to record a non-cash charge that could have a material adverse effect on its results of operations and financial position.

5.  Segments and Major Customers
For the three and nine months ended September 30, 2015, MID and CRD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segments were shown under “Other.” Additionally, some employees moved departments in the fourth quarter of 2014 causing a change in the prior period reportable segment financial results. The presentation of the 2014 segment data has been updated accordingly to conform to the updated segment presentation.
The Company evaluates the performance of its segments based on segment operating income (loss), which is defined as revenue minus segment operating expenses. Segment operating expenses are comprised of direct operating expenses.
Segment operating expenses do not include sales, general and administrative expenses and the allocation of certain expenses managed at the corporate level, such as stock-based compensation, amortization, and certain bonus and acquisition costs. The “Reconciling Items” category includes these unallocated sales, general and administrative expenses as well as corporate level expenses.
The tables below present reported segment operating income (loss) for the three and nine months ended September 30, 2015 and 2014, respectively.
 
For the Three Months Ended September 30, 2015
 
For the Nine Months Ended September 30, 2015
 
MID
 
CRD
 
Other
 
Total
 
MID
 
CRD
 
Other
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
55,383

 
$
12,246

 
$
6,150

 
$
73,779

 
$
164,696

 
$
36,849

 
$
17,960

 
$
219,505

Segment operating expenses
11,734

 
6,653

 
9,276

 
27,663

 
36,055

 
21,317

 
25,306

 
82,678

Segment operating income (loss)
$
43,649

 
$
5,593

 
$
(3,126
)
 
$
46,116

 
$
128,641

 
$
15,532

 
$
(7,346
)
 
$
136,827

Reconciling items
 

 
 
 
 

 
(28,476
)
 
 

 
 
 
 

 
(85,741
)
Operating income
 

 
 
 
 

 
$
17,640

 
 

 
 
 
 

 
$
51,086

Interest and other income (expense), net
 

 
 
 
 

 
(2,578
)
 
 

 
 
 
 

 
(8,417
)
Income before income taxes
 

 
 
 
 

 
$
15,062

 
 

 
 
 
 

 
$
42,669


12


 
For the Three Months Ended September 30, 2014
 
For the Nine Months Ended September 30, 2014
 
MID
 
CRD
 
Other
 
Total
 
MID
 
CRD
 
Other
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
52,495

 
$
11,255

 
$
5,962

 
$
69,712

 
$
172,314

 
$
36,929

 
$
15,275

 
$
224,518

Segment operating expenses
10,337

 
7,356

 
9,793

 
27,486

 
28,655

 
21,076

 
27,640

 
77,371

Segment operating income (loss)
$
42,158

 
$
3,899

 
$
(3,831
)
 
$
42,226

 
$
143,659

 
$
15,853

 
$
(12,365
)
 
$
147,147

Reconciling items
 

 
 
 
 

 
(27,758
)
 
 

 
 
 
 

 
(89,386
)
Operating income
 

 
 
 
 

 
$
14,468

 
 

 
 
 
 

 
$
57,761

Interest and other income (expense), net
 

 
 
 
 

 
(3,608
)
 
 

 
 
 
 

 
(22,187
)
Income before income taxes
 

 
 
 
 

 
$
10,860

 
 

 
 
 
 

 
$
35,574

The Company’s CODM does not review information regarding assets on an operating segment basis. Additionally, the Company does not record intersegment revenue or expense.
Accounts receivable from the Company's major customers representing 10% or more of total accounts receivable at September 30, 2015 and December 31, 2014, respectively, was as follows:
 
 
As of
Customer 
 
September 30, 2015
 
December 31, 2014
Customer 1 (Other segment)
 
50%
 
50%
Customer 2 (CRD reportable segment)
 
37%
 
*
Customer 3 (MID reportable segment)
 
*
 
33%
_________________________________________
*    Customer accounted for less than 10% of total accounts receivable in the period
Revenue from the Company’s major customers representing 10% or more of total revenue for the three and nine months ended September 30, 2015 and 2014, respectively, was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Customer 
 
2015
 
2014
 
2015
 
2014
Customer A (MID and CRD reportable segments)
 
20
%
 
22
%
 
21
%
 
20
%
Customer B (MID reportable segment)
 
21
%
 
17
%
 
18
%
 
16
%
Customer C (MID reportable segment)
 
13
%
 
14
%
 
13
%
 
13
%

Revenue from customers in the geographic regions based on the location of contracting parties was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(In thousands)
 
2015
 
2014
 
2015
 
2014
South Korea
 
$
30,821

 
$
26,821

 
$
84,463

 
$
80,620

USA
 
33,146

 
24,950

 
90,530

 
81,522

Japan
 
3,460

 
6,497

 
19,866

 
23,140

Europe
 
1,571

 
4,238

 
8,287

 
17,077

Canada
 
6

 
1,754

 
207

 
5,365

Singapore
 
3,222

 
3,910

 
11,042

 
10,170

Asia-Other
 
1,553

 
1,542

 
5,110

 
6,624

Total
 
$
73,779

 
$
69,712

 
$
219,505

 
$
224,518



13


6. Marketable Securities
Rambus invests its excess cash and cash equivalents primarily in U.S. government sponsored obligations, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within three years.  As of September 30, 2015 and December 31, 2014, all of the Company’s cash equivalents and marketable securities had a remaining maturity of less than one year.
All cash equivalents and marketable securities are classified as available-for-sale. Total cash, cash equivalents and marketable securities are summarized as follows:
 
 
As of September 30, 2015
(In thousands)
 
Fair Value
 
Amortized
 Cost
 
Gross
 Unrealized
 Gains
 
Gross
 Unrealized
 Losses
 
Weighted
 Rate of
 Return
Money market funds
 
$
186,481

 
$
186,481

 
$

 
$

 
0.01
%
Corporate notes, bonds and commercial paper
 
146,325

 
146,398

 
6

 
(79
)
 
0.44
%
Total cash equivalents and marketable securities
 
332,806

 
332,879

 
6

 
(79
)
 
 

Cash
 
30,072

 
30,072

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
362,878

 
$
362,951

 
$
6

 
$
(79
)
 
 

 
 
As of December 31, 2014
(In thousands)
 
Fair Value
 
Amortized
 Cost
 
Gross
 Unrealized
 Gains
 
Gross
 Unrealized
 Losses
 
Weighted
 Rate of
 Return
Money market funds
 
$
124,938

 
$
124,938

 
$

 
$

 
0.01
%
Corporate notes, bonds and commercial paper
 
145,983

 
146,096

 
1

 
(114
)
 
0.25
%
Total cash equivalents and marketable securities
 
270,921

 
271,034

 
1

 
(114
)
 
 

Cash
 
29,188

 
29,188

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
300,109

 
$
300,222

 
$
1

 
$
(114
)
 
 


Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:
 
As of
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Cash equivalents
$
186,481

 
$
124,938

Short term marketable securities
146,325

 
145,983

Total cash equivalents and marketable securities
332,806

 
270,921

Cash
30,072

 
29,188

Total cash, cash equivalents and marketable securities
$
362,878

 
$
300,109


The Company continues to invest in highly rated quality, highly liquid debt securities. As of September 30, 2015, these securities have a remaining maturity of less than one year. The Company holds all of its marketable securities as available-for-sale, marks them to market, and regularly reviews its portfolio to ensure adherence to its investment policy and to monitor individual investments for risk analysis, proper valuation, and unrealized losses that may be other than temporary.


