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Agreement with SK hynix | 9 Months Ended
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Sep. 30, 2013
Patent License Agreement [Abstract] |
Agreement with SK hynix | Agreement with 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 as described below. 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. Each license is a non-exclusive, non-transferable, royalty-bearing, worldwide patent license, without the right to sublicense, solely under the applicable patent claims of Rambus for such licensed products, to make (including have made), use, sell, offer for sale and/or import such licensed products until the expiration or termination of the license pursuant to the terms of the license agreement. The license agreement requires that SK hynix pay Rambus cash payments over the next five years of a fixed amount of $12.0 million each quarter, commencing in the quarter ended September 30, 2013. Additional payments or certain adjustments to the payments by SK hynix to Rambus under the license agreement may be due for certain acquisitions of businesses or assets by SK hynix involving unlicensed products. The license agreement and the licenses granted thereunder may be modified under certain conditions and may be terminated upon a material breach by a party of its obligations under the agreement, a bankruptcy event involving a party or a change of control of SK hynix subject to certain conditions. The agreement with SK hynix is considered a multiple element arrangement for accounting purposes. For a multiple element arrangement under the applicable accounting rules, the Company is required to identify specific elements of the arrangement and then determine when those elements should be recognized. The Company identified three elements in the arrangement: antitrust litigation settlement, settlement of past infringement, and license agreement. The Company considered several factors in determining the accounting fair value of the elements of the SK hynix agreement which included a third party valuation using an income approach (collectively the “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 had a substantial impact on the Fair Value as assigned to each element. These inputs and assumptions represent management’s best estimates at the time of the transaction. The following estimates do not reflect any agreement (expressed or implied) reached between the parties on the values attributed to any aspect of this transaction. The estimated Fair Value is determined as follows:
(in millions) | Estimated Fair Value
Antitrust litigation settlement | $ | 4.0 |
Settlement of past infringement | 280.0 |
License agreement | 250.0 |
Total Fair Value | $ | 534.0 |
The total consideration of $240.0 million (as per the terms of the agreement with SK hynix) takes into account the court ruling in May 2013 that $250.0 million should be applied as a credit against the court’s March 2009 award to Rambus in the SK hynix litigation. Using the accounting guidance from multiple element revenue arrangements, the Company allocated the consideration to each element using the estimated Fair Value of the elements which include antitrust litigation settlement, settlement of past infringement, and license agreement as shown in the table above. The following allocations do not reflect any agreement (expressed or implied) reached between the parties on the values attributed to any aspect of this transaction, but instead, reflect only what is required as disclosure under the applicable accounting rules. Based on the estimated Fair Value, the total consideration of $240.0 million was allocated to the following elements:
(in millions) | Allocated Consideration
Antitrust litigation settlement | $ | 1.9 |
Settlement of past infringement | 125.8 |
License agreement | 112.3 |
Total consideration | $ | 240.0 |
The consideration of $240.0 million (assuming no adjustments to the payments under the terms of the agreements) will be recognized in the Company’s financial statements until 2018 as follows:
· | $238.1 million as "royalty revenue" which represents the allocated consideration related to the settlement of past infringement ($125.8 million) from the resolution of the infringement litigation and the patent license agreement ($112.3 million); and
· | $1.9 million as "gain from settlement" which represents the allocated consideration related to the resolution of the antitrust litigation.
During the three and nine months ended September 30, 2013, the Company received cash consideration of $12.0 million from SK hynix. The amount was allocated between royalty revenue ($11.8 million) and gain from settlement ($0.2 million) based on the elements’ Fair Value. The remaining $228.0 million is expected to be paid in successive quarterly payments of $12.0 million, concluding in the second quarter of 2018. The cumulative cash receipts through September 30, 2013 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:
| Received to-date in |  | Estimated to Be Received in |  | Total Estimated Cash Receipts
| 2013 |  | Remainder of 2013 |  | 2014 |  | 2015 |  | 2016 |  | 2017 |  | 2018 |
(in millions) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Royalty revenue | $ | 11.8 |  |  | $ | 11.8 |  |  | $ | 47.3 |  |  | $ | 47.3 |  |  | $ | 47.9 |  |  | $ | 48.0 |  |  | $ | 24.0 |  |  | $ | 238.1 |
Gain from settlement | 0.2 |  |  | 0.2 |  |  | 0.7 |  |  | 0.7 |  |  | 0.1 |  |  | — |  |  | — |  |  | 1.9 |
Total | $ | 12.0 |  |  | $ | 12.0 |  |  | $ | 48.0 |  |  | $ | 48.0 |  |  | $ | 48.0 |  |  | $ | 48.0 |  |  | $ | 24.0 |  |  | $ | 240.0 |

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