10-Q 1 rmbs-2017630x10q.htm 10-Q Document

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 June 30, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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
 
 
 
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. 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 109,277,223 as of June 30, 2017.



RAMBUS INC.
TABLE OF CONTENTS
 
 
PAGE
Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

3


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, including our acquisitions of Smart Card Software Ltd., the assets of Semtech Corporation's Snowbush IP group and Inphi Corporation's Memory Interconnect Business;
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, software, services and solutions to address additional markets in lighting, memory, chip, mobile payments, smart ticketing and 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, operations and expansion;
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, shipping 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;
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;

4


Issuances of debt or equity securities, which could involve restrictive covenants or be dilutive to our existing stockholders;
Effects of fluctuations in currency exchange rates;
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 Part II: 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.


5


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
RAMBUS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
2017
 
December 31,
2016
 
(In thousands, except shares
and par value)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
167,207

 
$
135,294

Marketable securities
746

 
36,888

Accounts receivable
36,788

 
21,099

Inventories
5,328

 
5,633

Prepaids and other current assets
12,255

 
17,867

Total current assets
222,324

 
216,781

Intangible assets, net
111,875

 
132,388

Goodwill
207,959

 
204,794

Property, plant and equipment, net
54,305

 
58,442

Deferred tax assets
204,267

 
168,342

Other assets
2,564

 
2,749

Total assets
$
803,294

 
$
783,496

LIABILITIES & STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
9,099

 
$
9,793

Accrued salaries and benefits
14,076

 
14,177

Deferred revenue
21,327

 
16,932

Other current liabilities
6,615

 
10,399

Total current liabilities
51,117

 
51,301

Convertible notes, long-term
129,690

 
126,167

Long-term imputed financing obligation
37,677

 
38,029

Other long-term liabilities
14,592

 
15,217

Total liabilities
233,076

 
230,714

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 June 30, 2017 and December 31, 2016

 

Common stock, $.001 par value:
 

 
 

Authorized: 500,000,000 shares
 

 
 

Issued and outstanding: 109,277,223 shares at June 30 2017 and 111,053,734 shares at December 31, 2016
109

 
111

Additional paid-in capital
1,179,283

 
1,181,230

Accumulated deficit
(600,557
)
 
(615,051
)
Accumulated other comprehensive loss
(8,617
)
 
(13,508
)
Total stockholders’ equity
570,218

 
552,782

Total liabilities and stockholders’ equity
$
803,294

 
$
783,496

See Notes to Unaudited Condensed Consolidated Financial Statements

6


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share amounts)
Revenue:
 

 
 

 
 

 
 

Royalties
$
69,990

 
$
62,835

 
$
138,946

 
$
125,712

Product revenue
8,401

 
3,902

 
19,305

 
7,214

Contract and other revenue
16,329

 
9,764

 
33,820

 
16,257

Total revenue
94,720

 
76,501

 
192,071

 
149,183

Operating costs and expenses:
 

 
 

 
 

 
 

Cost of product revenue*

7,480

 
3,016

 
12,730

 
5,550

Cost of contract and other revenue
14,337

 
11,073

 
28,818

 
20,746

Research and development*
37,522

 
28,753

 
73,522

 
57,280

Sales, general and administrative*
27,137

 
21,789

 
55,323

 
44,884

Gain from settlement

 
(138
)
 

 
(579
)
Total operating costs and expenses
86,476

 
64,493

 
170,393

 
127,881

Operating income
8,244

 
12,008

 
21,678

 
21,302

Interest income and other income (expense), net
129

 
1,138

 
283

 
1,380

Interest expense
(3,261
)
 
(3,163
)
 
(6,467
)
 
(6,304
)
Interest and other income (expense), net
(3,132
)
 
(2,025
)
 
(6,184
)
 
(4,924
)
Income before income taxes
5,112

 
9,983

 
15,494

 
16,378

Provision for income taxes
2,507

 
6,107

 
9,883

 
10,624

Net income
$
2,605

 
$
3,876

 
$
5,611

 
$
5,754

Net income per share:
 

 
 

 
 

 
 

Basic
$
0.02

 
$
0.04

 
$
0.05

 
$
0.05

Diluted
$
0.02

 
$
0.03

 
$
0.05

 
$
0.05

Weighted average shares used in per share calculation:
 

 
 

 
 

 
 

Basic
110,060

 
109,904

 
110,758

 
109,818

Diluted
112,565

 
112,061

 
114,091

 
112,202

_________________________________________
*    Includes stock-based compensation:
Cost of product revenue
$
19

 
$
14

 
$
33

 
$
28

Research and development
$
3,067

 
$
2,109

 
$
6,079

 
$
4,189

Sales, general and administrative
$
3,523

 
$
2,926

 
$
7,093

 
$
5,696


See Notes to Unaudited Condensed Consolidated Financial Statements

7


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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Net income
 
$
2,605

 
$
3,876

 
$
5,611

 
$
5,754

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Foreign currency translation adjustment
 
3,597

 
(5,559
)
 
4,596

 
(6,199
)
Unrealized gain (loss) on marketable securities, net of tax
 
55

 
(188
)
 
295

 
(371
)
Total comprehensive income (loss)
 
$
6,257

 
$
(1,871
)
 
$
10,502

 
$
(816
)

See Notes to Unaudited Condensed Consolidated Financial Statements

8


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
5,611

 
$
5,754

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

 
 

Stock-based compensation
13,205

 
9,913

Depreciation
6,722

 
5,965

Amortization of intangible assets
20,938

 
15,871

Non-cash interest expense and amortization of convertible debt issuance costs
3,523

 
3,326

Deferred income taxes
514

 
2,816

Excess tax benefits from stock-based compensation

 
(591
)
(Gain) loss from disposal of property, plant and equipment
180

 
(37
)
Effect of exchange rate on assumed cash liability from acquisition

 
(624
)
Change in operating assets and liabilities, net of impact of acquisitions:
 

 
 

Accounts receivable
(13,152
)
 
14,809

Prepaid expenses and other assets
5,116

 
(1,319
)
Inventories
304

 
(537
)
Accounts payable
(396
)
 
2,167

Accrued salaries and benefits and other liabilities
(4,122
)
 
(9,046
)
Deferred revenue
4,090

 
1,794

Net cash provided by operating activities
42,533

 
50,261

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(3,482
)
 