14


The estimated fair value of cash equivalents and marketable securities classified by the length of time that the securities have been in a continuous unrealized loss position at September 30, 2015 and December 31, 2014 are as follows:
 
Fair Value
 
Gross Unrealized Loss
 
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Less than one year
 

 
 

 
 

 
 

Corporate notes, bonds and commercial paper
$
110,870

 
$
139,989

 
$
(79
)
 
$
(114
)

The gross unrealized loss at September 30, 2015 and December 31, 2014 was not material in relation to the Company’s total available-for-sale portfolio. The gross unrealized loss can be primarily attributed to a combination of market conditions as well as the demand for and duration of the corporate notes and bonds. There is no requirement to sell and the Company believes that it can recover the amortized cost of these investments. The Company has found no evidence of impairment due to credit losses in its portfolio. Therefore, these unrealized losses were recorded in other comprehensive income. However, the Company cannot provide any assurance that its portfolio of cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require the Company in the future to record an impairment charge for credit losses which could adversely impact its financial results.
See Note 7, “Fair Value of Financial Instruments,” for discussion regarding the fair value of the Company’s cash equivalents and marketable securities.
7. Fair Value of Financial Instruments
The Company reviews the pricing inputs by obtaining prices from a different source for the same security on a sample of its portfolio. The Company has not adjusted the pricing inputs it has obtained. The following table presents the financial instruments that are carried at fair value and summarizes the valuation of its cash equivalents and marketable securities by the above pricing levels as of September 30, 2015 and December 31, 2014:
 
As of September 30, 2015
 
Total
 
Quoted
 Market
 Prices in
 Active
 Markets
 (Level 1)
 
Significant
 Other
 Observable
 Inputs
 (Level 2)
 
Significant
 Unobservable
 Inputs
 (Level 3)
 
(In thousands)
Money market funds
$
186,481

 
$
186,481

 
$

 
$

Corporate notes, bonds and commercial paper
146,325

 

 
146,325

 

Total available-for-sale securities
$
332,806

 
$
186,481

 
$
146,325

 
$

 
As of December 31, 2014
 
Total
 
Quoted
 Market
 Prices in
 Active
 Markets
 (Level 1)
 
Significant
 Other
 Observable
 Inputs
 (Level 2)
 
Significant
 Unobservable
 Inputs
 (Level 3)
 
(In thousands)
Money market funds
$
124,938

 
$
124,938

 
$

 
$

Corporate notes, bonds and commercial paper
145,983

 

 
145,983

 

Total available-for-sale securities
$
270,921

 
$
124,938

 
$
145,983

 
$


The Company monitors its investments for other-than-temporary impairment and records appropriate reductions in carrying value when necessary. The Company monitors its investments for other-than-temporary losses by considering current factors, including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, reductions in carrying values when necessary and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in the market. Any other-than-temporary loss is reported under “Interest and other income (expense), net” in the condensed consolidated statement of operations.

15


For the three and nine months ended September 30, 2015 and 2014, there were no transfers of financial instruments between different categories of fair value.
The following table presents the financial instruments that are not carried at fair value but require fair value disclosure as of September 30, 2015 and December 31, 2014:
 
 
As of September 30, 2015
 
As of December 31, 2014
(In thousands)
 
Face
 Value
 
Carrying
 Value
 
Fair Value
 
Face
 Value
 
Carrying
 Value
 
Fair Value
1.125% Convertible Senior Notes due 2018 (the "2018 Notes")
 
$
138,000

 
$
119,414

 
$
158,609

 
$
138,000

 
$
115,089

 
$
159,293


The fair value of the convertible notes at each balance sheet date is determined based on recent quoted market prices for these notes which is a level 2 measurement. As discussed in Note 8, "Convertible Notes," as of September 30, 2015, the 2018 Notes are carried at their face value of $138.0 million, less any unamortized debt discount. The carrying value of other financial instruments, including accounts receivable, accounts payable and other liabilities, approximates fair value due to their short maturities.

8. Convertible Notes
The Company’s convertible notes are shown in the following table:
(In thousands)
 
As of September 30, 2015
 
As of December 31, 2014
1.125% Convertible Senior Notes due 2018
 
$
138,000

 
$
138,000

Unamortized discount
 
(18,586
)
 
(22,911
)
Total convertible notes
 
$
119,414

 
$
115,089

Less current portion
 

 

Total long-term convertible notes
 
$
119,414

 
$
115,089

Interest expense related to the notes for the three and nine months ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
2014 Notes coupon interest at a rate of 5%
$

 
$

 
$

 
$
3,929

2014 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 11.7%

 

 

 
8,744

2018 Notes coupon interest at a rate of 1.125%
388

 
403

 
1,179

 
1,179

2018 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 5.5%
1,605

 
1,515

 
4,744

 
4,482

Total interest expense on convertible notes
$
1,993

 
$
1,918

 
$
5,923

 
$
18,334



16


9. Commitments and Contingencies
As of September 30, 2015, the Company’s material contractual obligations were as follows (in thousands):
 
Total
 
Remainder of 2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
Contractual obligations (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

Imputed financing obligation (2)
$
29,896

 
$
1,520

 
$
6,156

 
$
6,302

 
$
6,447

 
$
6,602

 
$
2,869

Leases and other contractual obligations
7,566

 
1,439

 
3,831

 
1,540

 
546

 
210

 

Software licenses (3)
6,342

 
3,035

 
2,568

 
549

 
190

 

 

Convertible notes
138,000

 

 

 

 
138,000

 

 

Interest payments related to convertible notes
4,658

 

 
1,553

 
1,553

 
1,552

 

 

