(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The forward-looking statements involve risks and uncertainties. Forward-looking statements are identified by words such as "anticipates", "believes", "expects", "intends", ""may", "will", "places", and other similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements, which refer to expectations, projections, or other characterizations of future events or circumstances, are forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth below in "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and in Item 1A, "Risk Factors", those described elsewhere in this report, and those described in our other reports filed with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements after the filing of this report.
You are urged to review carefully and consider our various disclosures in this report and in our other reports publicly disclosed or filed with the SEC that attempt to advise you of the risks and factors that may affect our business.
Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, stock-based compensation, short-term investments, leases, income taxes and contingencies. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.
Performance Obligation B - Transfer rights to our patent portfolio as it evolves over the term of the contract, including access to new patent applications that the licensee can benefit from over the term of the contract. If a fixed fee license agreement contains only Performance Obligation A, we will recognize most or all of the revenue from the agreement at the inception of the contract. For fixed fee license agreements that contain both Performance Obligation A and B, we will be required to allocate the transaction price based on the standalone price for each of the two performance obligations. We have developed a process, and established internal controls around such process, to estimate standalone prices related to Performance Obligation A and B using a number of factors primarily related to the attributes of our patent portfolio. Once the transaction price is allocated, the portion of the transaction price allocable to Performance Obligation A will be recognized in the quarter the license agreement is signed and the customer can benefit from rights provided in the contract, and the portion allocable to Performance Obligation B will be recognized on a straight-line basis over the contract term. For such
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contracts, a contract liability account will be established and included within "deferred revenue" on the consolidated balance sheet. As the rights and obligations in a contract are interdependent, contract assets and contract liabilities that arise in the same contract have been presented on a net basis. Historically, certain of our license agreements contained fixed fees related to past infringements for which the fixed fees were recognized as revenue or recorded as a deduction to its operating expense in the quarter the license agreement was signed. After the adoption of ASC 606, we recognize revenue from such fixed fees related to past infringements in the same manner in the quarter the license agreement is signed.
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If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods, or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating results.
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Results of Operations
Overview of 2019
Total revenues for 2019 were $36.0 million, a decrease of $75.0 million, or 68%, versus 2018. The decrease was primarily driven by the $70.9 million decrease in fixed fee license revenue and the $4.0 million decrease in per-unit royalty revenue.
Years Ended December 31, 2019 2018 2017 Revenues: Fixed fee license revenue 35.1 % 75.3 % 36.0 % Per-unit royalty revenue 64.0 24.3 61.4 Total royalty and license revenue 99.1 99.6 97.4 Development, services, and other 0.9 0.4 2.6 Total revenues 100.0 100.0 100.0 Costs and expenses: Cost of revenues 0.5 0.2 0.6 Sales and marketing 17.9 5.5 38.6 Research and development 21.8 8.8 33.6 General and administrative 119.4 37.7 152.4 Restructuring costs - - 4.6 Total costs and expenses 159.6 52.2 229.8 Operating income (loss) (59.6 ) 47.8 (129.8 ) Interest and other income 5.0 1.7 1.0 Other expense 0.2 (0.2 ) 0.9 Income (loss) before provision for income taxes (54.4 ) 49.3 (127.9 ) Provision for income taxes (1.3 ) (0.4 ) (1.4 ) Net income (loss) (55.7 )% 48.9 % (129.3 )%
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Revenues Our revenue is primarily derived from fixed fee license agreements and per-unit royalty agreements, along with less significant revenue earned from development, services and other revenue. Royalty and license revenue is composed of per unit royalties earned based on usage or net sales by licensees and fixed payment license fees charged for our IP and software. A revenue summary for the years ended December 31, 2019, 2018 and 2017 are as follows (in thousands, except for percentages): Change Change 2019 Amount % 2018 Amount % 2017 Fixed fee license revenue $ 12,627 $ (70,946 ) (85 )% $ 83,573 $ 70,998 565 % $ 12,575 Per-Unit royalty revenue 23,016 (3,968 ) (15 )% 26,984 5,470 25 % 21,514 Total royalty and license revenue 35,643 (74,914 ) (68 )% 110,557 76,468 224 % 34,089 Development, services,
2019 Compared to 2018
Royalty and license revenue - Total royalty and license revenue for 2019 was $35.6 million, a decrease of $74.9 million, or 68%, compared to $110.6 million for 2018.
Fixed fee license revenue was $12.6 million for 2019, a decrease of $70.9 million, or 85%, compared to $83.6 million in 2018. The decrease was primarily related to a material fixed fee license agreement entered into with a mobility customer during the first quarter of 2018.
Per-unit royalty revenue decreased by $4.0 million, or 15%, to $23.0 million for the year ended December 31, 2019 from $27.0 million for the year ended December 31, 2018. This decrease in per-unit royalty revenue was primarily caused by a $5.8 million decrease in automotive royalties, a $2.8 million decrease in gaming royalties and a $0.7 million decrease in medical royalties. The automotive, gaming and medical decreases in per-unit royalty revenue were partially offset by a $5.3 million increase in mobility royalties. The decrease in automotive royalties was mainly due to the impact of certain per-unit royalty agreements entered into during the first quarter of 2018 that contained a minimum royalty provision for which we recognized minimum royalties as revenue at the inception of such agreements. The decrease in gaming royalties was primarily due to lower shipments experienced by our licensees. The increase in mobility royalties was primarily due to revenue from per-unit royalty agreements entered into in 2019 partially offset by the impact of lower shipment volumes reported by other mobility licensees.