(3,557
)
Purchases of marketable securities

 
(54,869
)
Maturities of marketable securities
32,048

 
81,971

Proceeds from sale of marketable securities
4,450

 
44,546

Proceeds from sale of property, plant and equipment
17

 

Acquisitions of businesses, net of cash acquired

 
(80,523
)
Net cash provided by (used in) investing activities
33,033

 
(12,432
)
Cash flows from financing activities:
 
 
 
Proceeds received from issuance of common stock under employee stock plans
8,345

 
8,259

Principal payments against lease financing obligation
(395
)
 
(295
)
Payments of taxes on restricted stock units
(2,824
)
 
(1,572
)
Repurchase and retirement of common stock, including prepayment under accelerated
share repurchase program
(50,036
)
 

Excess tax benefits from stock-based compensation

 
591

Net cash provided by (used in) financing activities
(44,910
)
 
6,983

Effect of exchange rate changes on cash and cash equivalents
1,257

 
(565
)
Net increase in cash and cash equivalents
31,913

 
44,247

Cash and cash equivalents at beginning of period
135,294

 
143,764

Cash and cash equivalents at end of period
$
167,207

 
$
188,011

 
 
 
 
Non-cash investing activities during the period:
 

 
 

Property, plant and equipment received and accrued in accounts payable and other liabilities
$
176

 
$
246

Non-cash financing activities during the period:
 
 
 
Additional purchase consideration from acquisition
$

 
$
11,476


See Notes to Unaudited Condensed Consolidated Financial Statements

9


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.
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, 2016.
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 Interfaces Division ("MID"), which focuses on the design, development, manufacturing through partnerships and licensing of technology and solutions that is related to memory and interfaces; (2) Rambus Security Division ("RSD"), which focuses on the design, development, deployment and licensing of technologies for chip, system and in-field application security, anti-counterfeiting, smart ticketing and mobile payments; (3) Emerging Solutions Division ("ESD"), which includes the Rambus Labs team, the computational sensing and imaging group as well as the development efforts in the area of emerging technologies; and (4) Rambus Lighting Division ("RLD"), which focuses on the design, development and licensing of technologies for advanced LED-based lighting solutions.
For the three and six months ended June 30, 2017, only MID and RSD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining other operating segments 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. Product revenue and related cost of product revenue were reclassified from contract and other revenue and cost of contract and other revenue, respectively. Refer to the Unaudited Condensed Consolidated Statements of Operations.
2. Recent Accounting Pronouncements
In July 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-11, "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815)." The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial

10


conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this ASU recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the FASB codification, to a scope exception. Those amendments do not have an accounting effect. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting," which amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities," which amends the amortization period for certain purchased callable debt securities held at a premium. This ASU will shorten the amortization period for the premium to be amortized to the earliest call date. This ASU does not apply to securities held at a discount, which will continue to be amortized to maturity. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." The amendment seeks to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective dates. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15 which amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and is applied retrospectively. Early adoption is permitted including adoption in an interim period. The Company is currently evaluating the impact that this guidance will have on its financial condition and results of operations.
In June 2016, the FASB issued ASU No. 2016-13. The purpose of this ASU is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact that this guidance will have on its financial condition and results of operations.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU simplifies the accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The updated standard no longer requires cash flows related to excess tax benefits to be presented as a financing activity separate from other income tax cash flows. The update also allows entities to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments to taxing authorities made on an employee's behalf for withheld shares should be presented as a financing activity on the statement of cash flows, and provides for an accounting policy election to account for forfeitures as they occur. The Company adopted this ASU on January 1, 2017. The impact of the adoption is as follows:
This ASU requires excess tax benefits to be recognized regardless of whether the benefit reduces taxes payable. The adoption of this guidance on a modified retrospective basis resulted in the recognition of a cumulative-effect adjustment of $38.2 million that reduced the Company's accumulated deficit and increased its deferred tax assets as of January 1, 2017. The previously unrecognized California excess tax effects were recorded as a deferred tax asset net of a valuation allowance.

11


The Company has elected to continue to estimate forfeitures expected to occur to determine the amount of stock-based compensation cost to be recognized in each period. As such, the guidance relating to forfeitures did not have an impact on its accumulated deficit as of January 1, 2017.
Additionally, the Company anticipates the potential for increased periodic volatility in future effective tax rates as a result of the continued application of ASU No. 2016-09.
In February 2016, the FASB issued ASU No. 2016-02, "Leases." This ASU requires lessees to recognize right-of-use assets and liabilities for operating leases, initially measured at the present value of the lease payments, on the balance sheet. In addition, it requires lessees to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. This ASU will become effective for the Company in the first quarter of fiscal year 2019, and requires adoption using a modified retrospective approach. The Company is evaluating the impact of adopting this new accounting standard update on its consolidated financial statements and related disclosures and anticipates this new guidance will materially impact the Company’s financial statements given the Company has a significant number of operating leases.
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory (Topic 330)," which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out (“LIFO”). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“Standard”). The core principle of the Standard is for a company to recognize revenue for goods or services transferred to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. To do so, a company will be required to exercise more judgment and make more estimates than under current guidance, including in identifying the performance obligations included in the arrangement, estimating and revising the variable consideration, if any, to be included in the transaction price and allocating the transaction price to distinct performance obligations. The FASB further clarified the Standard by issuing ASU No. 2016-10 (Identifying Performance Obligations and Licensing); ASU No. 2016-12 (Narrow-Scope Improvements and Practical Expedients); and ASU No. 2016-20 (Technical Corrections and Improvements).
The Standard may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect recognized as of the date of initial application (the modified retrospective method). The Standard, as amended, is effective for the company on January 1, 2018. As of June 30, 2017, the Company is determining which method to adopt, although the Company believes it will adopt the Standard using the full retrospective method which requires that the Standard be applied retrospectively to each prior period presented.
The Company is currently finalizing its assessment of the impact the Standard will have on its consolidated financial statements, including disclosures, and expects that the Standard will materially impact the timing of revenue recognition for fixed or guaranteed minimums intellectual property ("IP") licensing arrangements as revenue could be recognized at a point in time, as opposed to when payments are due and payable under current guidance; the Company will also be required to compute and recognize interest income over time as control over the IP generally transfers significantly in advance of cash being received from customers. The Company will be required to recognize revenue on the basis of sales or usage based royalty estimates, with a true-up recorded in subsequent periods when licensees report actual sales or usage, as applicable.
As part of the Company’s assessment and implementation plan, the Company is evaluating and implementing changes to its policies, procedures and controls.

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 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.