Total
$
186,462

 
$
5,994

 
$
14,108

 
$
9,944

 
$
146,735

 
$
6,812

 
$
2,869

_________________________________________
(1)
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $20.7 million including $18.5 million recorded as a reduction of long-term deferred tax assets and $2.2 million in long-term income taxes payable as of September 30, 2015. As noted below in Note 12, “Income Taxes,” although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
(2)
With respect to the imputed financing obligation, the main components of the difference between the amount reflected in the contractual obligations table and the amount reflected on the unaudited condensed consolidated balance sheets are the interest on the imputed financing obligation and the estimated common area expenses over the future periods. The amount includes the amended Ohio lease and the amended Sunnyvale lease.
(3)
The Company has commitments with various software vendors for non-cancellable agreements generally having terms longer than one year.
Building lease expense was approximately $0.7 million and $2.0 million for the three and nine months ended September 30, 2015, respectively. Building lease expense was approximately $0.6 million and $1.9 million for the three and nine months ended September 30, 2014, respectively. Deferred rent of $0.9 million and $1.1 million as of September 30, 2015 and December 31, 2014, respectively, was included primarily in other long-term liabilities.
Indemnification
The Company enters into standard license agreements in the ordinary course of business. Although the Company does not indemnify most of its customers, there are times when an indemnification is a necessary means of doing business. Indemnification covers customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement or any other claim by any third party arising as result of the applicable agreement with the Company. The Company generally attempts to limit the maximum amount of indemnification that the Company could be required to make under these agreements to the amount of fees received by the Company.
10. Equity Incentive Plans and Stock-Based Compensation
As of September 30, 2015, 12,560,716 shares of the 35,400,000 shares approved under the 2015 Equity Incentive Plan (the “2015 Plan”) remain available for grant, which included an increase of 4,000,000 shares approved under the 2015 Plan. On April 23, 2015, the Company's stockholders approved the 2015 Plan, which authorizes 4,000,000 shares for future issuance plus the number of shares that remained available for grant under the 2006 Plan as of the effective date of the 2015 Plan. The 2015 Plan became effective and replaced the 2006 Plan on April 23, 2015. The 2015 Plan was the Company’s only plan for providing stock-based incentive awards to eligible employees, executive officers, non-employee directors and consultants as of September 30, 2015. No further awards will be made under the 2006 Plan, but the 2006 Plan will continue to govern awards previously granted under it. In addition, any shares subject to stock options or other awards granted under the 2006 Plan that on or after the effective date of the 2015 Plan are forfeited, cancelled, exchanged or surrendered or terminate under the 2006 Plan will become available for grant under the 2015 Plan. Additionally, the 1997 Stock Option Plan (the “1997 Plan”) continues to govern awards previously granted under that plan.

17


A summary of shares available for grant under the Company’s plans is as follows:
 
Shares Available
 for Grant
Shares available as of December 31, 2014
10,724,228

Increase in shares approved for issuance
4,000,000

Stock options granted
(362,335
)
Stock options forfeited
1,401,928

Stock options expired under former plans
(619,422
)
Nonvested equity stock and stock units granted (1) (2)
(2,747,667
)
Nonvested equity stock and stock units forfeited (1)
163,984

Total available for grant as of September 30, 2015
12,560,716

_________________________________________
(1)
For purposes of determining the number of shares available for grant under the 2015 Plan (and previously the 2006 Plan) against the maximum number of shares authorized, each share of restricted stock granted reduces the number of shares available for grant by 1.5 shares and each share of restricted stock forfeited increases shares available for grant by 1.5 shares.
(2)
Amount includes 238,980 shares that have been reserved for potential future issuance related to certain performance unit awards discussed under the section titled "Nonvested Equity Stock and Stock Units" below.
General Stock Option Information
The following table summarizes stock option activity under the 1997 Plan, 2006 Plan and 2015 Plan for the nine months ended September 30, 2015 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of September 30, 2015.
 
Options Outstanding
 
 
 
 
 
Number of
 Shares
 
Weighted
 Average
 Exercise Price
 Per Share
 
Weighted
 Average
 Remaining
 Contractual
 Term (years)
 
Aggregate
 Intrinsic
 Value
 
(In thousands, except per share amounts)
Outstanding as of December 31, 2014
11,441,646

 
$
10.73

 
 
 
 

Options granted
362,335

 
$
11.27

 
 
 
 

Options exercised
(926,418
)
 
$
7.61

 
 
 
 

Options forfeited
(1,401,928
)
 
$
18.32

 
 
 
 

Outstanding as of September 30, 2015
9,475,635

 
$
9.93

 
6.00
 
$
36,128

Vested or expected to vest at September 30, 2015
9,087,205

 
$
9.99

 
5.92
 
$
34,808

Options exercisable at September 30, 2015
5,571,712

 
$
11.60

 
4.83
 
$
19,105


No stock options that contain a market condition were granted during the three and nine months ended September 30, 2015. As of both September 30, 2015 and December 31, 2014, there were 1,315,000 stock options outstanding that require the Company to achieve minimum market conditions in order for the options to become exercisable. The fair values of the options granted with a market condition were calculated, on their respective grant dates, using a binomial valuation model, which estimates the potential outcome of reaching the market condition based on simulated future stock prices.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at September 30, 2015, based on the $11.80 closing stock price of Rambus’ common stock on September 30, 2015 on the NASDAQ Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of September 30, 2015 was 7,416,409 and 3,817,568, respectively.

18


Employee Stock Purchase Plan
Under the 2006 Employee Stock Purchase Plan ("2006 ESPP"), the Company issued 315,100 shares at a price of $9.66 per share during the nine months ended September 30, 2015. The Company issued 374,588 shares at a price of $7.42 per share during the nine months ended September 30, 2014. As of September 30, 2015, 2,607,944 shares under the employee stock purchase plan remain available for issuance, which include the additional 2,000,000 shares from the 2015 Employee Stock Purchase Plan (“2015 ESPP”) approved by the Company's stockholders on April 23, 2015. The 2006 ESPP will remain in effect until the Company’s next offering period scheduled to begin on November 2, 2015 at which time the first offering period under the 2015 ESPP will begin.
Stock-Based Compensation
For the nine months ended September 30, 2015 and 2014, the Company maintained stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance based instruments. In addition, the Company sponsors the 2006 ESPP and 2015 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.
Stock Options
During the three months ended September 30, 2015, the Company did not grant any stock options. During the nine months ended September 30, 2015, the Company granted 362,335 stock options with an estimated total grant-date fair value of $1.7 million. During the three and nine months ended September 30, 2015, the Company recorded stock-based compensation expense related to stock options of $1.4 million and $5.9 million, respectively.
During the three and nine months ended September 30, 2014, the Company granted 252,232 and 2,168,309 stock options, respectively, with an estimated total grant-date fair value of $1.5 million and $9.1 million, respectively. During the three and nine months ended September 30, 2014, the Company recorded stock-based compensation expense related to stock options of $2.4 million and $6.9 million, respectively.
As of September 30, 2015, there was $8.3 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 2.1 years. The total fair value of shares vested as of September 30, 2015 was $41.4 million.
The total intrinsic value of options exercised was $0.9 million and $5.5 million for the three and nine months ended September 30, 2015, respectively. The total intrinsic value of options exercised was $1.7 million and $3.9 million for the three and nine months ended September 30, 2014, respectively. Intrinsic value is the total value of exercised shares based on the price of the Company’s common stock at the time of exercise less the cash received from the employees to exercise the options.
During the nine months ended September 30, 2015, net proceeds from employee stock option exercises totaled approximately $7.0 million.
Employee Stock Purchase Plan
For the three and nine months ended September 30, 2015, the Company recorded compensation expense related to the 2006 ESPP of $0.3 million and $1.2 million, respectively. For the three and nine months ended September 30, 2014, the Company recorded compensation expense related to the 2006 ESPP of $0.4 million and $2.2 million, respectively. As of September 30, 2015, there was $0.1 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under the 2006 ESPP. That cost is expected to be recognized over one month.
There were no tax benefits realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the three and nine months ended September 30, 2015 and 2014 calculated in accordance with accounting for share-based payments.
Valuation Assumptions
The fair value of stock awards is estimated as of the grant date using the Black-Scholes-Merton (“BSM”) option-pricing model assuming a dividend yield of 0% and the additional weighted-average assumptions as listed in the table below.

