Rambus Inc.
RAMBUS INC (Form: 10-Q, Received: 04/22/2016 14:02:09)
Table of Contents

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 March 31, 2016
OR
¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-22339
_______________________________
RAMBUS INC.
(Exact name of registrant as specified in its charter)
_______________________________
Delaware
 
94-3112828
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1050 Enterprise Way, Suite 700
 Sunnyvale, California
 
 
 
94089
(Address of principal executive offices)
 
 
 
(ZIP Code)

Registrant’s telephone number, including area code: (408) 462-8000
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
 
 
Non-accelerated filer  o (Do not check if a smaller reporting company)
 
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  ý
The number of shares outstanding of the registrant’s Common Stock, par value $.001 per share, was 110,077,451 as of March 31, 2016 .


Table of Contents

RAMBUS INC.
TABLE OF CONTENTS
 
 
PAGE
Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015
Condensed Consolidated Statements of Comprehensive  Income for the three months ended March 31, 2016 and 2015
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

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Table of Contents

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 recent acquisition of Smart Card Software Ltd.;
Impairment of goodwill and long-lived assets;
Pricing policies of our customers;
Changes in our strategy and business model, including the expansion of our portfolio of inventions, products and solutions to address additional markets in lighting, chip and system security;
Deterioration of financial health of commercial counterparties and their ability to meet their obligations to us;
Effects of security breaches or failures in our or our customers’ products and services on our business;
Engineering, sales and general and administration expenses;
Contract revenue;
Operating results;
International licenses and operations;
Effects of changes in the economy and credit market on our industry and business;
Ability to identify, attract, motivate and retain qualified personnel;
Effects of government regulations on our industry and business;
Manufacturing and supply partners and/or sale and distribution channels;
Growth in our business;
Methods, estimates and judgments in accounting policies;
Adoption of new accounting pronouncements;
Effective tax rates;
Restructurings and plans of termination;
Realization of deferred tax assets/release of deferred tax valuation allowance;
Trading price of our common stock;
Internal control environment;
The level and terms of our outstanding debt and the repayment or financing of such debt;
Litigation expenses;
Protection of intellectual property;
Any changes in laws, agency actions and judicial rulings that may impact the ability to enforce intellectual property rights;
Indemnification and technical support obligations;
Equity repurchase plans;

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Table of Contents

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


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Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
RAMBUS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31,
2016
 
December 31,
2015
 
(In thousands, except shares
and par value)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
136,629

 
$
143,764

Marketable securities
88,943

 
143,942

Accounts receivable
14,617

 
16,408

Prepaids and other current assets
13,017

 
11,476

Total current assets
253,206

 
315,590

Intangible assets, net
114,325

 
64,266

Goodwill
163,805

 
116,899

Property, plant and equipment, net
56,403

 
56,616

Deferred tax assets
160,464

 
162,485

Other assets
4,622

 
2,165

Total assets
$
752,825

 
$
718,021

LIABILITIES &   STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
4,874

 
$
4,096

Accrued salaries and benefits
8,432

 
12,278

Deferred revenue
7,317

 
5,780

Accrued acquisition liability
12,100

 

Other current liabilities
7,392

 
6,212

Total current liabilities
40,115

 
28,366

Convertible notes, long-term
121,069

 
119,418

Long-term imputed financing obligation
38,496

 
38,625

Long-term income taxes payable
3,110

 
2,903

Deferred tax liabilities
14,677

 

Other long-term liabilities
637

 
2,176

Total liabilities
218,104

 
191,488

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 March 31, 2016 and December 31, 2015

 

Common stock, $.001 par value:
 

 
 

Authorized: 500,000,000 shares
 

 
 

Issued and outstanding: 110,077,451 shares at March 31, 2016 and 109,287,591 shares at December 31, 2015
110

 
109

Additional paid-in capital
1,137,500

 
1,130,368

Accumulated deficit
(602,439
)
 
(604,317
)
Accumulated other comprehensive income (loss)
(450
)
 
373

Total stockholders’ equity
534,721

 
526,533

Total liabilities and stockholders’ equity
$
752,825

 
$
718,021

See Notes to Unaudited Condensed Consolidated Financial Statements

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Table of Contents

RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  

 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands, except per share amounts)
Revenue:
 

 
 

Royalties
$
62,877

 
$
66,963

Contract and other revenue
9,805

 
5,951

Total revenue
72,682

 
72,914

Operating costs and expenses:
 

 
 

Cost of revenue*
12,207

 
10,756

Research and development*
28,527

 
28,534

Sales, general and administrative*
23,095

 
18,502

Gain from sale of intellectual property

 
(2,260
)
Gain from settlement
(441
)
 
(510
)
Total operating costs and expenses
63,388

 
55,022

Operating income
9,294

 
17,892

Interest income and other income (expense), net
242

 
132

Interest expense
(3,141
)
 
(3,083
)
Interest and other income (expense), net
(2,899
)
 
(2,951
)
Income before income taxes
6,395

 
14,941

Provision for income taxes
4,517

 
5,439

Net income
$
1,878

 
$
9,502

Net income per share:
 

 
 

Basic
$
0.02

 
$
0.08

Diluted
$
0.02

 
$
0.08

Weighted average shares used in per share calculation:
 

 
 

Basic
109,733

 
115,336

Diluted
112,252

 
117,442

_________________________________________
*    Includes stock-based compensation:
Cost of revenue
$
14

 
$
12

Research and development
$
2,080

 
$
1,767

Sales, general and administrative
$
2,770

 
$
1,987


See Notes to Unaudited Condensed Consolidated Financial Statements

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Table of Contents

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

 
 
Three Months Ended
 
 
March 31,
(In thousands)
 
2016
 
2015
Net income
 
$
1,878

 
$
9,502

Other comprehensive income:
 
 

 
 

Foreign currency translation adjustment
 
(640
)
 

Unrealized gain (loss) on marketable securities, net of tax
 
(183
)
 
53

Total comprehensive income
 
$
1,055

 
$
9,555


See Notes to Unaudited Condensed Consolidated Financial Statements

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Table of Contents

RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)  
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
1,878

 
$
9,502

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

 
 

Stock-based compensation
4,864

 
3,766

Depreciation
2,969

 
3,227

Amortization of intangible assets
7,719

 
6,322

Non-cash interest expense and amortization of convertible debt issuance costs
1,651

 
1,559

Deferred income taxes
1,142

 
644

Incremental tax benefits from stock-based compensation
(485
)
 
(182
)
Gain from sale of intellectual property and property, plant and equipment, net
(37
)
 
(2,267
)
Change in operating assets and liabilities:
 

 
 

Accounts receivable
10,015

 
(540
)
Prepaid expenses and other assets
(2,398
)
 
(1,436
)
Accounts payable
266

 
(965
)
Accrued salaries and benefits and other liabilities
(9,857
)
 
(5,959
)
Income taxes payable
(233
)
 
(86
)
Deferred revenue
(1,236
)
 
1,272

Net cash provided by operating activities
16,258

 
14,857

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(1,599
)
 
(1,095
)
Purchases of marketable securities

 
(46,779
)
Maturities of marketable securities
54,585

 
40,070

Proceeds from sale of marketable securities

 
6,600

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

 
2,280

Acquisition of business, net of cash acquired
(80,523
)
 

Net cash provided by (used in) investing activities
(27,537
)
 
1,076

Cash flows from financing activities:
 
 
 
Proceeds received from issuance of common stock under employee stock plans
3,799

 
1,424

Principal payments against lease financing obligation
(140
)
 
(98
)
Incremental tax benefits from stock-based compensation
485

 
182

Net cash provided by financing activities
4,144

 
1,508

Net increase (decrease) in cash and cash equivalents
(7,135
)
 
17,441

Cash and cash equivalents at beginning of period
143,764

 
154,126

Cash and cash equivalents at end of period
$
136,629

 
$
171,567

 
 
 
 
Non-cash investing activities during the period:
 

 
 