12


The following table sets forth the computation of basic and diluted net income per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income per share:
(In thousands, except per share amounts)
Numerator:
 

 
 

 
 
 
 
Net income
$
2,605

 
$
3,876

 
$
5,611

 
$
5,754

Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
110,060

 
109,904

 
110,758

 
109,818

Effect of potential dilutive common shares
2,505

 
2,157

 
3,333

 
2,384

Weighted-average shares outstanding - diluted
112,565

 
112,061

 
114,091

 
112,202

Basic net income per share
$
0.02

 
$
0.04

 
$
0.05

 
$
0.05

Diluted net income per share
$
0.02

 
$
0.03

 
$
0.05

 
$
0.05

For the three months ended June 30, 2017 and 2016, options to purchase approximately 2.0 million and 2.3 million shares, respectively, and for the six months ended June 30, 2017 and 2016, options to purchase approximately 2.0 million and 2.3 million shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise 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 six months ended June 30, 2017:
Reportable Segment:
 
As of December 31, 2016
 
Additions to Goodwill (1)
 
Impairment of Goodwill
 
Effect of Exchange Rates (2)
 
As of June 30, 2017
 
 
(In thousands)
MID
 
$
66,643

 
$

 
$

 
$

 
$
66,643

RSD
 
138,151

 
803

 

 
2,362

 
141,316

Total
 
$
204,794

 
$
803

 
$

 
$
2,362

 
$
207,959

(1) During the first quarter of 2017, the Company corrected an immaterial error related to an overstatement in prepaids and other current assets that originated in 2016.

(2) Effect of exchange rates relates to foreign currency translation adjustments for the period.
 
 
 
As of
 
 
June 30, 2017
Reportable Segment:
 
Gross Carrying Amount
 
Accumulated Impairment Losses
 
Net Carrying Amount
 
 
(In thousands)
MID
 
$
66,643

 
$

 
$
66,643

RSD
 
141,316

 

 
141,316

Other
 
21,770

 
(21,770
)
 

Total
 
$
229,729

 
$
(21,770
)
 
$
207,959


13


Intangible Assets
The components of the Company’s intangible assets as of June 30, 2017 and December 31, 2016 were as follows:
 
 
 
As of June 30, 2017
 
Useful Life
 
Gross Carrying
 Amount (1)
 
Accumulated
 Amortization
 
Net Carrying
 Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
257,911

 
$
(174,539
)
 
$
83,372

Customer contracts and contractual relationships
1 to 10 years
 
67,236

 
(43,833
)
 
23,403

Non-compete agreements and trademarks
3 years
 
300

 
(300
)
 

In-process research and development
Not applicable
 
5,100

 

 
5,100

Total intangible assets
 
 
$
330,547


$
(218,672
)
 
$
111,875

(1) The change in gross carrying amount reflects the effects of exchange rates during the period.

 
 
 
As of December 31, 2016
 
Useful Life
 
Gross Carrying
 Amount
 
Accumulated
 Amortization
 
Net Carrying
 Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
256,656

 
$
(156,577
)
 
$
100,079

Customer contracts and contractual relationships
1 to 10 years
 
65,109

 
(37,900
)
 
27,209

Non-compete agreements and trademarks
3 years
 
300

 
(300
)
 

In-process research and development
Not applicable
 
5,100

 

 
5,100

Total intangible assets
 
 
$
327,165

 
$
(194,777
)
 
$
132,388


During the three and six months ended June 30, 2017, the Company did not purchase or sell any intangible assets. During the three and six months ended June 30, 2016, the Company did not sell any intangible assets.

Included in customer contracts and contractual relationships are favorable contracts which are acquired software and service 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 June 30, 2017 and 2016, the Company received $1.2 million and $2.4 million, respectively, related to the favorable contracts. For the six months ended June 30, 2017 and 2016, the Company received $2.4 million and $4.1 million, respectively, related to the favorable contracts. As of June 30, 2017 and December 31, 2016, the net balance of the favorable contract intangible assets was $2.2 million and $3.6 million, respectively.
Amortization expense for intangible assets for the three and six months ended June 30, 2017 was $10.5 million and $20.9 million, respectively. Amortization expense for intangible assets for the three and six months ended June 30, 2016, was $8.2 million and $15.9 million, respectively. The estimated future amortization of intangible assets as of June 30, 2017 was as follows (amounts in thousands):
Years Ending December 31:
Amount
2017 (remaining 6 months)
$
22,174

2018
29,338

2019
19,594

2020
18,876

2021
12,500

Thereafter
9,393

 
$
111,875


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

14


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 six months ended June 30, 2017, MID and RSD 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.”
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 six months ended June 30, 2017 and 2016, respectively.
 
For the Three Months Ended June 30, 2017
 
For the Six Months Ended June 30, 2017
 
MID
 
RSD
 
Other
 
Total
 
MID
 
RSD
 
Other
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
67,402

 
$
23,366

 
$
3,952

 
$
94,720

 
$
137,997

 
$
46,571

 
$
7,503

 
$
192,071

Segment operating expenses
23,801

 
12,214

 
8,654

 
44,669

 
44,056

 
24,613

 
17,389

 
86,058

Segment operating income (loss)
$
43,601

 
$
11,152

 
$
(4,702
)
 
$
50,051

 
$
93,941

 
$
21,958

 
$
(9,886
)
 
$
106,013

Reconciling items
 

 
 
 
 

 
(41,807
)
 
 

 
 
 
 

 
(84,335
)
Operating income
 

 
 
 
 

 
$
8,244

 
 

 
 
 
 

 
$
21,678

Interest and other income (expense), net
 

 
 
 
 

 
(3,132
)
 
 

 
 
 
 

 
(6,184
)
Income before income taxes
 

 
 
 
 

 
$
5,112

 
 

 
 
 
 

 
$
15,494

 
For the Three Months Ended June 30, 2016
 
For the Six Months Ended June 30, 2016
 
MID
 
RSD
 
Other
 
Total
 
MID
 
RSD
 
Other
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
54,467

 
$
16,407

 
$
5,627

 
$
76,501

 
$
108,012

 
$
30,508

 
$
10,663

 
$
149,183

Segment operating expenses
13,229

 
13,105

 
7,092

 
33,426

 
25,272

 
25,015

 
14,218

 
64,505

Segment operating income (loss)
$
41,238

 
$
3,302

 
$
(1,465
)
 
$
43,075

 
$
82,740

 
$
5,493

 
$
(3,555
)
 
$
84,678

Reconciling items
 

 
 
 
 

 
(31,067
)
 
 

 
 
 
 

 
(63,376
)
Operating income
 

 
 
 
 

 
$
12,008

 
 

 
 
 
 

 
$
21,302

Interest and other income (expense), net
 

 
 
 
 

 
(2,025
)
 
 

 
 
 
 

 
(4,924
)
Income before income taxes
 

 
 
 
 

 
$
9,983

 
 

 
 
 
 

 
$
16,378

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.