19


The following table presents the weighted-average assumptions used to estimate the fair value of stock options granted that contain only service conditions in the periods presented.
 
Stock Option Plans
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Stock Option Plans
 

 
 

 
 

 
 

Expected stock price volatility
%
 
44
%
 
41
%
 
40-44%

Risk free interest rate
%
 
2.1
%
 
1.2
%
 
2.1-2.2%

Expected term (in years)


 
6.0

 
6.0

 
6.0-6.1

Weighted-average fair value of stock options granted to employees
$

 
$
5.81

 
$
4.59

 
$
4.20

There were no stock options granted during the three months ended September 30, 2015.    
 
 
Employee Stock Purchase Plan
 
 
Nine Months Ended
 
 
September 30,
 
 
2015
 
2014
Employee Stock Purchase Plan
 
 

 
 

Expected stock price volatility
 
34
%
 
39-44%

Risk free interest rate
 
0.05
%
 
0.0-0.1%

Expected term (in years)
 
0.5

 
0.02-0.5

Weighted-average fair value of purchase rights granted under the purchase plan
 
$
3.48

 
$
3.91


Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the three and nine months ended September 30, 2015, the Company granted nonvested equity stock units totaling 90,556 and 1,672,458 shares under the 2006 Plan, respectively. During the three and nine months ended September 30, 2014, the Company granted nonvested equity stock units totaling 52,596 and 281,272 shares under the 2006 Plan, respectively. These awards have a service condition, generally a service period of four years, except in the case of grants to directors, for which the service period is 1 year. For the three and nine months ended September 30, 2015, the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $1.3 million and $19.3 million. For the three and nine months ended September 30, 2014, the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $0.7 million and $2.8 million. During the first quarter of 2015, the Company granted performance unit awards to certain Company executive officers with vesting subject to the achievement of certain performance conditions. The ultimate number of performance units that can be earned can range from 0% to 150% of target depending on performance relative to target over the applicable period. The shares earned will vest on the third anniversary of the date of grant. The Company's shares available for grant has been reduced to reflect the shares that could be earned at 150% of target. During the three and nine months ended September 30, 2015, the Company recorded $0.3 million and $0.8 million of stock-based compensation expense related to these performance unit awards.
For the three and nine months ended September 30, 2015, the Company recorded stock-based compensation expense of approximately $1.8 million and $4.7 million related to all outstanding nonvested equity stock grants. For the three and nine months ended September 30, 2014, the Company recorded stock-based compensation expense of approximately $0.7 million and $2.1 million related to all outstanding nonvested equity stock grants. Unrecognized stock-based compensation related to all nonvested equity stock grants, net of estimated forfeitures, was approximately $15.1 million at September 30, 2015. This amount is expected to be recognized over a weighted average period of 2.9 years.

20


The following table reflects the activity related to nonvested equity stock and stock units for the nine months ended September 30, 2015:
Nonvested Equity Stock and Stock Units
 
Shares
 
Weighted-
 Average
 Grant-Date
 Fair Value
Nonvested at December 31, 2014
 
673,864

 
$
9.23

Granted
 
1,672,458

 
$
11.53

Vested
 
(191,824
)
 
$
9.22

Forfeited
 
(109,322
)
 
$
10.47

Nonvested at September 30, 2015
 
2,045,176

 
$
11.04


11.  Stockholders’ Equity
Share Repurchase Program
During the nine months ended September 30, 2015, the Company did not repurchase any shares of its common stock under its share repurchase program.
On January 21, 2015, the Company's Board approved a new share repurchase program authorizing the repurchase of up to an aggregate of 20.0 million shares. Share repurchases under the plan may be made through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules, and regulations. There is no expiration date applicable to the plan. This new stock repurchase program replaced the previous program approved by the Board in February 2010 and canceled the remaining shares outstanding as part of the previous authorization. No repurchases have been made under the new plan.
The Company records stock repurchases as a reduction to stockholders’ equity. The Company records 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.
12. Income Taxes
The Company recorded a provision for (benefit from) income taxes of $(167.0) million and $5.3 million for the three months ended September 30, 2015 and 2014, respectively, and $(155.7) million and $17.2 million for the nine months ended September 30, 2015 and 2014, respectively. The benefit from income taxes for the three and nine months ended September 30, 2015 is primarily comprised of the tax benefit from the release of the valuation allowance on the Company's U.S. federal and state deferred tax assets, offset by federal, state and foreign taxes. The provision for income taxes for the three and nine months ended September 30, 2014 was primarily comprised of withholding taxes, state taxes and other foreign taxes based upon income earned during the period.
During the three and nine months ended September 30, 2015, the Company paid withholding taxes of $5.4 million and $15.0 million. During the three and nine months ended September 30, 2014, the Company paid withholding taxes of $4.8 million and $14.6 million, respectively.
As of September 30, 2015, the Company’s unaudited condensed consolidated balance sheets included net deferred tax assets, before valuation allowance, of approximately $182.7 million, which consists of net operating loss carryovers, tax credit carryovers, amortization, employee stock-based compensation expenses and certain liabilities, partially reduced by deferred tax liabilities associated with the convertible notes.
Management periodically evaluates the realizability of the Company's net deferred tax assets based on all available evidence, both positive and negative. The realizability of the Company's net deferred tax assets is dependent on its ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. Management evaluated the realizability of its net deferred tax assets based on all available evidence, both positive and negative, in determining that it was appropriate to release the valuation allowance for the Company's U.S. federal income deferred tax assets of $174.4 million as of September 30, 2015 in accordance with FASB ASC 740-10-30-16 to 25.
The Company emerged from a cumulative loss position over the previous three years during the first quarter of 2015. The cumulative three-year pre-tax income is considered positive evidence which is objective and verifiable, and thus, received significant weighting. The continued stability in the Company's operations along with the increased visibility into the adoption

21


of its security technology in the third quarter of 2015 provided additional evidence to the Company’s belief that it will generate sufficient taxable income in the future. Additional positive evidence considered by management in its assessment included a lack of unused operating loss carryforwards in the Company's history as well as anticipated future benefits from the cost management by the Company. Negative evidence management considered included economic uncertainties such as volatility of the semiconductor industry and uncertainties associated with the development of new products that could impact the Company’s ability to generate a sustained level of future profits.