Property, plant and equipment received and accrued in accounts payable and other liabilities
$
830

 
$
248

Assumed cash liability from acquisition
$
12,100

 
$


See Notes to Unaudited Condensed Consolidated Financial Statements

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RAMBUS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Rambus Inc. (“Rambus” or the “Company”) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. Investments in entities with less than 20% ownership or in which the Company does not have the ability to significantly influence the operations of the investee are being accounted for using the cost method and are included in other assets.
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) necessary to state fairly the financial position and results of operations for each interim period presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Certain information and Note disclosures included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in Form 10-K for the year ended December 31, 2015 .
Operating Segment Definitions
Operating segments are based upon Rambus' internal organization structure, the manner in which its operations are managed, the criteria used by its Chief Operating Decision Maker ("CODM") to evaluate segment performance and availability of separate financial information regularly reviewed for resource allocation and performance assessment.
The Company determined its CODM to be the Chief Executive Officer and determined its operating segments to be: (1) Memory and Interface Division ("MID"), which focuses on the design, development and licensing of technology that is related to memory and interfaces; (2) Cryptography Research Division ("CRD"), which focuses on the design, development and licensing of technologies for chip and system security and anti-counterfeiting; (3) Emerging Solutions Division ("ESD"), which includes the computational sensing and imaging group along with the development efforts in the area of emerging technologies; and (4) Lighting and Display Technologies ("LDT"), which focuses on the design, development and licensing of technologies for lighting.
For the three months ended March 31, 2016 , only MID and CRD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining other operating 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. Refer to Note 8 "Convertible Notes" for details.
2. Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions, which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. This ASU will become effective for the Company on January 1, 2017. Early adoption is permitted in any interim or annual period. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases." This ASU requires assets and liabilities arising from leases, including operating leases, to be recognized on the balance sheet. 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 currently evaluating the impact of this guidance on its consolidated financial statements.

9


In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes (Topic 740)," to simplify the presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company early adopted this ASU as of December 31, 2015 on a prospective basis. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The Company has adopted this ASU as of March 31, 2016 on a retrospective basis. Refer to Note 8, "Convertible Notes" for further details.
In May 2014, the FASB and International Accounting Standards Board issued their converged accounting standards update on revenue recognition. The core principle of the new guidance is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new guidance also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. In August 2015, the FASB deferred the effective date of this accounting standards update by one year. The new accounting standards update becomes effective for the Company on January 1, 2018. The Company is currently evaluating the impact that this guidance will have on its financial condition and results of operations.
3. Earnings Per Share
Basic earnings per share is calculated by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing the earnings by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, employee stock purchases, restricted stock and restricted stock units and shares issuable upon the conversion of convertible notes. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instrument was exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a net loss is reported.
The following table sets forth the computation of basic and diluted net income per share:
 
Three Months Ended March 31,
 
2016
 
2015
Net income per share:
(In thousands, except per share amounts)
Numerator:
 

 
 

Net income
$
1,878

 
$
9,502

Denominator:
 
 
 
Weighted-average shares outstanding - basic
109,733

 
115,336

Effect of potential dilutive common shares
2,519

 
2,106

Weighted-average shares outstanding - diluted
112,252

 
117,442

Basic net income per share
$
0.02

 
$
0.08

Diluted net income per share
$
0.02

 
$
0.08

For the three months ended March 31, 2016 and 2015 , options to purchase approximately 2.6 million and 3.8 million shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise, taxes and related unrecognized stock-based compensation expense.

10


4. Intangible Assets and Goodwill
Goodwill
The following tables present goodwill information for each of the reportable segments for the three months ended March 31, 2016 :
Reportable Segment:
 
As of December 31, 2015
 
Additions to Goodwill (1)
 
Impairment Charge of Goodwill
 
Effect of Exchange Rates
 
As of March 31, 2016
 
 
(In thousands)
MID
 
$
19,905

 
$

 
$

 
$

 
$
19,905

CRD
 
96,994

 
47,239

 

 
(333
)
 
143,900

Total
 
$
116,899

 
$
47,239

 
$

 
$
(333
)
 
$
163,805

(1) During the first quarter of 2016, the Company acquired Smart Card Software Limited (“SCS”) which resulted in the addition to goodwill. See Note 16, “Acquisition” for further details.

 
 
As of
 
 
March 31, 2016
Reportable Segment:
 
Gross Carrying Amount
 
Accumulated Impairment Losses
 
Net Carrying Amount
 
 
(In thousands)
MID
 
$
19,905

 
$

 
$
19,905

CRD
 
143,900

 

 
143,900

Other
 
21,770

 
(21,770
)
 

Total
 
$
185,575

 
$
(21,770
)
 
$
163,805

Intangible Assets
The components of the Company’s intangible assets as of March 31, 2016 and December 31, 2015 were as follows:
 
 
 
As of March 31, 2016
 
Useful Life
 
Gross Carrying
  Amount
 
Accumulated
  Amortization
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology (1)
3 to 10 years
 
$
212,244

 
$
(133,426
)
 
$
78,818

Customer contracts and contractual relationships (1)
1 to 10 years
 
63,824

 
(28,317
)
 
35,507

Non-compete agreements and trademarks
3 years
 
300

 
(300
)
 

Total intangible assets
 
 
$
276,368


$
(162,043
)
 
$
114,325

(1) Includes intangible assets from the acquisition of SCS. See Note 16, “Acquisition” for further details.
 
 
 
As of December 31, 2015
 
Useful Life
 
Gross Carrying
  Amount
 
Accumulated
  Amortization
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
185,321

 
$
(127,028
)
 
$
58,293

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

 
(25,120
)
 
5,973

Non-compete agreements and trademarks
3 years
 
300

 
(300
)
 

Total intangible assets
 
 
$
216,714

 
$
(152,448
)
 
$
64,266


During the three months ended March 31, 2016 , the Company did not sell any intangible assets. During the three months ended March 31, 2015 , the Company did not purchase or sell any intangible assets.


11


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 March 31, 2016 , the Company received $1.7 million related to the favorable contracts. For the three months ended March 31, 2015 , the Company did not receive any cash related to the favorable contracts. As of March 31, 2016 and December 31, 2015 , the net balance of the favorable contract intangible assets was $6.9 million and zero , respectively.
Amortization expense for intangible assets for the three months ended March 31, 2016 was $7.7 million . Amortization expense for intangible assets for the three months ended March 31, 2015 was $6.3 million . The estimated future amortization expense of intangible assets as of March 31, 2016 was as follows (amounts in thousands):
Years Ending December 31:
Amount
2016 (remaining 9 months)
$
30,394

2017
34,102

2018
20,519

2019
11,391

2020
10,903

Thereafter
7,016

 
$
114,325


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

5.   Segments and Major Customers
For the three months ended March 31, 2016 , MID and CRD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segments were shown under “Other.”
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 months ended March 31, 2016 and 2015 , respectively.
 