15


Accounts receivable from the Company's major customers representing 10% or more of total accounts receivable at June 30, 2017 and December 31, 2016, respectively, was as follows:
 
 
As of
Customer 
 
June 30, 2017
 
December 31, 2016
Customer 1 (RSD reportable segment)
 
*

 
17
%
Customer 2 (Other segment)
 
*

 
12
%
Customer 3 (MID reportable segment)
 
20
%
 
13
%
Customer 4 (MID reportable segment)
 
25
%
 
*

_________________________________________
*    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 six months ended June 30, 2017 and 2016, respectively, was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Customer 
 
2017
 
2016
 
2017
 
2016
Customer A (MID and RSD reportable segments)
 
17
%
 
20
%
 
17
%
 
21
%
Customer B (MID reportable segment)
 
13
%
 
21
%
 
13
%
 
21
%
Customer C (MID reportable segment)
 
14
%
 
13
%
 
14
%
 
13
%

Revenue from customers in the geographic regions based on the location of contracting parties was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
South Korea
 
$
28,291

 
$
31,632

 
$
57,260

 
$
63,086

USA
 
41,155

 
26,532

 
79,593

 
51,776

Japan
 
7,057

 
5,911

 
13,575

 
10,898

Europe
 
4,243

 
4,377

 
8,681

 
8,189

Canada
 
1,352

 
1,168

 
2,420

 
1,382

Singapore
 
4,889

 
4,526

 
12,636

 
9,145

Asia-Other
 
7,733

 
2,355

 
17,906

 
4,707

Total
 
$
94,720

 
$
76,501

 
$
192,071

 
$
149,183


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 June 30, 2017 and December 31, 2016, all of the Company’s cash equivalents and marketable securities had a remaining maturity of less than one year.

16


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 June 30, 2017
(In thousands)
 
Fair Value
 
Amortized
 Cost
 
Gross
 Unrealized
 Gains
 
Gross
 Unrealized
 Losses
 
Weighted
 Rate of
 Return
Money market funds
 
$
15,460

 
$
15,460

 
$

 
$

 
0.83
%
U.S. Government bonds and notes
 
63,612

 
63,610

 
2

 

 
0.83
%
Corporate notes, bonds, commercial paper and other
 
37,754

 
37,758

 

 
(4
)
 
0.97
%
Total cash equivalents and marketable securities
 
116,826

 
116,828

 
2

 
(4
)
 
 

Cash
 
51,127

 
51,127

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
167,953

 
$
167,955

 
$
2

 
$
(4
)
 
 

 
 
As of December 31, 2016
(In thousands)
 
Fair Value
 
Amortized
 Cost
 
Gross
 Unrealized
 Gains
 
Gross
 Unrealized
 Losses
 
Weighted
 Rate of
 Return
Money market funds
 
$
10,681

 
$
10,681

 
$

 
$

 
0.41
%
U.S. Government bonds and notes
 
48,292

 
48,291

 
1

 

 
0.39
%
Corporate notes, bonds, commercial paper and other
 
62,178

 
62,199

 

 
(21
)
 
0.66
%
Total cash equivalents and marketable securities
 
121,151

 
121,171

 
1

 
(21
)
 
 

Cash
 
51,031

 
51,031

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
172,182

 
$
172,202

 
$
1

 
$
(21
)
 
 


Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:
 
As of
 
June 30,
2017
 
December 31,
2016
 
(In thousands)
Cash equivalents
$
116,080

 
$
84,263

Short term marketable securities
746

 
36,888

Total cash equivalents and marketable securities
116,826

 
121,151

Cash
51,127

 
51,031

Total cash, cash equivalents and marketable securities
$
167,953

 
$
172,182


The Company continues to invest in highly rated quality, highly liquid debt securities. As of June 30, 2017, 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.

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 June 30, 2017 and December 31, 2016 are as follows:
 
Fair Value
 
Gross Unrealized Loss
 
June 30,
2017
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
 
(In thousands)
Less than one year
 

 
 

 
 

 
 

U.S. Government bonds and notes
$
8,997

 
$
18,395

 
$

 
$

Corporate notes, bonds and commercial paper
33,668

 
54,377

 
(4
)
 
(21
)
Total Corporate notes, bonds, and commercial paper and U.S. Government bonds and notes
$
42,665

 
$
72,772

 
$
(4
)
 
$
(21
)

17



The gross unrealized loss at June 30, 2017 and December 31, 2016 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 U.S. government-sponsored obligations and corporate notes and bonds. There is no need to sell these investments, 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 June 30, 2017 and December 31, 2016:
 
As of June 30, 2017
 
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
$
15,460

 
$
15,460

 
$

 
$

U.S. Government bonds and notes
63,612

 

 
63,612

 

Corporate notes, bonds, commercial paper and other
37,754

 
746

 
37,008

 

Total available-for-sale securities
$
116,826

 
$
16,206

 
$
100,620

 
$

 
As of December 31, 2016
 
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
$
10,681

 
$
10,681

 
$

 
$

U.S. Government bonds and notes
48,292

 

 
48,292

 

Corporate notes, bonds, commercial paper and other
62,178

 
303

 
61,875

 

Total available-for-sale securities
$
121,151

 
$
10,984

 
$
110,167

 
$


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.
For the three and six months ended June 30, 2017 and 2016, there were no transfers of financial instruments between different categories of fair value.