Upon considering the relative impact of all evidence during the third quarter of 2015, both negative and positive, and the weight accorded to each, the Company concluded that it was more likely than not that its deferred tax assets would be realizable with the exception of primarily its California deferred tax assets that have not met the “more likely than not” realization threshold criteria. As a result, the Company released the related valuation allowance against such deferred tax assets which is included as a component of the benefit from income taxes in the accompanying unaudited condensed consolidated statement of operations. The Company continues to maintain a deferred tax asset valuation allowance of $20.9 million as of September 30, 2015.
The Company maintains liabilities for uncertain tax positions within its long-term income taxes payable accounts and as a reduction to existing deferred tax assets to the extent tax attributes are available to offset such liabilities. These liabilities involve judgment and estimation and are monitored by management based on the best information available including changes in tax regulations, the outcome of relevant court cases and other information.
As of September 30, 2015, the Company had approximately $20.7 million of unrecognized tax benefits, including $18.5 million recorded as a reduction of long-term deferred tax assets and $2.2 million in long-term income taxes payable. If recognized, approximately $2.2 million would be recorded as an income tax benefit. Approximately $18.5 million would be recognized for the remaining unrecognized tax benefits recorded as a reduction of long-term deferred tax asset. As of December 31, 2014, the Company had $19.9 million of unrecognized tax benefits, including $17.8 million recorded as a reduction of long-term deferred tax assets and $2.1 million recorded in long-term income taxes payable.
Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. At September 30, 2015 and December 31, 2014, an immaterial amount of interest and penalties is included in long-term income taxes payable.
Rambus files income tax returns for the U.S., California, India and various other state and foreign jurisdictions. The U.S. federal returns are subject to examination from 2012 and forward. The California returns are subject to examination from 2009 and forward. In addition, any research and development credit carryforward or net operating loss carryforward generated in prior years and utilized in these or future years may also be subject to examination. The India returns are subject to examination from fiscal year ended March 2009 and forward. The Company is currently under examination by California for the 2010 and 2011 tax years. The Company’s India subsidiary is under examination by the Indian tax administration for tax years beginning 2009. These examinations may result in proposed adjustments to the income taxes as filed during these periods. Management regularly assesses the likelihood of outcomes resulting from income tax examinations to determine the adequacy of their provision for income taxes and believes their provision for unrecognized tax benefits is adequate.
Additionally, the Company's future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of its deferred tax assets and liabilities or by changes in tax laws or interpretations of those laws.

13. Litigation and Asserted Claims
Rambus is not currently a party to any material pending legal proceeding; however, from time to time, Rambus may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial position or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies.


22


14. Agreements with SK hynix and Micron
SK hynix
On June 11, 2013, Rambus, SK hynix and certain related entities of SK hynix entered into a settlement agreement, pursuant to which the parties have agreed to release all claims against each other with respect to all outstanding litigation between them. Pursuant to the settlement agreement, Rambus and SK hynix entered into a semiconductor patent license agreement on June 11, 2013, under which SK hynix licenses from Rambus non-exclusive rights to certain Rambus patents and has agreed to pay Rambus cash amounts over the next five years. Under the license agreement, Rambus has granted to SK hynix (i) a paid-up perpetual patent license for certain identified SK hynix DRAM products and (ii) a five-year term patent license to all other DRAM and other semiconductor products.
In June 2015, the Company signed an amendment that extends its current agreement with SK hynix for an additional six years for use of Rambus memory-related patented innovations in SK hynix semiconductor products. The Company signed the original agreement with SK hynix for a five-year term in June 2013. Under the amendment, SK hynix has agreed to continue to pay the Company an average quarterly cash payment of $12.0 million which equates to $432.0 million over the remaining term of the agreement ending July 1, 2024, provided that (a) for each of the six full calendar quarters immediately following July 1, 2015, SK hynix will pay the Company a quarterly cash payment of $16.0 million, and (b) in addition, after December 1, 2017, SK hynix will have the option to make six quarterly cash payments of $8.0 million upon six months written notice. In addition, SK hynix has the option to renew the agreement for an additional three-year extension under the existing rate structure.
The agreements with SK hynix are considered a multiple element arrangement for accounting purposes. For a multiple element arrangement under the applicable accounting rules, the Company is required to identify specific elements of the arrangement and then determine when those elements should be recognized. The Company identified three elements in the arrangement: antitrust litigation settlement, settlement of past infringement, and license agreement. The Company considered several factors in determining the accounting fair value of the elements of the SK hynix agreements which included a third party valuation using an income approach (collectively the “SK hynix Fair Value”). The inputs and assumptions used in this accounting valuation were from a market participant perspective and included projected customer revenue, royalty rates, estimated discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model requires a significant amount of management judgment and discretion, and is based upon a number of factors, including the selection of industry comparables, market growth rates and other relevant factors. Changes in any number of these assumptions may have a substantial impact on the SK hynix Fair Value as assigned to each element. These inputs and assumptions represent management’s best estimates at the time of the transaction.
During the third quarter of 2015, the Company received cash consideration of $16.0 million from SK hynix. The amount was allocated between royalty revenue ($15.8 million) and gain from settlement ($0.2 million) based on the elements’ SK hynix Fair Value. During the nine months ended September 30, 2015, the Company received cash consideration of $40.0 million from SK hynix. The amount was allocated between royalty revenue ($39.5 million) and gain from settlement ($0.5 million) based on the elements’ SK hynix Fair Value.
The cumulative cash receipts through September 30, 2015 and the remaining future cash receipts from the agreements with SK hynix are expected to be recognized as follows assuming no adjustments to the payments under the terms of the agreements:
 
Cumulative Received
to-date as of September 30,
 
Estimated to Be Received in
 
 
 
Total Estimated
Cash Receipts
 
2015
 
Remainder
of 2015
 
2016
 
2017
 
2018
 
2019
 
2020 and Thereafter
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty revenue
$
110.4

 
$
15.8

 
$
63.9

 
$
48.0

 
$
40.0

 
$
32.0

 
$
216.0

 
$
526.1

Gain from settlement
1.6

 
0.2

 
0.1

 

 

 

 

 
1.9

Total
$
112.0

 
$
16.0

 
$
64.0

 
$
48.0

 
$
40.0

 
$
32.0

 
$
216.0

 
$
528.0

Micron
On December 9, 2013, Rambus, Micron and certain related entities of Micron entered into a settlement agreement, pursuant to which the parties have agreed that they will release all claims against each other with respect to all outstanding litigation between them and certain other potential claims. Pursuant to the settlement agreement, Rambus and Micron entered into a