For the Three Months Ended March 31, 2016
 
MID
 
CRD
 
Other
 
Total
 
(In thousands)
Revenues
$
53,545

 
$
14,101

 
$
5,036

 
$
72,682

Segment operating expenses
12,043

 
11,910

 
7,126

 
31,079

Segment operating income (loss)
$
41,502

 
$
2,191

 
$
(2,090
)
 
$
41,603

Reconciling items
 

 
 
 
 

 
(32,309
)
Operating income
 

 
 
 
 

 
$
9,294

Interest and other income (expense), net
 

 
 
 
 

 
(2,899
)
Income before income taxes
 

 
 
 
 

 
$
6,395


12


 
For the Three Months Ended March 31, 2015
 
MID
 
CRD
 
Other
 
Total
 
(In thousands)
Revenues
$
54,733

 
$
12,826

 
$
5,355

 
$
72,914

Segment operating expenses
11,520

 
7,339

 
7,259

 
26,118

Segment operating income (loss)
$
43,213

 
$
5,487

 
$
(1,904
)
 
$
46,796

Reconciling items
 

 
 
 
 

 
(28,904
)
Operating income
 

 
 
 
 

 
$
17,892

Interest and other income (expense), net
 

 
 
 
 

 
(2,951
)
Income before income taxes
 

 
 
 
 

 
$
14,941

The Company’s CODM does not review information regarding assets on an operating segment basis. Additionally, the Company does not record intersegment revenue or expense.
Accounts receivable from the Company's major customers representing 10% or more of total accounts receivable at March 31, 2016 and December 31, 2015 , respectively, was as follows:
 
 
As of
Customer 
 
March 31, 2016
 
December 31, 2015
Customer 1 (Other segment)
 
24
%
 
27
%
Customer 2 (CRD reportable segment)
 
21
%
 
21
%
Customer 3 (MID reportable segment)
 
*

 
28
%
Customer 4 (MID reportable segment)
 
*

 
16
%
_________________________________________
*    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 months ended March 31, 2016 and 2015 , respectively, was as follows:
 
 
Three Months Ended
 
 
March 31,
Customer 
 
2016
 
2015
Customer A (MID and CRD reportable segments)
 
21
%
 
21
%
Customer B (MID reportable segment)
 
22
%
 
16
%
Customer C (MID reportable segment)
 
13
%
 
13
%

Revenue from customers in the geographic regions based on the location of contracting parties was as follows:
 
 
Three Months Ended
 
 
March 31,
(In thousands)
 
2016
 
2015
South Korea
 
$
31,454

 
$
26,821

USA
 
25,265

 
27,707

Japan
 
4,987

 
8,491

Europe
 
3,793

 
5,175

Canada
 
214

 
196

Singapore
 
4,619

 
2,810

Asia-Other
 
2,350

 
1,714

Total
 
$
72,682

 
$
72,914



13


6. Marketable Securities
Rambus invests its excess cash and cash equivalents primarily in U.S. government sponsored obligations, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within three years.  As of March 31, 2016 and December 31, 2015 , all of the Company’s cash equivalents and marketable securities had a remaining maturity of less than one year .
All cash equivalents and marketable securities are classified as available-for-sale. Total cash, cash equivalents and marketable securities are summarized as follows:
 
 
As of March 31, 2016
(In thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
90,342

 
$
90,342

 
$

 
$

 
0.20
%
U.S. Government bonds and notes
 
14,057

 
14,061

 

 
(4
)
 
0.48
%
Corporate notes, bonds, commercial paper and other
 
74,886

 
74,910

 
2

 
(26
)
 
0.56
%
Total cash equivalents and marketable securities
 
179,285

 
179,313

 
2

 
(30
)
 
 

Cash
 
46,287

 
46,287

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
225,572

 
$
225,600

 
$
2

 
$
(30
)
 
 

 
 
As of December 31, 2015
(In thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
77,804

 
$
77,804

 
$

 
$

 
0.12
%
U.S. Government bonds and notes
 
14,110

 
14,142

 

 
(32
)
 
0.48
%
Corporate notes, bonds, commercial paper and other
 
160,823

 
160,979

 

 
(156
)
 
0.45
%
Total cash equivalents and marketable securities
 
252,737

 
252,925

 

 
(188
)
 
 

Cash
 
34,969

 
34,969

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
287,706

 
$
287,894

 
$

 
$
(188
)
 
 


Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:
 
As of
 
March 31,
2016
 
December 31,
2015
 
(In thousands)
Cash equivalents
$
90,342

 
$
108,795

Short term marketable securities
88,943

 
143,942

Total cash equivalents and marketable securities
179,285

 
252,737

Cash
46,287

 
34,969

Total cash, cash equivalents and marketable securities
$
225,572

 
$
287,706


The Company continues to invest in highly rated quality, highly liquid debt securities. As of March 31, 2016 , these securities have a remaining maturity of less than one year. The Company holds all of its marketable securities as available-for-sale, marks them to market, and regularly reviews its portfolio to ensure adherence to its investment policy and to monitor individual investments for risk analysis, proper valuation, and unrealized losses that may be other than temporary.


14


The estimated fair value of cash equivalents and marketable securities classified by the length of time that the securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015 are as follows:
 
Fair Value
 
Gross Unrealized Loss
 
March 31,
2016
 
December 31,
2015
 
March 31,
2016
 
December 31,
2015
 
(In thousands)
Less than one year
 

 
 

 
 

 
 

U.S. Government bonds and notes
$
10,212

 
$
14,110

 
$
(4
)
 
$
(32
)
Corporate notes, bonds and commercial paper
47,247

 
145,563

 
(26
)
 
(156
)
Total Corporate notes, bonds, and commercial paper and U.S. Government bonds and notes
$
57,459

 
$
159,673

 
$
(30
)
 
$
(188
)

The gross unrealized loss at March 31, 2016 and December 31, 2015 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 requirement to sell and the Company believes that it can recover the amortized cost of these investments. The Company has found no evidence of impairment due to credit losses in its portfolio. Therefore, these unrealized losses were recorded in other comprehensive income. However, the Company cannot provide any assurance that its portfolio of cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require the Company in the future to record an impairment charge for credit losses which could adversely impact its financial results.
See Note 7, “Fair Value of Financial Instruments,” for discussion regarding the fair value of the Company’s cash equivalents and marketable securities.
7. Fair Value of Financial Instruments
The Company reviews the pricing inputs by obtaining prices from a different source for the same security on a sample of its portfolio. The Company has not adjusted the pricing inputs it has obtained. The following table presents the financial instruments that are carried at fair value and summarizes the valuation of its cash equivalents and marketable securities by the above pricing levels as of March 31, 2016 and December 31, 2015 :
 
As of March 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
$
90,342

 
$
90,342

 
$

 
$

U.S. Government bonds and notes
14,057

 

 
14,057

 

Corporate notes, bonds, commercial paper and other
74,886

 
922

 
73,964

 

Total available-for-sale securities
$
179,285

 
$
91,264

 
$
88,021

 
$

 
As of December 31, 2015
 
Total
 
Quoted
  Market
  Prices in
  Active
  Markets
  (Level 1)
 
Significant
  Other
  Observable
  Inputs
  (Level 2)
 
Significant
  Unobservable
  Inputs
  (Level 3)
 
(In thousands)
Money market funds
$
77,804

 
$
77,804

 
$

 
$

U.S. Government bonds and notes
14,110

 

 
14,110

 

Corporate notes, bonds, commercial paper and other
160,823

 
1,264

 
159,559

 

Total available-for-sale securities
$
252,737

 
$
79,068

 
$
173,669

 
$



15


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 months ended March 31, 2016 and 2015 , there were no transfers of financial instruments between different categories of fair value.
The following table presents the financial instruments that are not carried at fair value but require fair value disclosure as of March 31, 2016 and December 31, 2015 :
 
 
As of March 31, 2016
 
As of December 31, 2015
(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

 
$
121,069

 
$
174,853

 
$
138,000

 
$
119,418

 
$
156,292


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 March 31, 2016 , 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 adopted ASU 2015-03 during the first quarter of 2016. Pursuant to the guidance in ASU 2015-03, the Company has reclassified unamortized debt issuance costs associated with the Company's 2018 Notes in the previously reported Consolidated Balance Sheet as of December 31, 2015 , as follows:
(In thousands)
 
As presented December 31, 2015
 
Reclassifications
 
As adjusted December 31, 2015
Other assets
 
$
3,648

 
$
(1,483
)
 
$
2,165

Convertible notes, long-term
 
120,901

 
(1,483
)
 
119,418

The Company’s convertible notes are shown in the following table:
(In thousands)
 
As of March 31, 2016
 
As of December 31, 2015
1.125% Convertible Senior Notes due 2018
 
$
138,000

 
$
138,000

Unamortized discount
 
(15,589
)
 
(17,099
)
Unamortized debt issuance costs
 
(1,342
)
 
(1,483
)
Total convertible notes
 
$
121,069

 
$
119,418

Less current portion
 

 