18


The following table presents the financial instruments that are not carried at fair value but require fair value disclosure as of June 30, 2017 and December 31, 2016:
 
 
As of June 30, 2017
 
As of December 31, 2016
(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

 
$
129,690

 
$
151,386

 
$
138,000

 
$
126,167

 
$
173,961


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 June 30, 2017, the 2018 Notes are carried at their face value of $138.0 million, less any unamortized debt discount and unamortized debt issuance costs. 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 June 30, 2017
 
As of December 31, 2016
1.125% Convertible Senior Notes due 2018
 
$
138,000

 
$
138,000

Unamortized discount
 
(7,673
)
 
(10,913
)
Unamortized debt issuance costs
 
(637
)
 
(920
)
Total convertible notes
 
$
129,690

 
$
126,167

Less current portion
 

 

Total long-term convertible notes
 
$
129,690

 
$
126,167

Interest expense related to the notes for the three and six months ended June 30, 2017 and 2016 was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
2018 Notes coupon interest at a rate of 1.125%
$
388

 
$
388

 
776

 
776

2018 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 5.5%
1,774

 
1,675

 
3,523

 
3,326

Total interest expense on convertible notes
$
2,162

 
$
2,063

 
$
4,299

 
$
4,102



19


9. Commitments and Contingencies
As of June 30, 2017, the Company’s material contractual obligations were as follows (in thousands):
 
Total
 
Remainder of 2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
Contractual obligations (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

Imputed financing obligation (2)
$
19,103

 
$
3,185

 
$
6,447

 
$
6,602

 
$
2,869

 
$

 
$

Leases and other contractual obligations
18,784

 
4,213

 
4,569

 
3,514

 
2,549

 
2,646

 
1,293

Software licenses (3)
18,557

 
4,849

 
10,176

 
3,532

 

 

 

Convertible notes
138,000

 

 
138,000

 

 

 

 

Interest payments related to convertible notes
2,328

 
776

 
1,552

 

 

 

 

Total
$
196,772

 
$
13,023

 
$
160,744

 
$
13,648

 
$
5,418

 
$
2,646

 
$
1,293

_________________________________________
(1)
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $22.9 million including $20.7 million recorded as a reduction of long-term deferred tax assets and $2.2 million in long-term income taxes payable as of June 30, 2017. 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 $1.1 million and $2.1 million for the three and six months ended June 30, 2017, respectively. Building lease expense was approximately $0.9 million and $1.7 million for the three and six months ended June 30, 2016, respectively. Deferred rent of $0.3 million and $0.5 million as of June 30, 2017 and December 31, 2016, respectively, was included primarily in other current liabilities.
Indemnification
From time to time, the Company indemnifies certain customers as 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 or liability that the Company could be exposed to under these agreements, however, this is not always possible. The fair value of the liability as of June 30, 2017 and December 31, 2016 is not material.
10. Equity Incentive Plans and Stock-Based Compensation
As of June 30, 2017, 5,440,093 shares of the 35,400,000 cumulative shares approved under both the current 2015 Equity Incentive Plan (the “2015 Plan”) and past 2006 Equity Incentive Plan (the “2006 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 June 30, 2017. 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.

20


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, 2016
7,305,368

Stock options granted
(498,426
)
Stock options forfeited
1,472,366

Nonvested equity stock and stock units granted (1) (2)
(3,553,590
)
Nonvested equity stock and stock units forfeited (1)
714,375

Total available for grant as of June 30, 2017
5,440,093

_________________________________________
(1)
For purposes of determining the number of shares available for grant under the 2015 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 266,847 shares that have been reserved for potential future issuance related to certain performance unit awards granted in the first quarter of 2017 and 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 2006 Plan and 2015 Plan for the six months ended June 30, 2017 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of June 30, 2017.
 
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, 2016
7,008,833

 
$
9.34

 
 
 
 

Options granted
498,426

 
$
12.74

 
 
 
 

Options exercised
(654,388
)
 
$
7.04

 
 
 
 

Options forfeited
(1,472,366
)
 
$
10.95

 
 
 
 

Outstanding as of June 30, 2017
5,380,505

 
$
9.49

 
5.48
 
$
16,061

Vested or expected to vest at June 30, 2017
5,297,443

 
$
9.45

 
5.43
 
$
16,037

Options exercisable at June 30, 2017
3,874,169

 
$
9.20

 
4.58
 
$
13,287


No stock options that contain a market condition were granted during the three and six months ended June 30, 2017. As of June 30, 2017 and December 31, 2016, there were 320,000 and 1,135,000, respectively, 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 June 30, 2017, based on the $11.43 closing stock price of Rambus’ common stock on June 30, 2017 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 June 30, 2017 was 3,703,530 and 3,063,509, respectively.
Employee Stock Purchase Plan
Under the 2015 Employee Stock Purchase Plan ("2015 ESPP"), the Company issued 361,994 shares at a price of $10.33 per share during the six months ended June 30, 2017. Under the 2015 ESPP, the Company issued 340,349 shares at a price of $8.96 per share during the six months ended June 30, 2016. As of June 30, 2017, 1,089,649 shares under the 2015 ESPP remain available for issuance.

21


Stock-Based Compensation
For the six months ended June 30, 2017 and 2016, 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 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 June 30, 2017, the Company granted 40,000 stock options with an estimated total grant-date fair value of $0.2 million. During the six months ended June 30, 2017, the Company granted 498,426 stock options with an estimated total grant-date fair value of $2.1 million. During the three and six months ended June 30, 2017, the Company recorded stock-based compensation expense related to stock options of $0.7 million and $1.4 million, respectively.
During the three months ended June 30, 2016, the Company did not grant any stock options. During the six months ended June 30, 2016, the Company granted 440,000 stock options with an estimated total grant-date fair value of $2.1 million. During the three and six months ended June 30, 2016, the Company recorded stock-based compensation expense related to stock options of $1.1 million and $2.3 million, respectively.
As of June 30, 2017, there was $4.9 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 2.0 years. The total fair value of shares vested as of June 30, 2017 was $20.7 million.
The total intrinsic value of options exercised was $1.8 million and $3.8 million for the three and six months ended June 30, 2017, respectively. The total intrinsic value of options exercised was $0.9 million and $4.0 million for the three and six months ended June 30, 2016, 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 six months ended June 30, 2017, net proceeds from employee stock option exercises totaled approximately $4.6 million.
Employee Stock Purchase Plan
For the three and six months ended June 30, 2017, the Company recorded compensation expense related to the 2015 ESPP of $0.4 million and $0.9 million, respectively. For the three and six months ended June 30, 2016, the Company recorded compensation expense related to the 2015 ESPP of $0.3 million and $0.8 million, respectively. As of June 30, 2017, there was $0.5 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under the 2015 ESPP. That cost is expected to be recognized over four months.
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 six months ended June 30, 2017 calculated in accordance with accounting for share-based payments were $0.2 million and $0.5 million, respectively. 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 six months ended June 30, 2016 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.