23


semiconductor patent license agreement on December 9, 2013. Under the license agreement, Rambus has granted to Micron and its subsidiaries and certain affiliated entities (i) a paid-up perpetual patent license for certain identified Micron DRAM products and (ii) a seven-year term patent license to other memory and semiconductor products.
The agreements with Micron are considered a multiple element arrangement for accounting purposes. For a multiple element arrangement under the applicable accounting rules, the Company is required to identify specific elements of the arrangement and then determine when those elements should be recognized. The Company identified three elements in the arrangement: antitrust litigation settlement, settlement of past infringement, and license agreement. The Company considered several factors in determining the accounting fair value of the elements of the Micron agreements which included a third party valuation using an income approach (collectively the “Micron Fair Value”). The inputs and assumptions used in this accounting valuation were from a market participant perspective and included projected customer revenue, royalty rates, estimated discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model requires a significant amount of management judgment and discretion, and is based upon a number of factors, including the selection of industry comparables, market growth rates and other relevant factors. Changes in any number of these assumptions may have a substantial impact on the Micron Fair Value as assigned to each element. These inputs and assumptions represent management’s best estimates at the time of the transaction.
During the third quarter of 2015, the Company received cash consideration of $10.0 million from Micron. The amount was allocated between royalty revenue ($9.7 million) and gain from settlement ($0.3 million) based on the elements’ Micron Fair Value. During the nine months ended September 30, 2015, the Company received cash consideration of $30.0 million from Micron. The amount was allocated between royalty revenue ($29.0 million) and gain from settlement ($1.0 million) based on the elements’ Micron Fair Value.
The remaining $204.5 million is expected to be paid in successive quarterly payments of $10.0 million, concluding in the fourth quarter of 2020.
The cumulative cash receipts through September 30, 2015 and the remaining future cash receipts from the agreements with Micron are expected to be recognized as follows assuming no adjustments to the payments under the terms of the agreements:
 
Cumulative Received
to-date as of September 30,
 
Estimated to Be Received in
 
Total Estimated
Cash Receipts
 
2015
 
Remainder of 2015
 
2016
 
2017
 
2018
 
2019
 
2020
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty revenue
$
73.0

 
$
9.7

 
$
39.5

 
$
40.0

 
$
40.0

 
$
40.0

 
$
34.5

 
$
276.7

Gain from settlement
2.5

 
0.3

 
0.5

 

 

 

 

 
3.3

Total
$
75.5

 
$
10.0

 
$
40.0

 
$
40.0

 
$
40.0

 
$
40.0

 
$
34.5

 
$
280.0


24


15. Subsequent Event
During the fourth quarter of 2015, the Company announced that on October 16, 2015 the Board of Directors approved the commitment for a restructuring and a plan of termination resulting in a reduction of 8% of the Company's headcount. The reductions in expense and associated workforce are expected to be completed by the first quarter of 2016. The total estimated cash payout related to the reduction in force will be approximately $3.5 million, which is related to severance and termination benefits. The estimated non-cash expense is expected to be approximately $1 million.

25


Item 2. 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.
Rambus, RDRAM, XDR, FlexIO and FlexPhase are trademarks or registered trademarks of Rambus Inc. Other trademarks that may be mentioned in this quarterly report on Form 10-Q are the property of their respective owners.
Industry terminology, used widely throughout this report, has been abbreviated and, as such, these abbreviations are defined below for your convenience:
Differential Power Analysis
DPA
Dynamic Random Access Memory
DRAM
Light Emitting Diodes
LED
Rambus Dynamic Random Access Memory
RDRAM
eXtreme Data Rate
XDR
From time to time we will refer to the abbreviated names of certain entities and, as such, have provided a chart to indicate the full names of those entities for your convenience.
Advanced Micro Devices Inc.
AMD
Broadcom Corporation
Broadcom
Cryptography Research Division
CRD
Eaton Corporation plc
Eaton
Elpida Memory, Inc.
Elpida
Emerging Solutions Division
ESD
Freescale Semiconductor Inc.
Freescale
Fujitsu Limited
Fujitsu
General Electric Company
GE
Intel Corporation
Intel
International Business Machines Corporation
IBM
Lighting and Display Technology
LDT
LSI Corporation (now a division of Avago Technologies Limited)
LSI
Memory and Interfaces Division
MID
Micron Technologies, Inc.
Micron
Mobile Technology Division
MTD
Nanya Technology Corporation
Nanya
NVIDIA Corporation
NVIDIA
Qualcomm Incorporated
Qualcomm
Panasonic Corporation
Panasonic
Renesas Electronics
Renesas
Samsung Electronics Co., Ltd.
Samsung
SK hynix, Inc.
SK hynix
Sony Computer Electronics
Sony
ST Microelectronics N.V.
STMicroelectronics
Toshiba Corporation
Toshiba