We expect royalty and license revenue to continue to be a major component of our future revenue as our technology is included in products and we succeed in our efforts to monetize our IP. Our fixed fee license revenue could fluctuate depending upon the timing of execution of new fixed license fee arrangements under ASC 606. We also anticipate that our royalty revenue will fluctuate relative to our customers' unit shipments. We historically experienced seasonally higher royalty revenue from our gaming and mobility customers due to the reporting of holiday sales in the first calendar quarter compared to other calendar quarters. Due to the elimination of the one-quarter lag in reporting royalty income, we now expect to experience this seasonal impact in the fourth calendar quarter.
Development, services and other revenue - Development, services, and other revenue for 2019 was $0.3 million, a decrease of $0.1 million, or 27%, compared to $0.4 million in 2018.
Geographically, revenues generated in Asia, North America and Europe for the year ended December 31, 2019 represented 65%, 28%, and 7%, respectively, of our total revenue as compared to 12%, 77%, and 11%, respectively, for the year ended December 31, 2018. The increase in revenue from Asia as a percentage of total revenue was primarily driven by an increase in revenues from mobility customers and partially offset by a decrease in revenues from automotive customers in the region. The decrease in revenue attributable to North America as a percentage of total revenue was primarily caused by lower revenues from mobility customers and partially offset by increased revenue from gaming and automotive customers in the region.
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2018 Compared to 2017
Royalty and license revenue - Total royalty and license revenue for 2018 was $110.6 million, an increase of $76.5 million, or 224% compared to $34.1 million for 2017. Excluding the impact of adoption of ASC 606, royalty and license revenue for the year ended December 31, 2018 would be $0.1 million lower than the reported royalty and license revenue for the year ended December 31, 2017.
Per-unit royalty revenue for 2018 was $27.0 million, an increase of $5.5 million, or 25% compared to $21.5 million for 2017. Per-unit royalty revenue for the year ended December 31, 2018 would be $3.0 million lower, if reported under ASC 605, than per-unit royalty revenue for the year ended December 31, 2017. The $8.5 million change due to ASC 606 adoption was primarily related to minimum royalties recognized as revenue at the inception of certain license agreements entered into in 2018 that contain minimum royalty provision. Under ASC 606, minimum royalties are considered a fixed transaction price to which we will have an unconditional right once all other performance obligations, if any, are satisfied. Per our previous accounting policy under ASC 605, such minimum royalties were recognized as revenue at the end of each reporting period (usually a calendar year) if the actual royalties reported by the customer for that reporting period were below the minimum threshold set forth in the contract.
Fixed fee license revenue for 2018 was $83.6 million, an increase of $71.0 million, or 565% compared to $12.6 million for 2017. Excluding the impact of adoption of ASC 606, fixed fee license revenue for the year ended December 31, 2018 would be $2.9 million higher than fixed fee license revenue for the year ended December 31, 2017 resulting from new customer contracts entered into in 2018.
Development, services and other revenue - Development, services, and other revenue for the year ended December 31, 2018 decreased by $0.5 million, or 54%, compared to $0.9 million for the year ended December 31, 2017, primarily due to certain non-recurring service fees from customer contracts completed in 2017. The adoption of ASC 606 had little impact on the way we recognize development, service and other revenue.
Geographically, revenues generated in North America, Asia, and Europe for the year ended December 31, 2018 represented 77%, 12%, and 11%, respectively, of our total revenue as compared to 22%, 63%, and 15%, respectively, for the year ended December 31, 2017. The increase in revenue attributable to North America as a percentage of total revenue was primarily driven by increased revenues from mobility customers, including Apple, partially offset by decreased revenues from gaming and automotive customers in North America. The decrease in revenue attributable to Asia as a percentage of total revenue was caused by declining revenues from mobility, gaming and automotive customers in the region.
Expenses A summary of operating expenses for the years ended December 31, 2019, 2018 and 2017 are as follows: 2019 $ Change % Change 2018 $ Change % Change 2017 Sales and marketing $ 6,426 $ 308 5 % $ 6,118 $ (7,398 ) (55 )% $ 13,516 Research and development 7,840 (1,887 ) (19 )% 9,727 (2,032 ) (17 )% 11,759 General and administrative 42,968 1,153 3 % 41,815 (11,528 ) (22 )% 53,343 Restructuring Costs - - - % - (1,620 ) 100 % 1,620
2019 Compared to 2018
Sales and Marketing - Our sales and marketing expenses primarily consisted of employee compensation and benefits, sales commissions, advertising, trade shows, collateral marketing materials, market development funds, travel, and allocated facilities costs. Sales and marketing expenses increased $0.3 million, or 5%, for 2019 as compared to 2018 primarily attributable to a $0.3 million increase in compensation, benefits, and other related costs, $0.2 million increase in marketing and advertising costs and a $0.2 million increase in occupancy and depreciation expenses. These increases in sales and marketing expenses were partially offset by a $0.4 million decrease in outside services costs. The . . .
Mar 06, 2020
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