22


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 Plan
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Stock Option Plan
 

 
 

 
 

 
 

Expected stock price volatility
32
%
 
%
 
32
%
 
36
%
Risk free interest rate
1.8
%
 
%
 
1.8% - 1.9%

 
1.7
%
Expected term (in years)
5.3

 

 
5.3 - 5.4

 
6.1

Weighted-average fair value of stock options granted to employees
$
3.84

 
$

 
$
4.12

 
$
4.66

There were no stock options granted during the three months ended June 30, 2016.
 
Employee Stock Purchase Plan
 
Six Months Ended
 
June 30,
 
2017
 
2016
Employee Stock Purchase Plan
 

 
 

Expected stock price volatility
27
%
 
33
%
Risk free interest rate
0.98
%
 
0.41
%
Expected term (in years)
0.5

 
0.5

Weighted-average fair value of purchase rights granted under the purchase plan
$
2.87

 
$
2.86

Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the three and six months ended June 30, 2017, the Company granted nonvested equity stock units totaling 151,354 and 2,191,162 shares under the 2015 Plan. During the three and six months ended June 30, 2016, the Company granted nonvested equity stock units totaling 184,456 and 2,024,640 shares under the 2015 Plan. 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 six months ended June 30, 2017, the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $1.9 million and $28.1 million. For the three and six months ended June 30, 2016, the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $2.3 million and $25.0 million. During the first quarters of 2017 and 2016, 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 six months ended June 30, 2017, the Company recorded $1.0 million and $1.9 million, respectively, of stock-based compensation expense related to these performance unit awards. During the three and six months ended June 30, 2016, the Company recorded $0.7 million and $1.3 million, respectively, of stock-based compensation expense related to these performance unit awards.
For the three and six months ended June 30, 2017, the Company recorded stock-based compensation expense of approximately $5.5 million and $10.8 million related to all outstanding nonvested equity stock grants. For the three and six months ended June 30, 2016, the Company recorded stock-based compensation expense of approximately $3.7 million and $6.8 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 $48.9 million at June 30, 2017. This amount is expected to be recognized over a weighted average period of 2.7 years.

23


The following table reflects the activity related to nonvested equity stock and stock units for the six months ended June 30, 2017:
Nonvested Equity Stock and Stock Units
 
Shares
 
Weighted-
 Average
 Grant-Date
 Fair Value
Nonvested at December 31, 2016
 
4,863,056

 
$
12.33

Granted
 
2,191,162

 
$
12.81

Vested
 
(615,671
)
 
$
11.59

Forfeited
 
(450,339
)
 
$
12.54

Nonvested at June 30, 2017
 
5,988,208

 
$
12.57


11.  Stockholders’ Equity
Share Repurchase Program
During the six months ended June 30, 2017, the Company repurchased shares of its common stock under its share repurchase program as discussed below.
On January 21, 2015, the Company's Board approved a 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.
On May 1, 2017, the Company initiated an accelerated share repurchase program with Barclays Bank PLC. The accelerated share repurchase program is part of the broader share repurchase program previously authorized by the Company's Board on January 21, 2015. Under the accelerated share repurchase program, the Company pre-paid to Barclays Bank PLC, the $50.0 million purchase price for its common stock and, in turn, the Company received an initial delivery of approximately 3.2 million shares of its common stock from Barclays Bank PLC, in the second quarter of 2017, which were retired and recorded as a $40.0 million reduction to stockholders' equity. The remaining $10.0 million of the initial payment was recorded as a reduction to stockholders’ equity as an unsettled forward contract indexed to the Company's stock. The number of shares to be ultimately purchased by the Company will be determined based on the volume weighted average price of the common stock during the terms of the transaction, minus an agreed upon discount between the parties. The program is expected to be completed by November 2017.

As of June 30, 2017, there remained an outstanding authorization to repurchase approximately 8.3 million shares of the Company's outstanding common stock under the current share repurchase program.

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. During the six months ended June 30, 2017, the cumulative price of $29.4 million was recorded as an increase to accumulated deficit.

12. Income Taxes
The Company recorded a provision for income taxes of $2.5 million and $6.1 million for the three months ended June 30, 2017 and 2016, respectively, and $9.9 million and $10.6 million for the six months ended June 30, 2017 and 2016, respectively. The income taxes for the three and six months ended June 30, 2017 is primarily comprised of the Company's U.S. federal, state and foreign taxes and income tax expense recognized from exercises and expiration of out-of-the-money fully vested shares from equity incentive plans. Similarly, the income taxes for the three and six months ended June 30, 2016 was primarily comprised of the Company's U.S. federal, state and foreign taxes and income tax expense recognized from exercises and expiration of shares from equity incentive plans.
During the three and six months ended June 30, 2017, the Company paid withholding taxes of $5.4 million and $10.9 million, respectively. During the three and six months ended June 30, 2016, the Company paid withholding taxes of $5.4 million and $10.9 million, respectively.

24


As of June 30, 2017, the Company’s unaudited condensed consolidated balance sheets included net deferred tax assets, before valuation allowance, of approximately $219.5 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.
The Company has U.S. federal deferred tax assets related to research and development credits, foreign tax credits and other tax attributes that can be used to offset federal taxable income in future periods. These credit carryforwards will expire if they are not used within certain time periods. As of June 30, 2017, the Company determined that there is sufficient positive evidence to conclude that it is more likely than not sufficient taxable income will exist in the future allowing the Company to recognize these deferred tax assets. It is possible that some or all these attributes could ultimately expire unused. If facts and circumstances change in the future, the Company may determine at that time a valuation allowance is necessary. A valuation allowance would materially increase the Company's tax expense in the period applied and would adversely affect its results of operations and statements of financial condition. Changes in the Company's underlying facts or circumstances, such as the impact of the acquisitions, will be continually assessed and the Company will re-evaluate its position accordingly.
As of June 30, 2017, the Company continues to maintain a valuation allowance against the majority of its state deferred tax assets. 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. The Company continues to maintain a deferred tax asset valuation allowance of $26.2 million as of June 30, 2017.
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 June 30, 2017, the Company had approximately $22.9 million of unrecognized tax benefits, including $20.7 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. As of December 31, 2016, the Company had $21.9 million of unrecognized tax benefits, including $19.7 million recorded as a reduction of long-term deferred tax assets and $2.2 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 June 30, 2017 and December 31, 2016, 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, the U.K., the Netherlands and various other state and foreign jurisdictions. The U.S. federal returns are subject to examination from 2013 and forward. The California returns are subject to examination from 2010 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 ending March 2012 and forward. The Company is currently under examination by California for the 2010 and 2011 tax years and New York for the 2013, 2014 and 2015 tax years. The Company’s India subsidiary is under examination by the Indian tax administration for tax years beginning with 2011, except for 2014, which was assessed in the Company's favor. 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.