Total long-term convertible notes
 
$
121,069

 
$
119,418


16


Interest expense related to the notes for the three months ended March 31, 2016 and 2015 was as follows:
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
(In thousands)
2018 Notes coupon interest at a rate of 1.125%
$
388

 
$
403

2018 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 5.5%
1,651

 
1,559

Total interest expense on convertible notes
$
2,039

 
$
1,962


9. Commitments and Contingencies
As of March 31, 2016 , the Company’s material contractual obligations were as follows (in thousands):
 
Total
 
Remainder   of 2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Contractual obligations (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

Imputed financing obligation (2)
$
26,856

 
$
4,636

 
$
6,302

 
$
6,447

 
$
6,602

 
$
2,869

 
$

Leases and other contractual obligations
10,425

 
3,847

 
2,823

 
1,798

 
1,040

 
456

 
461

Software licenses (3)
3,562

 
1,497

 
1,300

 
765

 

 

 

Convertible notes
138,000

 

 

 
138,000

 

 

 

Interest payments related to convertible notes
3,881

 
776

 
1,553

 
1,552

 

 

 

Total
$
182,724

 
$
10,756

 
$
11,978

 
$
148,562

 
$
7,642

 
$
3,325

 
$
461

_________________________________________
(1)
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $22.1 million including $19.6 million recorded as a reduction of long-term deferred tax assets and $2.5 million in long-term income taxes payable as of March 31, 2016 . As noted below in Note 12, “Income Taxes,” although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
(2)
With respect to the imputed financing obligation, the main components of the difference between the amount reflected in the contractual obligations table and the amount reflected on the unaudited condensed consolidated balance sheets are the interest on the imputed financing obligation and the estimated common area expenses over the future periods. The amount includes the amended Ohio lease and the amended Sunnyvale lease.
(3)
The Company has commitments with various software vendors for non-cancellable agreements generally having terms longer than one year.
Building lease expense was approximately $0.8 million and $0.7 million for the three months ended March 31, 2016 and 2015 , respectively. Deferred rent of $0.7 million and $0.8 million as of March 31, 2016 and December 31, 2015 , respectively, was included primarily in other long-term 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 that the Company could be required to make under these agreements to the amount of fees received by the Company, however, this is not always possible.  The fair value of the liability as of March 31, 2016 and December 31, 2015 is not material.

17


10. Equity Incentive Plans and Stock-Based Compensation
As of March 31, 2016 , 8,408,844 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 March 31, 2016. No further awards will be made under the 2006 Plan, but the 2006 Plan will continue to govern awards previously granted under it. In addition, any shares subject to stock options or other awards granted under the 2006 Plan that on or after the effective date of the 2015 Plan are forfeited, cancelled, exchanged or surrendered or terminate under the 2006 Plan will become available for grant under the 2015 Plan. Additionally, the 1997 Stock Option Plan (the “1997 Plan”) continues to govern awards previously granted under that plan.
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, 2015
11,173,545

Stock options granted
(440,000
)
Stock options forfeited
470,134

Stock options expired under former plans
(192,467
)
Nonvested equity stock and stock units granted (1) (2)
(3,060,279
)
Nonvested equity stock and stock units forfeited (1)
457,911

Total available for grant as of March 31, 2016
8,408,844

_________________________________________
(1)
For purposes of determining the number of shares available for grant under the 2015 Plan (and previously the 2006 Plan) against the maximum number of shares authorized, each share of restricted stock granted reduces the number of shares available for grant by 1.5 shares and each share of restricted stock forfeited increases shares available for grant by 1.5 shares.
(2)
Amount includes 300,003 shares that have been reserved for potential future issuance related to certain performance unit awards granted in the first quarter of 2016 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 1997 Plan, 2006 Plan and 2015 Plan for the three months ended March 31, 2016 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of March 31, 2016 .
 
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, 2015
8,995,017

 
$
10.01

 
 
 
 

Options granted
440,000

 
$
12.31

 
 
 
 

Options exercised
(550,229
)
 
$
6.82

 
 
 
 

Options forfeited
(470,134
)
 
$
15.02

 
 
 
 

Outstanding as of March 31, 2016
8,414,654

 
$
10.06

 
5.75
 
$
43,807

Vested or expected to vest at March 31, 2016
8,129,382

 
$
10.12

 
5.68
 
$
42,263

Options exercisable at March 31, 2016
5,139,627

 
$
11.39

 
4.66
 
$
24,873



18


No stock options that contain a market condition were granted during the three months ended March 31, 2016 . As of March 31, 2016 and December 31, 2015 , there were 1,225,000 and 1,315,000, 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 March 31, 2016 , based on the $13.75 closing stock price of Rambus’ common stock on March 31, 2016 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 March 31, 2016 was 6,922,015 and 3,702,454 , respectively.
Employee Stock Purchase Plan
No purchases were made under the 2006 Employee Stock Purchase Plan ("2006 ESPP") or 2015 Employee Stock Purchase Plan ("2015 ESPP") during the three months ended March 31, 2016 and 2015 , respectively. As of March 31, 2016 , 2,000,000 shares under the 2015 ESPP remain available for issuance. The 2006 ESPP remained in effect until the Company’s November 2, 2015 offering period, at which time the first offering period under the 2015 ESPP began.
Stock-Based Compensation
For the three months ended March 31, 2016 and 2015 , 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 (and previously the 2006 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 March 31, 2016 , the Company granted 440,000 stock options with an estimated total grant-date fair value of $2.1 million . During the three months ended March 31, 2016 , the Company recorded stock-based compensation expense related to stock options of $1.2 million .
During the  three  months ended  March 31, 2015 , the Company granted  362,335 stock options, with an estimated total grant-date fair value of  $1.7 million . During the three  months ended March 31, 2015 , the Company recorded stock-based compensation expense related to stock options of  $2.2 million .
As of March 31, 2016 , there was $7.4 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 1.9 years. The total fair value of shares vested as of March 31, 2016 was $36.9 million .
The total intrinsic value of options exercised was $3.1 million for the three months ended March 31, 2016 . The total intrinsic value of options exercised was  $1.0 million for the  three  months ended  March 31, 2015 . 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 three months ended March 31, 2016 , net proceeds from employee stock option exercises totaled approximately $3.8 million .
Employee Stock Purchase Plan
For the three months ended March 31, 2016 , the Company recorded compensation expense related to the 2015 ESPP of $0.5 million . For the three months ended March 31, 2015 , the Company recorded compensation expense related to the 2006 ESPP of $0.4 million . As of March 31, 2016 , there was $0.2 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 one month.
There were no tax benefits realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the three months ended March 31, 2016 and 2015 calculated in accordance with accounting for share-based payments.

19


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.
The following table presents the weighted-average assumptions used to estimate the fair value of stock options granted that contain only service conditions in the periods presented.
 