26


Business Overview
We are an innovative technology solutions company that brings invention to market. Our customers leverage our customizable platforms, services and tools to improve, differentiate and accelerate the development of products and services. Our extensive technology portfolio addresses the evolving power, performance and security requirements of the mobile, cloud computing and connected device markets. We drive innovations in memory, chip interfaces and architectures, end-to-end security, and advanced LED lighting, while also looking to disruptions and opportunities in tomorrow’s high-growth markets. We generate revenue by licensing our inventions and solutions and providing services to market-leading companies.
While we have historically focused our efforts on the development of technologies for electronics memory and chip interfaces, we have expanded our portfolio of inventions and solutions to address additional markets in lighting, chip and system security, as well as new areas within the semiconductor industry, such as computational sensing and imaging. We intend to continue our growth into new technology fields, consistent with our mission to create great value through our innovations and to make those technologies available through both our licensing and non-licensing business models.
We have four operational units: (1) Memory and Interfaces Division, or MID, which focuses on the design, development and licensing of technology that is related to memory and interfaces; (2) Cryptography Research Division, or CRD, which focuses on the design, development and licensing of technologies for chip and system security and anti-counterfeiting; (3) Emerging Solutions Division, or ESD, which includes our computational sensing and imaging group along with our development efforts in the area of emerging technologies; and (4) Lighting and Display Technologies, or LDT, which focuses on the design, development and licensing of technologies for lighting. As of September 30, 2015, MID and CRD were considered reportable segments as they met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segments were shown under “Other.” For additional information concerning segment reporting, see Note 5, “Segments and Major Customers,” of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
Our inventions and technology solutions are primarily offered to our customers through either a patent license or a technology license. Royalties from patent licenses accounted for 85% of our consolidated revenue for both the three and nine months ended September 30, 2015, respectively, as compared to 89% for both the three and nine months ended September 30, 2014. Royalties from technology licenses accounted for 5% and 4% of our consolidated revenue for the three and nine months ended September 30, 2015, respectively, as compared to 3% for both the three and nine months ended September 30, 2014. Today, a majority of our revenues are derived from patent licenses, through which we provide our customers a license to use a certain portion of our broad portfolio of patented inventions. The license provides our customers with a defined right to use our innovations in the customer's own digital electronics products, systems or services, as applicable. The licenses may also define the specific field of use where our customers may use or employ our inventions in their products. License agreements are structured with fixed, variable or a hybrid of fixed and variable royalty payments over certain defined periods ranging for periods of up to ten years. Leading consumer product, semiconductor and system companies such as AMD, Broadcom, Cisco, Freescale, Fujitsu, GE, IBM, Intel, LSI, Micron, Nanya, Panasonic, Qualcomm, Renesas, Samsung, SK hynix, STMicroelectronics and Toshiba have licensed our patents for use in their own products. The majority of our intellectual property in MID was developed in-house and we have expanded our business strategy of monetizing our MID intellectual property to include the sale of select intellectual property. As any sales executed under this expanded strategy represent a component of our ongoing major or central operations and activities, we will record the related proceeds as revenue.
We also offer our customers technology licenses to support the implementation and adoption of our technology in their products or services. Our customers include leading companies such as Eaton, GE, IBM, Panasonic, Qualcomm, Samsung, Sony and Toshiba. Our technology license offerings include a range of technologies for incorporation into our customers' products and systems. We also offer a range of services as part of our technology licenses which can include know-how and technology transfer, product design and development, system integration, and other services. These technology license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Further, under technology licenses, our customers typically receive licenses to our patents necessary to implement these solutions in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts with us.
The remainder of our revenue is contract services revenue which includes license fees and engineering services fees. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenue or account receivables in any given period.
We intend to continue making significant expenditures associated with engineering, sales, general and administration and expect that these costs and expenses will continue to be a significant percentage of revenue in future periods. Whether such expenses increase or decrease as a percentage of revenue will be substantially dependent upon the rate at which our revenue or expenses change.

27


Our strategy is to evolve from providing primarily patent licenses to providing additional technology, products and services while creating and leveraging strategic synergies to increase revenue. One of our goals is to supplement our patent licensing business with additional licensing opportunities for our technologies, products and services to be incorporated into our customers’ products and/or systems. Our technology licenses are designed to support the implementation and adoption of our technology into our customers’ products or services. As part of these offerings, we can provide a range of services that can include access to technical experts, advanced system design and analysis, hardware and software to enhance design and validation, system IP and specifications, and process-specific hard and soft macros, along with other services. These technology license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Further, under technology licenses, our customers typically receive licenses to our patents necessary to implement these solutions in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts with us. We are also developing standards-based semiconductor chip offerings that feature leading-edge performance and advanced functionality as part of our growth strategy as described below.
We believe that the successful execution of this strategy requires an exceptional business model that relies on the skills and talent of our employees. Accordingly, we seek to hire and retain world-class scientific and engineering expertise in all of our fields of technological focus, as well as the executive management and operating personnel required to successfully execute our business strategy. In order to attract the quality of employees required for this business model, we have created an environment and culture that encourages, fosters and supports research, development and innovation in breakthrough technologies with significant opportunities for broad industry adoption. We believe we have created a compelling company for inventors and innovators who are able to work within a business model and platform that focuses on technology development to drive strong future growth.
As of September 30, 2015, our semiconductor, lighting, security and other technologies are covered by 1,802 U.S. and foreign patents. Additionally, we have 705 patent applications pending. Some of the patents and pending patent applications are derived from a common parent patent application or are foreign counterpart patent applications. We have a program to file applications for and obtain patents in the United States and in selected foreign countries where we believe filing for such protection is appropriate and would further our overall business strategy and objectives. In some instances, obtaining appropriate levels of protection may involve prosecuting continuation and counterpart patent applications based on a common parent application. We believe our patented innovations provide our customers with the ability to achieve improved performance, lower risk, greater cost-effectiveness and other benefits in their products and services.
Executive Summary
During the third quarter of 2015, we introduced the R+ DDR4 server memory chipset, RB26, for RDIMMs and LRDIMMs. The first in a family of R+ chips, the RB26 is an enhanced, JEDEC-compliant memory module chipset, or buffer chipset, designed to accelerate data-intensive applications, including real-time analytics, virtualization and in-memory computing, with increased speed, reliability and power-efficiency. We are currently in technical development with this buffer chipset which we are currently sampling to key potential customers and critical ecosystem partners. We are currently working to make the chipset commercially available, but we do not expect any material contribution to revenue from the chipset through 2016.

We also announced in the third quarter of 2015 that CRD has been selected by the Secure Content Storage Association, or SCSA, to run and manage the VIDITY™ Key Issuance Center. This service, part of the Cryptography Research Trust Services offering, manages cryptographic keys that SCSA-enabled devices and services use in securing high-quality 4K Ultra HD with HDR, HD and SD content. The SCSA develops technologies for consumers to easily and securely purchase, transfer, and view content across multiple electronic devices.

Engineering expenses continue to play a key role in our efforts to maintain product innovations. Our engineering expenses for the three months ended September 30, 2015 increased $1.4 million as compared to the same period in 2014 primarily due to increased expenses related to software design tools of $0.7 million, increased headcount related expenses of $0.5 million, increased cost of sales associated with increased sales of light guides and security products and engineering services of $0.6 million offset by decreased amortization costs of $0.5 million. Our engineering expenses for the nine months ended September 30, 2015 increased $6.7 million as compared to the same period in 2014 primarily due to increased expenses related to software design tools of $2.9 million, increased headcount related expenses of $2.3 million, increased prototyping costs of $2.0 million, increased bonus accrual expense of $1.2 million and increased cost of sales associated with increased sales of light guides and security products and engineering services of $2.8 million offset by decreased accrual of retention bonuses of $1.5 million, decreased amortization costs of $1.3 million, decreased equipment and software maintenance costs of $0.6 million and decreased stock based compensation costs of $0.3 million.