25


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.

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, CryptoFirewallTM, CryptoMediaTM and CryptoManagerTM 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.




26


Executive Summary
During the second quarter of 2017, we secured partnership agreements with industry leaders including: Cybertrust, Synopsys, Google and Interac. Additionally, we launched turn-key, secure CryptoManager™ IoT Device Management service and demonstrated with Qualcomm and STMicroelectronics. Key 2017 second quarter financial results included:

Revenue of $94.7 million;
Total Operating Costs and Expenses of $86.5 million;
Diluted net income per share of $0.02; and
Operating cash flows of approximately $25 million.

Business Overview
Rambus creates innovative hardware and software technologies, driving advancements from the data center to the mobile edge. Our chips, customizable IP cores, patent licenses, software, services, and other innovations improve the competitive advantage of our customers. We collaborate with the industry, partnering with leading ASIC and SoC designers, foundries, IP developers, processor companies, EDA companies and validation labs. Our innovations are integrated into a wide range of devices and systems, powering and securing diverse applications, including Big Data, Internet of Things, mobile, consumer and media platforms.

While we have historically focused our efforts on the development of technologies for memory, SerDes and other chip interfaces, we have expanded our portfolio of inventions and solutions to address chip and system security, mobile payments and smart ticketing. We intend to continue our growth into new technology fields, consistent with our mission to create value through our innovations and to make those technologies available through the shipment of products, the provisioning of services, as well as our licensing business models. Key to our efforts continues to be hiring and retaining world-class inventors, scientists and engineers to lead the development and deployment of inventions and technology solutions for our fields of focus.

Our strategy is to continue to augment our patent license business model to provide additional technology, products and services while creating and leveraging strategic synergies to increase revenue. In support of our strategy, we acquired four businesses in 2016 in the fields of mobile payments, smart ticketing, memory buffer chips and SerDes IP cores. On January 25, 2016, our Security division completed the acquisition of Smart Card Software, Ltd. (“SCS”), a privately-held company incorporated in the United Kingdom, for a pound sterling equivalent of $104.7 million in cash. Through this purchase we acquired two complementary businesses: Bell Identification Ltd., a leader in mobile payments, and Ecebs Ltd., a leading supplier of smart ticketing systems. We believe these businesses complement our security division by allowing us to extend our foundational security technology to offer differentiated, value-added security solutions to our customers.

On August 4, 2016, our Memory and Interfaces division completed the acquisition of all the assets of Inphi’s Memory Interconnect Business for $90 million in cash. The acquisition included product inventory, customer contracts, supply chain agreements and intellectual property. On August 5, 2016, our Memory and Interfaces division completed the acquisition of the assets of Semtech Corporation’s Snowbush IP group for $32 million in cash. Snowbush IP, formerly part of Semtech’s Systems Innovation Group, is a provider of silicon-proven, high-performance serial link solutions. We believe these acquisitions strengthen our market position for memory buffer chip products and bolster our SerDes and IP offerings enabling us to better address the needs of the server, networking and data center market.

Organization

We have organized the business into four operational units: (1) Memory and Interfaces, or MID, which focuses on the design, development, manufacturing through partnerships and licensing of technology and solutions that is related to memory and interfaces; (2) Security, or RSD, which focuses on the design, development, deployment and licensing of technologies for chip, system and in-field application security, anti-counterfeiting, smart ticketing and mobile payments; (3) Emerging Solutions, or ESD, which encompasses our long-term research and development efforts in the area of emerging technologies; and (4) Lighting, or RLD, which focuses on the design, development and licensing of technologies for advanced LED-based lighting solutions. As of June 30, 2017, MID and RSD met quantitative thresholds for disclosure as reportable segments. Results for ESD and RLD are 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.

Revenue Sources


27


Our inventions and technology solutions are offered to our customers through patent, technology, software and IP core licenses, as well as product sales and services. Today, our primary source of revenue is 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, industrial, semiconductor and system companies such as AMD, Broadcom, Cisco, Freescale, Fujitsu, GE, IBM, Intel, LSI, Micron, Nanya, NVIDIA, Panasonic, Qualcomm, Renesas, Samsung, SK hynix, STMicroelectronics, Toshiba and Xilinx have licensed our patents. The vast majority of our patents were secured through our internal research and development efforts across all of our business units. Royalties from patent licenses accounted for 68% and 66% of our consolidated revenue for the three and six months ended June 30, 2017, respectively, as compared to 76% and 79% for the three and six months ended June 30, 2016, respectively.

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 use fees and in some cases, 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. Royalties from technology licenses accounted for 6% of our consolidated revenue for both the three and six months ended June 30, 2017, as well as for the three and six months ended June 30, 2016.

The remainder of our revenue is product revenue, contract services and other revenue, which includes our product sales, IP core licenses, software licenses and related implementation, support and maintenance fees, and engineering services fees. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenue or account receivables in any given period. Product revenue accounted for 9% and 10% of our consolidated revenue for the three and six months ended June 30, 2017, respectively, as compared to 5% for both the three and six months ended June 30, 2016. Contract and other revenue accounted for 17% and 18% of our consolidated revenue for the three and six months ended June 30, 2017, respectively, as compared to 13% and 11% for the three and six months ended June 30, 2016, respectively. As we continue to execute on our strategy to augment our traditional patent licensing business model to provide additional technology, products and services, product revenue and related cost of product revenue were reclassified from contract and other revenue and cost of contract and other revenue, respectively, during the second quarter of 2017. Refer to the Unaudited Condensed Consolidated Statements of Operations of this Form 10-Q.

Expenses

Cost of product revenue for the three months ended June 30, 2017 increased $4.5 million as compared to the same period in 2016 primarily due to increased cost of sales associated with higher sales of memory and security products as we transition from legacy to new product lines. Cost of product revenue for the six months ended June 30, 2017 increased $7.1 million as compared to the same period in 2016 primarily due to the same reason as above.