Stock Option Plans
 
Three Months Ended
 
March 31,
 
2016
 
2015
Stock Option Plans
 

 
 

Expected stock price volatility
36
%
 
41
%
Risk free interest rate
1.7
%
 
1.2
%
Expected term (in years)
6.1

 
6.0

Weighted-average fair value of stock options granted to employees
$
4.66

 
$
4.59

No shares were issued under the 2015 ESPP and 2006 ESPP during the three months ended March 31, 2016 and 2015 , respectively.
Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the three months ended March 31, 2016 , the Company granted nonvested equity stock units totaling 1,840,184 shares under the 2015 Plan. During the three months ended March 31, 2015 , the Company granted nonvested equity stock units totaling 1,521,178 shares under the 2006 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 months ended March 31, 2016 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $22.7 million . For the three months ended March 31, 2015 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $17.1 million . During the first quarters of 2016 and 2015, the Company granted performance unit awards to certain Company executive officers with vesting subject to the achievement of certain performance conditions. The ultimate number of performance units that can be earned can range from 0% to 150% of target depending on performance relative to target over the applicable period. The shares earned will vest on the third anniversary of the date of grant. The Company's shares available for grant has been reduced to reflect the shares that could be earned at 150% of target. During the three months ended March 31, 2016 and 2015 , the Company recorded $0.6 million and $0.2 million of stock-based compensation expense related to these performance unit awards, respectively.
For the three months ended March 31, 2016 , the Company recorded stock-based compensation expense of approximately $3.2 million related to all outstanding nonvested equity stock grants. For the three months ended March 31, 2015 , the Company recorded stock-based compensation expense of approximately $1.2 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 $36.2 million at March 31, 2016 . This amount is expected to be recognized over a weighted average period of 3.2 years .
The following table reflects the activity related to nonvested equity stock and stock units for the three months ended March 31, 2016 :
Nonvested Equity Stock and Stock Units
 
Shares
 
Weighted-
  Average
  Grant-Date
  Fair Value
Nonvested at December 31, 2015
 
3,008,118

 
$
11.32

Granted
 
1,840,184

 
$
12.33

Vested
 
(362,963
)
 
$
10.04

Forfeited
 
(164,864
)
 
$
11.61

Nonvested at March 31, 2016
 
4,320,475

 
$
11.85



20


11.   Stockholders’ Equity
Share Repurchase Program
During the three months ended March 31, 2016 , the Company did not repurchase any shares of its common stock under its share repurchase program.
On January 21, 2015, the Company's Board approved a 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 October 26, 2015, the Company initiated an accelerated share repurchase program with Citibank, N.A. 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 Citibank, N.A., the $100.0 million purchase price for its common stock and, in turn, the Company received an initial delivery of approximately 7.8 million shares of its common stock from Citibank, N.A, which were retired and recorded as a $80.0 million reduction to stockholders' equity. The remaining $20.0 million of the initial payment was recorded as a reduction to stockholders’ equity as an unsettled forward contract indexed to 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 June 2016.

As of March 31, 2016 , there remained an outstanding authorization to repurchase approximately 12.2 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.

12. Income Taxes
The Company recorded a provision for income taxes of $4.5 million and $5.4 million for the three months ended March 31, 2016 and 2015 , respectively. The income taxes for the three months ended March 31, 2016 is 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. The provision for income taxes for the three months ended March 31, 2015 was primarily comprised of withholding taxes, state taxes and other foreign taxes based upon income earned during the period.
During the three months ended March 31, 2016 , the Company paid withholding taxes of $5.5 million . During the three months ended March 31, 2015 , the Company paid withholding taxes of $4.8 million .
As of March 31, 2016 , the Company’s unaudited condensed consolidated balance sheets included net deferred tax assets, before valuation allowance, of approximately $166.7 million , which consists of net operating loss carryovers, tax credit carryovers, amortization, employee stock-based compensation expenses and certain liabilities, partially reduced by deferred tax liabilities associated with the convertible notes.
As of March 31, 2016, 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 $21.9 million as of March 31, 2016 .

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 March 31, 2016 , the Company had approximately $22.1 million of unrecognized tax benefits, including $19.6 million recorded as a reduction of long-term deferred tax assets and $2.5 million in long-term income taxes payable. If recognized, approximately $2.5 million would be recorded as an income tax benefit. As of December 31, 2015 , the Company had $20.8 million of unrecognized tax benefits, including $18.6 million recorded as a reduction of long-term deferred tax assets and $2.2 million recorded in long-term income taxes payable.

21



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 March 31, 2016 and December 31, 2015 , an immaterial amount of interest and penalties is included in long-term income taxes payable.
Rambus files income tax returns for the U.S., California, India and various other state and foreign jurisdictions. The U.S. federal returns are subject to examination from 2012 and forward. The California returns are subject to examination from 2009 and forward. In addition, any research and development credit carryforward or net operating loss carryforward generated in prior years and utilized in these or future years may also be subject to examination. The India returns are subject to examination from fiscal year ended March 2009 and forward. The Company is currently under examination by California for the 2010 and 2011 tax years. The Company’s India subsidiary is under examination by the Indian tax administration for tax years beginning 2011. These examinations may result in proposed adjustments to the income taxes as filed during these periods. Management regularly assesses the likelihood of outcomes resulting from income tax examinations to determine the adequacy of their provision for income taxes and believes their provision for unrecognized tax benefits is adequate.
Additionally, the Company's future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of its deferred tax assets and liabilities or by changes in tax laws or interpretations of those laws.

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

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

14. Agreements with SK hynix and Micron
SK hynix
On June 11, 2013, Rambus, SK hynix and certain related entities of SK hynix entered into a settlement agreement, pursuant to which the parties have agreed to release all claims against each other with respect to all outstanding litigation between them. Pursuant to the settlement agreement, Rambus and SK hynix entered into a semiconductor patent license agreement on June 11, 2013, under which SK hynix licenses from Rambus non-exclusive rights to certain Rambus patents and has agreed to pay Rambus cash amounts over the next five years . Under the license agreement, Rambus has granted to SK hynix (i) a paid-up perpetual patent license for certain identified SK hynix DRAM products and (ii) a five -year term patent license to all other DRAM and other semiconductor products.
In June 2015, the Company s igned an amendment that extends its current agreement with SK hynix for an additional six years for use of Rambus memory-related patented innovations in SK hynix semiconductor products. The Company signed the original agreement with SK hynix for a five-year term in June 2013. Under the amendment, SK hynix has agreed to continue to pay the Company an average quarterly cash payment of $12.0 million which equates to $432.0 million from the signing of the amendment through the term of the agreement ending July 1, 2024, provided that (a) for each of the six full calendar quarters immediately following July 1, 2015, SK hynix will pay the Company a quarterly cash payment of $16.0 million , and (b) in addition, after December 1, 2017, SK hynix will have the option to make six quarterly cash payments of $8.0 million upon six months written notice. In addition, SK hynix has the option to renew the agreement for an additional three-year extension under the existing rate structure.
The agreements with SK hynix are considered a multiple element arrangement for accounting purposes. For a multiple element arrangement under the applicable accounting rules, the Company is required to identify specific elements of the arrangement and then determine when those elements should be recognized. The Company identified three elements in the arrangement: antitrust litigation settlement, settlement of past infringement, and license agreement. The Company considered

22


several factors in determining the accounting fair value of the elements of the SK hynix agreements which included a third party valuation using an income approach (collectively the “SK hynix Fair Value”). The inputs and assumptions used in this accounting valuation were from a market participant perspective and included projected customer revenue, royalty rates, estimated discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model requires a significant amount of management judgment and discretion, and is based upon a number of factors, including the selection of industry comparables, market growth rates and other relevant factors. Changes in any number of these assumptions may have a substantial impact on the SK hynix Fair Value as assigned to each element. These inputs and assumptions represent management’s best estimates at the time of the transaction.
During the first quarter of 2016, the Company received cash consideration of $16.0 million from SK hynix. The amount was allocated between royalty revenue ( $15.9 million ) and gain from settlement ( $0.1 million ) based on the elements’ SK hynix Fair Value.
The cumulative cash receipts through March 31, 2016 and the remaining future cash receipts from the agreements with SK hynix are expected to be recognized as follows assuming no adjustments to the payments under the terms of the agreements (and assuming the option to make the lower payments begins with payments made during the middle of 2018):
 
Cumulative Received
to-date as of March 31,
 
Estimated to Be Received in
 
 
 
Total Estimated
Cash Receipts
 
2016
 
Remainder
of 2016
 
2017
 
2018
 
2019
 
2020
 
2021 and Thereafter
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty revenue
$
142.1

 
$
48.0

 
$
48.0

 
$
40.0

 
$
32.0

 
$
48.0

 
$
168.0

 
$
526.1

Gain from settlement
1.9

 

 

 

 

 

 