Sales, general and administrative expenses for the three months ended September 30, 2015 decreased $0.3 million as compared to the same period in 2014 primarily due to decreased consulting costs of $0.8 million and decreased depreciation

28


expense of $0.3 million offset by increased sales and marketing costs of $0.4 million and increased legal patent costs of $0.4 million. Sales, general and administrative expenses for the nine months ended September 30, 2015 decreased $1.9 million as compared to the same period in 2014 primarily due to decreased consulting costs of $2.3 million, decreased depreciation expense of $1.1 million, decreased litigation costs of $0.6 million and decreased software and equipment maintenance costs of $0.6 million offset by increased headcount related expenses of $1.9 million and increased stock-based compensation expense of $0.8 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 technology, adoption of LEDs in general lighting, the use and adoption of our inventions or technologies 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 for each reporting period represented approximately 71% and 65% of our revenue for the three and nine months ended September 30, 2015, respectively, as compared to 67% and 62% for the three and nine months ended September 30, 2014. As a result of renewing with Samsung in 2013 and settling with SK hynix and Micron in 2013, as well as extending our license agreement with SK hynix in June 2015, Samsung, SK hynix and Micron are expected to account for a significant portion of our ongoing licensing revenue. For the three and nine months ended September 30, 2015, revenue from Micron, Samsung and SK hynix each accounted for 10% or more of our total revenue. For the three and nine months ended September 30, 2014, revenue from Micron, Samsung and SK hynix each accounted for 10% or more of our total revenue.
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 licensing cycle is lengthy, costly and unpredictable with any degree of certainty. We may incur costs in any particular period before any associated revenue stream begins, if at all. Our lengthy license negotiation cycles could make our future revenue difficult to predict because we may not be successful in entering into licenses with our customers in the amounts projected, or on our anticipated timelines. In addition, while some of our license agreements provide for fixed, quarterly royalty payments, many of our license agreements provide for volume-based royalties, and may also be subject to caps on royalties in a given period. The sales volume and prices of our customers' products in any given period can be difficult to predict. As a result, our actual results may differ substantially from analyst estimates or our forecasts in any given quarter or over the next year.

The semiconductor industry is intensely competitive and highly cyclical, limiting our visibility with respect to future sales. To the extent that macroeconomic fluctuations negatively affect our principal customers, the demand for our technology may be significantly and adversely impacted and we may experience substantial period-to-period fluctuations in our operating results. The royalties we receive from our semiconductor customers are partly a function of the adoption of our technologies by 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. System companies face intense competitive pressure in their markets, which are characterized by extreme volatility, frequent new product introductions and rapidly shifting consumer preferences.
Global demand for effective security technologies continues to increase. In particular, highly integrated devices such as smart phones and tablets are increasingly used for applications requiring security such as mobile payments, content protection, corporate information and user data. Our CRD is primarily focused on positioning its DPA countermeasures, CryptoFirewall™ and CryptoManager™ technology solutions to capitalize on these trends and growing adoption among technology partners and customers.
The highly fragmented general lighting industry is undergoing a fundamental shift from incandescent technology to cold cathode fluorescent lights and LED driven technology due to the need to reduce energy consumption and to comply with government mandates. LED lighting typically saves energy costs as compared to existing installed lighting. Our LDT group's patents in LED edge-lit light guide technology can be applied in the design of next generation LED lighting products.
During 2013, we changed our business strategy to increase our focus on general lighting technologies instead of lower margin bulb products. With this shift to focus on the general lighting market, the strategy of the LDT group is to focus on providing the market with novel, patented light guide technologies and products to customers who are leading the transition to solid-state LED-based lamps and fixtures.

29


Another shift in our business strategy regarding our core display patents led us in 2013 to sell a set of patent assets where the purchaser of the patents can proceed independently with a licensing program. We have a net proceeds-sharing program in place with the purchaser of the patents upon their licensing of these patent assets. We retain the rights to use certain application techniques and may selectively engage with customers to license our intellectual property and technology for use and applications as permitted under our agreement, including without limitation, display panel and designs.
During the third quarter of 2015 we announced that we are in technical development of the buffer chipset which we are currently sampling to key potential customers and critical ecosystem partners. We are currently working to make the chipset commercially available, but we do not expect any material contribution to revenue from the chipset through 2016.
Our revenue from companies headquartered outside of the United States accounted for approximately 55% and 59% of our total revenue for the three and nine months ended September 30, 2015, respectively, as compared to 64% for both the three and nine months ended September 30, 2014, respectively. We expect that revenue derived from international customers will continue to represent a significant portion of our total revenue in the future. To date, all of the revenue from international customers has been denominated in U.S. dollars. However, to the extent that such customers’ sales to their customers are not denominated in U.S. dollars, any revenue that we receive as a result of such sales could be subject to fluctuations in currency exchange rates. In addition, if the effective price of licensed products sold by our foreign customers were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed products could fall, which in turn would reduce our revenue. We do not use financial instruments to hedge foreign exchange rate risk.
For additional information concerning international revenue, see Note 5, “Segments and Major Customers,” of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
Engineering costs in the aggregate increased and as a percentage of revenue decreased for the three months ended September 30, 2015 as compared to the same period in the prior year. Engineering costs in the aggregate and as a percentage of revenue increased for the nine months ended September 30, 2015 as compared to the same period in the prior year. In the near term, we expect engineering costs in the aggregate to remain relatively flat.
Sales, general and administrative expenses in the aggregate and as a percentage of revenue decreased for the three months ended September 30, 2015 as compared to the same period in the prior year. Sales, general and administrative expenses in the aggregate and as a percentage of revenue decreased for the nine months ended September 30, 2015 as compared to the same period in the prior year. In the past, our litigation expenses have been high and difficult to predict. Because we have successfully negotiated settlements and license agreements with SK hynix, Micron and Nanya during the course of 2013 and 2014, we have settled all outstanding litigation and should no longer have material litigation expenses related to these specific matters. In the near term, we expect our sales, general and administrative costs in the aggregate to remain relatively flat. To the extent litigation is again necessary, our expectations on the amount and timing of any future general and administrative costs is uncertain.
Our continued investment in research and development projects, involvement in any future litigation or other legal proceedings and any lower revenue from our customers in the future, will negatively affect our cash from operations.
As a part of our overall business strategy, from time to time, we evaluate businesses and technologies for potential acquisition that are aligned with our core business and designed to supplement our growth. In the first nine months of 2015, we did not identify any acquisition opportunities that met our criteria from a strategic and valuation perspective.

We continue to evaluate our acquisition options, but to provide us with more flexibility in returning capital back to our stockholders, on January 21, 2015, our Board authorized a new share repurchase program authorizing the repurchase of up to an aggregate of 20.0 million shares, which we may opportunistically execute from time to time.

During the fourth quarter of 2015, we announced that on October 16, 2015 our Board of Directors approved the commitment for a restructuring and a plan of termination resulting in a reduction of 8% of our headcount. The reductions in expense and associated workforce are expected to be completed by the first quarter of 2016. The total estimated cash payout related to the reduction in force will be approximately $3.5 million, which is related to severance and termination benefits. The estimated non-cash expense is expected to be approximately $1 million.


30


Results of Operations
The following table sets forth, for the periods indicated, the percentage of total revenue represented by certain items reflected in our unaudited condensed consolidated statements of operations:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 

 
 

 
 

 
 

Royalties
90.6
 %
 
91.8
 %
 
89.4
 %
 
92.4
 %
Contract and other revenue
9.4
 %
 
8.2
 %
 
10.6
 %
 
7.6
 %
Total revenue
100.0
 %
 
100.0
 %
 
100.0