Engineering expenses continue to play a key role in our efforts to maintain product innovations. Our engineering expenses for the three months ended June 30, 2017 increased $12.0 million as compared to the same period in 2016 primarily due to the business acquisitions during 2016. This includes increased headcount related expenses of $3.8 million, increased amortization costs of $2.3 million, increased expenses related to software design tools of $1.7 million, increased bonus accrual expense of $1.0 million, increased stock-based compensation expense of $1.0 million, increased prototyping costs of $0.8 million and increased travel costs of $0.3 million. Engineering expenses for the six months ended June 30, 2017 increased $24.3 million as compared to the same period in 2016 primarily due to increased headcount related expenses of $8.3 million, increased amortization costs of $4.8 million, increased expenses related to software design tools of $3.6 million, increased stock-based compensation expense of $1.9 million, increased consulting costs of $1.4 million, increased bonus accrual expense of $1.3 million, increased travel costs of $0.5 million and increased prototyping costs of $0.4 million.

Sales, general and administrative expenses for the three months ended June 30, 2017 increased $5.3 million as compared to the same period in 2016 primarily due to the business acquisitions during 2016. This includes increased sales and marketing expenses of $1.4 million, increased headcount related expenses of $1.3 million, increased bonus accrual expense of $1.1 million, increased consulting costs of $1.0 million, increased stock-based compensation expense of $0.6 million, increased

28


travel costs of $0.5 million and increased accounting and audit costs of $0.5 million, offset by decreased acquisition related costs of $0.8 million. Sales, general and administrative expenses for the six months ended June 30, 2017 increased $10.4 million as compared to the same period in 2016 primarily due to increased consulting costs of $3.2 million, increased headcount related expenses of $2.9 million, increased bonus accrual expense of $2.3 million, increased sales and marketing expenses of $1.8 million, increased stock-based compensation expense of $1.4 million, increased travel costs of $1.1 million, and increased accounting and audit costs of $0.7 million, offset by decreased acquisition related costs of $2.6 million.

Intellectual Property

As of June 30, 2017, our semiconductor, lighting, security and other technologies are covered by 2,030 U.S. and foreign patents. Additionally, we have 623 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.

Trends
There are a number of trends that may have a material impact on us in the future, including but not limited to, the evolution of memory and SerDes technology, adoption of mobile payment, smart ticketing and security solutions, adoption of LEDs in edge-lit general lighting, the use and adoption of our inventions or technologies generally, industry consolidation, and global economic conditions with the resulting impact on sales of consumer electronic systems.
We have a high degree of revenue concentration. Our top five customers for each reporting period represented approximately 59% and 55% of our revenue for the three and six months ended June 30, 2017, respectively, as compared to 68% and 69% for the three and six months ended June 30, 2016, respectively. For the three and six months ended June 30, 2017, and for the three and six months ended June 30, 2016, revenue from Micron, Samsung and SK hynix each accounted for 10% or more of our total revenue. While we expect Samsung, SK hynix and Micron to account for a significant portion of our ongoing licensing 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 revenue from companies headquartered outside of the United States accounted for approximately 57% and 59% of our total revenue for the three and six months ended June 30, 2017, respectively, as compared to 65% for both the three and six months ended June 30, 2016. We expect that revenue derived from international customers will continue to represent a significant portion of our total revenue in the future. To date, the majority 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.
Our licensing cycle for new licensees as well as renewals for existing licensees is lengthy, costly and unpredictable without 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.
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 products and 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

29


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.
Global demand for effective security technologies continues to increase. In particular, highly integrated devices such as smart phones are increasingly used for applications requiring security such as mobile payments, corporate information and user data. Our RSD operating segment is primarily focused on positioning its DPA countermeasures, CryptoMedia™, CryptoFirewall™ and CryptoManager™ technology solutions, and the introduction of in-field applications mobile payments and smart ticketing solutions to our offerings to capitalize on these trends and growing adoption among technology partners and customers.
Cost of product revenue, engineering costs as well as sales, general and administrative expenses in the aggregate and as a percentage of revenue increased in the second quarter of 2017 as compared to the same period in 2016. Cost of product revenue, engineering costs as well as sales, general and administrative expenses in the aggregate increased during the six months ended June 30, 2017 as compared to the same period in 2016. Cost of product revenue and engineering costs as a percentage of revenue increased and sales, general and administrative expenses as a percentage of revenue decreased during the six months ended June 30, 2017 as compared to the same period in 2016. In the near term, we expect these costs in the aggregate to be higher as we intend to continue to make investments in the infrastructure and technologies required to increase our product innovation in semiconductor, security, mobile payments, smart cards and other technologies. In addition, while we have not been involved in material litigation since 2014, to the extent litigation is again necessary, our expectations on the amount and timing of any future general and administrative costs are uncertain.
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, including the acquisitions of SCS, the assets of the Snowbush IP group and the Memory Interconnect Business. Similarly, we evaluate our current businesses and technologies that are not aligned with our core business for potential divestiture.


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 

 
 

 
 

 
 

Royalties
73.9
 %
 
82.1
 %
 
72.3
 %
 
84.3
 %
Product revenue
8.9
 %
 
5.1
 %
 
10.1
 %
 
4.8
 %
Contract and other revenue
17.2
 %
 
12.8
 %
 
17.6
 %
 
10.9
 %
Total revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Operating costs and expenses:
 

 
 

 
 

 
 

Cost of product revenue*
7.9
 %
 
14.5
 %
 
6.6
 %
 
13.9
 %
Cost of contract and other revenue
15.1
 %
 
3.9
 %
 
15.0
 %
 
3.7
 %
Research and development*
39.6
 %
 
37.6
 %
 
38.3
 %
 
38.4
 %
Sales, general and administrative*
28.7
 %
 
28.5
 %
 
28.8
 %
 
30.1
 %
Gain from settlement
 %
 
(0.2
)%
 
 %
 
(0.4
)%
Total operating costs and expenses
91.3
 %
 
84.3
 %
 
88.7
 %
 
85.7
 %
Operating income
8.7
 %
 
15.7
 %
 
11.3
 %
 
14.3
 %
Interest income and other income (expense), net
0.1
 %
 
1.5
 %
 
0.1
 %
 
0.9
 %
Interest expense
(3.4
)%
 
(4.1
)%
 
(3.4
)%
 
(4.2
)%
Interest and other income (expense), net
(3.3
)%
 
(2.6
)%
 
(3.3
)%
 
(3.3
)%
Income before income taxes
5.4
 %
 
13.1
 %
 
8.0
 %
 
11.0
 %
Provision for income taxes
2.6
 %
 
8.0
 %
 
5.1
 %
 
7.1
 %
Net income
2.8
 %