 
1.9

Total
$
144.0

 
$
48.0

 
$
48.0

 
$
40.0

 
$
32.0

 
$
48.0

 
$
168.0

 
$
528.0

Micron
On December 9, 2013, Rambus, Micron and certain related entities of Micron entered into a settlement agreement, pursuant to which the parties have agreed that they will release all claims against each other with respect to all outstanding litigation between them and certain other potential claims. Pursuant to the settlement agreement, Rambus and Micron entered into a semiconductor patent license agreement on December 9, 2013. Under the license agreement, Rambus has granted to Micron and its subsidiaries and certain affiliated entities (i) a paid-up perpetual patent license for certain identified Micron DRAM products and (ii) a seven -year term patent license to other memory and semiconductor products.
The agreements with Micron are considered a multiple element arrangement for accounting purposes. For a multiple element arrangement under the applicable accounting rules, the Company is required to identify specific elements of the arrangement and then determine when those elements should be recognized. The Company identified three elements in the arrangement: antitrust litigation settlement, settlement of past infringement, and license agreement. The Company considered several factors in determining the accounting fair value of the elements of the Micron agreements which included a third party valuation using an income approach (collectively the “Micron Fair Value”). The inputs and assumptions used in this accounting valuation were from a market participant perspective and included projected customer revenue, royalty rates, estimated discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model requires a significant amount of management judgment and discretion, and is based upon a number of factors, including the selection of industry comparables, market growth rates and other relevant factors. Changes in any number of these assumptions may have a substantial impact on the Micron Fair Value as assigned to each element. These inputs and assumptions represent management’s best estimates at the time of the transaction.
During the first quarter of 2016, the Company received cash consideration of $10.0 million from Micron. The amount was allocated between royalty revenue ( $9.7 million ) and gain from settlement ( $0.3 million ) based on the elements’ Micron Fair Value.
The remaining $184.5 million is expected to be paid in successive quarterly payments of $10.0 million , concluding in the fourth quarter of 2020.

23


The cumulative cash receipts through March 31, 2016 and the remaining future cash receipts from the agreements with Micron are expected to be recognized as follows assuming no adjustments to the payments under the terms of the agreements:
 
Cumulative Received
to-date as of March 31,
 
Estimated to Be Received in
Total Estimated
Cash Receipts
 
2016
 
Remainder of 2016
 
2017
 
2018
 
2019
 
2020
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty revenue
$
92.3

 
$
29.9

 
$
40.0

 
$
40.0

 
$
40.0

 
$
34.5

 
$
276.7

Gain from settlement
3.2

 
0.1

 

 

 

 

 
3.3

Total
$
95.5

 
$
30.0

 
$
40.0

 
$
40.0

 
$
40.0

 
$
34.5

 
$
280.0


24


15. Restructuring Charges
The 2015 Plan
During 2015, the Company initiated a restructuring program to reduce overall corporate expenses which is expected to improve future profitability by reducing spending on sales, general and administrative programs and refining some of its research and development efforts ("the 2015 Plan"). In connection with this restructuring program, the Company initiated a plan of termination resulting in a reduction of 8% of the Company's headcount. The Company estimated that it would incur a cash payout related to the reduction in force of approximately $3.0 million , which is related to severance and termination benefits. The estimated non-cash expense was expected to be approximately $1.0 million . During the year ended December 31, 2015, the Company recorded a charge of $3.6 million related primarily to the reduction in workforce, of which $1.4 million was related to the MID reportable segment, $0.1 million was related to the CRD reportable segment, $1.2 million was related to the Other segment and $0.9 million was related to corporate support functions. The majority of the 2015 Plan was completed in the first quarter of 2016.
The following table summarizes the 2015 Plan restructuring activities during the three months ended March 31, 2016:
 
 
Employee
Severance
and Related Benefits
 
Facilities
 
Total
 
 
(In thousands)
Balance at December 31, 2014
 
$

 
$

 
$

Charges
 
2,993

 
583

 
3,576

Payments
 
(1,765
)
 

 
(1,765
)
Non-cash settlements
 

 
(583
)
*
(583
)
Balance at December 31, 2015
 
$
1,228

 
$

 
$
1,228

Payments
 
(1,181
)
 

 
(1,181
)
Balance at March 31, 2016
 
$
47

 

 
$
47

______________________________________
*The non-cash charge of $583 thousand is related to the write down of fixed assets related to the Other segment.

25


16. Acquisition
Smart Card Software Limited
On January 25, 2016, the Company completed its acquisition of Smart Card Software Limited (“SCS”), a privately-held company incorporated in the United Kingdom, by acquiring all issued and outstanding shares of capital stock of SCS. Pursuant to the merger agreement on January 25, 2016, SCS was merged into Rambus, Inc. The transaction was denominated in British pounds. Under the terms of the merger agreement, the total consideration in U.S. dollar equivalent was $104.7 million which included the purchase price of $92.6 million paid on January 25, 2016 and purchase adjustments to be paid in the second quarter of 2016 totaling $12.1 million and comprised of $11.6 million in cash, $4.0 million in working capital, offset by $3.5 million in debt assumed from SCS. Of the purchase price, approximately $17.1 million of the consideration was deposited into an escrow account to fund indemnification obligations and other contractual provisions, with releases of portions of the escrow at various intervals through 18 months . SCS is a leader in mobile payments and a leading supplier of smart ticketing systems, which includes Bell Identification Ltd. and Ecebs Ltd. SCS is part of the CRD reporting unit. This acquisition will complement the Company's CRD reporting unit by allowing the Company to leverage its foundational security technology to offer differentiated, value-added security solutions to its customers. As of March 31, 2016 , the Company has incurred approximately $2.0 million in direct acquisition costs in connection with the acquisition which were expensed as incurred.
The initial purchase price allocation and related accounting for this acquisition is preliminary. The preliminary fair value estimates for the assets acquired and liabilities assumed were based upon preliminary calculations and valuations and the Company's estimates and assumptions for the acquisition are subject to change as the Company obtains additional information during the measurement period (up to one year from the acquisition date). The primary area of the preliminary estimates that are not yet finalized, relate to working capital adjustments and valuation of net assets.
The fair value of the assets acquired has been determined primarily by using valuation methods that discount the expected future cash flows to present value using estimates and assumptions determined by management. The Company performed a valuation of the net assets acquired as of the January 25, 2016 closing date. The total consideration from the business combination was allocated as follows:
 
Total
 
(in thousands)
Cash
$
12,056

Accounts receivable
6,563

Property and equipment
524

Other tangible assets
1,462

Identified intangible assets
59,700

Goodwill
47,239

Accounts payable and accrued liabilities
(5,996
)
Deferred income taxes
(15,556
)
Deferred revenue
(1,313
)
Total
$
104,679


The goodwill arising from the acquisition is primarily attributed to synergies related to the combination of new and complementary technologies of the Company and the assembled workforce of SCS. This goodwill is not expected to be deductible for tax purposes.

26


The identified intangible assets assumed in the acquisition of SCS were recognized as follows based upon their estimated fair values as of the acquisition date:
 
Total
 
Estimated Weighted Average Useful Life
 
(in thousands)
 
(in years)
Existing technology
$
24,600

 
6
Customer contracts and contractual relationships (1)
35,100

 
6
Total
$
59,700

 
 
(1) Includes favorable contracts of $8.3 million with an estimated useful life of 5 years . The favorable contracts 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.

Disclosure of proforma earnings attributable to SCS is excluded as it would be impracticable, since the acquired company was a closely-held foreign private entity, its historical financial records are not available in U.S. GAAP and the Company is still in the preliminary stages of the acquisition and related integration efforts.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as described in more detail under “Note Regarding Forward-Looking Statements. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect. As a result of the factors described herein, and in the documents incorporated herein by reference, including, in particular, those factors described under “Risk Factors,” we undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission.
Rambus, RDRAM , XDR , FlexIO  and FlexPhase  are trademarks or registered trademarks of Rambus Inc. Other trademarks that may be mentioned in this quarterly report on Form 10-Q are the property of their respective owners.
Industry terminology, used widely throughout this report, has been abbreviated and, as such, these abbreviations are defined below for your convenience:
Differential Power Analysis
DPA
Dynamic Random Access Memory
DRAM
Light Emitting Diodes
LED
Rambus Dynamic Random Access Memory
RDRAM
eXtreme Data Rate
XDR

27


From time to time we will refer to the abbreviated names of certain entities and, as such, have provided a chart to indicate the full names of those entities for your convenience.
Advanced Micro Devices Inc.
AMD
Broadcom Corporation
Broadcom
Cryptography Research Division
CRD
Eaton Corporation plc
Eaton
Elpida Memory, Inc.
Elpida
Emerging Solutions Division
ESD
Freescale Semiconductor Inc.
Freescale
Fujitsu Limited
Fujitsu
General Electric Company
GE
Intel Corporation
Intel
International Business Machines Corporation
IBM
Lighting and Display Technology
LDT
LSI Corporation (now a division of Avago Technologies Limited)
LSI
Memory and Interfaces Division
MID
Micron Technologies, Inc.
Micron
Nanya Technology Corporation
Nanya
Qualcomm Incorporated
Qualcomm
Panasonic Corporation
Panasonic
Renesas Electronics
Renesas
Samsung Electronics Co., Ltd.
Samsung
SK hynix, Inc.
SK hynix
Smart Card Software Ltd.
SCS
Sony Computer Electronics
Sony
ST Microelectronics N.V.
STMicroelectronics
Toshiba Corporation
Toshiba


28


Business Overview
Rambus creates cutting-edge semiconductor and IP products, spanning memory and interfaces to security, smart sensors and lighting. Our chips, customizable IP cores, architecture licenses, tools, services, software, training and innovations improve the competitive advantage of our customers. We collaborate with the industry, partnering with leading ASIC and SoC designers, foundries, IP developers, EDA companies and validation labs. Our products are integrated into tens of billions of devices and systems, powering and securing diverse applications, including Big Data, Internet of Things (IoT), mobile, consumer and media platforms. We generate revenue by licensing our inventions and solutions, selling our semiconductor and security products and providing services to market-leading companies.
While we have historically focused our efforts on the development of technologies for electronics memory and chip interfaces, we have expanded our portfolio of inventions and solutions to address additional markets in lighting, chip and system security, as well as new areas within the semiconductor industry, such as computational sensing and imaging. We intend to continue our growth into new technology fields, consistent with our mission to create great value through our innovations and to make those technologies available through both our licensing and non-licensing business models. Key to our efforts will be hiring and retaining world-class inventors, scientists and engineers to lead the development of inventions and technology solutions for our fields of focus, and the management and business support personnel necessary to execute our plans and strategies.
We have four operational units: (1) Memory and Interfaces Division, or MID, which focuses on the design, development and licensing of technology that is related to memory and interfaces; (2) Cryptography Research Division, or CRD, which focuses on the design, development and licensing of technologies for chip and system security, anti-counterfeiting, smart ticketing and mobile payments; (3) Emerging Solutions Division, or ESD, which includes our computational sensing and imaging group along with our development efforts in the area of emerging technologies; and (4) Lighting and Display Technologies, or LDT, which focuses on the design, development and licensing of technologies for lighting. As of March 31, 2016, MID and CRD were considered reportable segments as they met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segments were shown under “Other.” For additional information concerning segment reporting, see Note 5, “Segments and Major Customers,” of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
Our inventions and technology solutions are primarily offered to our customers through either a patent license or a technology license. Royalties from patent licenses accounted for 81% and 89% of our consolidated revenue for the three months ended March 31, 2016 and 2015, respectively. Royalties from technology licenses accounted for 5% and 3% of our consolidated revenue for the three months ended March 31, 2016 and 2015, respectively. Today, a majority of our revenues are derived from patent licenses, through which we provide our customers a license to use a certain portion of our broad portfolio of patented inventions. The license provides our customers with a defined right to use our innovations in the customer's own digital electronics products, systems or services, as applicable. The licenses may also define the specific field of use where our customers may use or employ our inventions in their products. License agreements are structured with fixed, variable or a hybrid of fixed and variable royalty payments over certain defined periods ranging for periods of up to ten years. Leading consumer product, semiconductor and system companies such as AMD, Broadcom, Cisco, Freescale, Fujitsu, GE, IBM, Intel, LSI, Micron, Nanya, Panasonic, Qualcomm, Renesas, Samsung, SK hynix, STMicroelectronics and Toshiba have licensed our patents for use in their own products. The majority of our intellectual property was developed in-house and we have expanded our business strategy of monetizing our intellectual property to include the sale of select intellectual property. As any sales executed under this expanded strategy represent a component of our ongoing major or central operations and activities, we will record the related proceeds as revenue.
We also offer our customers technology licenses to support the implementation and adoption of our technology in their products or services. Our customers include leading companies such as Eaton, GE, IBM, Panasonic, Qualcomm, Samsung, Sony and Toshiba. Our technology license offerings include a range of technologies for incorporation into our customers' products and systems. We also offer a range of services as part of our technology licenses which can include know-how and technology transfer, product design and development, system integration, and other services. These technology license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Further, under technology licenses, our customers typically receive licenses to our patents necessary to implement these solutions in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts with us.
The remainder of our revenue is contract services revenue which includes license fees and engineering services fees. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenue or account receivables in any given period.


29


We intend to continue making significant expenditures associated with engineering, sales, general and administration and expect that these costs and expenses will continue to be a significant percentage of revenue in future periods. Whether such expenses increase or decrease as a percentage of revenue will be substantially dependent upon the rate at which our revenue or expenses change.
Our strategy is to evolve from providing primarily patent licenses to providing additional technology, products and services while creating and leveraging strategic synergies to increase revenue. One of our goals is to supplement our patent licensing business with additional licensing opportunities for our technologies, products and services to be incorporated into our customers’ products and/or systems. Our technology licenses are designed to support the implementation and adoption of our technology into our customers’ products or services. As part of these offerings, we can provide a range of services that can include access to technical experts, advanced system design and analysis, hardware and software to enhance design and validation, system IP and specifications, and process-specific hard and soft macros, along with other services. These technology license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Further, under technology licenses, our customers typically receive licenses to our patents necessary to implement these solutions in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts with us.
As of March 31, 2016, our semiconductor, lighting, security and other technologies are covered by 1,871 U.S. and foreign patents. Additionally, we have 671 patent applications pending. Some of the patents and pending patent applications are derived from a common parent patent application or are foreign counterpart patent applications. We have a program to file applications for and obtain patents in the United States and in selected foreign countries where we believe filing for such protection is appropriate and would further our overall business strategy and objectives. In some instances, obtaining appropriate levels of protection may involve prosecuting continuation and counterpart patent applications based on a common parent application. We believe our patented innovations provide our customers with the ability to achieve improved performance, lower risk, greater cost-effectiveness and other benefits in their products and services.
Executive Summary
During the first quarter of 2016, we acquired Smart Card Software Ltd., or SCS, a privately held company who is a leader in mobile payments and a leading supplier of smart ticketing systems, which includes Bell Identification Ltd., or Bell ID, and Ecebs Ltd. through the purchase of all outstanding shares of SCS, for approximately $105 million. We expect the acquisition of SCS to be accretive to revenue within the first twelve months from the date of acquisition. Our Bell ID group will support international issuing banks, payment schemes and processors to integrate with Android Pay. Bell ID customers can utilize its Token Service Provider (TSP) software to enable and secure near field communication (NFC) payments functionality on Android phones.

Additionally, we have extended our patent license agreement with AMD. Under the terms of the agreement, AMD will continue to be licensed for its integrated circuit and circuit board products for an additional five years.

Engineering expenses continue to play a key role in our efforts to maintain product innovations. Our engineering expenses for the three months ended March 31, 2016 increased $1.4 million as compared to the same period in 2015 primarily due to increased headcount related expenses of $0.7 million, increased expenses related to software design tools of $0.8 million, increased amortization costs of $0.6 million due to the acquisition of SCS and increased stock-based compensation expense of $0.3 million, offset by decreased bonus accrual expense of $0.4 million, decreased prototyping costs of $0.3 million, decreased consulting costs of $0.2 million and decreased depreciation expense of $0.2 million.

Sales, general and administrative expenses for the three months ended March 31, 2016 increased $4.6 million as compared to the same period in 2015 primarily due to increased headcount related expenses of $0.7 million, increased stock-based compensation expense of $0.8 million, increased amortization costs of $0.7 million due to the acquisition of SCS, and various acquisition related costs of $1.8 million, including legal, accounting and other compliance fees.
Trends
There are a number of trends that may have a material impact on us in the future, including but not limited to, the evolution of memory technology, adoption of LEDs in general lighting, the use and adoption of our inventions or technologies and global economic conditions with the resulting impact on sales of consumer electronic systems.
We have a high degree of revenue concentration. Our top five customers for each reporting period represented approximately 70% and 66% of our revenue for the three months ended March 31, 2016 and 2015, respectively. As a result of renewing with Samsung in 2013 and settling with SK hynix and Micron in 2013, as well as extending our license agreement with SK hynix in June 2015, Samsung, SK hynix and Micron are expected to account for a significant portion of our ongoing

30


licensing revenue. For both the three months ended March 31, 2016 and 2015, revenue from Micron, Samsung and SK hynix each accounted for 10% or more of our total revenue.
The particular customers which account for revenue concentration have varied from period to period as a result of the addition of new contracts, expiration of existing contracts, renewals of existing contracts, industry consolidation and the volumes and prices at which the customers have recently sold to their customers. These variations are expected to continue in the foreseeable future.
Our licensing cycle is lengthy, costly and unpredictable with any degree of certainty. We may incur costs in any particular period before any associated revenue stream begins, if at all. Our lengthy license negotiation cycles could make our future revenue difficult to predict because we may not be successful in entering into licenses with our customers in the amounts projected, or on our anticipated timelines. In addition, while some of our license agreements provide for fixed, quarterly royalty payments, many of our license agreements provide for volume-based royalties, and may also be subject to caps on royalties in a given period. The sales volume and prices of our customers' products in any given period can be difficult to predict. As a result, our actual results may differ substantially from analyst estimates or our forecasts in any given quarter or over the next year.

The semiconductor industry is intensely competitive and highly cyclical, limiting our visibility with respect to future sales. To the extent that macroeconomic fluctuations negatively affect our principal customers, the demand for our technology may be significantly and adversely impacted and we may experience substantial period-to-period fluctuations in our operating results. The royalties we receive from our semiconductor customers are partly a function of the adoption of our technologies by system companies. Many system companies purchase semiconductors containing our technologies from our customers and do not have a direct contractual relationship with us. Our customers generally do not provide us with details as to the identity or volume of licensed semiconductors purchased by particular system companies. As a result, we face difficulty in analyzing the extent to which our future revenue will be dependent upon particular system companies. System companies face intense competitive pressure in their markets, which are characterized by extreme volatility, frequent new product introductions and rapidly shifting consumer preferences.
During the third quarter of 2015 we announced that we are in technical development of the buffer chipset which we are currently sampling to key potential customers and critical ecosystem partners. We are currently working to make the chipset commercially available, but we do not expect any material contribution to revenue from the chipset in 2016.
Global demand for effective security technologies continues to increase. In particular, highly integrated devices such as smart phones and tablets are increasingly used for applications requiring security such as mobile payments, content protection, corporate information and user data. Our CRD is primarily focused on positioning its DPA countermeasures, CryptoFirewall™ and CryptoManager™ technology solutions, and the introduction of mobile payments and smart ticketing solutions to our offerings to capitalize on these trends and growing adoption among technology partners and customers.
The highly fragmented general lighting industry is undergoing a fundamental shift from incandescent technology to cold cathode fluorescent lights and LED driven technology due to the need to reduce energy consumption and to comply with government mandates. LED lighting typically saves energy costs as compared to existing installed lighting. Our LDT group's patents in LED edge-lit light guide technology can be applied in the design of next generation LED lighting products.
The strategy of the LDT group focuses on providing the market with novel, patented light guide technologies and products to customers who are leading the transition to solid-state LED-based general lighting fixtures.
In 2013, we sold a set of patent assets related to our core display patents where the purchaser of the patents can proceed independently with a licensing program. We have a net proceeds-sharing program in place with the purchaser of the patents upon their licensing of these patent assets. We retain the rights to use certain application techniques and may selectively engage with customers to license our intellectual property and technology for use and applications as permitted under our agreement, including without limitation, display panel and designs.
Our revenue from companies headquartered outside of the United States accounted for approximately 65% and 62% of our total revenue for the three months ended March 31, 2016 and 2015, respectively. We expect that revenue derived from international customers will continue to represent a significant portion of our total revenue in the future. To date, 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.

31


For additional information concerning international revenue, see Note 5, “Segments and Major Customers,” of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
Engineering costs in the aggregate and as a percentage of revenue increased for the three months ended March 31, 2016 as compared to the same period in the prior year. In the near term, we expect engineering costs in the aggregate to be higher as we intend to continue to make investments in the infrastructure and technologies required to maintain our product innovation in semiconductor, lighting, security and other technologies, including costs related to the acquisition of SCS.
Sales, general and administrative expenses in the aggregate and as a percentage of revenue increased for the three months ended March 31, 2016 as compared to the same period in the prior year. In the past, our litigation expenses have been high and difficult to predict. Because we successfully negotiated settlements and license agreements with SK hynix, Micron and Nanya during the course of 2013 and 2014, we have settled all outstanding litigation and should no longer have material litigation expenses related to these specific matters. To the extent litigation is again necessary, our expectations on the amount and timing of any future general and administrative costs is uncertain. In the near term, we expect our sales, general and administrative costs in the aggregate to be lower as the acquisition costs associated with SCS occurred primarily during the first quarter of 2016.
Our continued investment in research and development projects, involvement in any future litigation or other legal proceedings and any lower revenue from our customers in the future, will negatively affect our cash from operations.
As a part of our overall business strategy, from time to time, we evaluate businesses and technologies for potential acquisition that are aligned with our core business and designed to supplement our growth, including the acquisition of SCS.

To provide us with more flexibility in returning capital back to our shareholders, on January 21, 2015, our Board authorized a share repurchase program authorizing the repurchase of up to an aggregate of 20.0 million shares. In the fourth quarter of 2015, we entered into an accelerated share repurchase program to repurchase an aggregate of $100.0 million of our common stock and received an initial delivery of 7.8 million shares. We may continue to tactically execute the share repurchase program from time to time.


32


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
 
March 31,
 
2016
 
2015
Revenue:
 

 
 

Royalties
86.5
 %
 
91.8
 %
Contract and other revenue
13.5
 %
 
8.2
 %
Total revenue
100.0
 %
 
100.0
 %
Operating costs and expenses:
 

 
 

Cost of revenue*
16.8
 %
 
14.8
 %
Research and development*
39.2
 %
 
39.1
 %
Sales, general and administrative*
31.8
 %
 
25.4
 %
Gain from sale of intellectual property
 %
 
(3.1
)%
Gain from settlement
(0.6
)%
 
(0.7
)%
Total operating costs and expenses
87.2
 %
 
75.5
 %
Operating income
12.8
 %
 
24.5
 %
Interest income and other income (expense), net
0.3
 %
 
0.2
 %
Interest expense
(4.3
)%
 
(4.2
)%
Interest and other income (expense), net
(4.0
)%
 
(4.0
)%
Income before income taxes
8.8
 %
 
20.5
 %
Provision for income taxes
6.2
 %
 
7.5
 %
Net income
2.6
 %
 
13.0
 %
_________________________________________
*      Includes stock-based compensation:
Cost of revenue
0.0
%
 
0.0
%
Research and development
2.9
%
 
2.4